Managerial Ethics and Social Responsibility-2
law43665_fm_i-xx i 01/07/19 10:32 AM
Stakeholders, Ethics, Public Policy Sixteenth Edition
Anne T. Lawrence San José State University
James Weber Duquesne University
Business and Society
Final PDF to printer
law43665_fm_i-xx ii 01/07/19 10:32 AM
BUSINESS AND SOCIETY: STAKEHOLDERS, ETHICS, PUBLIC POLICY, SIXTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2014, and 2011. 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 McGraw-Hill Education, 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 LWI 21 20 19
ISBN 978-1-260-04366-2 (bound edition) MHID 1-260-04366-5 (bound edition) ISBN 978-1-260-14049-1 (loose-leaf edition) MHID 1-260-14049-0 (loose-leaf edition)
Portfolio Manager: Laura Hurst Spell Marketing Manager: Lisa Granger Content Project Managers: Jeni McAtee, Katie Reuter Buyer: Susan K. Culbertson Design: Jessica Cuevas Content Licensing Specialist: Traci Vaske Cover Image: ©View Apart/Shutterstock Compositor: SPi Global
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data Names: Lawrence, Anne T., author. | Weber, James (Business ethics professor), author. Title: Business and society: stakeholders, ethics, public policy / Anne T. Lawrence, San Jose State University, James Weber, Duquesne University. Description: Sixteenth edition. | New York, NY : McGraw-Hill Education, [2020] Identifiers: LCCN 2018052591 | ISBN 9781260043662 (alk. paper) | ISBN 1260043665 (bound edition) | ISBN 9781260140491 (loose-leaf edition) | ISBN 1260140490 (loose-leaf edition) Subjects: LCSH: Social responsibility of business. Classification: LCC HD60 .F72 2020 | DDC 658.4/08—dc23 LC record available at https://lccn.loc .gov/2018052591
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
Final PDF to printer
iii
law43665_fm_i-xx iii 01/07/19 10:32 AM
Anne T. Lawrence San José State University Anne T. Lawrence is professor of management emerita at San José State University. She holds a Ph.D. from the University of California, Berkeley, and completed two years of post- doctoral study at Stanford University. Her articles, cases, and reviews have appeared in many journals, including the Academy of Management Review, Administrative Science Quarterly, Case Research Journal, Journal of Management Education, California Management Review, Business and Society Review, Research in Corporate Social Performance and Policy, and Journal of Corporate Citizenship. Her cases in business and society have been reprinted in many textbooks and anthologies. She has served as guest editor of the Case Research Journal. She served as president of both the North American Case Research Association (NACRA) and of the Western Casewriters Association and is a Fellow of NACRA, from which she received a Distinguished Contributor Award in 2014. She received the Emerson Center Award for Outstanding Case in Business Ethics (2004) and the Curtis E. Tate Award for Outstanding Case of the Year (1998, 2009, and 2015). At San José State University, she was named Outstanding Professor of the Year in 2005. In 2015, she received a Master Teacher in Ethics Award from The Wheatley Institution at Brigham Young University. She currently serves as chair of the board of the Case Research Foundation.
James Weber Duquesne University James Weber is a professor of management and business ethics at Duquesne University, where he also serves as the managing director of the Institute for Ethics in Business. He holds a Ph.D. from the University of Pittsburgh and has taught at the University of San Francisco, University of Pittsburgh, and Marquette University. His areas of interest and research include personal, managerial, and organizational values and cognitive moral reasoning. His work has appeared in Organization Science, Human Relations, Business & Society, Journal of Business Ethics, and Business Ethics Quarterly. He received the SIM Sumner Marcus Award for lifetime contribution to the Social Issues in Management division of the Academy of Management in 2013 and the Best Reviewer Award from Business & Society in 2015. He was recognized by the Social Issues in Management divi- sion with the Best Paper Award in 1989 and 1994 and received the Best Article Award from the International Association for Business and Society in 1998. He has served as division and program chair of the Social Issues in Management division of the Academy of Management. He has also served as president and program chair of the International Association of Business and Society (IABS).
About the Authors
Final PDF to printer
iv
law43665_fm_i-xx iv 01/07/19 10:32 AM
Preface In a world economy that is becoming increasingly integrated and interdependent, the rela- tionship between business and society is becoming ever more complex. The globaliza- tion of business, the emergence of civil society organizations in many nations, and rapidly changing government regulations and international agreements have significantly altered the job of managers and the nature of strategic decision making within the firm.
At no time has business faced greater public scrutiny or more urgent demands to act in an ethical and socially responsible manner than at the present. Consider the following:
∙ The rise of populist and nationalist political leaders in the United States and parts of Europe and the Middle East have led to renewed debates on the proper role of govern- ment in regulating business and protecting stakeholders. As environmental, financial, employment, and consumer regulations have been rolled back, particularly in the United States, businesses have had to choose whether to take advantage of loosened rules or to follow a strategy of voluntary corporate responsibility. Long-standing trade relationships have been upended by tariffs and other barriers on imports, helping some businesses and hurting others. Changing immigration policy has required firms to rethink their policies toward their foreign-born workers, including so-called Dreamers brought to the United States illegally as children. In this rapidly changing environment, business firms have been challenged to manage in a way that remains consistent with their values.
∙ A host of new technologies have become part of the everyday lives of billions of the world’s people. Advances in the basic sciences are stimulating extraordinary changes in agriculture, telecommunications, transportation, and pharmaceuticals, which have the potential to enhance peoples’ health and quality of life. Artificial intelligence can be used to drive vehicles, diagnose illnesses, and manage investments. Technology has changed how we interact with others, bringing people closer together through social networking, instant messaging, and photo and video sharing. These innovations hold great promise. But they also raise serious ethical issues, such as those associated with the use of the Internet to exploit or defraud others, censor free expression, or invade individuals’ privacy. Businesses must learn to harness powerful technologies for good, while acting responsibly and ethically toward their many stakeholders.
∙ Businesses in the United States and other nations are transforming the employment relationship, abandoning practices that once provided job security and guaranteed pen- sions in favor of highly flexible but less secure forms of employment. The rise of the “gig” economy has transformed many workers into self-employed contractors. Many jobs, including those in the service sector, are being outsourced to the emerging econo- mies of China, India, and other nations. As jobs shift abroad, multinational corporations are challenged to address their obligations to workers in far-flung locations with very different cultures and to respond to initiatives, like the Responsible Business Alliance Code of Conduct, which call for voluntary commitment to enlightened labor standards and human rights. The #MeToo movement has focused a spotlight on sexual harassment and abusive behavior in the workplace, and led to the fall of well-known executives and media personalities and calls for change in workplace culture.
∙ Severe weather events—hurricanes, floods, and wildfires—have urgently focused attention on the human impact on natural systems, prompting both businesses and
Final PDF to printer
Preface v
law43665_fm_i-xx v 01/07/19 10:32 AM
governments to act. An emerging consensus about the causes and risks of climate change is leading many companies to adopt new practices, and once again the nations of the world have experimented with public policies designed to limit the emissions of greenhouse gases, most notably in the Paris Agreement. Many businesses have cut air pollution, curbed solid waste, and designed products and buildings to be more energy-efficient, saving money in the process. A better understanding of how human activities affect natural resources is producing a growing understanding that economic growth must be achieved in balance with environmental protection if development is to be sustainable.
∙ Many regions of the world and its nations are developing at an extraordinary rate. Yet, the prosperity that accompanies economic growth is not shared equally. Access to health care, adequate nutrition, and education remain unevenly distributed among and within the world’s nations, and inequalities of wealth and income have become greater than they have been in many years. These trends have challenged businesses to consider the impact of their compensation, recruitment, and professional development practices on the persistent—and in some cases, growing—gap between the haves and the have-nots. Big corporate tax cuts in the United States have required companies to decide whether to distribute their windfalls to their executives, shareholders, employees, or customers; to invest in new jobs; or to buy back stock.
∙ The opioid epidemic has focused attention on the role of drug companies, distributors, and pharmacies—as well as government regulators—in contributing to the scourge of addiction, disability, and death caused by narcotics. The continuing pandemic of AIDS in sub-Saharan Africa and the threat of a swine or avian flu, the Zika virus, or another Ebola outbreak have compelled drug makers to rethink both their pricing policies and their research priorities. Many businesses must consider the delicate balance between their intellectual property rights and the urgent demands of public health, particularly in the developing world.
∙ In many nations, legislators have questioned business’s influence on politics. Business has a legitimate role to play in the public policy process, but it has on occasion shaded over into undue influence and even corruption. Technology offers candidates and politi- cal parties new ways to reach out and inform potential voters, but it has also created new opportunities for manipulation of the electoral process through deceptive messaging. Businesses the world over are challenged to determine their legitimate scope of influ- ence and how to voice their interests most effectively in the public policy process.
The new Sixteenth Edition of Business and Society addresses this complex agenda of issues and their impact on business and its stakeholders. It is designed to be the required textbook in an undergraduate or graduate course in Business and Society; Business, Gov- ernment, and Society; Social Issues in Management; or the Environment of Business. It may also be used, in whole or in part, in courses in Business Ethics and Public Affairs Manage- ment. This new edition of the text is also appropriate for an undergraduate sociology course that focuses on the role of business in society or on contemporary issues in business.
The core argument of Business and Society is that corporations serve a broad public purpose: to create value for society. All companies must make a profit for their owners. Indeed, if they did not, they would not long survive. However, corporations create many other kinds of value as well. They are responsible for professional development for their employees, innovative new products for their customers, and generosity to their communi- ties. They must partner with a wide range of individuals and groups in society to advance collaborative goals. In our view, corporations have multiple obligations, and all stakehold- ers’ interests must be considered.
Final PDF to printer
vi Preface
law43665_fm_i-xx vi 01/07/19 10:32 AM
A Tradition of Excellence
Since the 1960s, when Professors Keith Davis and Robert Blomstrom wrote the first edi- tion of this book, Business and Society has maintained a position of leadership by discuss- ing central issues of corporate social performance in a form that students and faculty have found engaging and stimulating. The leadership of the two founding authors, and later of Professors William C. Frederick and James E. Post, helped Business and Society to achieve a consistently high standard of quality and market acceptance. Thanks to these authors’ remarkable eye for the emerging issues that shape the organizational, social, and public policy environments in which students will soon live and work, the book has added value to the business education of many thousands of students.
Business and Society has continued through several successive author teams to be the market leader in its field. The current authors bring a broad background of business and society research, teaching, consulting, and case development to the ongoing evolution of the text. The new Sixteenth Edition of Business and Society builds on its legacy of market leadership by reexamining such central issues as the role of business in society, the nature of corporate responsibility and global citizenship, business ethics practices, and the com- plex roles of government and business in a global community.
For Instructors
For instructors, this textbook offers a complete set of supplements.
Instructor Library The Connect Management Instructor Library is a repository for additional resources to improve student engagement in and out of class. The instructor can select and use any asset that enhances their lecture. The Connect Instructor Library includes an extensive instruc- tor’s resource manual—fully revised for this edition—with lecture outlines, discussion case questions and answers, tips from experienced instructors, and extensive case teaching notes. A computerized test bank and power point slides for every chapter are also provided.
Final PDF to printer
Preface vii
law43665_fm_i-xx vii 01/07/19 10:32 AM
Create
With McGraw-Hill Create, create.mheducation.com, the instructor can easily rearrange chapters, combine material from other content sources, and quickly upload self-developed content such as a course syllabus or teaching notes. Content may be drawn from any of the thousands of leading McGraw-Hill textbooks and arranged to fit a specific class or teach- ing approach. Create even allows an instructor to personalize the book’s appearance by selecting the cover and adding the instructor’s name, school, and course information and to select a print or eBook format.
For Students
Business and Society has long been popular with students because of its lively writing, up-to-date examples, and clear explanations of theory. This textbook has benefited greatly from feedback over the years from thousands of students who have used the material in the authors’ own classrooms. Its strengths are in many ways a testimony to the students who have used earlier generations of Business and Society.
The new Sixteenth Edition of the text is designed to be as student-friendly as always. Each chapter opens with a list of key learning objectives to help focus student reading and study. Numerous figures, exhibits, and real-world business examples (set as blocks of colored type) illustrate and elaborate the main points. A glossary at the end of the book provides definitions for bold-faced and other important terms. Inter- net references and a full section-by-section bibliography guide students who wish to do further research on topics of their choice, and subject and name indexes help students locate items in the book.
Final PDF to printer
law43665_fm_i-xx viii 01/07/19 10:32 AM
Students—study more efficiently, retain more and achieve better outcomes. Instructors—focus on what you love—teaching.
You’re in the driver’s seat. Want to build your own course? No problem. Prefer to use our turnkey, prebuilt course? Easy. Want to make changes throughout the semester? Sure. And you’ll save time with Connect’s auto-grading too.
They’ll thank you for it. Adaptive study resources like SmartBook® help your students be better prepared in less time. You can transform your class time from dull definitions to dynamic debates. Hear from your peers about the benefits of Connect at www.mheducation.com/highered/connect
Make it simple, make it affordable. Connect makes it easy with seamless integration using any of the major Learning Management Systems—Blackboard®, Canvas, and D2L, among others—to let you organize your course in one convenient location. Give your students access to digital materials at a discount with our inclusive access program. Ask your McGraw-Hill representative for more information.
Solutions for your challenges. A product isn’t a solution. Real solutions are affordable, reliable, and come with training and ongoing support when you need it and how you want it. Our Customer Experience Group can also help you troubleshoot tech problems—although Connect’s 99% uptime means you might not need to call them. See for yourself at status.mheducation.com
SUCCESSFUL SEMESTERS INCLUDE CONNECT
65% Less Time Grading
©Hill Street Studios/Tobin Rogers/Blend Images LLC
For Instructors
Final PDF to printer
law43665_fm_i-xx ix 01/07/19 10:32 AM
©Shutterstock/wavebreakmedia
Effective, efficient studying. Connect helps you be more productive with your study time and get better grades using tools like SmartBook, which highlights key concepts and creates a personalized study plan. Connect sets you up for success, so you walk into class with confidence and walk out with better grades.
Study anytime, anywhere. Download the free ReadAnywhere app and access your online eBook when it’s convenient, even if you’re offline. And since the app automatically syncs with your eBook in Connect, all of your notes are available every time you open it. Find out more at www.mheducation.com/readanywhere
No surprises. The Connect Calendar and Reports tools keep you on track with the work you need to get done and your assignment scores. Life gets busy; Connect tools help you keep learning through it all.
Learning for everyone. McGraw-Hill works directly with Accessibility Services Departments and faculty to meet the learning needs of all students. Please contact your Accessibility Services office and ask them to email accessibility@mheducation.com, or visit www.mheducation.com/about/accessibility.html for more information.
“I really liked this app—it made it easy to study when
you don't have your text- book in front of you.”
- Jordan Cunningham, Eastern Washington University
Chapter 12 Quiz Chapter 11 Quiz
Chapter 7 Quiz
Chapter 13 Evidence of Evolution Chapter 11 DNA Technology
Chapter 7 DNA Structure and Gene...
and 7 more...
