Steiner and steiner business government and society

Business Ethics

Business, Government, and Society

Thirteenth Edition

John F. Steiner George A. Steiner

A Managerial Perspective Text and Cases

B usiness, G

overnm ent, and S

ociety

13E

A M

anagerial P erspective T

ext and C ases

Steiner Steiner

The thirteenth edition continues a long effort to tell the story of how forces in business, government, and society shape our world. In addition, an emphasis on management issues and processes allows students to apply the principles they learn to real-world situations.

As always, a stream of events dictated the need for extensive revision. Accordingly, the authors have updated the chapters to include new ideas, events, personalities, and publications, while continuing the work of building insight into basic underlying principles, institutions, and forces.

Highlights of the Thirteenth Edition include: An expanded discussion of white collar crime and criminal prosecution of both managers and corporations in Chapter 7, “Business Ethics.”

A new section on the neural basis of ethical decisions in Chapter 8, “Making Ethical Decisions in Business.”

An expanded discussion of lobbying ethics as well as a revised discussion of corpo- rate money in elections and recent changes in election law in Chapter 9, “Business in Politics.”

A new fifth wave, “terrorism and financial crisis,” has been added to the four histori- cal waves of regulatory growth in Chapter 10, “Regulating Business.”

A new discussion of globalization, including the rise of the modern trading system and coverage of various trade organizations, such as the IMF and World Bank, in Chapter 12, “Globalization, Trade, and Corruption.”

New sections in Chapter 15, “Consumerism,” including Thoreau’s rejection of materialism, arguments defending consumerism, and a description of the consumer protection activities of the Federal Trade Commission.

Added emphasis on the nature and significance of diversity management programs in corporations in Chapter 17, “Civil Rights, Women, and Diversity.”

New coverage of the story of the Lehman Brothers bankruptcy and of the new governance reforms in the wake of the recent financial crisis in Chapter 18, “Corporate Governance.”

To learn more, visit this book’s Online Learning Center at

www.mhhe.com/steiner13e

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Business, Government, and Society A Managerial Perspective, Text and Cases

Thirteenth Edition

John F. Steiner Professor of Management, Emeritus California State University, Los Angeles

George A. Steiner Harry and Elsa Kunin Professor of Business and Society and Professor of Management, Emeritus, UCLA

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BUSINESS, GOVERNMENT, AND SOCIETY: A MANAGERIAL PERSPECTIVE, TEXT AND CASES Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2012, 2009, 2006, 2003, 2000, 1997, 1994, 1991, 1988, 1985, 1980 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 DOC/DOC 1 0 9 8 7 6 5 4 3 2 1

ISBN 978-0-07-811267-6 MHID 0-07-811267-2

Vice president and editor-in-chief: Brent Gordon Editorial director: Paul Ducham Executive director of development: Ann Torbert Managing development editor: Laura Hurst Spell Editorial coordinator: Jonathan Thornton Vice president and director of marketing: Robin J. Zwettler Marketing director: Amee Mosley Market development specialist: Jaime Halteman Vice president of editing, design, and production: Sesha Bolisetty Lead project manager: Christine A. Vaughan Buyer II: Debra R. Sylvester Design coordinator: Joanne Mennemeier Senior photo research coordinator: Keri Johnson Media project manager: Suresh Babu, Hurix Systems Pvt. Ltd. Cover images: © Ingram Publishing; © Skip Nall/Getty Images; © Royalty-Free/CORBIS; © Hisham F. Ibrahim/Getty Images; © Getty Images/Digital Vision; © U.S. Navy photo by Mass Communication Specialist 1st Class Demetrius Kennon Typeface: 10/12 Palatino Compositor: Aptara®, Inc. Printer: R. R. Donnelley

Library of Congress Cataloging-in-Publication Data Steiner, John F. Business, government, and society : a managerial perspective: text and cases / John F. Steiner, George A. Steiner.—13th ed. p. cm. Includes index. ISBN-13: 978-0-07-811267-6 (alk. paper) ISBN-10: 0-07-811267-2 (alk. paper) 1. Industries—Social aspects—United States. 2. Industrial policy—United States. 3. Social responsibility of business—United States. I. Steiner, George Albert, 1912- II. Title. HD60.5.U5S8 2012 658.4—dc22 2011007905

www.mhhe.com

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We dedicate this book to the memory of Jean Wood Steiner.

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Brief Table of Contents Preface xi

PART ONE A Framework for Studying Business, Government, and Society

1 The Study of Business, Government, and Society 1

2 The Dynamic Environment 22

3 Business Power 55

4 Critics of Business 83

PART TWO The Nature and Management of Corporate Responsibility

5 Corporate Social Responsibility 121

6 Implementing Corporate Social Responsibility 157

PART THREE Managing Ethics

7 Business Ethics 194

8 Making Ethical Decisions in Business 238

PART FOUR Business and Government

9 Business in Politics 271

10 Regulating Business 316

PART FIVE Multinational Corporations and Globalization

11 Multinational Corporations 352

12 Globalization, Trade, and Corruption 395

PART SIX Corporations and the Natural Environment

13 Industrial Pollution and Environmental Regulation 436

14 Managing Environmental Quality 476

PART SEVEN Consumerism

15 Consumerism 512

PART EIGHT Human Resources

16 The Changing Workplace 549

17 Civil Rights, Women, and Diversity 585

PART NINE Corporate Governance

18 Corporate Governance 630

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Table of Contents

Preface xi

PART ONE A Framework for Studying Business, Government, and Society

Chapter 1 The Study of Business, Government, and Society 1

ExxonMobil Corporation 1 What Is the Business–Government–Society Field? 4 Why Is the BGS Field Important to Managers? 7 Four Models of the BGS Relationship 8

The Market Capitalism Model 9 The Dominance Model 12 The Countervailing Forces Model 15 The Stakeholder Model 16

Our Approach to the Subject Matter 20 Comprehensive Scope 20 Interdisciplinary Approach with a Management Focus 20 Use of Theory, Description, and Case Studies 20 Global Perspective 21 Historical Perspective 21

Chapter 2 The Dynamic Environment 22

Royal Dutch Shell PLC 22 Deep Historical Forces at Work 24

The Industrial Revolution 25 Inequality 25 Population Growth 28 Technology 30 Globalization 32 Nation-States 33

Dominant Ideologies 34 Great Leadership 35 Chance 35

Six External Environments of Business 36 The Economic Environment 36 The Technological Environment 38 The Cultural Environment 39 The Government Environment 41 The Legal Environment 42 The Natural Environment 43 The Internal Environment 44

Concluding Observations 45 Case Study: The American Fur Company 47

Chapter 3 Business Power 55

James B. Duke and The American Tobacco Company 55 The Nature of Business Power 58 What Is Power? 58 Levels and Spheres of Corporate Power 59 The Story of the Railroads 61 Two Perspectives on Business Power 64

The Dominance Theory 65 Pluralist Theory 71

Concluding Observations 75 Case Study: John D. Rockefeller and the Standard Oil Trust 75

Chapter 4 Critics of Business 83

Mary “Mother” Jones 83 Origins of Critical Attitudes Toward Business 86

The Greeks and Romans 86 The Medieval World 88 The Modern World 88

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The American Critique of Business 89 The Colonial Era 89 The Young Nation 90 1800–1865 91 Populists and Progressives 93 Socialists 95 The Great Depression and World War II 99 The Collapse of Confidence 100 The New Progressives 102

Global Critics 103 The Story of Liberalism 104 The Rise of Neoliberalism 105 Agenda of the Global Justice Movement 106 Global Activism 108

Concluding Observations 110 Case Study: A Campaign against KFC Corporation 112

PART TWO The Nature and Management of Corporate Responsibility

Chapter 5 Corporate Social Responsibility 121

Merck & Co., Inc. 121 The Evolving Idea of Corporate Social Responsibility 123

Social Responsibility in Classical Economic Theory 125 The Early Charitable Impulse 125 Social Responsibility in the Late Nineteenth and Early Twentieth Centuries 127 1950 to the Present 129

Basic Elements of Social Responsibility 131 General Principles 133 Are Social and Financial Performance Related? 134 Corporate Social Responsibility in a Global Context 135 The Problem of Cross-Border Corporate Power 136 The Rise of New Global Values 137

Global Corporate Responsibility 138 Development of Norms and Principles 138 Codes of Conduct 140 Reporting and Verification Standards 142 Certification and Labeling Schemes 142 Management Standards 143 Social Investment and Lending 144 Government Actions 144 Civil Society Vigilance 145

Assessing the Evolving Global CSR System 146 Concluding Observations 146 Case Study: Jack Welch at General Electric 147

Chapter 6 Implementing Corporate Social Responsibility 157

The Bill & Melinda Gates Foundation 157 Managing the Responsive Corporation 160 Leadership and Business Models 160 A Model of CSR Implementation 162

CSR Review 163 CSR Strategy 167 Implementation of CSR Strategy 168 Reporting and Verification 171

How Effectively Is CSR Implemented? 174 Corporate Philanthropy 175

Patterns of Corporate Giving 175 Strategic Philanthropy 177 Cause Marketing 179 New Forms of Philanthropy 181

Concluding Observations 183 Case Study: Marc Kasky versus Nike 183

PART THREE Managing Ethics

Chapter 7 Business Ethics 194

Bernard Ebbers 194 What Are Business Ethics? 197 Two Theories of Business Ethics 198

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Major Sources of Ethical Values in Business 200

Religion 201 Philosophy 202 Cultural Experience 204 Law 206

Factors That Influence Managerial Ethics 212

Leadership 212 Strategies and Policies 214 Corporate Culture 215 Individual Characteristics 218

How Corporations Manage Ethics 220 Ethics and Compliance Programs: An Assessment 227 Concluding Observations 228 Case Study: The Trial of Martha Stewart 229

Chapter 8 Making Ethical Decisions in Business 238

David Geffen 238 Principles of Ethical Conduct 241

The Categorical Imperative 241 The Conventionalist Ethic 242 The Disclosure Rule 243 The Doctrine of the Mean 244 The Ends–Means Ethic 244 The Golden Rule 245 The Intuition Ethic 246 The Might-Equals-Right Ethic 246 The Organization Ethic 247 The Principle of Equal Freedom 248 The Proportionality Ethic 248 The Rights Ethic 249 The Theory of Justice 249 The Utilitarian Ethic 251

Reasoning with Principles 251 Character Development 253 The Neural Basis of Ethical Decisions 253

Probing Ethical Decisions 254 Emotions and Intuition 256

Practical Suggestions for Making Ethical Decisions 257 Concluding Observations 259 Case Studies: Short Incidents for Ethical Reasoning 260 Tangled Webs 264

PART FOUR Business and Government

Chapter 9 Business in Politics 271

Paul Magliocchetti and Associates 271 The Open Structure of American Government 275 A History of Political Dominance by Business 277

Laying the Groundwork 277 Ascendance, Corruption, and Reform 278 Business Falls Back under the New Deal 280 Postwar Politics and Winds of Change 281

The Rise of Antagonistic Groups 282 Diffusion of Power in Government 283 The Universe of Organized Business Interests 284 Lobbying 287

