module 2
Chapter 2: Theories about Business Government Relations
Agenda
Three models of government-business relations
The shareholder model
The strategic model
The stakeholder model
Crony Capitalism
Why Study Theories?
Helpful in understanding complex social realities
Simplify and organize knowledge by describing patterns and regularities
Offer different perspectives regarding the interactions between business and government.
In practice they define the strategies, operations, and outcomes of businesses
Three Models of Business and Society
Business centered approaches
Shareholder model
Strategic business model
Stakeholder model
Note that there are other important “players” in society, in particular, religion
The Shareholder Model
Emphasizes economic principles
Views business in isolation
Emphasizes economic analysis and profit-making for direct or indirect owners
Emphasizes the invisible hand at the micro level
Stresses the importance of dynamic market
Promotes non-intervention by government
Contends the principle duty of government is to ensure that markets function properly, and to correct market failures
Sociopolitical Environment
Market Environment
Business
Shareholder
Examples of shareholder model
Economic freedom Index (Heritage Foundation)
Rule of law
Limited government
Regulatory efficiency
Open markets
(Top in 2015: Hong Kong, Singapore, NZ, Australia, Switzerland, Canada, Chile, Estonia, Ireland, and Mauritius)
Domestic example: Investment banks
Various critiques of the Shareholder Model
Downplays market imperfections
Ignores the need for government vigilance and intervention to protect market failure
In practice, tends to ignore the reality of business’ demands on government and the advantages frequently provided by government
Too much emphasis on monetary and material gains
The Strategic Business Model
Emphasizes the practice of business and success
One element: being highly competitive
Most efficient and effective use of resources;
Competing to win through hard work and cleverness
Playing the game well
The model also emphasizes collaboration
Joining other strong competitors, networking, creating goodwill, focusing on comparative strengths
Pragmatically, it wants:
Moderate taxes and moderate regulations, stable policies, and protections in global competition
To pragmatically use/exploit governmental resources
Examples
Council on Competitiveness
Where America Needs to Be
To drive US productivity, buttress our leadership in world markets, and raise the standard of living for all Americans, the United States must:
• Immediately work to:
– Ensure lower cost, easy access to high quality education and training for all Americans
– Maintain long-term federal investments in science and technology leadership
– Reform and simplify the tax code to stimulate investment and attract global capital to the United States
• Over the next ten years:
– Create at least 21 million jobs
– Reduce unemployment to 5 percent
– Reduce government debt by $4 trillion to ensure America’s long term solvency
– Invest $2.2 trillion in infrastructure to maintain competitive advantage
– Double exports
Global Competitiveness Index; Community Banks
Critique of the Strategic Business Model
More balanced and realistic than the shareholder perspective, but
Unclear and inconsistent
How do you decide your values when they compete and evolve?
The stakeholder model
This perspective sees business as critical to but nonetheless subordinate to society
Stakeholders include not only investors, partners and employees, but also customers, the community, government, and other groups in society affected by business (e.g., environmental groups)
The stakeholder model
Creates duties toward multiple constituents of the corporation
While profits are important and one of the mainstays of business, they do not crowd out other business and social values in the stakeholder view
A long-term perspective encourages an attitude of sportsmanship in competition, with the accent being on getting better rather than simply winning in the short term
Pursuit of a good reputation for pragmatic purposes
Requires business management raise its gaze above profits to see and respond to a spectrum of other values
Examples, company level
Annual listing by Corporate Responsibility
impact on the environment,
climate change behaviors,
avoidance of human rights abuse,
quality employee relations,
open corporate governance,
community-based philanthropy, and
financial integrity
Development banks
Examples, at the country level
Three stakeholder perspectives: quality of life, environmental concern, equity
Human Development Index (UN) where US is very high
Environmental Performance Index where US is upper middle
Wealth distribution: Gini Coefficient (from .25 to .70 with low fraction as the most equal); US in the lower middle
The stakeholder model
Critics to the stakeholder model
Unrealistic assessment of power relationships between the corporation and other entities
Too vague a guideline to substitute for the yardstick of profits
Not clear who or what is a legitimate stakeholder
Comparison of three models
| Models | Shareholder | Strategic | Stakeholder |
| Role of societal interests | Complete separation of financial and societal interests | Mix of financial interests | Financial interests should never override social good |
| Integration of private and public sector | Sectors as separate as possible; regulation or financial incentives for business as little as possible | Sectors work together and business benefit from government support | Business sector should not manipulate the public sector for its selfish ends |
| Size of government | Government as small as possible; private sector models are preferred | Government being large enough to ensure basic services | Business having self-regulation and strong professional norms |
| Key values | Short-term wealth creation, self-reliance, dynamic destruction by market; win-lose philosophy | Long-term wealth creation, synergy of sectors and selective partnerships, pragmatic use/exploitation of government, do good when it is profitable ; change is both strategic/rational; game theory | Wealth creation never at expense of some stakeholders; inclusion of stakeholders ; win-win strategies; concern for the world |
When the Ideal Models Become Corrupted: Crony Capitalism
Crony Capitalism
Close relationship between business and government leading to favored treatment to individuals, firms, or industries at the expense of the public
Spectrum of Crony Capitalism
1. Strongman model
Dominance of leader and his/her group (i.e., dictatorships or quasi-dictatorships)
Vague laws; laws instituted abruptly by dominant figure
Example:
Russia under Putin
Spectrum of Crony Capitalism
2. Fused political-bureaucratic elite model
Dominance by family or small group of large asset owners (rather than strongman or despot)
Rampant bribery and corruption
Example:
Second red/official generations in China
Spectrum of Crony Capitalism
3. Economic elite dominance model
Dominance by economic elites because of the power of money; often more subtle
Market distortion and unhealthy imbalances in civil society
(Source: http://seanmarske.wordpress.com/2012/07/10/whos-running-the-show-introducing-the-criminal-elite/)
Economic elite dominance model
Powerful financial interests can corrupt the society through
Ability to change critical administrative rulemaking
Exerting influence via control of media
Increased opportunity to be elected officials
Buying access based on economic support of candidates
Ability to influence the electorate with threats
To some degree in all developed capitalist countries; Issue: when does elite dominance become overweening?
Example: US.
Conclusion
The three “pure” types of business-government model ungird many of our public discussions. However, the elements are often muddled and so we talk past one another.
Exaggerating for clarity, they emphasize business efficiency, business pragmatism, and business ethics
Government itself has elements that emphasize these elements too!
Securities and Exchange Commission
US Trade Representative
US Department of Health and Human Services
Crony capitalism is a distortion of “pure” types
It includes various subtypes:
Strongman
Fused political-bureaucratic elite
Economic elite-dominance model
While crony capitalism tendencies can never be fully eliminated, they can be reduced by wise policies in order to retain the trust and respect of society for both government and business in creating a fair society and a healthy market economy.