13 14
For Students
Final PDF to printer
x Preface
law43665_fm_i-xx x 01/07/19 10:32 AM
New for the Sixteenth Edition
Over the years, the issues addressed by Business and Society have changed as the envi- ronment of business itself has been transformed. This Sixteenth Edition is no exception, as readers will discover. Some issues have become less compelling and others have taken their place on the business agenda, while others have endured through the years.
The Sixteenth Edition has been thoroughly revised and updated to reflect the latest theoretical work in the field and statistical data, as well as recent events. Among the new additions are:
∙ New discussion of theoretical advances in stakeholder theory, corporate citizenship, public affairs management, public and private regulation, corporate governance, social and environmental auditing, social investing, reputation management, business partnerships, supply chain codes of conduct, social entrepreneurship, and corporate philanthropy.
∙ Treatment of practical issues, such as social networking, artificial intelligence and robotics, gender diversity, political advertising and campaign contributions, public and media relations, well as the latest developments in the regulatory environment in which businesses operate.
∙ New discussion cases and full-length cases on such timely topics as the role of busi- ness in the unfolding opioid crisis, Wells Fargo’s unauthorized consumer accounts, the Volkswagen diesel emissions scandal, the aftermath of the BP disaster in the Gulf of Mexico, the massive Equifax data breach, the consumer boycott of Stoli vodka, the business response to the movement for school safety, LaFarge’s dealings in the Syrian war zone, the potential regulation of Facebook in the United States and Europe, political action by the U.S. steel industry on the issue of tariffs, the rise of autonomous vehicles, law enforcement access to mobile phone data, executive misconduct at Wynn Resorts, business response to the threat to “Dreamers,” IKEA’s sustainable supply chain, Sales- force’s integrated philanthropy, and social media criticism of United Airlines.
Finally, this is a book with a vision. It is not simply a compendium of information and ideas. The new edition of Business and Society articulates the view that in a global community, where traditional buffers no longer protect business from external change, managers can create strategies that integrate stakeholder interests, respect personal values, support community development, and are implemented fairly. Most important, businesses can achieve these goals while also being economically successful. Indeed, this may be the only way to achieve economic success over the long term.
Anne T. Lawrence James Weber
Final PDF to printer
xi
law43665_fm_i-xx xi 01/07/19 10:32 AM
Acknowledgments We are grateful for the assistance of many colleagues at universities in the United States and abroad who over the years have helped shape this book with their excellent suggestions and ideas. We also note the feedback from students in our classes and at other colleges and universities that has helped make this book as user-friendly as possible.
We especially wish to thank two esteemed colleagues who made special contributions to this edition. David M. Wasieleski, professor of management and business ethics at Duquesne University, led the revisions of Chapters 5 and 6, to which he contributed his knowledge of ethics theory and organizational practice. Vanessa D. Hill, associate profes- sor of management at the University of Louisiana at Lafayette, generously shared with us her expertise on the employment relationship and workplace diversity and inclusion. She was the lead author of Chapters 15 and 16, which have greatly benefited from her insights. For these contributions, we are most grateful.
We also wish to express our appreciation for the colleagues who provided detailed reviews for this edition. These reviewers were Hossein Bidgoli, California State Uni- versity, Bakersfield; Ryan Fehr, Foster School of Business, University of Washington, Seattle; Scott Jeffrey, Monmouth University; Eun-Hee Kim, Gabelli School of Business, Fordham University; Jet Mboga, William Paterson University; Stephen P. Preacher, South- ern Wesleyan University; and A. J. Stagliano, Saint Joseph’s University. Their insights helped guide our revision.
Thanks are also due Daniel Jacobs of Loyola Marymount University; Samir Kumar Barua of the Indian Institute of Management Ahmedabad and Mahendra R. Gurarathi of Bentley University; Grishma Shah, Janet Rovenpor, and Musa Jafar of Manhattan College; Robyn Linde of Rhode Island College and H. Richard Eisenbeis of the Univer- sity of Southern Colorado Pueblo (retired); Cynthia E. Clark of Bentley University; and Debra M. Staab, a freelance writer and researcher, who contributed cases to this edition.
We are grateful to several individuals have made specific research contributions to this project. Denise Kleinrichert, of the Center for Ethical and Sustainable Business Manage- ment at San Francisco State University, provided new material on B Corporations and social entrepreneurship for Chapter 3, which we appreciate. Natalie Hanna and Kelsey Aemi of Duquesne University provided able research assistance. Thanks are due also to Carolyn Roose Eagle, Ben Eagle, and Nate Marsh for research support. Emily Marsh, of Colorbox Industries, provided graphic design services.
Debra M. Staab, in addition to authoring a case, provided research assistance and under- took the complex task of preparing the instructor’s resource manual, test bank, and other ancillary materials. Her contributions have been invaluable.
In addition, we are grateful to the many colleagues who over the years have gener- ously shared with us their insights into the theory and pedagogy of business and soci- ety. In particular, we would like to thank Cynthia E. Clark and Jill Brown of Bentley University; Shawn Berman, Harry J. Van Buren III, Natalia Vidal, and Garima Sharma of the University of New Mexico; Anke Arnaud of Embry Riddle Aeronautical Univer- sity; Jennifer J. Griffin of Loyola University of Chicago; Ronald M. Roman, Asbjorn Osland, Thomas Altura, and Matthew Maguire of San José State University; Heather Elms of American University; Joseph A. Petrick of Wright State University; Kathleen
Final PDF to printer
law43665_fm_i-xx xii 01/07/19 10:32 AM
xii Acknowledgments
Rehbein of Marquette University; Judith Schrempf-Stirling of the University of Geneva; Michelle Westermann-Behaylo of the University of Amsterdam; Diane Swanson and Bernie Hayen of Kansas State University; Cynthia M. Orms of Georgia College & State University; Ali Al-Kazemi of Kuwait University; Sandra Waddock of Boston College; Mary C. Gentile of the University of Virginia Darden School of Business; Michael E. Johnson-Cramer and Jamie Hendry of Bucknell University; John Mahon and Stephanie Welcomer of the University of Maine; Bradley Agle of Brigham Young University; Gina Vega of Merrimack College; Craig Dunn and Brian Burton of Western Washington University; Lori V. Ryan of San Diego State University; Bryan W. Husted of EGADE Business School Monterrey; Sharon Livesey of Fordham University; Barry Mitnick of the University of Pittsburgh; Virginia Gerde of Furman University; Matthew Drake of Duquesne University; Robbin Derry of the University of Lethbridge; Jerry Calton of the University of Hawaii-Hilo; Linda Klebe Treviño of Pennsylvania State University; Mary Meisenhelter of York College of Pennsylvania; Amy Hillman and Gerald Keim of Arizona State University; Barbara Altman of Texas A&M University Central Texas; Randall Harris of Texas A&M University Corpus Christi; Richard Wokutch of Virginia Tech University; Dawn Elm of University of St. Thomas; Lynda Brown of the Univer- sity of Montana; Kathleen A. Getz of Loyola University – Maryland; Gordon P. Rands of Western Illinois University; Paul S. Adler of the University of Southern California; Linda C. Rodriguez of the University of South Carolina Aiken; Emmanuel Raufflet of HEC Montreal; Bruce Paton of Menlo College; Smita Trivedi, Tom E. Thomas, Geoffrey Desa, and Murray Silverman (retired), of San Francisco State University; Jacob Park of Green Mountain College; Armand Gilinsky of Sonoma State University; and Tara Ceranic Salinas of the University of San Diego.
These scholars’ dedication to the creative teaching of business and society has been a continuing inspiration to us.
We wish to express our appreciation to James E. Post, a former author of this book, who has continued to offer valuable intellectual guidance to this project. We also wish to note, with sadness and gratitude, the passing of our mentor and a former author of this book, William C. Frederick, in 2018. His ideas live on in this book.
We continue to be grateful to the excellent editorial and production team at McGraw- Hill. We offer special thanks to Laura Hurst Spell, our associate portfolio manager, for her skillful leadership of this project. We also wish to recognize the able assistance of Marla Sussman, executive editor, and of Jeni McAtee, content project manager, whose ability to keep us on track and on time has been critical. Lisa Granger headed the excellent market- ing team. Katie Reuter, content project manager (assessment); Susan K. Culbertson, buyer; Richard Wright, copy editor; Traci Vaske, content licensing specialist; and Jessica Cuevas, who designed the book cover, also played key roles. Each of these people has provided professional contributions that we deeply value and appreciate.
As always, we are profoundly grateful for the ongoing support of our spouses, Paul Roose and Sharon Green.
Anne T. Lawrence
James Weber
Final PDF to printer
xiii
law43665_fm_i-xx xiii 01/07/19 10:32 AM
Brief Contents PART ONE Business in Society 1 1. The Corporation and Its Stakeholders 2 2. Managing Public Issues and Stakeholder
Relationships 25 3. Corporate Social Responsibility and
Citizenship 47 4. Business in a Globalized World 71
PART TWO Business and Ethics 93 5. Ethics and Ethical Reasoning 94 6. Organizational Ethics 115
PART THREE Business and Public Policy 137 7. Business–Government Relations 138 8. Influencing the Political Environment 161
PART FOUR Business and the Natural Environment 187 9. Sustainable Development and Global
Business 188 10. Managing for Sustainability 211
PART FIVE Business and Technology 237 11. The Role of Technology 238 12. Regulating and Managing Technology 261
PART SIX Business and Its Stakeholders 281 13. Shareholder Rights and Corporate
Governance 282
14. Consumer Protection 305 15. Employees and the Corporation 327 16. Managing a Diverse Workforce 350 17. Business and Its Suppliers 374 18. The Community and the
Corporation 396 19. Managing the Public and the Corporate
Reputation 419
CASES IN BUSINESS AND SOCIETY 441 1. Profiting from Pain: Business and the
U.S. Opioid Epidemic 442 2. Wells Fargo’s Unauthorized Customer
Accounts 453 3. The Carlson Company and Protecting
Children in the Global Tourism Industry 462
4. BP Blowout: The Aftermath of the Gulf Oil Disaster 471
5. Google and the Right to Be Forgotten 480
6. General Motors and the Ignition Switch Recalls 490
7. The Upper Big Branch Mine Disaster 500
8. After Rana Plaza 510 9. The Boycott of Stoli Vodka 521
GLOSSARY 529
BIBLIOGRAPHY 542
INDEXES Name 547 Subject 550
Final PDF to printer
law43665_fm_i-xx xiv 01/07/19 10:32 AM
xiv
Contents PART ONE BUSINESS IN SOCIETY 1
CHAPTER 1 The Corporation and Its Stakeholders 2 Business and Society 4
A Systems Perspective 5
The Stakeholder Theory of the Firm 6 The Stakeholder Concept 8
Different Kinds of Stakeholders 9
Stakeholder Analysis 11 Stakeholder Interests 12
Stakeholder Power 13
Stakeholder Coalitions 15
Stakeholder Mapping 16
The Corporation’s Boundary-Spanning Departments 19 The Dynamic Environment of Business 20 Creating Value in a Dynamic Environment 22 Summary 22 Key Terms 23 Internet Resources 23 Discussion Case: Insuring Uber’s App-On Gap 23
CHAPTER 2 Managing Public Issues and Stakeholder Relationships 25 Public Issues 26 Environmental Analysis 28
Competitive Intelligence 31
Stakeholder Materiality 32
The Issue Management Process 33 Identify Issue 33
Analyze Issue 34
Generate Options 35
Take Action 35
Evaluate Results 35
Organizing for Effective Issue Management 36 Stakeholder Engagement 38
Stages in the Business–Stakeholder Relationship 38
Drivers of Stakeholder Engagement 39
The Role of Social Media in Stakeholder Engagement 40
Stakeholder Dialogue 41 Stakeholder Networks 41
The Benefits of Engagement 42
Summary 43 Key Terms 44 Internet Resources 44 Discussion Case: Businesses Respond to the Movement for School Safety 44
CHAPTER 3 Corporate Social Responsibility and Citizenship 47 Corporate Power and Responsibility 49 Corporate Social Responsibility and Citizenship 51
The Origins of Corporate Social Responsibility 51
Balancing Social, Economic, and Legal Responsibilities 53 The Corporate Social Responsibility Question 53
Support for Corporate Social Responsibility 53
Concerns about Corporate Social Responsibility 57
Social Entrepreneurs and B Corporations 59 Management Systems for Corporate Social Responsibility and Citizenship 60 Stages of Corporate Citizenship 62 Assessing and Reporting Social Performance 64
Social Audit Standards 65
Social Reporting 65
Summary 67 Key Terms 68 Internet Resources 68 Discussion Case: Corporate Social Responsibility at Gravity Payments 69
CHAPTER 4 Business in a Globalized World 71 The Process of Globalization 72
Major Multinational Enterprises 73
International Financial and Trade Institutions 75
The Benefits and Costs of Globalization 78 Benefits of Globalization 78
Costs of Globalization 79
Doing Business in a Diverse World 81 Comparative Political and Economic Systems 82
Final PDF to printer
Contents xv
law43665_fm_i-xx xv 01/07/19 10:32 AM
Information Technology Ethics 121
Supply Chain Ethics 122
Making Ethics Work in Corporations 123 Building Ethical Safeguards into the Company 123
Ethics in a Global Economy 129 Efforts to Curtail Unethical Practices 130
Summary 132 Key Terms 133 Internet Resources 133 Discussion Case: Equifax’s Data Breach 133
PART THREE BUSINESS AND PUBLIC POLICY 137
CHAPTER 7 Business–Government Relations 138 How Business and Government Relate 139
Seeking a Collaborative Partnership 139
Working in Opposition to Government 140
Legitimacy Issues 141
Government’s Public Policy Role 141 Elements of Public Policy 142
Types of Public Policy 145
Government Regulation of Business 147 Market Failure 147
Negative Externalities 148
Natural Monopolies 148
Ethical Arguments 148
Types of Regulation 149
The Effects of Regulation 154
Regulation in a Global Context 156 Summary 157 Key Terms 157 Internet Resources 157 Discussion Case: Should Facebook Be Regulated? 158
CHAPTER 8 Influencing the Political Environment 161 Participants in the Political Environment 163
Business as a Political Participant 163
Influencing the Business–Government Relationship 164
Corporate Political Strategy 164
Political Action Tactics 165 Promoting an Information Strategy 166
Promoting a Financial-Incentive Strategy 170
Promoting a Constituency-Building Strategy 175
Global Inequality and the Bottom of the
Pyramid 84
Collaborative Partnerships for Global Problem Solving 86
A Three-Sector World 87
Summary 89 Key Terms 89 Internet Resources 89 Discussion Case: Intel and Conflict Minerals 90
PART TWO BUSINESS AND ETHICS 93