Lobbying Methods 288 Power and Limits 290 Regulation of Lobbyists 291

The Corporate Role in Elections 293 Efforts to Limit Corporate Influence 294 The Federal Election Campaign Act 295 Political Action Committees 296 Soft Money and Issue Advertising 298 Reform Legislation in 2002 299

How Business Dollars Enter Elections 301 Concluding Observations 303 Case Study: Citizens United v. Federal Election Commission 304

Chapter 10 Regulating Business 316

The Federal Aviation Administration 316

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The United Nations Global Compact 375 Criticism of the Global Compact 378

The Alien Tort Claims Act 379 The Drummond Company on Trial 381

Concluding Observations 383 Case Study: Union Carbide Corporation and Bhopal 384

Chapter 12 Globalization, Trade, and Corruption 395

McDonald's Corporation 395 Globalization 397

Ascent and Inertia 400 Trade 402

The Rise and Fall of Trade 402 A New Postwar Order 404 Success and Evolution 404 The World Trade Organization 406 Regional Trade Agreements 409

Free Trade versus Protectionism 411 Why Free Trade? 411 Why Protectionism? 412 The Politics of Protectionism 413 Free Trade Responses to Protectionism 415 U.S. Deviation from Free Trade Policy 416 Tariff Barriers in Other Countries 416

Corruption 417 A Spectrum of Corruption 418 The Fight Against Corruption 420 The Foreign Corrupt Practices Act 422 Corporate Actions to Fight Corruption 425

Concluding Observations 426 Case Study: David and Goliath at the WTO 427

PART SIX Corporations and the Natural Environment

Chapter 13 Industrial Pollution and Environmental Regulation 436

The Majestic Hudson River 436

Why Government Regulates Business 319 Flaws in the Market 319 Social and Political Reasons for Regulation 320

Waves of Growth 320 Wave 1: The Young Nation 321 Wave 2: Confronting Railroads and Trusts 322 Wave 3: The New Deal 323 Wave 4: Administering the Social Revolution 324 Wave 5: Terrorism and Financial Crisis 325 War Blips 327

How Regulations Are Made 327 Regulatory Statutes 327 Rulemaking 329 Presidential Oversight 332 Congressional Oversight 334 Challenges in the Courts 335

Costs and Benefits of Regulation 337 The Regulatory Burden 337 Benefits of Regulations 339

Regulation in Other Nations 340 Concluding Observations 342 Case Study: Good and Evil on the Rails 342

PART FIVE Multinational Corporations and Globalization

Chapter 11 Multinational Corporations 352

The Coca-Cola Company 352 The Multinational Corporation 354

A Statistical Perspective 356 How Transnational Is a Corporation? 358 Breaking the Bonds of Country: Weatherford International 359

Foreign Direct Investment 362 FDI in Developing Economies 364

International Codes of Conduct 367 The OECD Guidelines for Multinational Enterprises 369

How the OECD Guidelines Work 369 Vedanta Resources 371

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Consumerism 515 Consumerism as an Ideology 515 Consumerism Rises in America 516 Consumerism in Perspective 518 The Global Rise of Consumerism 522

In Defense of Consumerism 523 Consumerism as a Protective Movement 524

The Consumer’s Protective Shield 525 The Food and Drug Administration (FDA) 526 The Federal Trade Commission (FTC) 527 The Consumer Product Safety Commission (CPSC) 529 The National Highway Traffic Safety Administration (NHTSA) 530 Consumer Protection by Other Agencies 532

Product Liability 534 Negligence 534 Warranty 535 Strict Liability 536 Costs and Benefits of the Tort System 537

Concluding Observations 538 Case Study: Alcohol Advertising 538

PART EIGHT Human Resources

Chapter 16 The Changing Workplace 549

Ford Motor Company 549 External Forces Shaping the Workplace 552

Demographic Change 553 Technological Change 555 Structural Change 556 Competitive Pressures 558 Reorganization of Work 560

Government Intervention 562 Development of Labor Regulation in the United States 562

Work and Worker Protection in Japan and Europe 569

Japan 569 Europe 570

Labor Regulation in Perspective 572 Concluding Observations 572 Case Study: A Tale of Two Raids 575

Pollution 438 Human Health 439 The Biosphere 440

Industrial Activity and Sustainability 442 Ideas Shape Attitudes Toward the Environment 444

New Ideas Challenge the Old 445 Environmental Regulation in the United States 447

The Environmental Protection Agency 447 Principal Areas of Environmental Policy 448

Air 448 Water 458 Land 459

Concluding Observations 463 Case Study: A World Melting Away 464

Chapter 14 Managing Environmental Quality 476

The Commerce Railyards 476 Regulating Environmental Risk 479 Analyzing Human Health Risks 479

Risk Assessment 480 Risk Management 486

Cost–Benefit Analysis 487 Advantages 488 Criticisms 489

Control Options 491 Command-and-Control Regulation 491 Market Incentive Regulation 492

Voluntary Regulation 498 Managing Environmental Quality 499

Environmental Management Systems 500 A Range of Actions 501

Concluding Observations 503 Case Study: Harvesting Risk 503

PART SEVEN Consumerism

Chapter 15 Consumerism 512

Harvey W. Wiley 512

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PART NINE Corporate Governance

Chapter 18 Corporate Governance 630

Mark Hurd 630 What Is Corporate Governance? 633 The Corporate Charter 634 Power in Corporate Governance: Theory and Reality 636

Stockholders 636 Shareholder Resolutions 638 Assessing Shareholder Influence 639

Federal Regulation of Governance 639 Enron Corp. 640 Other Failures of Governance 644 The Sarbanes-Oxley Act 645 Lehman Brothers 646 The Dodd-Frank Act 650

Boards of Directors 651 Duties of Directors 652 Board Composition 652 Board Dynamics 653

Executive Compensation 655 Components of Executive Compensation 655 Problems with CEO Compensation 659

Concluding Observations 663 Case Study: High Noon at Hewlett- Packard 664

Chapter 17 Civil Rights, Women, and Diversity 585

The Employment Non-Discrimination Act 585 A Short History of Workplace Civil Rights 587

The Colonial Era 588 Civil War and Reconstruction 589 Other Groups Face Employment Discrimination 590 The Civil Rights Cases 591 Plessy v. Ferguson 592 Long Years of Discrimination 593

The Civil Rights Act of 1964 594 Disparate Treatment and Disparate Impact 595 The Griggs Case 596

Affirmative Action 597 Executive Order 11246 598

The Supreme Court Changes Title VII 599 The Affirmative Action Debate 601

Women at Work 602 Gender Attitudes at Work 604 Subtle Discrimination 605 Sexual Harassment 607 Occupational Segregation 610 Compensation 612

Diversity 614 Elements of Diversity Programs 616

Concluding Observations 618 Case Study: Adarand v. Peña 619

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Preface This 13th edition continues a long effort to tell the story of how forces in business, government, and society shape our world. As always, a stream of events dictated the need for extensive revision. In particular, a major financial crisis and a new presidential administration altered parts of the subject matter in important ways. Accordingly, we have updated the chapters to include new ideas, events, person- alities, and publications.

While current events move rapidly over the surface of our world, its underly- ing dynamics are largely undisturbed. As with every revision, we adapt to the flow of events, but we also continue the work of building insight into basic prin- ciples, institutions, and forces. So, while new events will doubtless erode the cur- rency of the discussions, we believe that certain insights about the relationships between business, government, and society should endure.

In what follows, we summarize new elements in this edition.

THE CHAPTERS Key revisions and additions in the chapters include these.

• Chapter 4, “Critics of Business,” has a new discussion of the rise of free market ideas that came to be called the Chicago School and their interaction with, first, Keynesian thinkers and, later, progressive thinkers.

• Chapter 7, “Business Ethics,” contains an expanded discussion of white-collar crime and criminal prosecution of both managers and corporations, including the growing use of deferred- and nonprosecution agreements. The chapter also has a new discussion of inner psychological processes interact that generate unethical behavior.

• Chapter 8, “Making Ethical Decisions in Business,” adds a new section on the neu- ral basis of ethical decisions. Studies of the brain using magnetic resonance imaging suggest that ethical decisions are fast, unconscious, and automatic processes. Their findings illuminate how individuals do (and should) make ethical decisions.

• Chapter 9, “Business in Politics,” includes an expanded discussion of lobbying ethics, including a more thorough discussion of the nature of bribery and inci- dents to illustrate its boundaries. The section on corporate money in elections is revised to explain changes in election law following the Citizens United v. Federal Election Commission decision. The chapter case study is now the story of Citizens United .

• Chapter 10, “Regulating Business,” adds a new fifth wave, “terrorism and fi- nancial crisis,” to the four historical waves of regulatory growth. This new wave covers the federal government’s aggressive expansion of regulation and changes in regulatory philosophy in the Barack Obama administration.

• Chapter 11, “Multinational Corporations,” has a new discussion of the Organisa- tion for Economic Co-Operation and Development’s Guidelines for Multinational

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xii Preface

Enterprises. It tells a story about how the guidelines were applied to a mining company that sought to develop a sacred tribal land in India.

• Chapter 12, “Globalization, Trade, and Corruption,” introduces a new discus- sion of globalization. The section on trade now explains the rise of the modern trading system, including discussions of Bretton Woods, the International Mon- etary Fund, the World Bank, the General Agreement on Tariffs and Trade, and the World Trade Organization. The section on international corruption is re- vised to accommodate recent, more vigorous anti-bribery enforcement. It now relates more incidents and stories about bribery.

• Chapter 15, “Consumerism,” has several new sections including a discussion of Henry David Thoreau and his principled rejection of materialism, a presenta- tion of arguments defending consumerism, and a description of the consumer protection activities of the Federal Trade Commission.

• Chapter 17, “Civil Rights, Women, and Diversity,” contains added emphasis on the nature and significance of diversity management programs in corporations.

• Chapter 18, “Corporate Governance,” now tells the story of the Lehman Broth- ers bankruptcy that resulted from, among other factors, the lack of oversight by a poorly structured board of directors. It explains new governance reforms in the wake of the recent financial crisis.

CHAPTER-OPENING STORIES As in past editions, we begin each chapter with a true story about a company, a bi- ographical figure, or a government action. Five new stories appear in this edition.

• “David Geffen” is the story of a brash young man willing to compromise the truth to make his fortune. His career invites a timeless discussion of whether actions are always right and wrong in themselves, or whether their conse- quences should be considered.

• “Paul Magliocchetti and Associates” is the story of a bright young man who went to Washington, D.C., worked for a member of Congress, and set up a lobbying firm. He specialized in getting earmarks for corporations. His story reveals the hidden influence that characterizes politics in the nation’s capital.

• “The Federal Aviation Administration” focuses on how this agency issues a license before each launch of a space vehicle by a private company. The story tells how the FAA goes about assessing risks to the public with each launch. The agency’s actions are a small window into the work of a massive regulatory presence.

• “The Majestic Hudson River” reveals the details of the huge project to remove polychlorinated biphenyls from this waterway. More than half a century ago General Electric released the chemicals. Now it will pay as much as $2 billion to clean them out even as it protests that they do less harm if left undisturbed.

• “Mark Hurd” is about a former Hewlett-Packard CEO accused of sexual ha- rassment. The board investigated, but found no violation of the company’s sex- ual harassment policy. Still, when questioned by directors he had shaded the

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Preface xiii

truth about his friendship with a woman. The board lost confidence in his in- tegrity. He was forced to resign.

THE CASE STUDIES Every chapter, except Chapter 1, ends with a case study. The cases illustrate one or more central themes in the chapter. Five new cases appear in this edition.

• “Tangled Webs” is a story of temptation and transgression. A man and a woman meet on a Web site for adulterers and begin a fated game of insider trading. The case invites discussion of the business model used by the Web site and of the psychology of lying and ethical transgression.

• “ Citizens United v. FEC” is the story of the Supreme Court decision that allowed corporations to contribute independently to federal political candidates. In a close five-to-four decision the Court’s more conservative justices decided that parts of America’s election law violated the First Amendment’s guarantee of free speech.

• “Good and Evil on the Rails” invites debate about the benefits and costs of regulation. After a train crash in California killed 24 passengers, Congress passed a law mandating $13.3 billion of computerized controls to make trains safer. Unfortunately, the benefits, including the value of statistical lives saved, were less than $1 billion. Is the money well spent?

• “A World Melting Away” is the story of the polar bear endangered by warming of its habitat. What kind of measures can prevent its extinction?

• “A Tale of Two Raids” is a study of the dilemmas faced by corporations trying to comply with laws that prohibit hiring unauthorized workers. It tells of two raids, one a physical raid, the other a sudden, mass firing based on an audit. Both tore apart families and towns.

SUPPORT MATERIALS FOR INSTRUCTORS The Online Learning Center, at www.mhhe.com/steiner13e, features resources for students and instructors. For students there are interactive exercises and self- quizzes designed to enhance understanding of text material.

For instructors there is an Instructor’s Resource Manual with sample course out- lines, chapter objectives, term paper topics for each chapter, and case study teach- ing notes with answers to the case questions. There also is a test bank covering chapters and case studies, including multiple-choice, true/false, fill-in, and essay questions.

Instructors will also find a set of PowerPoint© slides for each chapter to use for classroom lectures.

The Computerized Test Bank covers chapters and case studies. It includes multiple- choice, true/false, fill-in, and essay questions. In preparing exams instructors can view questions as they are selected; scramble questions and answers; add, delete, and edit questions; create multiple test versions; and view and save tests.

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Acknowledgments We are indebted to the long line of authors, extending from ancient Athens to the present, who have tutored and inspired us. We extend special thanks to the ranks of colleagues and friends within the Academy of Management who have worked to develop and expand the field over the years. Where appropriate we cite their work. For this edition, the following reviewers have guided us. We are very apprecia- tive of their efforts and have followed their recommendations.

Gwendolyn Yvonne Alexis Monmouth University Laura Curran California State University, Fullerton Jeanne Enders Portland State University Susan A. O’Sullivan-Gavin Seton Hall University Jaqueline G. Slifkin The College at Brockport, SUNY Dennis L. Slivinski California State University,

Channel Islands Harry J. Taft Stetson University Robert E. Ward Baldwin-Wallace College George W. Watson Southern Illinois University,

Edwardsville Aimee Lynn Williamson Suffolk University

We thank also those in the world of affairs who were consulted along the way. Those who gave us new ideas, affirmed our interpretations, or verified our facts include Stephen E. Auslander; Jeff Ballinger, Press for Change; Ruthven Benjamin; Chris Banocy, General Electric Transportation; Jamie Yood, Google; Gordon Bennett, New Square Chambers; Bob Davis, Airgas Inc.; Warren Flatau, Federal Railroad Administration; Cheryl Gossin, Constellation Brands, Inc.; Maury Hendler; Kristi R. King, Talladega Speedway; George C. Nield, Office of Commercial Space Transportation, Federal Aviation Administration; Margaret L. Reilly, Office of Management and Budget, Executive Office of the President; Tracy Warner, The Wenatchee World ; Tom Wasz, Yum! Brands, Inc.; and Jo Woodman, Survival International. We are thankful for an outstanding editorial team at McGraw-Hill/Irwin, in- cluding especially managing development editor Laura Spell, whose guidance led to important and constructive changes in the book; editorial coordinator Jonathan Thornton, who responded to author suggestions while carefully putting all the elements of the effort in place; and lead project manager Christine Vaughan, who is exceptionally competent in the detailed work of turning an original manuscript into a printed book. Their patience and faith throughout the process were always welcome. We are grateful to copyeditor Nancy Dietz for schooling our style and adding clarity and consistency to the benefit of readers. We also express gratitude

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Acknowledgments xv

to marketing manager Jaime Halteman, designer Joanne Mennemeier, senior photo research coordinator Keri Johnson, and media project manager Suresh Babu. Finally, we express our appreciation for the very fine work of Rakhshinda Chishty and the composition team at Aptara, Inc. This edition, like all previous editions, is an improbable, momentary, and par- tial triumph over an unruly, cosmic mass of information. That it occurred is due in significant part to those named here.

John F. Steiner

George A. Steiner

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xvi

About the Authors

John F. Steiner is Professor of Management Emeritus at California State University, Los Angeles. He received his B.S. from Southern Oregon University and received an M.A. and Ph.D. in political science from the University of Arizona. He has coauthored two other books with George A. Steiner, Issues in Business and Society and Casebook for Business, Government, and Society. He is also the author of Industry, Society, and Change: A Casebook. Professor Steiner is a former chair of the Social Issues in Man- agement Division of the Academy of Management and former chair of the Depart- ment of Management at California State University, Los Angeles.

George A. Steiner is one of the leading pioneers in the development of university curriculums, re- search, and scholarly writings in the field of business, government, and society. In 1983 he was the recipient of the first Sumner Marcus Award for distinguished achievement in the field by the Social Issues in Management Division of the Acad- emy of Management. In 1990 he received the Distinguished Educator Award, given for the second time by the Academy of Management. After receiving his B.S. in business administration at Temple University, he was awarded an M.A. in eco- nomics from the Wharton School of the University of Pennsylvania and a Ph.D. in economics from the University of Illinois. He is the author of many books and ar- ticles. Two of his books received “book-of-the-year” awards. In recognition of his writings, Temple University awarded him a Litt.D. honorary degree. Professor Steiner has held top-level positions in the federal government and in industry, in- cluding corporate board directorships. He is a past president of the Academy of Management and cofounder of The California Management Review .

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Chapter One

The Study of Business, Government, and Society ExxonMobil Corporation

ExxonMobil is a colossus. In 2010 it had revenues of $370 billion and net income of $29 billion. To put this in perspective, it had five times the sales of Microsoft; its profits equaled the total sales of Nike. It paid $89 billion in taxes, a sum exceeding the combined revenues of Microsoft and Nike. ExxonMobil employs 84,000 people, most in the 143 subsidiaries it uses for its operations. Its main business is discovering, producing, and selling oil and natural gas, and it has a long record of profiting more at this business than its rivals.

The company cannot be well understood apart from its history. It descends from the Standard Oil Trust, incorporated in 1882 by John D. Rockefeller as Standard Oil of New Jersey. Rockefeller was a quiet, meticulous, secretive manager, a relentless com- petitor, and a painstaking accountant who obsessed over every detail of strategy and every penny of cost and earnings. He believed that the end of imposing order on a youthful, rowdy oil industry justified the use of ruthless means.

As Standard Oil grew, Rockefeller’s values defined the company’s culture; that is, the shared assumptions, both spoken and unspoken, that animate its employees. If the values of a founder such as Rockefeller are effective, they become embedded over time in the organization. Once widely shared, they tend to be exceptionally long-lived and stable. 1 Rockefeller emphasized cost control, efficiency, centralized organization, and suppression of competitors. And no set of principles was ever more triumphant. Standard Oil once had more than 90 percent of the American oil market.

Standard Oil’s power so offended public values that in 1890 Congress passed the Sherman Antitrust Act to outlaw its monopoly. In 1911, after years of legal battles, the trust was finally broken into 39 separate companies. 2 After the breakup, Standard Oil

1 See, for example, Edgar H. Schein, The Corporate Culture Survival Guide, rev. ed. (San Francisco: Jossey-Bass, 2009), part one.

2 Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911).

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2 Chapter 1 The Study of Business, Government, and Society

of New Jersey continued to exist. Although it had shed 57 percent of its assets to create the new firms, it was still the world’s largest oil company. Some companies formed in the breakup were Standard Oil of Indiana (later renamed Amoco), Atlantic Refining (ARCO), Standard Oil of California (Chevron), Continental Oil (Conoco), Standard Oil of Ohio (Sohio), Chesebrough-Pond’s (a company that made petroleum jelly), and Standard Oil of New York (Mobil). In 1972 Standard Oil of New Jersey changed its name to Exxon, and in 1999 it merged with Mobil, forming Exxon Mobil.

The passage of time now obscures Rockefeller’s influence, but ExxonMobil’s actions remain consistent with his nature. It has a centralized, authoritarian culture. Profit is an overriding goal. Every project must meet strict criteria for return on capital. ExxonMobil consistently betters industry rivals in its favorite measure, return on aver- age capital employed.

Unlike Southwest Airlines or Google, where having fun is part of the job, perform- ance pressure at ExxonMobil is so intense that it “is not a fun place to work.” 3 As Rockefeller bought competitors, he kept only the best managers from their ranks. Today managers at ExxonMobil face a Darwinian promotion system that weeds out anyone who is not a top performer. “We put them through a big distillation column,” said a former CEO, and “only the top of the column stays there.” 4 And oil industry competitors still find it a ferocious adversary. The company says simply that it “employs all methods of competition which are lawful and appropriate.” 5

Although ExxonMobil is a powerful corporation, it is no longer the commanding trust of Rockefeller’s era. As in the old days, its power is challenged and limited by economic, political, and social forces. Now, however, these forces are more leveling.

Markets are more contested. ExxonMobil pumps only 8 percent of the world’s daily output of oil and controls less than 2 percent of petroleum reserves. These fig- ures are far lower than in the 1950s when Exxon was the largest of the Seven Sisters, a group of Western oil firms that dominated global production and reserves, includ- ing the huge Middle East oil fields. 6 Now its largest competitors are seven state- owned oil companies, often called the new Seven Sisters, whose output dwarfs that of today’s privately owned companies. 7 The biggest, Saudi Aramco, is 3.5 times the size of ExxonMobil in daily crude oil output and has 32 times its reserves. 8 The rise of these state-owned companies reflects a new form of nationalism, one that rejects reliance on foreign firms to exploit natural resources.

3 Fadel Gheit, a former employee and an oil industry analyst, quoted in Geoff Colvin, “The Defiant One,” Fortune, April 30, 2007, p. 88.

4 Lee Raymond, quoted in Tom Bower, Oil: Money, Politics, and Power in the 21st Century (New York: Grand Central Publishing, 2009), p. 162.