CHAPTER 5 Ethics and Ethical Reasoning 94 The Meaning of Ethics 95
What Is Business Ethics? 96
Why Should Business Be Ethical? 97
Why Ethical Problems Occur in Business 101 Personal Gain and Selfish Interest 101
Competitive Pressures on Profits 102
Conflicts of Interest 102
Cross-Cultural Contradictions 102
The Core Elements of Ethical Character 103 Managers’ Values 103
Spirituality in the Workplace 104
Managers’ Moral Development 105
Analyzing Ethical Problems in Business 106 Virtue Ethics: Pursuing a “Good” Life 107
Utility: Comparing Benefits and Costs 108
Rights: Determining and Protecting Entitlements 109
Justice: Is It Fair? 110
Applying Ethical Reasoning to Business Activities 110
The Moral Intensity of an Ethical Issue 111 Summary 112 Key Terms 112 Internet Resources 113 Discussion Case: LafargeHolcim and ISIS in Syria 113
CHAPTER 6 Organizational Ethics 115 Corporate Ethical Climates 116 Business Ethics across Organizational Functions 118
Accounting Ethics 118
Financial Ethics 119
Marketing Ethics 120
Final PDF to printer
xvi Contents
law43665_fm_i-xx xvi 01/07/19 10:32 AM
Levels of Political Involvement 178 Managing the Political Environment 179 Business Political Action: A Global Challenge 180 Summary 182 Key Terms 183 Internet Resources 183 Discussion Case: Political Action by the U.S. Steel Industry, 2015–2018 183
PART FOUR BUSINESS AND THE NATURAL ENVIRONMENT 187
CHAPTER 9 Sustainable Development and Global Business 188 Business and Society in the Natural Environment 190
Sustainable Development 190
Threats to the Earth’s Ecosystem 191
Forces of Change 192
The Earth’s Carrying Capacity 194
Global Environmental Issues 196 Climate Change 196
Ozone Depletion 199
Resource Scarcity: Water and Land 199
Decline of Biodiversity 201
Threats to Marine Ecosystems 202
Response of the International Business Community 203
Codes of Environmental Conduct 206
Summary 207 Key Terms 208 Internet Resources 208 Discussion Case: Clean Cooking 208
CHAPTER 10 Managing for Sustainability 211 Role of Government 213
Major Areas of Environmental Regulation 213
Alternative Policy Approaches 218
Costs and Benefits of Environmental Regulation 222 Managing for Sustainability 224
Stages of Corporate Environmental
Responsibility 224
The Ecologically Sustainable Organization 225 Sustainability Management in Practice 225
Environmental Auditing and Reporting 227
Environmental Partnerships 228
Sustainability Management as a Competitive Advantage 228
Cost Savings 229
Brand Differentiation 229
Technological Innovation 230
Reduction of Regulatory and Liability Risk 231
Strategic Planning 231
Summary 233 Key Terms 233 Internet Resources 234 Discussion Case: Hydraulic Fracturing—Can the Environmental Impacts Be Reduced? 234
PART FIVE BUSINESS AND TECHNOLOGY 237
CHAPTER 11 The Role of Technology 238 Technology Defined 239
Phases of Technology in Society 240
The Role of Technology in Our Daily Lives 241 The Presence of the Internet 241
Unwanted Technology Threats 243
Public Access to and Use of Technology 245 The Digital Divide in the United States and
Worldwide 245
Mobile Telephones 246
Social Networking 248
Ethical Challenges Involving Technology 250 The Loss of Privacy 250
Free Speech Issues 251
Government Censorship of Free Speech 252 The Impact of Scientific Breakthroughs 253
Genetically Engineered Foods 253
Sequencing of the Human Genome 255
Biotechnology and Stem Cell Research 256
Medical Breakthroughs 256
Summary 258 Key Terms 258 Internet Resources 258 Discussion Case: To Lock or Unlock Your Phone: Personal Privacy or National Security 259
CHAPTER 12 Regulating and Managing Technology 261 Government Regulation of Technology 262
Final PDF to printer
Contents xvii
law43665_fm_i-xx xvii 01/07/19 10:32 AM
The Role of Technology in Business 264 Access to Stakeholders’ Personal Information 265
E-Business 266
The Use of Robots and Artificial Intelligence at Work 267 The Chief Information, Security, Technology Officer 269 Cybercrime: A Threat to Organizations and the Public 271
Exploring Why Hackers Hack 271
Costs of Cybercrime 272
Business Responses to Invasions of Information Security 274 Government Efforts to Combat Cybercrime 275 Summary 276 Key Terms 277 Internet Resources 277 Discussion Case: The Arrival of Autonomous Cars—Bright Future or Looming Threat? 278
PART SIX BUSINESS AND ITS STAKEHOLDERS 281
CHAPTER 13 Shareholder Rights and Corporate Governance 282 Shareholders Around the World 283
Who Are Shareholders? 284
Objectives of Stock Ownership 285
Shareholders’ Legal Rights and Safeguards 286
Corporate Governance 287 The Board of Directors 287
Principles of Good Governance 289
Special Issue: Executive Compensation 291 Shareholder Activism 295
The Rise of Institutional Investors 296
Social Investment 297
Shareholder Lawsuits 298
Government Protection of Shareholder Interests 299
Securities and Exchange Commission 299
Information Transparency and Disclosure 299
Insider Trading 300
Shareholders and the Corporation 301 Summary 302 Key Terms 302 Internet Resources 303
Discussion Case: Corporate Governance and Executive Misconduct at Wynn Resorts 303
CHAPTER 14 Consumer Protection 305 The Rights of Consumers 307 Self-Advocacy for Consumer Interests 308 How Government Protects Consumers 309
Goals of Consumer Laws 309
Major Consumer Protection Agencies 311
Consumer Privacy in the Digital Age 314 Using the Courts and Product Liability Laws 316
Strict Liability 317
Product Liability Reform and Alternative Dispute
Resolution 317
Positive Business Responses to Consumerism 320 Managing for Quality 320
Voluntary Industry Codes of Conduct 321
Consumer Affairs Departments 322
Product Recalls 322
Consumerism’s Achievements 323 Summary 323 Key Terms 324 Internet Resources 324 Discussion Case: Volkswagen’s “Clean Diesel” Campaign 324
CHAPTER 15 Employees and the Corporation 327 The Employment Relationship 329 Workplace Rights 330
The Right to Organize and Bargain
Collectively 330
The Right to a Safe and Healthy Workplace 333
Job Security and the Right to Due Process 334
Fair Wages and Income Inequality 337 The Right to Privacy in the Workplace 339
Electronic Monitoring 340
Romance in the Workplace 341
Employee Drug Use and Testing 342
Alcohol Abuse at Work 343
Employee Theft and Honesty Testing 344
The Right to Blow the Whistle and Free Speech in the Workplace 345 Summary 347 Key Terms 347 Internet Resources 347 Discussion Case: The Ugly Side of Beautiful Nails 348
Final PDF to printer
xviii Contents
law43665_fm_i-xx xviii 01/07/19 10:32 AM
CHAPTER 16 Managing a Diverse Workforce 350 The Changing Face of the Workforce 351 Gender and Race in the Workplace 353
Women and Minorities at Work 353
The Gender and Racial Pay Gap 354
Where Women and Persons of Color Manage 356
Breaking the Glass Ceiling 356
Women and Minority Business Ownership 359
Government’s Role in Securing Equal Employment Opportunity 360
Equal Employment Opportunity 360
Affirmative Action 361
Sexual and Racial Harassment 362
What Business Can Do: Diversity and Inclusion Policies and Practices 364
Balancing Work and Life 367
Child Care and Elder Care 367
Work Flexibility 368
Summary 370 Key Terms 371 Internet Resources 371 Discussion Case: Apple and the Dreamers 371
CHAPTER 17 Business and Its Suppliers 374 Suppliers 376 Social, Ethical, and Environmental Issues in Global Supply Chains 378
Social Issues 379
Ethical Issues 380
Environmental Issues 382
Supply Chain Risk 383
Private Regulation of the Business–Supplier Relationship 384
Supply Chain Auditing 387
Supplier Development and Capability Building 389 Summary 392 Key Terms 393 Internet Resources 393 Discussion Case: IKEA’s Sustainable Cotton Supply Chain 393
CHAPTER 18 The Community and the Corporation 396 The Business–Community Relationship 398
The Business Case for Community Involvement 399
Community Relations 401 Economic Development 401
Housing 402
Aid to Minority, Women, and Disabled Veteran-Owned
Enterprises 402
Disaster, Terrorism, and War Relief 403
Corporate Giving 403 Forms of Corporate Giving 407
Priorities in Corporate Giving 409
Corporate Giving in a Strategic Context 410
Measuring the Return on Social Investment 412
Building Collaborative Partnerships 414 Summary 415 Key Terms 415 Internet Resources 416 Discussion Case: Salesforce’s 1+1+1 Integrated Philanthropy Model 416
CHAPTER 19 Managing the Public and the Corporate Reputation 419 The General Public 420 What Is Reputation? 421
Why Does Reputation Matter? 422
The Public Relations Department 424 Public Relations in the Internet and Social
Media Age 424
Brand Management 426 Crisis Management 427 Engaging Key Stakeholders with Specific Tactics 430
Executive Visibility 431
User-Generated Content 433
Paid Content 434
Event Sponsorship 434
Public Service Announcements 436
Image Advertisements 436
Summary 438 Key Terms 438 Internet Resources 438 Discussion Case: United Airlines—Navigating a Social Media Storm 439
CASES IN BUSINESS AND SOCIETY 441 1. Profiting from Pain: Business and the
U.S. Opioid Epidemic 442
2. Wells Fargo’s Unauthorized Customer Accounts 453
Final PDF to printer
Contents xix
law43665_fm_i-xx xix 01/07/19 10:32 AM
3. The Carlson Company and Protecting Children in the Global Tourism Industry 462
4. BP Blowout: The Aftermath of the Gulf Oil Disaster 471
5. Google and the Right to Be Forgotten 480
6. General Motors and the Ignition Switch Recalls 490
7. The Upper Big Branch Mine Disaster 500
8. After Rana Plaza 510
9. The Boycott of Stoli Vodka 521
Glossary 529 Bibliography 542 Indexes Name 547 Subject 550
Final PDF to printer
law43665_fm_i-xx xx 01/07/19 10:32 AM
Final PDF to printer
P A R T O N E
law43665_ch01_001-024.indd 1 11/14/18 11:33 AM
Business in Society
Final PDF to printer
2
law43665_ch01_001-024.indd 2 11/14/18 11:33 AM
C H A P T E R O N E
The Corporation and Its Stakeholders Business corporations have complex relationships with many individuals and organizations in society. The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. An important part of management’s role is to identify a firm’s relevant stakeholders and understand the nature of their interests, power, and alliances with one another. Building positive and mutually ben- eficial relationships across organizational boundaries can help enhance a company’s reputation and address critical social and ethical challenges. In a world of fast-paced globalization, shifting public expectations and government policies, growing ecological concerns, and new technologies, manag- ers face the difficult challenge of achieving economic results while simultaneously creating value for all of their diverse stakeholders.
This Chapter Focuses on These Key Learning Objectives:
LO 1-1 Understanding the relationship between business and society and the ways in which business and society are part of an interactive system.
LO 1-2 Considering the purpose of the modern corporation.
LO 1-3 Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and external stakeholders are.
LO 1-4 Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power.
LO 1-5 Recognizing the diverse ways in which modern corporations organize internally to interact with various stakeholders.
LO 1-6 Analyzing the forces of change that continually reshape the business and society relationship.
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 3
law43665_ch01_001-024.indd 3 11/14/18 11:33 AM
Amazon—which some have called the “Earth’s biggest store”—is an important part of many of our lives. We browse on Amazon, watch on Amazon, and buy on Amazon. We freely disclose to Amazon our wishes, interests, and willingness to pay. You may well have purchased or rented this textbook from Amazon.
In 2018, Amazon was the largest Internet retailer in the world, measured both by annual revenue ($178 billion) and market capitalization (more than $800 billion). It was the second largest private employer in the United States (after Walmart), with more than 540,000 employees (not counting the additional 120,000 or so temporary workers the com- pany brought on each year during the busy holiday season).1 From its start in 1994 as a scrappy Seattle start-up selling books online, Amazon had grown at an astonishing pace; in 2017, Amazon was responsible for fully 70 percent of all growth in U.S. online commerce.2 By 2018, the company’s founder and CEO, Jeff Bezos, had become the world’s richest person, with a net worth greater than $100 billion.3 Shareholders in the company had been richly rewarded; in early 2018, the price of Amazon’s stock was more than 12 times higher than it had been a decade earlier. The company was enormously popular with consumers, who turned to Amazon for one-click convenience, free and speedy delivery, and the ability to compare a seemingly endless assortment of products on the basis of price and reviews. Small businesses affiliated with Amazon Marketplace were able to tap into the company’s global e-commerce platform and unrivaled logistics to reach customers they never could have reached before. No doubt, many had benefited from Amazon’s success.
Yet the company had also become the target of criticism from many quarters, charged with destroying brick-and-mortar businesses, relentlessly driving their own employees, unfairly besting competitors, and pressuring communities for concessions. Consider that:
∙ Much of Amazon’s success had come at the expense of brick-and-mortar stores. Iconic retailers—such as Macy’s, JCPenney, and Target—had shed thousands of jobs as Amazon attracted ever-larger slices of consumer spending. A leading economist calculated that the rise of online commerce had caused the cumulative loss of 1.2 million retailing jobs—positions such as cashiers, salespeople, and stock clerks—in the United States.4 Many of these jobs were held by women and minorities (who made up 60 percent and 40 percent, respectively, of department store employees).5 Traditional retailing, concluded Scott Galloway, the author of The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google, had been “ravaged and depopulated by a single player”—Amazon.6
∙ Amazon’s own employees, by some accounts, were subject to an unusually punishing work culture. An investigative report by The New York Times, based on interviews with more than 100 current and former white-collar employees, found a pattern of setting “unreasonably high” performance standards, continually monitoring performance, and weeding out employees in a “rank and yank” system that one called “purposeful Dar- winism.” Turnover rates were among the highest in the Fortune 500. Said one former marketer, “Amazon is where overachievers go to feel bad about themselves.”7
1 “Amazon Is Now the Size of a Small Country,” Business Insider, January 16, 2018. 2 “U.S. E-Commerce Sales Grow 16.0% in 2017,” Internet Retailer, at www.digitalcommerce360.com, February 16, 2018. 3 “Jeff Bezos Is Now the Richest Person in History,” http://money.cnn.com, January 9, 2018. 4 Michael Feroli, chief U.S. economist at J.P. Morgan, cited in “Amazon to Add 100,000 Jobs as Brick-and-Mortar Retail Crum- bles,” The New York Times, January 12, 2017. 5 “The Silent Crisis of Retail Employment,” The Atlantic, April 18, 2017, and “Decline in Retail Jobs Felt Entirely by Women,” Institute for Women’s Policy Research, December 2017. 6 Scott Galloway, The Four: Scott Galloway, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google (New York: Penguin, 2017), Chapter 2. 7 “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” The New York Times, August 15, 2015.