5 Exxon Mobil Corporation, Form 10-K 2009, filed with the Securities and Exchange Commission, February 26, 2010, p. 1.

6 The Seven Sisters were Exxon, Mobil, Shell, British Petroleum, Gulf, Texaco, and Chevron.

7 The new Seven Sisters are Saudi Aramco (Saudi Arabia), Gazprom (Russia), China National Petroleum Company (China), National Iranian Oil Company (Iran), Petróleos de Venezuela S. A. (Venezuela), Petrobras (Brazil), and Petronas (Malaysia).

8 Government Accountability Office, Crude Oil, GAO-07-283, February 2007, fig. 9; and Ian Bremmer, “The Long Shadow of the Visible Hand,” The Wall Street Journal, May 22–23, 2010, p. W3.

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Chapter 1 The Study of Business, Government, and Society 3

ExxonMobil is on a treadmill, constantly searching for new oil and natural gas supplies to compensate for declining production in existing fields. Output from a mature field drops 5 to 8 percent a year. To maintain profitability the company pursues new reserves wherever they are, taking political risks and abiding unrest and corruption. Iran and Venezuela have expropriated its assets. In Indonesia, govern- ment troops guard its facilities against attacks by rebel forces. In Chad, Angola, Nigeria, and Equatorial Guinea, it has paid dictators for access to oil.

Governments are more active and relations with them, ranging from high-level diplomacy to mundane regulatory compliance, are more complex than in the past. In 2003 the company engaged in a high-stakes game of political intrigue trying to pur- chase Yukos Oil Company. Yukos was a technologically backward Russian company that controlled oil and gas deposits in Siberia so huge they would double Exxon- Mobil’s reserves. ExxonMobil wanted it badly and offered $45 billion to the Russian capitalists who owned it. Their leader was billionaire Mikhail Khodorkovsky, a political rival of Russia’s President Vladimir Putin. Khodorkovsky promised ExxonMobil that he would use his political influence to clear the deal, but when its top managers met with Putin he was guarded and said, “These details are for my ministers. You must deal with them.” 9 Soon, Khodorkovsky’s private jet was mysteriously delayed from taking off at a Siberian airfield and boarded by masked police, who arrested him on charges of fraud and tax evasion. He has been in jail ever since. Yukos soon merged with a state-owned oil company managed by one of Putin’s close allies.

In more ordinary ways, webs of law and regulation dictate ExxonMobil’s opera- tions in each country where it does business. In the United States alone approximately 200 federal departments, commissions, agencies, offices, and bureaus, only a hand- ful of which existed in Rockefeller’s day, impose rules on the company. If the founder were alive, he might find this tight supervision unrecognizable—even incredible. For example, in 2009 the company paid a $600,000 fine to settle charges that 85 migra- tory birds in five states died of hydrocarbon exposure after landing in production and wastewater ponds. It agreed to a $2.5 million bird protection program. It will put nets over ponds and install electronic systems that turn on flashing lights and noisemakers when they detect incoming flights of birds. 10

ExxonMobil also faces a demanding social environment. As a leader in the world’s largest industry, it is closely watched by environmental, civil rights, labor, and con- sumer groups—some of which are actively hostile. For years the company agitated environmentalists by rejecting the scientific case for global warming. Alone among major oil companies, it refused to make significant investments in renewable energy. Its former CEO called such investments “a complete waste of money.” 11

In 2006 a new CEO, Rex Tillerson, tried to blunt criticism by granting publicly that the world is warming. But he made no changes in strategy. A group of John D. Rockefeller’s heirs, believing that ExxonMobil no longer represented the “forward- looking” spirit of its great founder, wrote to Tillerson, welcoming him as the new

9 Quoted in Tom Bower, Oil: Money, Politics, and Power in the 21st Century, p. 10.

10 United States Attorney’s Office, District of Colorado, “Exxon-Mobil Pleads Guilty to Killing Migratory Birds in Five States,” press release, August 13, 2009.

11 Lee Raymond, quoted in “The Unrepentant Oilman,” The Economist, March 15, 2003, p. 64.

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4 Chapter 1 The Study of Business, Government, and Society

leader and requesting a meeting .12 He would not meet with them. Subsequently, 66 Rockefeller descendants signed an initiative calling on the company to convene a climate change task force. The company refused to talk with the family members, who held only 0.006 percent of its shares. 13

Besides using ethanol blends in gasoline, ExxonMobil’s major investment in alternative energy is a $600 million research project to make biofuels from algae. 14 That investment pales in comparison with its $27 billion in capital and exploration expenditures in 2009 and a $30 billion project nearing completion to liquefy and ship natural gas from Qatar.

As a corporate citizen ExxonMobil funds worldwide programs to benefit communi- ties, nature, and the arts. Its largest contributions, about 50 percent of the total, go to education. Other efforts range from $68 million to fight malaria in Africa to $5,000 for the National Cowgirl Museum in Fort Worth, Texas. In 2009 ExxonMobil gave $196 million to such efforts. This is a large sum from the perspective of an individual. However, for ExxonMobil it was seven-hundredths of 1 percent of its revenues, the equivalent of a person making $1 million a year giving $7 to charity. Does this giving live up to the elegant example of founder John D. Rockefeller, the great philanthro- pist of his era?

The story of ExxonMobil raises central questions about the role of business in society. When is a corporation socially responsible? How can managers know their responsibilities? What actions are ethical or unethical? How responsive must a corpo- ration be to its critics? This book is a journey into the criteria for answering such questions. As a beginning for this first chapter, however, the story illustrates a range of interactions between one large corporation and many nations and social forces. Such business–government–society interactions are innumerable and complicated. In the chapter that follows we try to order the universe of these interactions by introducing four basic models of the business-government-society relationship. In addition, we define basic terms and explain our approach to the subject matter.

WHAT IS THE BUSINESS–GOVERNMENT–SOCIETY FIELD?

In the universe of human endeavor, we can distinguish subdivisions of economic, political, and social activity—that is, business, government, and society—in every civilization throughout time. Interplay among these activities creates an environ- ment in which businesses operate. The business-government-society (BGS) field is the study of this environment and its importance for managers.

To begin, we define the basic terms. Business is a broad term encompassing a range of actions and institutions. It

covers management, manufacturing, finance, trade, service, investment, and other activities. Entities as different as a hamburger stand and a giant corporation are businesses. The fundamental purpose of every business is to make a profit by providing products and services that satisfy human needs.

business Profit-making activity that provides prod- ucts and ser- vices to satisfy human needs.

12 Daniel Gross, “There Will Be Blood Orange Juice,” Slate, April 30, 2008.

13 Jad Mouawad, “Can Rockefeller Heirs Turn Exxon Greener?” The New York Times, May 4, 2008, p. B2.

14 “ExxonMobil Invests in Algae for Biofuel,” Nature, July 2009, p. 449.

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Chapter 1 The Study of Business, Government, and Society 5

Government refers to structures and processes in society that authoritatively make and apply policies and rules. Like business, it encompasses a wide range of activities and institutions at many levels, from international to local. The focus of this book is on the economic and regulatory powers of government as they affect business.

A society is a cooperative network of human relations, organized by flows of power and relatively distinct in its boundaries from other, analogous networks. 15 Every society includes three interacting elements: (1) ideas, (2) institutions, and (3) material things.

Ideas, or intangible objects of thought, include values and ideologies. Values are enduring beliefs about which fundamental choices in personal and social life are correct. Cultural habits and norms are based on values. Ideologies are bundles of values that create a worldview. They establish the meaning of life or categories of experience by defining what is considered good, true, right, beautiful, and accept- able. Sacred ideologies, or theologies, include the great religions that define human experience in relation to a deity. Secular ideologies, such as democracy, liberalism, capitalism, socialism, or ethics, all of which will be discussed in this book as they relate to business, explain human experience in a visible world, a world ordered by values based on reason, not faith. The two kinds of ideology can overlap, as with ethics, an ideology rooted in both faith and reason. All ideologies have the power to organize collective activity. Ideas shape every institution in society, sometimes coming in conflict as when capitalism’s practiced values of exploitation, ruthless competition, self-interest, and short-term gain abrade values of love, mercy, charity, and patience in Christianity.

Institutions are formal patterns of relations that link people to accomplish a goal. They are essential to coordinate the work of individuals having no direct relationship with each other. 16 In modern societies, economic, political, cultural, legal, religious, military, educational, media, and familial institutions are salient. There are multiple economic institutions such as financial institutions, the corpo- rate form, and markets. Collectively, we call these business.

As Figure 1.1 shows, markets are supported by a range of institutions. Capital- ism has wide variation in nations where it abides because supporting institutions grow from unique historical and cultural roots. In developed nations these institu- tions are highly evolved and mutually supportive. Where they are weak, markets work in dysfunctional ways. An example is the story of Russia, which introduced a market economy after the fall of communism in the early 1990s. In the old sys- tem workers spent lifetimes in secure jobs at state-owned firms. There was no un- employment insurance and, because few workers ever moved, housing markets were undeveloped. A free market economy requires a strong labor market, so workers can switch from jobs in declining firms to jobs in expanding ones. But Russia’s labor market was undeveloped. Because the government did not yet

government Structures and processes in society that authoritatively make and apply policies and rules.

society A network of human relations composed of ideas, institu- tions, and material things.

idea An intangible object of thought.

value An enduring belief about which funda- mental life choices are correct.

ideology A bundle of values that creates a partic- ular view of the world.

institution A formal pat- tern of relations that links peo- ple to accom- plish a goal.

15 See Michael Mann, The Sources of Social Power, vol. I: A History of Power from the Beginning to A.D. 1760 (New York: Cambridge University Press, 1986), pp. 1–3.

16 Arnold J. Toynbee, A Study of History, vol. XII, Reconsiderations (London: Oxford University Press, 1961), p. 270.

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6 Chapter 1 The Study of Business, Government, and Society

provide unemployment benefits to idled workers, there was no safety net. And housing markets were anemic. Company managers, out of basic humanity, were unwilling to lay off workers who would get no benefits and who would find it difficult to move elsewhere. 17 As a result, restructuring in the new Russian economy was torpid. The lesson is that institutions are vital to markets.

Each institution has a specific purpose in society. The function of business is to make a profit by producing goods and services at prices attractive to consumers. A business uses the resources of society to create new wealth. This justifies its ex- istence and is its priority task. All other social tasks—raising an army, advancing knowledge, healing the sick, or raising children—depend on it. Businesses must,

FIGURE 1.1 How Institutions Support Markets

CORPORATIONS

Combine capital and labor, encourage risk

by limiting liability, and have continuity beyond

individual lives.

THE MARKET

JUDICIAL

Protect property rights, encourage

investment by making dispute resolution

predictable.

REGULATORY

Protect the public and investors from

dishonesty, danger, and fraud.

CULTURAL

Impart values, habits, and norms in family,

religious, or educational institutions.

Inform the public and stimulate

commerce with advertising.

MEDIA

POLITICAL

Make economic policy, collect taxes, provide social safety

nets, check and balance business power.

FINANCIAL

Mobilize capital for saving, borrowing,

and lending.

17 Joseph E. Stiglitz, Globalization and Its Discontents (New York: W. W. Norton, 2002), p. 140.

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Chapter 1 The Study of Business, Government, and Society 7

therefore, be managed to make a profit. A categorical statement of this point comes from Peter Drucker: “Business management must always, in every decision and action put economic performance first.” 18 Without profit, business fails in its duty to society and lacks legitimacy.

The third element in society is material things , including land, natural resources, infrastructure, and manufactured goods. These shape and, in the case of fabricated objects, are partly products of ideas and institutions. Economic institutions, together with the extent of resources, largely determine the type and quantity of society’s material goods.

The BGS field is the study of interactions among the three broad areas defined above. Its primary focus is on the interaction of business with the other two ele- ments. The basic subject matter, therefore, is how business shapes and changes government and society, and how it, in turn, is molded by political and social pres- sures. Of special interest is how forces in the BGS nexus affect the manager’s task.

WHY IS THE BGS FIELD IMPORTANT TO MANAGERS?

To succeed in meeting its objectives, a business must be responsive to both its eco- nomic and its noneconomic environment. 19 ExxonMobil, for example, must effi- ciently discover, refine, transport, and market energy. Yet swift response to market forces is not always enough. There are powerful nonmarket forces to which many businesses, especially large ones, are exposed. Their importance is clear in the two dramatic episodes that punctuate ExxonMobil’s history—the 1911 court-ordered breakup and the 1989 Exxon Valdez oil spill.

In 1911 the Supreme Court, in a decision that reflected public opinion as well as interpretation of the law, forced Standard Oil to conform with social values favoring open, competitive markets. With unparalleled managerial genius, courage, and perspicacity, John D. Rockefeller and his lieutenants had built a wonder of efficiency that spread fuel and light throughout America at lower cost than otherwise would have prevailed. They never understood why this remarkable commercial performance was not the full measure of Standard Oil. But beyond efficiency, the public demanded fair play. Thus, the great company was dismembered.

In Alaska, one of the company’s massive tankers spilled 11 million gallons of crude oil when its captain, having consumed enough vodka “to make most people unconscious,” quit the bridge during a critical maneuver. Left alone, an unlicenced third mate ran onto a reef in pristine, picturesque Prince William Sound. 20 The captain was an alcoholic, lately returned to command after a treatment program, but known to have relapsed, drinking in hotels, bars, restaurants, parking lots, and even with Exxon officials. Although the company had a clear policy against

material things Tangible arti- facts of a society that shape and are shaped by ideas and institutions.

18 Management: Tasks-Responsibilities-Practices (New York: Harper & Row, 1973), p. 40.

19 For discussion of this distinction see Jean J. Boddewyn, “Understanding and Advancing the Concept of ‘Nonmarket,’” Business & Society, September 2003.

20 In re: the Exxon Valdez, 270 F.3rd 1238 (2001).

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8 Chapter 1 The Study of Business, Government, and Society

use of alcohol by its crews, managers failed to monitor him. Years later, the United States Supreme Court would call this lapse “worse than negligent but less than malicious.” 21

The disaster brought acute legal, political, and image problems for the firm. It spent $2.4 billion to clean up the spill and another $2.2 billion to settle lawsuits that dragged on for 20 years, Congress passed a law barring its ship from ever again entering the area, and activists told motorists to get their gas from other companies. 22 Today ExxonMobil operates its 650 tankers with extreme care and randomly tests crews for drugs and alcohol. Remarkably, it is now so disciplined that it measures oil spills from its fleet in tablespoons per million gallons shipped. Between 2006 and 2009 it averaged fewer than five tablespoons lost per million gallons shipped. 23

Recognizing that a company operates not only within markets but also within a society is critical. If the society, or one or more powerful elements within it, fails to accept a company’s actions, that firm will be punished and constrained. Put philo- sophically, a basic agreement or social contract exists between economic institutions and other networks of power in a society. This contract establishes the general du- ties that business must fulfill to retain the support and acquiescence of the others as it organizes people, exploits nature, and moves markets. It is partly expressed in law, but it also resides in social values.

Unfortunately for managers, the social contract, while unequivocal, is not plain, fixed, precise, or concrete. It is as complex and ambiguous as the economic forces a business faces and no less difficult to comprehend. For example, the public be- lieves that business has social responsibilities beyond making profits and obeying regulations. If business does not meet them, it will suffer. But precisely what are those responsibilities? How is corporate social performance to be measured? To what extent must a business comply with unlegislated ethical values? When meet- ing social expectations beyond the law conflicts with raising profits, what is the priority? Despite these questions, the social contract codifies the expectations of society, and managers who ignore, misread, or violate it court disaster.

FOUR MODELS OF THE BGS RELATIONSHIP

Interactions among business, government, and society are infinite and their mean- ing is open to interpretation. Faced with this complexity, many people use simple mental models to impose order and meaning on what they observe. These models are like prisms, each having a different refractive quality, each giving the holder a different view of the world. Depending on the model (or prism) used, a person

social contract An underlying agreement be- tween business and society on basic duties and responsi- bilities business must carry out to retain public support. It may be reflected in laws and regulations.

21 Exxon Shipping Company v. Baker, 128 S.Ct. 2631 (2008).

22 The $2.4 billion includes $303 million in voluntary payments to nearby residents for economic losses. The $2.2 billion figure includes criminal and civil fines, civil settlements, interest, and $500 million in punitive damages imposed by a federal jury. The law was a provision in the Oil Protection Act of 1990.

23 “Changes ExxonMobil Has Made to Prevent Another Accident Like Valdez,” at www.exxonmobil.com/ Corporate/about_issues_valdez_prevention.aspx, accessed October 1, 2009.

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Chapter 1 The Study of Business, Government, and Society 9

will think differently about the scope of business power in society, criteria for managerial decisions, the extent of corporate responsibility, the ethical duties of managers, and the need for regulation.

The following four models are basic alternatives for seeing the BGS relation- ship. As abstractions they oversimplify reality and magnify central issues. Each model can be both descriptive and prescriptive; that is, it can be both an explana- tion of how the BGS relationship does work and, in addition, an ideal about how it should work.

The Market Capitalism Model The market capitalism model, shown in Figure 1.2, depicts business as operating within a market environment, responding primarily to powerful economic forces. There, it is substantially sheltered from direct impact by social and political forces. The market acts as a buffer between business and nonmarket forces. To appreciate this model, it is important to understand the history and nature of markets and the classic explanation of how they work.

Markets are as old as humanity, but for most of recorded history they were a minor institution. People produced mainly for subsistence, not to trade. Then, in the 1700s, some economies began to expand and industrialize, division of labor developed within them, and people started to produce more for trade. As trade grew, the market, through its price signals, took on a more central role in directing the creation and distribution of goods. The advent of this kind of market economy, or an economy in which markets play a major role, reshaped human life.

The classic explanation of how a market economy works comes from the Scottish professor of moral philosophy Adam Smith (1723–1790). In his extraordinary treatise, The Wealth of Nations, Smith wrote about what he called “commercial society” or what today we call capitalism. He never used that word. It was adopted later by the philosopher Karl Marx (1818–1883), who contrived it as a term of

market economy The economy that emerges when people move beyond subsistence production to production for trade, and markets take on a more central role.

capitalism An economic ideology with a bundle of val- ues including private owner- ship of means of production, the profit motive, free competition, and limited government restraint in markets.

FIGURE 1.2 The Market Capitalism Model Market Environment

BUSINESS

Sociopolitical Environment

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Mrs. Hayward
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Mrs. Hayward
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10 Chapter 1 The Study of Business, Government, and Society

pointed insult. But it caught on and soon lost its negative connotation. 24 Smith said the desire to trade for mutual advantage lay deep in human instinct. He noted the growing division of labor in society led more people to try to satisfy their self-interests by specializing their work, then exchanging goods with each other. As they did so, the market’s pricing mechanism reconciled supply and demand, and its ceaseless tendency was to make commodities cheaper, better, and more available.

The beauty of this process, according to Smith, was that it coordinated the activities of strangers who, to pursue their selfish advantage, were forced to ful- fill the needs of others. In Smith’s words, each trader was “led by an invisible hand to promote an end which was no part of his intention,” the collective good of society. 25 Through markets that harnessed the constant energy of greed for the public welfare, Smith believed that nations would achieve “universal opulence.” His genius was to demystify the way markets work, to frame market capitalism in moral terms, to extol its virtues, and to give it lasting justification as a source of human progress. The greater good for society came when businesses com- peted freely.

In Smith’s day producers and sellers were individuals and small businesses managed by their owners. Later, by the late 1800s and early 1900s, throughout the industrialized world, the type of economy described by Smith had evolved into a system of managerial capitalism. In it the innumerable, small, owner-run firms that animated Smith’s marketplace were overshadowed by a much smaller number of dominant corporations run by hierarchies of salaried managers. 26 These managers

managerial capitalism A market econ- omy in which the dominant businesses are large firms run by salaried managers, not smaller firms run by owner- entrepreneurs.

Full Production and Full Em- ployment under Our Democratic System of Pri- vate Enterprise, ca. 1944, a crayon and ink drawing by Michael Lenson, an artist work- ing for the Works Progress Administration Federal Art Project. Lenson focuses on the virtues of mar- ket capitalism. Source: The Library of Con- gress. © Barry Lenson, used with permission.

24 Jerry Z. Muller, The Mind and the Market: Capitalism in Modern European Thought (New York: Knopf, 2002), p. xvi.

25 Adam Smith, The Wealth of Nations, ed. E. Cannan (New York: Modern Library, 1937), Book IV, chap. II, p. 423. First published in 1776.

26 Alfred D. Chandler, Jr., “The Emergence of Managerial Capitalism,” Business History Review, winter 1984, p. 473.

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Chapter 1 The Study of Business, Government, and Society 11

had limited ownership in their companies and worked for shareholders. This variant of capitalism has now spread throughout the world.

The model incorporates important assumptions. One is that government inter- ference in economic life is slight. This is called laissez-faire, a term first used by the French to mean that government should “let us alone.” It stands for the belief that government intervention in the market is undesirable. It is costly because it lessens the efficiency with which free enterprise operates to benefit customers. It is unnecessary because market forces are benevolent and, if liberated, will channel economic resources to meet society’s needs. It is for governments, not businesses, to correct social problems. Therefore, managers should define company interests narrowly, as profitability and efficiency.

Another assumption is that individuals can own private property and freely risk investments. Under these circumstances, business owners are powerfully motivated to make a profit. If free competition exists, the market will hold profits to a minimum and the quality of products and services will rise as competing firms try to attract more buyers. If one tries to increase profits by charging higher prices, consumers will go to another. If one producer makes higher-quality prod- ucts, others must follow. In this way, markets convert selfish competition into broad social benefits.

Other assumptions include these: Consumers are informed about products and prices and make rational decisions. Moral restraint accompanies the self- interested behavior of business. Basic institutions such as banking and laws exist to ease commerce. There are many producers and consumers in competitive markets.