Final PDF to printer
4 Part One Business in Society
law43665_ch01_001-024.indd 4 11/14/18 11:33 AM
∙ Amazon’s control of both online and voice-activated search gave it powerful advantages— leading to what some saw as unfair competition. One study found that under some con- ditions, products displayed under “customers who bought this item also bought” were dominated by Amazon’s own private-label brands.8 Alexa, Amazon’s voice-activated virtual assistant on Echo and other digital devices, also gave the company an edge. The consulting firm Bain & Company found that Alexa’s recommendations were biased toward “Amazon’s Choice” and the company’s own private-label products (after prod- ucts the customer had previously ordered). “The ‘endless aisle’ just got a lot smaller,” Bain concluded.9
∙ In 2017, Amazon announced it would invest $5 billion to open a second North Ameri- can headquarters outside Seattle, promising to create 50,000 new jobs paying $100,000 or more. This was a tantalizing prospect, and 238 cities and regions submitted propos- als, with at least six offering financial incentives of $1 billion or more. Some public officials thought this was well worth it, but others thought taxpayer money should not be used to subsidize such a successful company. “Blindly giving away the farm isn’t our style,” said the mayor of San Antonio, Texas, which dropped out of the race.10
Amazon’s experience illustrates, on a particularly large scale, the challenges of manag- ing successfully in a complex network of stakeholders. The company’s actions affected not only itself, but also many other people, groups, and organizations in society. Customers, employees, business partners and suppliers, competitors, shareholders, creditors, govern- ments, and local communities all had a stake in Amazon’s decisions.
Every modern company, whether small or large, is part of a vast global business sys- tem. Whether a firm has 50 employees or, like Amazon, more than half a million—its links to customers, suppliers, employees, and communities are certain to be numerous, diverse, and vital to its success. This is why the relationship between business and society is important for you to understand as both a citizen and a manager.
Business and Society
Business today is arguably the most dominant institution in the world. The term business refers here to any organization that is engaged in making a product or providing a service for a profit. Consider that in the United States today there are 6 million businesses, according to government estimates, and in the world as a whole, there are uncounted millions more. Of course, these businesses vary greatly in size and impact. They range from a woman who helps support her family by selling handmade tortillas by the side of the road in Mexico City for a few pesos, to ExxonMobil, a huge corporation that employs almost 75,000 work- ers and earns annual revenues approaching $237 billion in almost every nation in the world.
Society, in its broadest sense, refers to human beings and to the social structures they collectively create. In a more specific sense, the term is used to refer to segments of humankind, such as members of a particular community, nation, or interest group. As a set of organizations created by humans, business is clearly a part of society. At the same time, it is also a distinct entity, separated from the rest of society by clear boundaries. Business
8 “The Antitrust Case Against Facebook, Google, and Amazon,” The Wall Street Journal, January 16, 2018, and “How Amazon Steers Shoppers to Its Own Products,” The Wall Street Journal, June 23, 2018; see also Galloway, op. cit. 9 “Dreaming of an Amazon Christmas?” Bain & Company, November 9, 2017. 10 “Amazon Just Revealed the Top Cities for HQ2—Here Are the Ones Throwing Hundreds of Millions to Land It,” Business Insider, January 18, 2018, and “As Cities Woo Amazon to Build Second Headquarters, Incentives Are Key,” The Wall Street Journal, October 19, 2017.
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 5
law43665_ch01_001-024.indd 5 11/14/18 11:33 AM
is engaged in ongoing exchanges with its external environment across these dividing lines. For example, businesses recruit workers, buy supplies, and borrow money; they also sell products, donate time, and pay taxes. This book is broadly concerned with the relation- ship between business and society. A simple diagram of the relationship between the two appears in Figure 1.1.
As the Amazon example that opened this chapter illustrates, business and society are highly interdependent. Business activities impact other activities in society, and actions by various social actors and governments continuously affect business. To manage these interdependencies, managers need an understanding of their company’s key relationships and how the social and economic system of which they are a part affects, and is affected by, their decisions.
A Systems Perspective General systems theory, first introduced in the 1940s, argues that all organisms are open to, and interact with, their external environments. Although most organisms have clear bound- aries, they cannot be understood in isolation, but only in relationship to their surroundings. This simple but powerful idea can be applied to many disciplines. For example, in botany, the growth of a plant cannot be explained without reference to soil, light, oxygen, moisture, and other characteristics of its environment. As applied to management theory, the systems concept implies that business firms (social organisms) are embedded in a broader social structure (external environment) with which they constantly interact. Corporations have ongoing boundary exchanges with customers, governments, competitors, suppliers, com- munities, and many other individuals and groups. Just as good soil, water, and light help a plant grow, positive interactions with society benefit a business firm.
Like biological organisms, moreover, businesses must adapt to changes in the environ- ment. Plants growing in low-moisture environments must develop survival strategies, like the cactus that evolves to store water in its leaves. Similarly, a telecommunications com- pany in a newly deregulated market must learn to compete by changing the products and services it offers. The key to business survival is often this ability to adapt effectively to changing conditions. In business, systems theory provides a powerful tool to help managers conceptualize the relationship between their companies and their external environments.
FIGURE 1.1 Business and Society: An Interactive System Society
Business
Final PDF to printer
6 Part One Business in Society
law43665_ch01_001-024.indd 6 11/14/18 11:33 AM
Systems theory helps us understand how business and society, taken together, form an interactive social system. Each needs the other, and each influences the other. They are entwined so completely that any action taken by one will surely affect the other. They are both separate and connected. Business is part of society, and society penetrates far and often into business decisions. In a world where global communication is rapidly expanding, the connections are closer than ever before. Throughout this book we discuss examples of organizations and people that are grappling with the challenges of, and helping to shape, business–society relationships.
The Stakeholder Theory of the Firm
What is the purpose of the modern corporation? To whom, or what, should the firm be respon- sible?11 No question is more central to the relationship between business and society.
In the shareholder theory of the firm (sometimes also called the ownership theory), the firm is seen as the property of its owners. The purpose of the firm is to maximize its long- term market value, that is, to make the most money it can for shareholders who own stock in the company. Managers and boards of directors are agents of shareholders and have no obligations to others, other than those directly specified by law. In this view, owners’ inter- ests are paramount and take precedence over the interests of others.
A contrasting view, called the stakeholder theory of the firm, argues that corporations serve a broad public purpose: to create value for society. All companies must make a profit for their owners; indeed, if they did not, they would not long survive. However, corpora- tions create many other kinds of value as well, such as professional development for their employees and innovative new products for their customers. In this view, corporations have multiple obligations, and all stakeholders’ interests must be taken into account. This perspective was well expressed by Laurence Fink, the CEO of BlackRock, a global firm that manages more than $5 trillion worth of assets for its clients. In his 2018 letter to CEOs, Fink stated that “. . . every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”12
Supporters of the stakeholder theory of the firm make three core arguments for their position: descriptive, instrumental, and normative.13
The descriptive argument says that the stakeholder view is simply a more realistic description of how companies really work. Managers have to pay keen attention, of course, to their quarterly and annual financial performance. Keeping Wall Street satisfied by man- aging for growth—thereby attracting more investors and increasing the stock price—is a core part of any top manager’s job. But the job of management is much more complex than this. In order to produce consistent results, managers have to be concerned with pro- ducing high-quality and innovative products and services for their customers, attracting
11 For summaries of contrasting theories of the purpose of the firm, see Margaret M. Blair, “Whose Interests Should Corpora- tions Serve,” in Margaret M. Blair and Bruce K. MacLaury, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (Washington, DC: Brookings Institution, 1995), Ch. 6, pp. 202–34; and James E. Post, Lee E. Preston, and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Palo Alto, CA: Stanford University Press, 2002). 12 “Larry Fink’s Annual [2018] Letter to CEOs: A Sense of Purpose,” at www.blackrock.com. 13 The descriptive, instrumental, and normative arguments are summarized in Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications,” Academy of Management Review 20, no. 1 (1995), pp. 65–71. See also, Post, Preston, and Sachs, Redefining the Corporation, Ch. 1.
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 7
law43665_ch01_001-024.indd 7 11/14/18 11:33 AM
and retaining talented employees, and complying with a plethora of complex government regulations. As a practical matter, managers direct their energies toward all stakeholders, not just owners.
In what became known as the “dollar store wars,” two companies made competing bids to buy Family Dollar, a U.S. discount retail chain based in Charlotte, North Carolina—each with very different consequences for stakeholders. One suitor, Dollar Tree, offered $76.50 per share for the company, while the other, Dollar General, offered $80—seemingly a better deal for shareholders. But the Dollar General deal faced likely government antitrust scrutiny and would probably have required the closure of thousands of stores, throwing employees out of work and depriving low-income communities of access to a discount store. In the end, after considering the impact on all stakeholders, Family Dollar’s management recommended the lower-priced offer, and three-quarters of its shareholders agreed.14
The instrumental argument says that stakeholder management is more effective as a corporate strategy. A wide range of studies have shown that companies that behave respon- sibly toward multiple stakeholder groups perform better financially, over the long run, than those that do not. (This empirical evidence is further explored in Chapter 3.) These findings make sense, because good relationships with stakeholders are themselves a source of value for the firm. Attention to stakeholders’ rights and concerns can help produce moti- vated employees, satisfied customers, committed suppliers, and supportive communities, all good for the company’s bottom line.
The normative argument says that stakeholder management is simply the right thing to do. Corporations have great power and control vast resources; these privileges carry with them a duty toward all those affected by a corporation’s actions. Moreover, all stakehold- ers, not just owners, contribute something of value to the corporation. A skilled engineer at Microsoft who applies his or her creativity to solving a difficult programming problem has made a kind of investment in the company, even if it is not a monetary investment. Any individual or group who makes a contribution, or takes a risk, has a moral right to some claim on the corporation’s rewards.15
A basis for both the shareholder and stakeholder theories of the firm exists in law. The legal term fiduciary means a person who exercises power on behalf of another, that is, who acts as the other’s agent. In U.S. law, managers are considered fiduciaries of the owners of the firm (its shareholders) and have an obligation to run the business in their interest. These legal concepts are clearly consistent with the shareholder theory of the firm. How- ever, other laws and court cases have given managers broad latitude in the exercise of their fiduciary duties. In the United States (where corporations are chartered not by the federal government but by the states), most states have passed laws that permit managers to take into consideration a wide range of other stakeholders’ interests, including those of employees, customers, creditors, suppliers, and communities. (Benefit corporations, firms with a special legal status that obligates them to do so, are further discussed in Chapter 3.)
14 “Family Dollar Shareholders Approve Sale to Dollar Tree,” Charlotte Observer, January 22, 2015. 15 Abe Zakhem and Daniel E. Palmer, “Normative Stakeholder Theory,” in David M. Wasieleski and James Weber (eds.), Stakeholder Management, Business and Society 360: Volume 1, pages 49–74 (Bingley, United Kingdom: Emerald Publishing Ltd., 2017). Another formulation of this point has been offered by Robert Phillips, who argues for a principle of stakeholder fairness. This states that “when people are engaged in a cooperative effort and the benefits of this cooperative effort are accepted, obligations are created on the part of the group accepting the benefit” [i.e., the business firm]. Robert Phillips, Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 9 and Ch. 5.
Final PDF to printer
8 Part One Business in Society
law43665_ch01_001-024.indd 8 11/14/18 11:33 AM
In addition, many federal laws extend specific protections to various groups of stakehold- ers, such as those that prohibit discrimination against employees or grant consumers the right to sue if harmed by a product.
In other nations, the legal rights of nonowner stakeholders are often more fully devel- oped than in the United States. For example, a number of European countries—including Germany, Norway, Austria, Denmark, Finland, and Sweden—require public companies to include employee members on their boards of directors, so that their interests will be explicitly represented. Under the European Union’s so-called harmonization statutes, man- agers are specifically permitted to take into account the interests of customers, employees, creditors, and others.
In short, while the law requires managers to act on behalf of shareholders, it also gives them wide discretion—and in some instances requires them—to manage on behalf of the full range of stakeholder groups. The next section provides a more formal definition and an expanded discussion of the stakeholder concept.
The Stakeholder Concept The term stakeholder refers to persons and groups that affect, or are affected by, an organi- zation’s decisions, policies, and operations.16 The word stake originally meant a pointed stick or post. The word later became used as a verb, as when a person was said to mark territory with a stake to assert ownership—that is, to stake a claim.17 In the context of man- agement theory, stake is used more abstractly to mean an interest in—or claim on—a busi- ness enterprise. Those with a stake in the firm’s actions include such diverse groups as customers, employees, shareholders (also called stockholders), governments, suppliers, professional and trade associations, social and environmental activists, and nongovern- mental organizations. The term stakeholder is not the same as stockholder, although the words sound similar. Stockholders—individuals or organizations that own shares of a com- pany’s stock—are one of several kinds of stakeholders.
Business organizations are embedded in networks involving many participants. Each of these participants has a relationship with the firm, based on ongoing interactions. Each of them shares, to some degree, in both the risks and rewards of the firm’s activities. And each has some kind of claim on the firm’s resources and attention, based on law, moral right, or both. The number of these stakeholders and the variety of their interests can be large, making a company’s decisions very complex, as the Amazon example illustrates.
Managers make good decisions when they pay attention to the effects of their deci- sions on stakeholders, as well as stakeholders’ effects on the company. On the positive side, strong relationships between a corporation and its stakeholders are an asset that adds value. On the negative side, some companies disregard stakeholders’ interests, either out of the belief that the stakeholder is wrong or out of the misguided notion that an unhappy customer, employee, or regulator does not matter. Such attitudes often prove costly to the company involved. Today, for example, companies know that they cannot locate a factory or store in a community that strongly objects. They also know that making a product that is perceived as unsafe invites lawsuits and jeopardizes market share.
16 The term stakeholder was first introduced in 1963 but was not widely used in the management literature until the pub- lication of R. Edward Freeman’s Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984). For a comprehensive review of the stakeholder management literature, see Samantha Miles, “Stakeholder Theory Classification, Definitions and Essential Contestability,” in David M. Wasieleski and James Weber (eds.) Stakeholder Management, Business and Society 360: Volume 1, pages 21–48 (Bingley, United Kingdom: Emerald Publishing Limited, 2017). 17 “Origin and Meaning of Stake,” Online Etymology Dictionary, at www.etymonline.com.
Final PDF to printer
9
law43665_ch01_001-024.indd 9 11/14/18 11:33 AM
Different Kinds of Stakeholders Business interacts with society in many diverse ways, and a company’s relationships with various stakeholders differ.
Market stakeholders are those that engage in economic transactions with the company as it carries out its purpose of providing society with goods and services. Each relationship between a business and one of its market stakeholders is based on a unique transaction, or two-way exchange. Shareholders invest in the firm and in return receive the potential for dividends and capital gains. Creditors loan money and collect payments of interest and principal. Employees contribute their skills and knowledge in exchange for wages, bene- fits, and the opportunity for personal satisfaction and professional development. In return for payment, suppliers provide raw materials, energy, services, finished products, and other inputs; and wholesalers, distributors, and retailers engage in market transactions with the firm as they help move the product from plant to sales outlets to customers. All businesses need customers who are willing to buy their products or services.
The puzzling question of whether or not managers should be classified as stakeholders along with other employees is discussed in Exhibit 1.A.