The perspective of the market capitalism model leads to these conclusions about the BGS relationship: (1) government regulation should be limited, (2) mar- kets will discipline private economic activity to promote social welfare, (3) the proper measure of corporate performance is profit, and (4) the ethical duty of management is to promote the interests of owners and investors. These tenets of market capitalism have shaped economic values in the industrialized West and, as markets spread, they do so increasingly elsewhere.

There are many critics of capitalism and the market capitalism model. Bernard Mandeville (1670–1733), an intellect predating Adam Smith, argued that markets erode virtue. The envy, avarice, self-love, and ruthlessness that energize them are base values driving out virtues such as love, friendship, and compassion. 27 Karl Marx believed that owners of capital exploited workers and promoted systems of rising inequality. The communist Vladimir Lenin (1870–1924) wrote that industri- alists masterminded imperial foreign policies to effect a “territorial division of the whole world among the greatest capitalist powers.” 28 Pope John Paul II (1920–2005) feared that markets place too much emphasis on money and material objects and cautioned against a “domination of things over people.” 29

laissez-faire An economic philosophy that rejects govern- ment interven- tion in markets.

27 See George Bragues, “Business Is One Thing, Ethics Is Another: Revisiting Bernard Mandeville’s The Fable of the Bees,” Business Ethics Quarterly, April 2005.

28 V. I. Lenin, Imperialism: The Highest Stage of Capitalism (New York: International Publishers, 1939), p. 89.

29 Ioannes Paulus PP.II, Encyclical Letter, Centesimus annus (May 1, 1991), no. 33.

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12 Chapter 1 The Study of Business, Government, and Society

Such critics see a long list of flaws that often, perhaps inevitably, appear in mar- kets. Without correction the market amplifies blemishes of human nature and the result is conspiracies, monopolies, frauds, pollution, and dangerous products. Business models arise to satisfy vices such as adultery, gossiping, gambling, smok- ing, drug use, and prostitution. Calls for corporate social responsibility and more ethical managerial behavior stem from the inevitability of capitalism’s flaws. As promised by its defenders, capitalism has created material progress. Yet its dark side is unremitting.

Denunciations of capitalism are pronounced today, but none are new. They carry on a regular attack that winds through the Western intellectual tradition. Adam Smith himself had some reservations and second thoughts. He feared both physical and moral decline in factory workers and the unwarranted idolization of the rich, who might have earned their wealth by unvirtuous methods. In his later years, he grew to see more need for government intervention. But Smith never envisioned a system based solely on greed and self-interest. He expected that in society these traits must coexist with restraint and benevolence. 30

The ageless debate over whether capitalism is the best means to human fulfill- ment will continue. Meanwhile, we turn our discussion to an alternative model of the BGS relationship that attracts many of capitalism’s detractors.

The Dominance Model The dominance model is a second basic way of seeing the BGS relationship. It rep- resents primarily the perspective of business critics. In it, business and govern- ment dominate the great mass of people. This idea is represented in the pyramidal, hierarchical image of society shown in Figure 1.3.

Business- Government

Masses

Environmental Forces FIGURE 1.3 The Dominance Model

30 E. G. West, ed., The Theory of Moral Sentiments (Indianapolis: Liberty Classics, 1976), pp. 70–72. Originally published in 1853.

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Chapter 1 The Study of Business, Government, and Society 13

Those who subscribe to the model believe that corporations and a powerful elite control a system that enriches a few at the expense of the many. Such a system is undemocratic. In democratic theory, governments and leaders represent inter- ests expressed by the people, who are sovereign.

Proponents of the dominance model focus on the defects and inefficiencies of capitalism. They believe that corporations are insulated from pressures holding them responsible, that regulation by a government in thrall to big business is fee- ble, and that market forces are inadequate to ensure ethical management. Unlike other models, the dominance model does not represent an ideal in addition to a description of how things are. For its advocates, the ideal is to turn it upside down so that the BGS relationship conforms to democratic principles.

In the United States the dominance model gained a following during the late nineteenth century when large trusts such as Standard Oil emerged, buying politi- cians, exploiting workers, monopolizing markets, and sharpening income dispari- ties. Beginning in the 1870s, diverse groups of plain people who found themselves toiling under the directives of rich capitalists rejected the market capitalism model and based a populist reform movement on the critical view of society implied in the dominance model.

Populism is a recurrent spectacle in which common people who feel oppressed or disadvantaged in some way seek to take power from a ruling elite that thwarts fulfillment of the collective welfare. In America, the populist impulse bred a socio- political movement of economically hard-pressed farmers, miners, and workers lasting from the 1870s to the 1890s that blamed the Eastern business establishment for a range of social ills and sought to limit its power.

This was an era when, for the first time, on a national scale the actions of powerful business magnates shaped the destinies of common people. Some displayed contempt for commoners. “The public be damned,” railroad mag- nate William H. Vanderbilt told a reporter during an interview in his luxurious private railway car. 31 The next day, newspapers around the country printed his remark, enraging the public. Later, Edward Harriman, the aloof, arrogant president of the Union Pacific Railroad, allegedly reassured industry leaders worried about reform legislation, saying “that he ‘could buy Congress’ and that if necessary he ‘could buy the judiciary.’” 32 It was with respect to Harriman that President Theodore Roosevelt once noted, “men of very great wealth in too many instances totally failed to understand the temper of the country and its needs.” 33

populism A political pat- tern, recurrent in world his- tory, in which common peo- ple who feel oppressed or disadvantaged seek to take power from a ruling elite seen as thwarting fulfillment of the collective welfare.

31 “Reporter C.P. Dresser Dead,” The New York Times, April 25, 1891, p. 7. In fairness to Vanderbilt, the context of the remark is elusive. It came in response to questioning by a reporter who may have awakened Vanderbilt at 2:00 a.m. to ask, perhaps insolently, if he would keep an unprofitable route in service to the public. Vanderbilt’s response was magnified far beyond a cross retort to become the age’s enduring emblem of arrogant wealth. See “Human Factor Great Lever in Railroading,” Los Angeles Times, October 20, 1912, p. V15; and Ashley W. Cole, “A Famous Remark,” The New York Times, August 25, 1918, p. 22 (letter to the editor).

32 Quoted from correspondence of Theodore Roosevelt in Maury Klein, The Life & Legend of E.H. Harriman (Chapel Hill: University of North Carolina Press, 2000), p. 369.

33 Ibid., p. 363.

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14 Chapter 1 The Study of Business, Government, and Society

The populist movement in America ultimately fell short of reforming the BGS relationship to a democratic ideal. Other industrializing nations, notably Japan, had similar populist movements. Marxism, an ideology opposed to industrial capitalism, emerged in Europe at about the same time as these movements, and it also contained ideas resonant with the dominance model. In capitalist societies, according to Karl Marx, an owner class dominates the economy and ruling institu- tions. Many business critics worldwide advocated socialist reforms that, based on Marx’s theory, could achieve more equitable distribution of power and wealth.

In the United States the dominance model may have been most accurate in the late 1800s when it first arose to conceptualize a world of brazen corporate power and politicians who openly represented industries. However, it remains popular. Ralph Nader, for example, speaks its language.

Over the past 20 years, big business has increasingly dominated our political econ- omy. This control by corporate government over our political government is creat- ing a widening “democracy gap.” The unconstrained behavior of big business is subordinating our democracy to the control of a corporate plutocracy that knows few self-imposed limits to the spread of its power to all sectors of our society. 34

Nader persists in the rhetoric of the dominance model. Running for president in 2008 he wrote that “the corporations . . . have become our government . . . [and]

Marxism An ideology holding that workers should revolt against property- owning capi- talists who exploit them, replacing economic and political domi- nation with more equal and demo- cratic socialist institutions.

This 1900 political car- toon illustrates a central theme of the domi- nance model, that powerful business inter- ests act in concert with government to further selfish money inter- ests. Although the cartoon is old, the idea remains com- pelling for many. Source: © Bett- mann/CORBIS

34 “Statement of Ralph Nader,” in The Ralph Nader Reader (New York: Seven Stories Press, 2000), pp. 3 and 4.

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Chapter 1 The Study of Business, Government, and Society 15

both parties are moving deeper into the grip of global corporatism,” 35 later adding that “corporate power over our political economy and its control over people’s lives knows few boundaries.” 36

The Countervailing Forces Model The countervailing forces model, shown in Figure 1.4, depicts the BGS relation- ship as a flow of interactions among major elements of society. It suggests exchanges of power among them, attributing constant dominance to none.

This is a model of multiple forces. The power of each element can rise or fall depending on factors such as the subject at issue, the strength of competing inter- ests, the intensity of feeling, and the influence of leaders. The countervailing forces model generally reflects a way of looking at the BGS relationship in the United States and other Western industrialized nations. It differs from the market capital- ism model in opening business directly to influence by nonmarket forces. It differs

•Markets •Geopolitics •Ideologies •Movements •Technology •Nature •Wars, terrorism •Information media

•Products, services •Use of technologies •Public relations •Campaign donations •Government service by executives •Lobbying •Philanthropy

•Cultural values •Public opinion •Voting •Interest groups •Market demands •Social classes •Demographic change

•Constitutions •Laws and statutes •Regulations •Political parties •Political leaders •Judiciaries

Environmental Catalysts

The Public

Business Government

FIGURE 1.4 The Counter- vailing Forces Model

35 Ralph Nader, “It’s Not About Me. It’s About Our Broken System,” USA Today, March 5, 2008, p. 11A.

36 Ralph Nader, “Time for Citizens to Convene,” Common Dreams.org, September 28, 2009, at www.commondreams.org.

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16 Chapter 1 The Study of Business, Government, and Society

from the dominance model in rejecting an absolute primacy of business and cred- iting more power to a combination of forces and interactions rendered paltry by the dominance model.

What overarching conclusions can be drawn from this model? First, business is deeply integrated into an open society and must respond to many forces, both economic and noneconomic. It is not isolated from any part of society, nor is it always dominant. Markets, for example, have the power to organize human activ- ity and can operate very independently of corporate influence. Business exerts power in them, but so do other elements in society. Consumer demand rewards some business decisions, penalizes others, and forces innovation. Governments also shape markets, restricting buyers and sellers as to what products can be exchanged, when, and how.

Second, business is a major force acting on government, the public, and envi- ronmental factors. Business often defeats labor, wins political battles, and shapes public opinion. It consumes natural resources. It conditions cultural values, for example, commercialism and materialism, each encouraged by advertising per- haps at the expense of values such as temperance and spirituality. Some believe that among the power groupings in American society business predominates. However, defeats, compromises, and power sharing are highly visible. For exam- ple, in the 1970s large corporations fought new environmental regulations only to see a string of major laws, costly to comply with, adopted by Congress.

Third, to maintain broad public support, business must adjust to social, politi- cal, and economic forces it can influence but not control. Faulty adjustment invites correction. This is the social contract in action. For more than 50 years American business suppressed labor unions. In keeping with the dominance model, govern- ment acted as its constant ally, even sending troops to end strikes forcibly, some- times violently. Then, during the depression of the 1930s, the public blamed economic problems on corporate greed and excesses, electing President Franklin D. Roosevelt to bring reform. Sympathy for struggling workers was so strong that in 1935 Congress passed the National Labor Relations Act, protecting and easing union organizing, a colossal defeat for business and a bitter lesson about the social contract.