Nonmarket stakeholders, by contrast, are people and groups who—although they do not engage in direct economic exchange with the firm—are nonetheless affected by or can affect its actions. Nonmarket stakeholders include the community, various levels of government, nongovernmental organizations, business support groups, competitors, and the general public. Nonmarket stakeholders are not necessarily less important than others, simply because they do not engage in direct economic exchange with a business. On the contrary, interactions with such groups can be critical to a firm’s success or failure, as shown in the following example.
In late 2017, a company called Energy Management Inc. (EMI) said it would finally call off its sixteen-year effort to build a wind farm off the shore of Cape Cod, Massachusetts, to supply clean, renewable power to New England customers. The project, called Cape Wind, had generated intense opposition from residents of Cape
Are Managers Stakeholders?
Are managers, especially top executives, stakeholders? This has been a contentious issue in stakeholder theory. On one hand, the answer clearly is “yes” Like other stakeholders, managers are impacted by the firm’s decisions. As employees of the firm, managers receive compensation—often very generous compensation, as shown in Chapter 13. Their managerial roles confer opportunities for professional advancement, social status, and power over others. Managers benefit from the company’s success and are hurt by its failure. For these reasons, they might properly be classified as employees. On the other hand, top executives are agents of the firm and are responsible for acting on its behalf. In the stakeholder theory of the firm, their role is to integrate stakeholder interests, rather than to promote their own more narrow, selfish goals. For these reasons, they might properly be classified as representatives of the firm itself, rather than as one of its stakeholders. Management theory has long recognized that these two roles of managers potentially conflict. The main job of executives is to act for the company, but all too often they act primarily for themselves. Consider, for example, the many top executives of Lehman Brothers, MF Global, and Merrrill Lynch, who enriched them- selves personally at the expense of shareholders, employees, customers, and other stakeholders. The chal- lenge of persuading top managers to act in the firm’s best interest is further discussed in Chapter 13.
Exhibit 1.A
Final PDF to printer
10 Part One Business in Society
law43665_ch01_001-024.indd 10 11/14/18 11:33 AM
Cod and nearby islands, who were concerned that its 130 wind turbines would spoil the view and get in the way of boats. A nonprofit group called Save Our Sound filed dozens of lawsuits, charging possible harm to wildlife, increased electricity rates, and danger to aircraft. Local utilities had withdrawn their commitments to buy power from the wind farm, and state regulators had denied permission for a power line connection to the mainland. “We were kept in a repeated sudden death period,” said the company’s discouraged owner, using a football analogy. “And the goal posts kept moving.”18
In this instance, various stakeholders were able to block the company’s plans completely— even though many did not have a market relationship with it.
Theorists also distinguish between internal stakeholders and external stakeholders. Internal stakeholders are those, such as employees and managers, who are employed by the firm. They are “inside” the firm, in the sense that they contribute their effort and skill, usu- ally at a company worksite. External stakeholders, by contrast, are those who—although they may have important transactions with the firm—are not directly employed by it.
The classification of government as a nonmarket stakeholder has been controversial in stakeholder theory. Most theorists say that government is a nonmarket stakeholder (as does this book) because it does not normally conduct any direct market exchanges (buying and selling) with business. However, money often flows from business to government in the form of taxes and fees, and sometimes from government to business in the form of subsidies or incentives. Moreover, some businesses—defense contractors for example—do sell directly to the government and receive payment for goods and services rendered. For this reason, a few theorists have called government a market stakeholder of business. And, in a few cases, the government may take a direct ownership stake in a company—as the U.S. government did after the financial crisis of 2008–09 when it invested in several banks and auto companies, becoming a shareholder of these firms. Government also has special influence over business because of its ability to charter and tax corporations, as well as make laws that regulate their activities. The unique relationship between government and business is discussed throughout this book.
Other stakeholders also have some market and some nonmarket characteristics. For example, business support groups, such as the Chamber of Commerce, are normally con- sidered a nonmarket stakeholder. However, companies may support the Chamber of Com- merce with their membership dues—a market exchange. Communities are a nonmarket stakeholder, but receive taxes, philanthropic contributions, and other monetary benefits from businesses. These subtleties are further explored in later chapters.
Modern stakeholder theory recognizes that most business firms are embedded in a com- plex web of stakeholders, many of which have independent relationships with each other.19 In this view, a business firm and its stakeholders are best visualized as an interconnected network. Imagine, for example, an electronics company, based in the United States, that produces smartphones, tablets, and music players. The firm employs people to design, engineer, and market its devices to customers in many countries. Shares in the company
18 “Now It’s Official: Cape Wind Project Dead,” Boston Globe, December 1, 2017, and “After 16 Years, Hopes for Cape Cod Wind Farm Float Away,” The New York Times, December 19, 2017. The story of the opposition to Cape Wind is told in Robert Whitcomb and Wendy Williams, Cape Wind: Money, Celebrity, Energy, Class, Politics, and the Battle for Our Energy Future (New York: PublicAffairs, 2008). 19 Timothy J. Rowley, “The Power of and in Stakeholder Networks,” in David M. Wasieleski and James Weber (eds.) Stake- holder Management, Business and Society 360: Volume 1, pp. 101–122 (Bingley, United Kingdom: Emerald Publishing Limited, 2017).
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 11
law43665_ch01_001-024.indd 11 11/14/18 11:33 AM
are owned by investors around the world, including many of its own employees and man- agers. Production is carried out by suppliers in Asia. Banks provide credit to the company, as well as to other companies. Competing firms sell their products to some of the same customers, and also contract production to some of the same Asian suppliers. Nongovern- mental organizations may seek to lobby the government concerning the firm’s practices, and may count some employees among their members. A visual representation of this company and its stakeholders is shown in Figure 1.2.
As Figure 1.2 suggests, some individuals or groups may play multiple stakeholder roles. Some theorists use the term role sets to refer to this phenomenon. For example, a person may work at a company, but also live in the surrounding community, own shares of com- pany stock in his or her 401(k) retirement account, and even purchase the company’s prod- ucts from time to time. This person has several stakes in a company’s actions.
Later sections of this book (especially Chapters 13 through 19) will discuss in more detail the relationship between business and its various stakeholders.
Stakeholder Analysis
An important part of the modern manager’s job is to identify relevant stakeholders and to understand both their interests and the power they may have to assert these interests. This process is called stakeholder analysis. The organization from whose perspective the analy- sis is conducted is called the focal organization.
FIGURE 1.2 A Firm and its Stakeholders
Business Firm
Governments
Customers
Shareholders
Employees
Creditors
Competitors
Suppliers
Non- governmental organizations
Final PDF to printer
12 Part One Business in Society
law43665_ch01_001-024.indd 12 11/14/18 11:33 AM
The first step of a stakeholder analysis is for managers of the focal organization to identify the issue at hand. For example, in the Cape Wind situation discussed earlier in this chapter, Energy Management Inc. had to analyze how to win regulatory approval for the construction of its wind farm. Once the issue is determined, managers must ask four key questions, as discussed below and summarized in Figure 1.3.
Who are the relevant stakeholders?
The first question requires management to identify and map the relevant stakeholders. Exhibit 1.B, which appears later in this chapter, provides a guide. However, not all stake- holders listed will be relevant in every management situation. For example, a privately held firm will not have shareholders. Some businesses sell directly to customers online, and therefore will not have retailers. In other situations, a firm may have a stakeholder—say, a creditor that has loaned money—but this group is not relevant to a particular issue that management faces.
But stakeholder analysis involves more than simply identifying stakeholders; it also involves understanding the nature of their interests, power, legitimacy, and links with one another.
Stakeholder Interests What are the interests of each stakeholder?
Each stakeholder has a unique relationship to the organization, and managers must respond accordingly. Stakeholder interests are, essentially, the nature of each group’s stake. What are their concerns, and what do they want from their relationship with the firm?20
Shareholders, for their part, have an ownership interest in the firm. In exchange for their investment, shareholders expect to receive dividends and, over time, capital appreciation. The economic health of the corporation affects these people financially; their personal wealth—and often, their retirement security—is at stake. They may also seek to achieve social objectives through their choice of investments. Customers, for their part, are most
20 A full discussion of the interests of stakeholders may be found in R. Edward Freeman, Ethical Theory and Business (Englewood Cliffs, NJ: Prentice Hall, 1994).
FIGURE 1.3 The Four Key Questions of Stakeholder Analysis
Who are the relevant stakeholders?
What are the interests of each stakeholder?
What is the power of each stakeholder?
How are coalitions likely to form?
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 13
law43665_ch01_001-024.indd 13 11/14/18 11:33 AM
interested in gaining fair value and quality in exchange for the purchase price of goods and services. Suppliers wish to obtain profitable orders, use their capacity efficiently, and build stable relationships with their business customers. Employees, in exchange for their time and effort, want to receive fair compensation and an opportunity to develop their job skills. Governments, public interest groups, and local communities have another sort of relation- ship with the company. In general, their stake is broader than the financial stake of owners, customers, and suppliers. They may wish to protect the environment, assure human rights, or advance other broad social interests. Managers need to understand these complex and often intersecting stakeholder interests.
Stakeholder Power What is the power of each stakeholder?
Stakeholder power means the ability to use resources to make an event happen or to secure a desired outcome. Stakeholders have five different kinds of power: voting power, eco- nomic power, political power, legal power, and informational power.
Voting power means that the stakeholder has a legitimate right to cast a vote. Share- holders typically have voting power proportionate to the percentage of the company’s stock they own. They typically have an opportunity to vote on such major decisions as mergers and acquisitions, the composition of the board of directors, and other issues that may come before the annual meeting. (Shareholder voting power should be distinguished from the voting power exercised by citizens, which is discussed below.)
For example, Starboard Value LP, a New York-based hedge fund, used its voting power as a shareholder to force change in a company it had invested in. Starboard bought more than 10 percent of the shares of Mellanox Technologies, an Israeli semiconductor company, and called for radical change, slamming management for “weak execution,” “excessive spending,” and “missed growth opportunities.” When Mellanox did not respond aggressively enough, in 2018 Starboard and its allies fielded their own slate of nominees in the election for the board of directors and organized support from other voting shareholders. The company eventually com- promised with Starboard, agreeing to add two of the activists’ nominees to the board and a third if performance goals were not met. In recent years, activist inves- tors like Starboard Value have won one board seat for every two board election campaigns they have waged.21
Suppliers, customers, employees, and other stakeholders have economic power with the company. Suppliers, for example, can withhold supplies or refuse to fill orders if a com- pany fails to meet its contractual responsibilities. Customers may refuse to buy a compa- ny’s products or services if the company acts improperly. They can boycott products if they believe the goods are too expensive, poorly made, or unsafe. Employees, for their part, can refuse to work under certain conditions, a form of economic power known as a strike or slowdown. Economic power often depends on how well organized a stakeholder group is. For example, workers who are organized into unions usually have more economic power than do workers who try to negotiate individually with their employers.
Governments exercise political power through legislation, regulations, or lawsuits. While government agencies act directly, other stakeholders use their political power
21 “Mellanox, Starboard Settle on New Board Members,” Reuters, June 19, 2018; “Starboard Value to Launch Proxy Fight for Entire Board at Mellanox,” The Wall Street Journal, January 17, 2018; and “Review and Analysis of 2017 U.S. Shareholder Activism,” Sullivan & Cromwell LLP, March 26, 2018.
Final PDF to printer
14 Part One Business in Society
law43665_ch01_001-024.indd 14 11/14/18 11:33 AM
indirectly by urging government to use its powers by passing new laws or enacting regula- tions. Citizens may also vote for candidates that support their views with respect to govern- ment laws and regulations affecting business, a different kind of voting power than the one discussed above. Stakeholders may also exercise political power directly, as when social, environmental, or community activists organize to protest a particular corporate action.
Stakeholders have legal power when they bring suit against a company for damages, based on harm caused by the firm; for instance, lawsuits brought by customers for damages caused by defective products, brought by employees for damages caused by workplace injury, or brought by environmentalists for damages caused by pollution or harm to species or habitat. After the mortgage lender Countrywide collapsed, many institutional share- holders, such as state pension funds, sued Bank of America (which had acquired Country- wide) to recoup some of their losses.
Finally, stakeholders have informational power when they have access to valuable data, facts, or details and are able to bring their own information and perspectives to the atten- tion of the public or key decision makers. With the explosive growth of technologies that facilitate the sharing of information, this kind of stakeholder power has become increas- ingly important.
Consumers’ ability to use social networks to express their views about businesses they like—and do not like—has given them power they did not previously have. For example, Yelp Inc. operates a website where people can search for local businesses, post reviews, and read others’ comments. In 2016, a dozen years after its launch, Yelp attracted 145 million unique visitors every month. Its reviewers collectively have gained considerable influence. Restaurants, cultural venues, hair salons, and other establishments can attract customers with five-star ratings and “People Love Us on Yelp” stickers in their windows—but, by the same token, can be badly hurt when reviews turn nasty. A Harvard Business School study reported that a one-star increase in an independent restaurant’s Yelp rating led to a 5 to 9 percent increase in revenue. Some businesses have complained that Yelp reviewers have too much power. “My business just died,” said the sole proprietor of a housecleaning business. “Once they locked me into the 3.5 stars, I wasn’t getting any calls.”22
Activists often try to use all of these kinds of power when they want to change a compa- ny’s policy. For example, human rights activists wanted to bring pressure on Unocal Corpo- ration to change its practices in Burma (Myanmar), where it had entered into a joint venture with the government to build a gas pipeline. Critics charged that many human rights vio- lations occurred during this project, including forced labor and relocations. In an effort to pressure Unocal to change its behavior, activists organized protests at shareholder meetings (voting power), called for boycotts of Unocal products (economic power), promoted local ordinances prohibiting cities from buying from Unocal (political power), brought a lawsuit for damages on behalf of Burmese villagers (legal power), and gathered information about government abuses by interviewing Burmese refugees and publicizing the results online (informational power). These activists increased their chances of success by mobilizing many kinds of power. This combination of tactics eventually forced Unocal to pay com- pensation to people whose rights had been violated and to fund education and health care projects in the pipeline region.23
22 Michael Luca, “Reviews, Reputation, and Revenue: The Case of Yelp.Com,” Harvard Business School NOM Unit Working Paper No. 12-016, March 16, 2016; and “Is Yelp Fair to Businesses?” PC World, November 15, 2011. 23 Further information about the campaign against Unocal is available at www.earthrights.org/unocal.
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 15
law43665_ch01_001-024.indd 15 11/14/18 11:33 AM
Exhibit 1.B provides a schematic summary of some of the main interests and powers of both market and nonmarket stakeholders.
Stakeholder Coalitions An understanding of stakeholder interests and power enables managers to answer the final question of stakeholder analysis regarding coalitions.
How are coalitions likely to form?
Not surprisingly, stakeholder interests often coincide. For example, consumers of fresh fruit and farmworkers who harvest that fruit in the field may have a shared interest in reducing the use of pesticides, because of possible adverse health effects from exposure to chemicals. When their interests are similar, stakeholders may form coalitions, temporary alliances to pursue a common interest. Companies may be both opposed and supported by stakeholder coalitions, as shown in the example of the controversial Keystone XL pipeline.