Finally, BGS relationships evolve as changes take place in the ideas, institutions, and processes of society. After the collapse of financial markets in late 2008, for example, the federal government took unprecedented actions, taking large owner- ship shares in big companies, firing the CEO of General Motors, and dictating executive salaries. Such actions altered the nature of capitalism as practiced in the United States in a way that reduced business power.

The Stakeholder Model The stakeholder model in Figure 1.5 shows the corporation at the center of an array of relationships with persons, groups, and entities called stakeholders . Stake- holders are those whom the corporation benefits or burdens by its actions and those who benefit or burden the firm with their actions. A large corporation has many stakeholders, all divisible into two categories based on the nature of the re- lationship. But the assignments are relative, approximate, and inexact. Depending

stakeholder An entity that is benefitted or burdened by the actions of a corporation or whose actions may benefit or burden the cor- poration. The corporation has an ethical duty toward these entities.

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Chapter 1 The Study of Business, Government, and Society 17

on the corporation or the episode, a few stakeholders may shift from one category to the other.

Primary stakeholders are a small number of constituents for which the impact of the relationship is mutually immediate, continuous, and powerful. They are usu- ally stockholders (owners), customers, employees, communities, and governments and may, depending on the firm, include others such as suppliers or creditors.

Secondary stakeholders include a possibly broad range of constituents in which the relationship is one of less immediacy, benefit, burden, or power to influence. Examples are activists, trade associations, politicians, and schools.

This model is based on a growing body of work by academicians who follow the lead of R. Edward Freeman, a management scholar and ethicist whose seminal 1984 book consolidated rudimentary ideas into a cohesive theory. 37 Now the idea seizes the imagination of many, including Pope Benedict XVI who writes of

primary stakeholders Entities in a re- lationship with the corporation in which they, the corporation, or both are affected imme- diately, contin- uously, and powerfully.

secondary stakeholders Entities in a re- lationship with the corporation in which the effects on them, the corporation, or both are less significant and pressing.

Suppliers

Competitors

Media

Corporation

Stockholders

Governments

Communities Employees

Secondary Stakeholders

Primary Stakeholders

Customers

Trade Associations

Political Interest Groups

Creditors Unions

Political Parties

Religious Groups

Earth’s Biosphere

Future Generations

The Poor

Educational Institutions

FIGURE 1.5 The Stakeholder Model

37 R. Edward Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman Publishing, 1984).

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18 Chapter 1 The Study of Business, Government, and Society

“a growing conviction that business management cannot concern itself only with the interests of proprietors, but must also assume responsibility for all the other stakeholders who contribute to the life of the business.” 38

Exponents of the stakeholder model debate how to identify who or what is a stakeholder. Some use a broad definition and extend the idea to include, for exam- ple, natural entities such as the earth’s atmosphere, oceans, terrain, and living creatures because corporations have an impact on them. 39 Others reject this broad- ening, since natural entities are defended by conventional stakeholders such as environmental groups. At the farthest reaches of the stakeholder idea lie groups such as the poor and future generations. But in the words of one advocate, “[s]takeholder theory should not be used to weave a basket big enough to hold the world’s misery.” 40 If groups such as the poor were included in the stakeholder network, managers would be morally obliged to run headlong at endless prob- lems, taking them beyond any conceivable economic mission. Still, any group be- comes a stakeholder simply by attacking the reputation and image of the corporation. Political activism equals right to consideration.

The stakeholder model reorders the priorities of management away from those in the market capitalism model. There, the corporation is the private property of those who contribute its capital. Its top priority is to benefit one group—the inves- tors. The stakeholder model, by contrast, removes this priority, replacing it with an ethical theory of management in which the welfare of each stakeholder must be considered as an end. Stakeholder interests have intrinsic worth: They are not to be valued only as they enrich investors. Managers have a duty to consider the in- terests of multiple stakeholders, and thus, “the interests of shareowners . . . are not always primary and never exclusive.” 41 Beyond this, other ethical duties that have been suggested include avoiding harm, justifying decisions, and protecting future generations. 42

The stakeholder theory is at heart a political ideology that regards traditional capitalist corporate governance as akin to an undemocratic political system in which the “population” of stakeholders is not given proper representation. With- out checks and balances autocratic managers will be tempted by greed into various degrees of economic oppression, treating the un- and underrepresented stakeholders unfairly. The ethical concept of duties introduces such a mechanism of representation. Stakeholder management creates duties toward multiple

38 Benedictus PP.XVI, Encyclical Letter, Caritas in Veritate (2009), no. 40.

39 See Edward Stead and Jean Garner Stead, “Earth: A Spiritual Stakeholder,” Business Ethics Quarterly, Ruffin Series no. 2 (2000), pp. 321–44.

40 Max Clarkson, A Risk-Based Model of Stakeholder Theory (Toronto: The Centre for Corporate Social Performance & Ethics, 1994), cited in Robert Philips, Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 119. See also James P. Walsh, “Taking Stock of Stakeholder Management,” Academy of Management Review 30, no. 2, p. 205.

41 James E. Post, Lee E. Preston, and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Stanford, CA: Stanford University Press, 2002), p. 17.

42 For a list of ethical duties toward stakeholders see Advisory Panel, Newmont Community Relationships Review, Building Effective Community Relationships: Final Report of the Advisory Panel to Newmont’s Community Relationship Review, February 8, 2009, appendix 7.

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Chapter 1 The Study of Business, Government, and Society 19

entities of the corporation—duties not emphasized in the traditional capitalist firm, which tries to dominate its environment out of an obsessive focus on enrich- ing stockholders. Management must raise its gaze above profits to see and re- spond to a spectrum of other values; it must manage to make each stakeholder “better off.” 43 The stakeholder model is intended to “revitalize capitalism” with a “new conceptualization” of how the corporation should work. 44 It rejects the shareholder-centered view of the firm in the market capitalism model as “ethically unacceptable.” 45

Not everyone agrees. Critics argue that the stakeholder model is an unrealistic assessment of power relationships between the corporation and other entities. It seeks to give power to the powerless by replacing force with ethical duty, a time- less and often futile quest of moralists. In addition, it sets up too vague a guideline to substitute for the yardstick of pure profit. Unlike traditional criteria such as re- turn on capital, there is no single, clear, and objective measure to evaluate the combined ethical/economic performance of a firm. According to one critic, this lack of a criterion “would render impossible rational management decision mak- ing for there is simply no way to adjudicate between alternative projects when there is more than one bottom line.” 46

In addition, the interests of stakeholders so vary that often they conflict with shareholders and with one another. With respect to corporate actions, laws and regulations protect stakeholder interests. Creating surplus ethical sensitivity that soars above legal duty is impractical and unnecessary. 47 And finally, a lasting con- viction, going back to Adam Smith, is that even the most fanatical pursuit of profit, if guided by law and the invisible hand, creates greater lasting good for society than pursuit of profit tempered by compassion. If a new conception of capitalism redistributes decision-making power and resources to stakeholders it can only impair the efficiency of the firm in maximizing both profits and social benefits. 48

Some puzzles exist in stakeholder thinking. It is not always clear who or what is a legitimate stakeholder, to what each stakeholder is entitled, or how managers should balance competing demands among a range of stakeholders. Yet its advo- cates find two arguments compelling. First, a corporation that embraces stake- holders prospers more, better sustaining its wealth-creating function with the support of a network of parties beyond shareholders. Put bluntly by an advocate of the stakeholder perspective, “[e]xecutives ignore stakeholders at the peril of the survival of their companies.” 49 Second, it is the ethical way to manage because stakeholders have moral rights that grow from the way powerful corporations

43 R. Edward Freeman, Jeffrey S. Harrison, and Andrew C. Wicks, Managing for Stakeholders: Survival, Reputation, and Success (New Haven: Yale University Press, 2007), p. 12.

44 Freeman, Harrison, and Wicks, Managing for Stakeholders, pp. x and 3.

45 Post, Preston, and Sachs, Redefining the Corporation, p. 16.

46 John Argenti, “Stakeholders: The Case Against,” Long Range Planning, June 1997, p. 444.

47 Anant K. Sundaram, “Tending to Shareholders,” Financial Times, May 26, 2006, p. 6.

48 James A. Stieb, “Assessing Freeman’s Stakeholder Theory,” Journal of Business Ethics, 87 (2009), p. 410.

49 R. Edward Freeman, “The Wal-Mart Effect and Business, Ethics, and Society,” Academy of Management Perspectives, August 2006, p. 40.

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20 Chapter 1 The Study of Business, Government, and Society

affect them. Despite academic debates, in practice the stakeholder ideology has been powerful enough to change the way capitalist corporations are managed. Most of the largest global corporations now analyze their stakeholders and enter into dialogue with a wide range of them. This trend is discussed in Chapter 6.

OUR APPROACH TO THE SUBJECT MATTER

Discussion of the business-government-society field could be organized in many ways. The following is an overview of our approach.

Comprehensive Scope This book is comprehensive. It covers many subjects. We believe that for those new to the field seeing a panorama is helpful. Because there is less depth in the treatment of subjects than can be found in specialized volumes, we suggest addi- tional sources in footnotes.

Interdisciplinary Approach with a Management Focus The field is exceptionally interdisciplinary. It exists at the confluence of a fairly large number of established academic disciplines, each of which contributes to its study. These disciplines include the traditional business disciplines, particu- larly management; other professional disciplines, including medicine, law, and theology; the social sciences, including economics, political science, philosophy, history, and sociology; and, from time to time, natural sciences such as che- mistry and ecology. Thus, our approach is eclectic; we cross boundaries to find insight.

The dominant orientation, however, is the discipline of management and, within it, the study of strategic management, or actions that adapt the company to its changing environment. To compete and survive, firms must create missions, purposes, and objectives; the policies and programs to achieve them; and the methods to implement them. We discuss these elements as they relate to corporate social performance, illustrating successes and failures.

Use of Theory, Description, and Case Studies Theories simplify and organize areas of knowledge by describing patterns or regu- larities in the subject matter. They are important in every field, but especially in this one, where innumerable details from broad categories of human experience intersect to create a new intellectual universe. Where theory is missing or weak, scholarship must rely more on description and the use of case method.

No underlying theory to integrate the entire field exists. Fortunately, the com- munity of scholars studying BGS relationships is building theory in several areas. The first is theory describing how corporations interact with stakeholders. The second is theory regarding the ethical duties of corporations and managers. And the third is theory explaining corporate social performance and how it can be measured. Theory in this last area focuses on defining exactly what a firm does to be responsible in society and on creating scales and rulers with which to weigh

strategic management Actions taken by managers to adapt a company to changes in its market and sociopolitical environments.

theory A statement or vision that creates insight by describing patterns or rela- tionships in a diffuse subject matter. A good theory is con- cise and simpli- fies complex phenomena.