TransCanada, a major North American energy company, sought approval to build a pipeline from Alberta, Canada, to Steele City, Nebraska, where it would connect to existing pipelines running to refineries and ports along the Gulf Coast. In opposing the Keystone XL pipeline, environmentalists argued it would enable the export of oil extracted from Canadian tar sands, an energy-intensive and dirty process. When burned, the tar sands oil would release carbon dioxide, contributing to further cli- mate change, and spills from the pipeline could foul water supplies. They were joined in coalition by other groups, such as ranchers, farmers, and Native Ameri- cans whose land would be crossed by the pipeline. On the other side, construction unions, many local governments, and business groups supported the pipeline, say- ing that it would create jobs, reduce U.S. dependence on foreign oil, and provide a safer method of transport than trains or tanker trucks. In 2018, debate still raged, and construction on the project had not begun.24
Stakeholder coalitions are not static. Groups that are highly involved with a company today may be less involved tomorrow. Issues that are controversial at one time may be uncontroversial later; stakeholders that are dependent on an organization at one time may be less so at another. To make matters more complicated, the process of shifting coali- tions does not occur uniformly in all parts of a large corporation. Stakeholders involved with one part of a large company often have little or nothing to do with other parts of the organization.
The discussion case at the end of this chapter describes the coalitions that developed in favor of and opposition to new regulations that would require the ride-hailing start-up Uber to insure drivers logged onto its system to look for customers.
Another variation of stakeholder analysis focuses on stakeholder salience. Some schol- ars have suggested that managers pay the most attention to stakeholders possessing greater salience. (Something is salient when it stands out from a background, is seen as important, or draws attention.) Stakeholders stand out to managers when they have power, legitimacy, and urgency. This section has already discussed various forms of stakeholder power. Legit- imacy refers to the extent to which a stakeholder’s actions are seen as proper or appropriate by the broader society, because they are clearly affected by the company’s actions. Urgency refers to the time-sensitivity of a stakeholder’s claim, that is, the extent to which it demands
24 “Keystone XL Pipeline Has Enough Oil Suppliers, Will be Built, TransCanada Says,” Inside Climate News, January 18, 2018; “Keystone Pipeline Pros, Cons and Steps to a Final Decision,” The New York Times, November 18, 2014.
Final PDF to printer
16
law43665_ch01_001-024.indd 16 11/14/18 11:33 AM
Stakeholders: Nature of Interest and PowerExhibit 1.B
Stakeholder Nature of Interest— Stakeholder Wishes To:
Nature of Power—Stakeholder Influences Company By:
Market Stakeholders
Employees ■ Maintain stable employment in firm ■ Receive fair pay for work and mandated
benefits ■ Work in safe, comfortable environment
■ Union bargaining power ■ Work actions or strikes ■ Publicity
Shareholders ■ Receive a satisfactory return on investments (dividends)
■ Realize appreciation in stock value over time
■ Exercising voting rights based on share ownership
■ Exercising rights to inspect company books and records
Customers ■ Receive fair exchange: value and quality for money spent
■ Receive safe, reliable products ■ Receive accurate information ■ Be able to voice concerns
■ Purchasing goods from competitors ■ Boycotting companies whose products
are unsatisfactory or whose policies are unacceptable
Suppliers ■ Receive regular orders for goods ■ Be paid promptly for supplies delivered ■ Use capacity efficiently ■ Build stable relationships with business
customers ■ Be treated ethically
■ Refusing to meet orders if conditions of contract are breached
■ Supplying to competitors
Retailers, Wholesalers ■ Receive quality goods in a timely fashion at reasonable cost
■ Offer reliable products that consumers trust and value
■ Buying from other suppliers if terms of contract are unsatisfactory
■ Boycotting companies whose goods or policies are unsatisfactory
Creditors ■ Receive repayment of loans ■ Collect debts and interest
■ Calling in loans if payments are not made ■ Utilizing legal authorities to repossess or
take over property if loan payments are severely delinquent
immediate action. The more of these three attributes a stakeholder possesses, the greater the stakeholder’s salience and the more likely that managers will notice and respond.25
Stakeholder Mapping Once managers have conducted a stakeholder analysis, they can use it to develop a stakeholder map, a visual representation of the relationships among stakeholder inter- ests, power, and coalitions with respect to a particular issue.26 (A stakeholder map can
25 Ronald K. Mitchell, Bradley R. Agle, and Donna J. Wood, “Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts,” Academy of Management Review 22, no. 4 (1997), pp. 853–86. 26 For two alternative approaches to stakeholder mapping, see David Saiia and Vananh Le, “A Map Leading to Less Waste,” Proceedings of the International Association for Business and Society 20: 302–13 (2009); and Robert Boutilier, Stakeholder Pol- itics: Social Capital, Sustainable Development, and the Corporation (Sheffield, UK: Greenleaf Publishing, 2009), Chs. 6 and 7.
Final PDF to printer
17
law43665_ch01_001-024.indd 17 11/14/18 11:33 AM
Stakeholder Nature of Interest— Stakeholder Wishes To:
Nature of Power—Stakeholder Influences Company By:
Nonmarket Stakeholders
Communities ■ Employ local residents in the company ■ Ensure that the local environment is
protected ■ Ensure that the local area is developed
■ Refusing to extend additional credit ■ Issuing or restricting operating licenses
and permits ■ Lobbying government for regulation of
the company’s policies or methods of land use and waste disposal
Nongovernmental organizations
■ Monitor company actions and policies to ensure that they conform to legal and ethical standards
■ Promote social and economic development
■ Gaining broad public support through publicizing the issue
■ Lobbying government for regulation of the company
Business support groups (e.g., trade associations)
■ Provide research and information which will help the company or industry perform in a changing environment
■ Using its staff and resources to assist company in business endeavors and development efforts
■ Providing legal or “group” political support beyond that which an individual company can provide for itself
Governments ■ Promote economic development ■ Encourage social improvements ■ Raise revenues through taxes
■ Adopting regulations and laws ■ Issuing licenses and permits ■ Allowing or disallowing commercial activity
The general public ■ Protect social values ■ Minimize risks ■ Achieve prosperity for society ■ Receive fair and honest communication
■ Networking with other stakeholders ■ Pressing government to act ■ Condemning or praising individual
companies
Competitors ■ Compete fairly ■ Cooperate on industry-wide or
community issues ■ Seek new customers
■ Pressing government for fair competition policies
■ Suing companies that compete unfairly
also be used to represent stakeholder salience, to help a firm identify which stakeholders may require more of their attention.) Consider the following example:
In Anaheim, California, a real estate developer called SunCal purchased a large lot near to the Disneyland theme park. SunCal planned to build condominiums, with 15 percent of the units set aside for below-market-rate rental apartments. Because the site was in the resort district, the developer required special permission from the city council to proceed. Affordable housing advocates quickly backed SunCal’s plans. Some unions representing Disney employees also supported the idea, as did environmentalists drawn by the prospect of reducing long commutes, a contributor to the region’s air pollution. Disney, however, strenuously opposed SunCal’s plan, arguing that the land should be used only for tourism-related development such as hotels and restaurants; the company was supported by the chamber of commerce and various businesses in the resort district. The city council itself was split.
Final PDF to printer
18 Part One Business in Society
law43665_ch01_001-024.indd 18 11/14/18 11:33 AM
If SunCal conducted a stakeholder analysis of this situation, it would conclude that the interests of relevant stakeholders were divided. Some, including Disney and vari- ous local businesses and some politicians, opposed its plan. But others, including some unions, affordable housing advocates, environmentalists, and other politicians, supported it. An analysis of coalitions would show how these stakeholders were likely to ally with one another. An analysis of power would show that Disney had enormous clout in Ana- heim, because it was the city’s major employer and taxpayer, with power far exceeding that of other relevant stakeholders. SunCal would no doubt conclude from this analysis that it was unlikely to succeed in building on this site. A stakeholder map of this situa- tion is shown in Figure 1.4. On the vertical axis, it shows various stakeholders’ level of power; on the horizontal axis, it shows their position on the issue of SunCal’s proposed development.
A stakeholder map is a useful tool, because it enables managers to see quickly how stakeholders feel about an issue. It helps them see how stakeholder coalitions are likely to form, how powerful these coalitions will be, and what outcomes are likely. The stakeholder map depicted in Figure 1.4 shows, for example, than the coalition in quadrant 4—Disney, local businesses, and some members of the City Council—is more powerful that the coa- lition in quadrant 2—unions, affordable housing activists, environmental groups, and other City Council members. An additional benefit of stakeholder analysis is that it can illuminate options that managers may not have initially noticed. In this example, SunCal might have realized that Disney (high opposition, high power) very much wanted to block the proposed development, but also had significant resources. Therefore, Disney might be willing to purchase the lot itself, providing funds for SunCal to use to purchase and develop another site, with support from unions, housing activists, and others. In short, stakeholder analysis and mapping can help managers “think outside the box.”
FIGURE 1.4 Stakeholder Map of SunCal’s Proposed Development
Source: Graphic design by Colorbox Industries. © 2018. All rights reserved. Used by permission.
Disney
Local Businesses
City Council
Unions
A�ordable Housing
Environmental Groups
COALITION IN OPPOSITION
COALITION IN SUPPORT
LOW POWER
SUPPORT
HIGH POWER
OPPOSE
4 1
3 2
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 19
law43665_ch01_001-024.indd 19 11/14/18 11:33 AM
The Corporation’s Boundary-Spanning Departments
How do corporations organize internally to respond to and interact with stakeholders? Boundary-spanning departments are departments, or offices, within an organization that
reach across the dividing line that separates the company from groups and people in soci- ety. Building positive and mutually beneficial relationships across organizational boundar- ies is a growing part of management’s role.
Figure 1.5 presents a list of the corporation’s market and nonmarket stakeholders, along- side the corporate departments that typically have responsibility for engaging with them. As the figure suggests, the organization of the corporation’s boundary-spanning functions
FIGURE 1.5 The Corporation’s Boundary-Spanning Departments
G o
ve rn
m en
t
C om
m u
n ity
Customers Sh
are hol
ders
Customer Relations
• Customer service • Total quality management • Liability lawsuit defense • Recall management
Shareholder Relations, Investor Relations
• External and internal audit • SEC filings, compliance • Communications • Proxy election managementPublic A�airs,
Governmental A�airs, Government Relations
• Public policy • Lobbying • Political action • Trade associations • Advocacy ads • Grassroots mobilization
Human Resources, Labor Relations
• Communications • Union negotiations • OSHA, EEOC, and labor law compliance • Diversity and family–work programs • Healthcare
Environment, Health & Safety, Sustainability
• EPA and state environmental compliance • Internal environmental auditing • Recycling, take-back
Community Relations, Corporate Citizenship
• Corporate philanthropy • Partners with community- based organizations • Volunteerism, employee time contributions
Public Relations, Media Relations, Corporate Communications
• Public relations • Brand management • Image advertising • Crisis management
Corporation Corporate Relations, Corporate Citizenship, Corporate Responsibility, External A�airs
• Environmental scanning • Stakeholder engagement • Social reporting and auditing
Environment Gen era
l pu bli
c
N G
O s,
s up
p lie
rsE m
p loyees
Final PDF to printer
20 Part One Business in Society
law43665_ch01_001-024.indd 20 11/14/18 11:33 AM
is complex. For example, in many companies, departments of public affairs or government relations interact with elected officials and regulators. Departments of investor relations interact with shareholders; human resources with employees; customer relations with cus- tomers; and community relations with the community. Specialized departments of envi- ronment, health, and safety may deal with environmental compliance and worker health and safety, and public relations or corporate communications. Many of these specific departments will be discussed in more detail in later chapters.
The Dynamic Environment of Business
A core argument of this book is that the external environment of business is dynamic and ever changing. Businesses and their stakeholders do not interact in a vacuum. On the con- trary, most companies operate in a swirl of social, ethical, global, political, ecological, and technological change that produces both opportunities and threats. Figure 1.6 diagrams the six dynamic forces that powerfully shape the business and society relationship. Each of these forces is introduced briefly below and will be discussed in more detail later in this book.
Changing societal expectations. Everywhere around the world, society’s expec- tations of business are rising. People increasingly expect business to be more responsible, believing companies should pay close attention to social issues and act as good citizens in society. New public issues constantly arise that require action. Increasingly, business is faced with the daunting task of balancing its social, legal, and economic obligations, seeking to meet its commitments to multiple stakehold- ers. Modern businesses are increasingly exploring opportunities to act in ways that balance numerous stakeholders’ needs with their multiple obligations. These changes in society’s expectations of business, and how managers have responded, are described in Chapters 2 and 3.
FIGURE 1.6 Forces That Shape the Business and Society Relationship
Explosion of
New Technology
Dynamic Natural
Environment
Evolving Government Regulation of Business
GlobalizationGrowing Emphasis on Ethical Values
Changing Societal
Expectations
Business and Its
Stakeholders
Final PDF to printer
Chapter 1 The Corporation and Its Stakeholders 21
law43665_ch01_001-024.indd 21 11/14/18 11:33 AM
Globalization. We live in an increasingly integrated world economy, characterized by the unceasing movement of goods, services, and capital across national borders. Large transnational corporations do business in scores of countries. Products and services people buy every day in the United States or Germany may have come from Indonesia, Haiti, or Mexico. Today, economic forces truly play out on a global stage. A financial crisis on Wall Street can quickly impact economies around the world. Societal issues—such as the race to find a cure for Ebola, the movement for gender equality, or the demands of citizens everywhere for full access to the Internet—also cut across national boundaries. Chapter 4 addresses the challenges of globalization.
Growing emphasis on ethical reasoning and actions. The public also expects business to be ethical and wants corporate managers to apply ethical principles or values—in other words, guidelines about what is right and wrong, fair and unfair, and morally correct—when they make business decisions. Fair employment practices, concern for consumer safety, contribution to the welfare of the community, and human rights protection around the world have become more prominent and important. Business has created ethics programs to help ensure that employees are aware of these issues and act in accordance with ethical standards. The ethical challenges faced by business, both domestically and abroad—and business’s response—are discussed in Chapters 5 and 6.
Evolving government regulations and business response. The role of government has changed dramatically in many nations in recent decades. Governments around the world have enacted a myriad of new policies that have profoundly constrained how business is allowed to operate. Government regulation of business periodically advances and then retreats, much as a pendulum swings back and forth. Because of the dynamic nature of this force, business has developed various strategies to influ- ence elected officials and government regulators at federal, state, and local levels. Companies may seek to be active participants in the political process, and in recent years the courts have given them more opportunities to do so. The changing role of government, its impact, and business’s response are explored in Chapters 7 and 8.
Dynamic natural environment. All interactions between business and society occur within a finite natural ecosystem. Humans share a single planet, and many of our resources—oil, coal, and gas, for example—are nonrenewable. Once used, they are gone forever. Other resources, like clean water, timber, and fish, are renewable, but only if humans use them sustainably, not taking more than can be naturally replen- ished. Climate change now threatens all nations. The relentless demands of human society, in many arenas, have already exceeded the carrying capacity of the Earth’s ecosystem. The state of the Earth’s resources and changing attitudes about the nat- ural environment powerfully impact the business–society relationship. These issues are explored in Chapters 9 and 10.