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Chapter 1 The Study of Business, Government, and Society 21

and measure its actions. Scholarship in all three areas shows increasing sophistica- tion and wider agreement on basic ideas.

Despite the lack of a grand theory to unify the field, useful theories abound in related disciplines. For example, there are economic theories about the impact of government regulation, scientific theories on the risks of industrial pollution, political theories of corporate power, ethical theories about the good and evil in manager’s actions, and legal theories on subjects such as negligence applied by courts to corporations when, for example, industrial accidents occur. When fitting, we discuss such theories; elsewhere we rely on descriptions of events. In each chapter, we also use stories at the beginning and case studies at the end to invite discussion.

Global Perspective Today economic globalization animates the planetary stage, creating movements of people, money, goods, and information that, in turn, beget conflicts as some benefit more and others less or not at all. Viewing any nation’s economy or busi- nesses in isolation from the rest of the world is myopic. Every government finds its economic and social welfare policies judged by world markets. Every corpora- tion has a home country, but many have more sales, assets, and employees outside its borders than within. For now, capitalism is ascendant. It brings unprecedented wealth creation and new material comforts, but it also brings profound risks of economic shocks, imposes burdens on human rights and the environment, and challenges diversity of values for those who stand aloof from the free market con- sensus. A fitting perspective on the BGS relationship must, therefore, be global.

Historical Perspective History is the study of phenomena moving through time. The BGS relationship is a stream of events, of which only one part exists today. Historical perspective is important for many reasons. It helps us see that today’s BGS relationship is not like that of other eras; that current ideas and institutions are not the only alternative; that historical forces are irrepressible; that corporations both cause and adapt to change; that our era is not unique in undergoing rapid change; and that we are shaping the future now. In addition, the historical record is rela- tively complete, revealing more clearly the lessons and consequences of past events as compared with current ones that have yet to play out and show their full significance.

Despite appearances of novelty, the present is seldom unparalleled and is best understood as an extension of the past. So we often examine the origins of current arrangements, finding them both enlightening and entertaining. Readers of this book, many at the beginning of long business careers, can take heart from the words of Nicolò Machiavelli, a student of history who believed that “whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times.” 50

history The study of phenomena moving through time.

50 Niccolò Machiavelli, Discourses on the First Ten Books of Titus Livius (New York: The Modern Library, 1950), book 3, chapter 43, p. 530, written in 1513.

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Chapter Two

The Dynamic Environment Royal Dutch Shell PLC

Royal Dutch Shell is one of the world’s largest companies. It operates in 130 coun- tries. Each year it makes capital investments of between $30 billion and $40 billion, sums that exceed the annual revenues generated from Coca-Cola. Payoffs on these massive bets may come only after years or decades. Risks are large. Shell exists in an uncertain geopolitical environment stirred by forces it cannot dominate. Even a giant must bend to fortune. Are its investments right for the future?

To find out, Shell convenes teams of elite scholars and staff to write alternative versions of the future called scenarios. 1 A scenario is a plausible story of the future based on assumptions about how current trends might play out. Carefully written scenarios challenge managers to think in original ways. They are mental wind tunnels that shift environmental forces around the form of the company to see how it “flies.”

Scenarios were first used in the 1960s by scholars studying the idea of a nuclear war between Russia and the United States. With no historical precedent for an ex- change of atomic bombs, they drew up riveting alternatives about how such a battle might advance. In the 1970s, Shell pioneered the use of scenarios in corporate plan- ning and they soon proved their worth. In 1971 its planners created a scenario in which oil-rich countries cut their oil exports to raise prices. Conventional wisdom at the time held this to be unlikely. Nonetheless, thinking about the possibility changed Shell’s strategy, and when an oil embargo surprised the world in 1973 it was the only major oil firm prepared for the supply interruption.

Shell’s reward was higher profits than its competitors for years afterward. Since then, it has continuously used scenarios to shape strategy. In the 1990s, its planners saw change in the global business environment caused by three dominant forces: globalization, technological change, and liberalization (meaning relaxation of trade restrictions and regulations). According to Shell, these forces made up “a rough,

scenario A plausible story of the future based on assumptions about how current trends might play out.

liberalization An economic policy of lower- ing tariffs and other barriers to encourage foreign trade.

1 See Peter Cornelius, Alexander Van de Putte, and Mattia Romani, “Three Decades of Scenario Planning in Shell,” California Management Review, Fall 2005.

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impersonal game, involving stresses and pressures akin to those of the Industrial Revolution.” 2 These three forces became the basis for multiple scenarios.

Now, Shell sees an emerging drama in the global energy system, with tensions building at the intersection of three powerful trends. First, developing nations with expanding populations are using policies of economic growth to alleviate poverty. China and India in particular will consume massive amounts of energy as they develop. Second, supplies of oil and gas cannot keep pace with rising demands for energy. Their shares in the global energy supply will shrink. Alternative sources of energy, including wind, solar, nuclear, and biofuels, will be insufficient to make up the difference. Coal remains abundant, but it is a pollution nightmare. Third, environ- mental stresses are growing. If fossil fuels maintain their current share of the global energy supply, atmospheric carbon dioxide, which has risen from about 280 parts per million (ppm) in 1800 to 390 ppm today, will bring climate warming that threatens the well-being of human society.

How will the tensions caused by the three trends play out? Shell explores the future in two new scenarios named Scramble and Blueprint. 3

In Scramble the world fumbles its response to the energy challenge. A dwindling energy supply leads to price spikes and shortages, putting nations in competition with each other for access to fuels. Politicians are pressured to maintain economic growth, so they push the use of more coal and biofuels. Action on climate change is postponed, even as coal burning releases massive amounts of carbon dioxide into the atmosphere. Rising use of biofuels absorbs much of the world’s corn crop. Soon, slowing economies, extreme weather events, and shortages of both energy and food cause political upheavals in several countries. Around 2030 advances in energy effi- ciency and the development of alternative sources bring energy shortages to an end. About this time a consensus on the need for a global greenhouse gas policy emerges. However, 20 years have passed and keeping carbon dioxide in the atmosphere below 550 ppm, a level that threatens human well-being, will be difficult.

In Blueprints the world is more prompt. As energy shortages emerge, a patchwork of responses appears in cities and regions around the world. New taxes and incentives pro- mote energy efficiency. Carbon markets develop. A growing number of local actions bring calls by corporations for clarity and predictability in markets, so national govern- ments act to harmonize policies. As they do, economies shift to less energy-intense foot- ings. With predictability in markets, investment flows to alternative energy sources. Vehicles powered by new battery and fuel-cell technologies dominate transportation. International cooperation grows. Europe, the United States, Japan, China, and India join in establishing a carbon market. Their cooperation leads to an international framework for reducing carbon dioxide emissions with a chance of stabilizing greenhouse gas con- centrations near 450 parts per million, a level that avoids catastrophic climate change.

Such story worlds may be more fantasy than prophecy. However, they show the importance that Shell places on understanding its dynamic external environment. In

2 Shell International Limited, Global Scenarios 1995–2020, Public Scenarios PX96-2 (London: Shell Center, May 1996), p. 2.

3 Shell International BV, Shell Energy Scenarios to 2050 (The Hague, The Netherlands: Royal Dutch Shell, 2008), pp. 12–41.

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24 Chapter 2 The Dynamic Environment

what follows we present a framework for understanding the forces that animate this environment. First, we identify deep historical forces that create change and risk. Then we identify key dimensions of the global business environment and describe major trends within them. Finally, we set forth a dynamic system that explains the interactions between business and its environment.

DEEP HISTORICAL FORCES AT WORK

Order exists behind the swirling patterns of current events. There is a deep logic in the passing of history. Change in the business environment results from the action of elemental historical forces moving in roughly predictable directions. Henry Adams defined a historical force as “anything that does, or helps to do, work.” 4 The work to which Adams refers is the power to cause events. Change in the business environment is the work of nine deep historical forces or streams of related events. They are shown in Figure 2.1. As we will explain, they are part of a dynamic, inter- active system that shapes the business environment.

4 In the essay “A Dynamic Theory of History (1904),” in Henry Adams, The Education of Henry Adams (New York: Modern Library, 1931), p. 474; originally published in 1908.

FIGURE 2.1 Nine Deep Historical Forces

CH AN

CE

INDUSTRIAL REVOLUTION

IN EQ

UALITY

PO PU

LA TI O N

G RO

W TH

TE CH

NO LO GY

GLOBALIZATION

NATION- STATES

D O M IN

A N T

ID EO

LO G IE S

G RE AT

LE AD

ER S

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The Industrial Revolution The first historical force is the drive for transformative economic change. It rose with the Industrial Revolution of the late 1700s, which turned simple economies of farmers and artisans into complex industrial societies, greatly increasing their wealth and national power. In thousands of years before this event, there had been no widespread, sustained economic growth to raise living standards. The vast majority of the world’s population was mired in poverty.

The Industrial Revolution required specific conditions, including a sufficiency of capital, labor, natural resources, and fuels; adequate transportation; strong markets; and ideas and institutions that supported the productive blend of these ingredients. The right conditions first appeared in Great Britain. It was an open society that allowed social mobility and encouraged individual initiative. Its par- liament embodied values of political liberty, free speech, and public debate. Per- haps consequently, Britain was the source of scientific advances and inventions such as the steam engine that liberated the energy in the nation’s massive coal deposits. Its climate supported agriculture and its island geography put it at the hub of sea routes for world trade. 5

After Britain’s industrial takeoff, conditions for sustained economic growth arose in Western Europe and the United States during the late nineteenth century. Japan and Russia followed in the first half of the twentieth century, and other Asian nations, including Taiwan, South Korea, and China, followed in the second half. Industrialization continues to spread as less developed nations try to create the conditions for it.

Industrial growth remakes societies. It elevates living standards, alters life ex- perience, and shifts values. Historically, material progress has been associated with moral progress; that is, in the words of one historian, it “fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.” 6 Since institutions built on older ideas change more slowly than people’s lives, industrialization generates huge strains in the social fabric even as it elevates civil life. The size and acceleration of economic growth in the twentieth century were astounding. The total amount of goods and services produced exceeded all that was produced in prior human history. As Figure 2.2 shows, output for just the half century from 1950 to 2000 exceeded all that came before. This growth continues today, generating enormous tensions in both devel- oping and developed societies.

Inequality From time immemorial, status distinctions, class structures, and gaps between rich and poor have characterized societies. Inequality is ubiquitous, as are its consequences—envy, demands for fair distribution of wealth, and doctrines to justify why some people have more than others. The basic political conflict

historical force An environ- mental force of unknown origin and mysterious action that pro- vides the en- ergy for events. The discussion divides this force, some- what artificially, into nine sepa- rate but related forces causing distinct chains of events.

The Industrial Revolution An economic metamorphosis in England in the late 1700s. It occurred when certain neces- sary conditions were present and shifted the country from a simple agrarian economy into a growing indus- trial economy.

5 See Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: Penguin Press, 2005), chapter 2.

6 Benjamin M. Friedman, The Moral Consequences of Economic Growth (Ne