Explosion of new technology and innovation. Technology is one of the most dra- matic and powerful forces affecting business and society. It has led to the world appearing to be smaller and more connected. New technological innovations har- ness the human imagination to create new machines, processes, and software that address the needs, problems, and concerns of modern society. In recent years, the pace of technological change has increased enormously. From scientific break- throughs in medicine to autonomous vehicles and artificial intelligence, change keeps coming. The extent and pace of technological innovation pose massive chal- lenges for business, and sometimes government, as they seek to manage various privacy, security, and intellectual property issues embedded in this dynamic force.
Final PDF to printer
22 Part One Business in Society
law43665_ch01_001-024.indd 22 11/14/18 11:33 AM
As discussed in Chapters 11 and 12, new technologies often force managers and organizations to examine seriously the ethical implications of their use.
Creating Value in a Dynamic Environment
These powerful and dynamic forces—fast-paced changes in societal and ethical expec- tations, the global economy, government policies, the natural environment, and new technology—establish the context in which businesses interact with their many market and nonmarket stakeholders, as discussed in Chapters 13 to 19. This means that the relation- ship between business and society is continuously changing in new and often unpredict- able ways. Environments, people, and organizations change; inevitably, new issues will arise and challenge managers to develop new solutions. To be effective, corporations must meet the reasonable expectations of stakeholders and society in general. A successful busi- ness must meet all of its economic, social, and environmental objectives. A core argument of this book is that the purpose of the firm is not simply to make a profit, but to create value for all its stakeholders. Ultimately, business success is judged not simply by a company’s financial performance but by how well it serves broad social interests.
∙ Business firms are organizations that are engaged in making a product or providing a service for a profit. Society, in its broadest sense, refers to human beings and to the social structures they collectively create. Business is part of society and engages in ongoing exchanges with its external environment. Together, business and society form an interactive social system in which the actions of each profoundly influence the other.
∙ According to the stakeholder theory of the firm, the purpose of the modern corporation is to create value for all of its stakeholders. To survive, all companies must make a profit for their owners. However, they also create many other kinds of value as well for their employees, customers, suppliers, communities, and others. For both practical and ethical reasons, corporations must take all stakeholders’ interests into account.
∙ Every business firm has economic and social relationships with others in society. Some are intended, some unintended; some are positive, others negative. Stakeholders are all those who affect, or are affected by, the actions of the firm. Some have a market relationship with the company, and others have a nonmarket relationship with it; some stakeholders are internal, and others are external.
∙ Stakeholders often have multiple interests and can exercise their economic, political, and other powers in ways that benefit or challenge the organization. Stakeholders may also act independently or create coalitions to influence the company. Stakeholder mapping is a technique for visually representing stakeholders’ relationship to an issue facing a firm.
∙ Modern corporations have developed a range of boundary-crossing departments and offices to manage interactions with market and nonmarket stakeholders. The organi- zation of the corporation’s boundary-spanning functions is complex. Most companies have many departments specifically charged with interacting with stakeholders.
∙ A number of broad forces shape the relationship between business and society. These include changing societal and ethical expectations; a dynamic global economy; redefini- tion of the role of government; ecological and natural resource concerns; and the trans- formational role of technology and innovation. To deal effectively with these changes, corporate strategy must address the expectations of all of the company’s stakeholders.
Summary
Final PDF to printer
law43665_ch01_001-024.indd 23 11/14/18 11:33 AM
Chapter 1 The Corporation and Its Stakeholders 23
Discussion Case: Insuring Uber’s App-On Gap At around 8 p.m. on a New Year’s Eve, a mother and her two young children were walking home in San Francisco. At a busy intersection, the family waited for the “walk” signal and then started across the street. Just then, an SUV made a right turn, striking all three members of the family in the crosswalk. The mother and her 5-year-old son were seriously injured. Her 6-year-old daughter was killed. The man behind the wheel of the SUV identi- fied himself as a driver for the ride-hailing service Uber.
Uber immediately distanced itself from the tragedy, saying that the driver was “not providing services on the Uber system at the time of the accident.” The family’s attorney contested this, saying that the driver was logged onto the Uber application, appeared on the system as available to accept a rider, and was interacting with his device when he struck the mother and children.
In other words, the tragic incident had apparently occurred during the app-on gap—the driver was on the road with his Uber application activated, but had not yet connected with or picked up a rider. So, who was responsible, the driver or the ride-hailing service?
Uber was, in the words of a New York Times columnist, “the hottest, most valuable tech- nology startup on the planet.” The company was founded in 2009 as “everyone’s private driver,” providing a premium town car service that could be summoned online. In 2012, it rolled out UberX, a service that enabled nonprofessional drivers to use their own vehicles to transport riders. Customers could use the Uber app to hail a car, connect with a willing driver, watch the vehicle approach on a map, pay their fare, and receive a receipt, all on their smartphone. Uber provided the technology and took a commission on each transaction.
Uber’s disruptive business model caught on rapidly. By 2014, Uber’s ride-sharing service had spread to more than 120 cities in 36 countries. In the United States, the service could reach 137 million people with an average pickup time of less than 10 minutes. Demand was growing so fast that Uber was scrambling to recruit 20,000 new drivers, whom Uber called “transpor- tation entrepreneurs,” every month. Private investors were enthusiastic about the company’s prospects: Uber had attracted $1.2 billion in funding and was valued at $18.2 billion.
Key Terms stakeholder (nonmarket), 9 stakeholder map, 16 stakeholder power, 13 stakeholder salience, 15 stakeholder theory of the firm, 6
boundary-spanning departments, 19 business, 4 external stakeholder, 10 focal organization, 11 general systems theory, 5 interactive social system, 6 internal stakeholder, 10
shareholder theory of the firm, 6 society, 4 stakeholder, 8 stakeholder analysis, 11 stakeholder coalitions, 15 stakeholder interests, 12 stakeholder (market), 9
Internet Resources
www.economist.com The Economist www.fortune.com Fortune www.nytimes.com The New York Times www.wsj.com The Wall Street Journal www.bloomberg.com Bloomberg www.ft.com Financial Times (London) www.cnnmoney.com CNN Money
Final PDF to printer
24 Part One Business in Society
law43665_ch01_001-024.indd 24 11/14/18 11:33 AM
Drivers who partnered with Uber had the flexibility to drive when and as much as they wished. They could also make a decent living; the median annual income for its full-time drivers in San Francisco, for example, was about $74,000. But they also assumed risk. In the event of an accident, Uber instructed its drivers to submit a claim to their personal insurance carrier first. If it was denied, Uber’s backup commercial liability insurance would go into effect, but only after the driver had been summoned by a customer or had one in the vehicle.
Traditional taxicab companies did not welcome competition from Uber. Cabdrivers in many cities across the world protested the entry of Uber into their markets, conducting strikes and “rolling rallies” charging Uber with unfair practices. Uber drivers did not have to comply with many of the rules that applied to taxicabs, such as those requiring commer- cial driver’s licenses, regular mechanical inspections, and commercial liability insurance. Governments at city, state, and national levels had become involved, with some imposing restrictions and others even banning Uber outright.
In the wake of the 6-year-old’s death in San Francisco, California legislator Susan Bonilla introduced a bill that would require Uber and other ride-hailing companies to provide commercial liability insurance from when the driver turned on the app to when the customer got out of the car, thus filling the app-on gap.
The American Insurance Association, representing insurance companies, supported the legislation, saying that personal auto policies should not be expected to cover ride-hailing drivers once they signaled availability. “This is not someone commuting to work or going to the grocery store or stopping to pick their children up from school,” a spokesperson said. The family of the girl killed on New Year’s Eve also supported Bonilla’s bill, as did con- sumer attorneys and the California App-Based Drivers Association.
But others lined up in opposition. Uber and other ride-hailing companies strenuously objected to the bill, as did trade associations representing high-technology and Internet-based firms, apparently concerned about increases in their costs of doing business. The bill, said an Uber spokesperson, was “an example of what happens when special interest groups dis- tract lawmakers from the best interests of consumers and small businesses.”
Sources: “Deadly Pedestrian Accident Driver Claimed He Drove for Uber,” January 1, 2014, www.abclocal.go.com; “Uber and a Child’s Death,” The New York Times, January 27, 2014; “An Uber Impact: 20,000 Jobs Created on the Uber Platform Every Month,” Uber press release, May 27, 2014; “With Uber, Less Reason to Own a Car,” The New York Times, June 11, 2014; “Uber and Airbnb’s Incredible Growth in 4 Charts,” VB News, June 19, 2014, online at www.venturebeat.com; “In Uber vs. Taxi Companies, Local Governments Play Referee,” Christian Science Monitor, July 7, 2014; “The Company Cities Love to Hate,” Bloomberg Businessweek, July 7, 2014; “Uber, Lyft, Sidecar Fight to Block New California Regulations,” San Jose Mercury News, August 13, 2014; “The Question of Coverage for Ride Service Drivers,” The New York Times, September 5, 2014; and private correspondence with the office of Assemblywoman Susan Bonilla.
Discussion Questions
1. Who are Uber’s relevant market and nonmarket stakeholders in this situation? 2. What are the various stakeholders’ interests? Please indicate if each stakeholder would
likely support, or oppose, a requirement that Uber extend its insurance to cover the app-on gap.
3. What sources of power do the relevant stakeholders have? 4. Based on the information you have, draw a stakeholder map of this case showing each
stakeholder’s position on the issue, its degree of power, and likely coalitions. What con- clusions can you draw from the stakeholder map?
5. Which of the stakeholders mentioned do you think has the most salience, and why? 6. Based on your stakeholder analysis and map, what do you think Uber should do in
response to the bill introduced by Susan Bonilla, and why?
Final PDF to printer
25
law43665_ch02_025-046.indd 25 11/16/18 11:08 AM
C H A P T E R T W O
Managing Public Issues and Stakeholder Relationships Businesses today operate in an ever-changing external environment, where effective management requires anticipating emerging public issues and engaging positively with a wide range of stake- holders. Whether the issue is growing concerns about climate change, health care, safety at work or in our schools, social equality, or consumer safety, managers must respond to the opportunities and risks it presents. To do so effectively often requires building relationships across organizational boundaries, learning from external stakeholders, and altering practices in response. Effective man- agement of public issues and stakeholder relationships builds value for the firm.
This Chapter Focuses on These Key Learning Objectives:
LO 2-1 Identifying public issues and analyzing gaps between corporate performance and stakeholder expectations.
LO 2-2 Applying available tools or techniques to scan an organization’s multiple environments and assess- ing stakeholder materiality.
LO 2-3 Describing the steps in the issue management process and determining how to make the process most effective.
LO 2-4 Identifying the managerial skills required to respond to emerging issues effectively.
LO 2-5 Understanding the various stages through which businesses can engage with stakeholders, what drives this engagement, and the role social media can play.
LO 2-6 Recognizing the value of creating stakeholder dialogue and networks.
Final PDF to printer
26 Part One Business in Society
law43665_ch02_025-046.indd 26 11/16/18 11:08 AM
A 2016 study from the Public Affairs Council found that many major corporations are feeling increased pressure to speak out on social issues, ranging from discrimination and human rights to environmental sustainability and quality education. Among companies with more than $15 billion in annual revenue, more than three in four said expectations for engagement had risen. Most of the pressure to engage in social issues, said the companies, has come from their own employees.1
Legislative battles in North Carolina, Tennessee, Mississippi, and Georgia prompted business leaders to take a stand favoring rights for transgender individuals. Dow Chemical, Alcoa, and Northrup Grumman lobbied elected officials and publicly condemned measures seen as discriminatory. Monsanto lead the fight in Missouri against a bill that would allow businesses to deny certain services to same-sex couples as a matter of religious freedom. In response to North Carolina’s state legislature passing a law that blocked antidiscriminatory protections at the local level, Deutsche Bank, the German financial institution with signifi- cant business in the United States, said it would freeze its plans to add jobs in North Caro- lina. PayPal announced it would halt its plans to open a new global operations center there.
While some thought these issues had little to do with business, executives pointed out these discriminatory state laws could harm local economies and hamper business’s ability to recruit and retain bright young workers. In the past few years, businesses have employed a number of measures to voice their views. These have ranged from joining coalitions, to issuing press releases, to engaging in lobbying at the state or local governmental levels. Experts believe that these efforts had some impact, such as in North Carolina where com- pany protests contributed to the state legislature’s repeal of a law that discriminated against gays and lesbians. Public reaction has been generally positive to these business actions. A Global Strategy Group poll found that 78 percent of Americans supported corporate engagement in social issues such as discrimination, human rights, and equality.2
In this case, emerging social issues focused on individual rights prompting various busi- nesses and their executives to become engaged and take action. This will likely improve the communities where these firms hire employees, operate, and sell their products. Yet, as this chapter will show, companies sometimes also ignore or mismanage public issues.
Public Issues
A public issue is any issue that is of mutual concern to an organization and one or more of its stakeholders. (Public issues are sometimes also called social issues or sociopolitical issues.) They are typically broad issues, often impacting many companies and groups, and of concern to a significant number of people. Public issues are often contentious—different groups may have different opinions about what should be done about them. They often, but not always, have public policy or legislative implications.
The emergence of a new public issue often indicates there is a gap between what the firm wants to do or is doing and what stakeholders expect. Scholars have called this the performance–expectations gap. Stakeholder expectations are a mixture of people’s opin- ions, attitudes, and beliefs about what constitutes reasonable business behavior. Managers and organizations have good reason to identify emergent expectations as early as possible. Failure to understand stakeholder concerns and to respond appropriately will permit the
1 “Taking a Stand: How Corporations Speak Out on Social Issues,” Public Affairs Council, 2016. 2 “Why Companies Are Getting More Engaged on Social Issues,” Public Affairs Council, August 30, 2016, pac.org; “Big Busi- ness Speaks Up on Social Issues,” The Wall Street Journal, April 17, 2016, www.wsj.com; and “Seeking End to Boycott, North Carolina Rescinds Transgender Bathroom Law,” Reuters, March 30, 2017, www.reuters.com.
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 27
law43665_ch02_025-046.indd 27 11/16/18 11:08 AM
performance–expectations gap to grow: the larger the gap, the greater the risk of stake- holder backlash or of missing a major business opportunity. The performance–expectations gap is pictured in Figure 2.1.
Emerging public issues are both an opportunity and a risk. On one hand, correctly anticipating the emergence of a public issue can confer a competitive advantage. However, they also are a risk because issues that firms do not anticipate and plan for effectively can seriously hurt a company, as the following example shows.
The Italian–U.S. automobile maker, Fiat Chrysler, became aware of a serious prob- lem involving more than 11 million vehicles, including older Jeeps with rear gas- oline tanks that were linked to numerous fatal fires. Yet, Fiat Chrysler was slow to respond to the increasing expectations of its customers and regulators, the National Highway Traffic Safety Administration (NHTSA). The NHTSA accused the firm of misleading and obstructing regulators tasked with overseeing the resolution of many consumer complaints, inadequate and lagging repairs authorized through their dealerships, and failing to notify car owners of the recalls in a timely manner. The firm agreed to a consent agreement that included a fine of $105 million and an unprecedented buyback option covering hundreds of thousands of vehicles, whose owners can receive a trade-in or a financial incentive to get their vehicles repaired. Fiat Chrysler also agreed to submit to an independent monitor’s audit of its recall performance over the following three-year period.3
Understanding and responding to changing stakeholder expectations is a business neces- sity. As Mark Moody-Stuart, former managing director of Royal Dutch/Shell, put it in an interview, “Communication with society. . . is a commercial matter, because society is your customers. It is not a soft and wooly thing, because society is what we depend on for our living. So we had better be in line with its wishes, its desires, its aspirations, its dreams.4
3 “U.S. Auto Safety Regulators Fine Fiat Chrysler Record $105 million,” Reuters, July 26, 2015, www.reuters.com. 4 Interview conducted by Anne T. Lawrence, “Shell Oil in Nigeria,” interactive online case published by www.icase.co.
FIGURE 2.1 The Performance– Expectations Gap
Time
Expected Corporate Performance (What stakeholders expect)
Actual Corporate Performance (What actually happens)
Performance – Expectations Gap
High
Low
P e
rf o
rm an
ce (S
o ci
al a
n d
E co
n o
m ic
)
Final PDF to printer
28 Part One Business in Society
law43665_ch02_025-046.indd 28 11/16/18 11:08 AM
Every company faces many public issues. Some emerge over a long period of time; others emerge suddenly. Some are predictable; others are completely unexpected. Some companies respond effectively; others do not. Consider the following recent examples of public issues and companies’ responses:
∙ Sexual harassment: An often well-kept secret vaulted into the public spotlight in 2017: accusations of sexual harassment in the corporate boardroom, executive suite, and workplace. Numerous high-profile business leaders were accused, including Fox News host Bill O’Reilly, film producer Harvey Weinstein, television show host Matt Lauer, Fox News CEO Roger Ailes, Ford Motor Company president for North America Raj Nair, CEO of the Humane Society of the United States Wayne Pacelle, and billionaire and casino executive Steve Wynn, along with many others. These executives resigned or were fired amidst sexual harassment accusations.
∙ Consumer safety: The Centers for Disease Control and Prevention declared separate E. coli outbreaks that sickened hundreds of customers at two different Chipotle Mexican Grill restaurants in the Pacific Northwest in 2015. These incidents followed other occur- rences where customers became ill from a salmonella outbreak involving tomatoes in Minnesota, as well as an outbreak of norovirus in California and Massachusetts. Chipotle tried to counter the negative publicity by pledging $10 million to help local growers meet new food safety standards and invited its 50,000 employees nationwide to tune in to a broadcasted meeting with executives at their Denver headquarters.
∙ Protection of personal information: Instances of the illegal acquisition, or hacking, of individuals’ personal identification and financial information have become common occurrences. Yahoo, Equifax, Delta Airlines, FedEx, England’s National Health Ser- vices, Merck Pharmaceuticals, Forever 21, Target, and many more organizations expe- rienced data breaches that compromised and exposed personal data of its customers or employees. These breaches may have reflected managers’ failure to keep abreast of the latest techniques used by sophisticated cybercriminals.
Whether the focus is sexual harassment in the workplace, consumer safety, or the pro- tection of personal information, society has increased its demands that businesses take on important public issues and become more involved in addressing them. Another critical public issue that caught the attention of many business organizations after a school shoot- ing in Florida—gun violence and school safety in America—is discussed in the case at the end of this chapter.
A survey of Millennials (people born between 1977 and 1994) was conducted in 2014 and found that four out of five Millennials “need (not just want) business to get involved in addressing social issues and believe business can make a greater impact.” One Millennial from China explained: “Compared to governments, businesses have the potential and the possibility to make real change in society happen faster and more efficiently. Businesses have the resources—from financial means, collective intelligence to technology—to con- tribute and make a difference.”5
Environmental Analysis
As new public issues arise, businesses must respond. Organizations need a systematic way of identifying, monitoring, and selecting public issues that warrant organizational action because of the risks or opportunities they present. Organizations rarely have full control of
5 The Future of Business Citizenship, People’s Insights Magazine, www.scribd.com.
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 29
law43665_ch02_025-046.indd 29 11/16/18 11:08 AM
a public issue because of the many factors involved. But it is possible for the organization to create a management system that identifies and monitors issues as they emerge.
To identify those public issues that require attention and action, a firm needs a frame- work for seeking out and evaluating environmental information. (In this context, environ- mental means outside the organization; in Chapters 9 and 10, the term refers to the natural environment.) Environmental analysis is a method managers use to gather information about external issues and trends, so they can develop an organizational strategy that mini- mizes threats and takes advantage of new opportunities.
Environmental intelligence is the acquisition of information gained from analyzing the multiple environments affecting organizations. Acquiring this information may be done informally or as a formal management process. If done well, this environmental intelli- gence can help an organization avoid crises and spot opportunities.
According to management scholar Karl Albrecht, scanning to acquire environmental intelligence should focus on eight strategic radar screens.6 Radar is an instrument that uses microwave radiation to detect and locate distant objects, which are often displayed on a screen; law enforcement authorities use radar, for example, to track the speed of passing cars. Albrecht uses the analogy of radar to suggest that companies must have a way of tracking important developments that are outside of their immediate view. He identifies eight different environments that managers must systematically follow. These are shown in Figure 2.2 and described next.
∙ Customer environment includes the demographic factors, such as gender, age, marital status, and other factors, of the organization’s customers as well as their social values or preferences, buying preferences, and technology usage. For example, the explosion of social media has created opportunities for creating new marketing approaches that provide potential consumers with coupons or sales information on their smartphones as they leave their car and walk toward the retail store.
∙ Competitor environment includes information on the number and strength of the orga- nization’s competitors, whether they are potential or actual allies, patterns of aggres- sive growth versus static maintenance of market share, and the potential for customers to become competitors if they “insource” products or services previously purchased from the organization. (This environment is discussed further in the next section of this chapter.)
∙ Economic environment includes information about costs, prices, international trade, and any other features of the economic environment. The severe recession that hit the world’s economy in the late 2000s greatly shifted the behavior of customers, suppli- ers, creditors, and other stakeholders, dramatically impacting decision making in many firms.
∙ Technological environment includes the development of new technologies and their applications affecting the organization, its customers, and other stakeholder groups. Faster access to information through cell phones, tablets, and other handheld electronic devices changed how people around the world were alerted to the devastation of natural disasters or terrorist actions and how they could be contacted regarding new job open- ings or the launching of innovative consumer products.
∙ Social environment includes cultural patterns, values, beliefs, trends, and conflicts among the people in the societies where the organization conducts business or might
6 Adapted from Karl Albrecht, Corporate Radar: Tracking the Forces That Are Shaping Your Business (New York: American Management Association, 2000).
Final PDF to printer
30 Part One Business in Society
law43665_ch02_025-046.indd 30 11/16/18 11:08 AM
conduct business. Issues of civil or human rights, family values, and the roles of spe- cial interest groups are important elements in acquiring intelligence from the social environment.
∙ Political environment includes the structure, processes, and actions of all levels of government—local, state, national, and international. Awareness of the stability or insta- bility of governments and their inclination or disinclination to pass laws and regulations is essential environmental intelligence for the organization. The emergence of strict environmental laws in Europe—including requirements to limit waste and provide for recycling at the end of a product’s life—have caused firms all over the world that sell to Europeans to rethink how they design and package their products.
∙ Legal environment includes patents, copyrights, trademarks, and considerations of intel- lectual property, as well as antitrust considerations and trade protectionism and organi- zational liability issues. China’s commitment to triple its patent filings from nearly one million in 2013 to three million by 2020 sent shock waves through the global business community.
∙ Geophysical environment relates to awareness of the physical surroundings of the orga- nization’s facilities and operations, whether it is the organization’s headquarters or its field offices and distribution centers, and the organization’s dependency and impact on natural resources such as minerals, water, land, or air. Growing concerns about global warming and climate change, for example, have caused many firms to seek to improve their energy efficiency.
FIGURE 2.2 Eight Strategic Radar Screens
Source: Adapted from Karl A. Albrecht, Corporate Radar: Tracking the Forces That Are Shaping Your Business (New York: American Management Association, 2000).
Customer Environment
Seeking Environmental
Intelligence
Social Environment
Geophysical Environment
Legal Environment
Political Environment
Technological Environment
Economic Environment
Competitor Environment
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 31
law43665_ch02_025-046.indd 31 11/16/18 11:08 AM
The eight strategic radar screens represent a system of interrelated segments, each one connected to and influencing the others.
Companies do not become experts in acquiring environmental intelligence overnight. New attitudes have to be developed, new routines learned, and new policies and action pro- grams designed. Many obstacles must be overcome in developing and implementing the effective scanning of the business environments. Some are structural, such as the report- ing relationships between groups of managers; others are cultural, such as changing tradi- tional ways of doing things. In addition, the dynamic nature of the business environments requires organizations to continually evaluate their environmental scanning procedures.
Competitive Intelligence One of the eight environments discussed by Albrecht is the competitor environment. The term competitive intelligence refers to the systematic and continuous process of gathering, analyzing, and managing external information about the organization’s competitors that can affect the organization’s plans, decisions, and operations. (As discussed in Chapter 1, competitors may be considered a nonmarket stakeholder of business.) The acquisition of this information benefits an organization by helping it better understand what other compa- nies in its industry are doing. Competitive intelligence enables managers in companies of all sizes to make informed decisions ranging from marketing, research and development, and investing tactics to long-term business strategies. “During difficult times, excellent competitive intelligence can be the differentiating factor in the marketplace,” explained Paul Meade, vice president of the research and consulting firm Best Practices. “Companies that can successfully gather and analyze competitive information, then implement strategic decisions based on that analysis, position themselves to be ahead of the pack.”7
However, the quest for competitors’ information can also raise numerous ethical issues. Businesses may overstep ethical and legal boundaries when attempting to learn as much as they can about their competitors, as the following example shows.
Today, Deloitte is one of the world’s largest accounting firms, employing 245,000 people in 150 countries and providing various accounting and consulting services. But, in the mid-2000s, the firm wanted to dramatically grow its federal security consulting services from a $300 million to more than a billion dollars in annual revenues. Deloitte formed a competitive intelligence unit (CIU). “Our job was to spy on Ernst & Young, PriceWaterhouseCoopers, KPMG, and some of the consulting competitors,” said a CIU employee. “We were trying to steal their pricing models, how they determined discounts, and especially new product lines or service lines.”
One example of how the CIU conducted its business occurred in 2007 when they learned that BearingPoint, a consulting firm, was struggling financially and had called an emergency meeting to determine its fate. Deloitte’s CIU agents traveled to the meeting location and spent several days stationing themselves at a bar, picking up scraps of conversation from distraught BearingPoint partners. Others spent time in bathrooms. “You can’t believe what people will say while they’re in there,” said a CIU agent. The best source for information was a Bearing Point meeting room the agents discovered. They entered the meeting room, found notes and other docu- ments left behind, and brought this information back to Deloitte’s CIU. According to one Deloitte CIU employee, “There were accounts that would have taken years
7 See Best Practices report at www.benchmarkingreports.com/competitiveintelligence.
Final PDF to printer
32 Part One Business in Society
law43665_ch02_025-046.indd 32 11/16/18 11:08 AM
for Deloitte to develop relationships at the Department of Defense, the Department of Homeland Security, and other institutions. It was a huge opportunity.” A few years later, Deloitte was able to take advantage of an opportunity to buy BearingPoint’s North American public services unit for $350 million as Bearing- Point worked through a bankruptcy.
As the example above indicates, the perceived value of intellectual property or other information may be so great that businesses or their employees may be tempted to use unethical or illegal means to obtain such information. Although questionable, Deloitte employees did nothing illegal. Competitive intelligence acquired ethically remains one of the most valued assets sought by businesses. A business must balance the importance of acquiring information about its competitors’ practices with the need to comply with all applicable laws, domestic and international, and to follow the professional standards of fairness and honesty. Disclosure of all relevant information prior to conducting an inter- view and avoidance of conflicts of interest are just a few of the ethical guidelines promoted by the Strategic and Competitive Intelligence Professional’s code of ethics.8
Stakeholder Materiality After the many environments are scanned, a company needs to evaluate and prioritize the impact that its stakeholders and their issues may have on the company. The importance attributed to a stakeholder is often referred to as materiality. Stakeholder materiality is an adaptation of an accounting term that focuses on the importance or significance of some- thing. In this case, it describes a method used to prioritize the relevance of the stakeholders and their issues to the company.
Sonoco, a global provider of packaging products and services, completed its first stakeholder materiality assessment of economic, environmental, and social issues in 2014. The company began by identifying potential stakeholders and created a list of nine stakeholders: customers, suppliers, peers, shareholders, non-governmental organizations, community leaders, government regulators, employees, and lead- ership. The company then searched various sources for information on each stakeholder, such as websites, corporate social responsibility reports, mission statements, and 10-K filings to create a list of issues. They used a four-point scale to rate each stakeholder from low to high based on the significance of the issue to the stakeholder. This scoring system enabled Sonoco to identify highly influential stakeholder groups as having the greatest potential impact on the company’s strategic objectives or those stakeholders most influenced by the company’s operations.9
After the information is collected, it needs to be analyzed and placed on a matrix that shows the importance of the issue for the stakeholder and the importance of the issue assigned by the company. This evaluation allows the company to prioritize their attention on issues in the quadrant showing issues of importance to stakeholders AND the company. An example of such a matrix representing stakeholder materiality at Nestlé is shown in Figure 2.3. Nestlé assessed the degree of stakeholder importance for an issue, as well as the potential impact of the issue on Nestlé. This combination enabled the company to place a higher, or lower, priority on many public issues.
8 For information about the professional association focusing on competitive intelligence, particularly with attention to ethical considerations, see the Strategic and Competitive Intelligence Professionals’ website at www.scip.org. 9 Information from Nestlé’s website, www.nestleusa.com/csv/what-is-csv/materiality-and-stakeholder-engagement.
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 33
law43665_ch02_025-046.indd 33 11/16/18 11:08 AM
The Issue Management Process
Once a company has identified a public issue and detects a gap between society’s expec- tations and its own practices, what are its next steps? Proactive companies do not wait for something to happen; they actively manage issues as they arise. The process of doing so is called issue management. The issue management process, illustrated in Figure 2.4, has five steps or stages. Each of these steps is explained below, using the example of the poul- try industry’s response to concerns over antibiotics in chickens.
Identify Issue Issue identification involves anticipating emerging concerns, sometimes called “horizon issues” because they seem to be just coming up over the horizon like the first morning sun. Sometimes managers become aware of issues by carefully tracking the media, experts’ views, activist opinion, and legislative developments to identify issues of concern to the pub- lic. Normally, this requires attention to all eight of the environments described in Figure 2.2. Organizations often use techniques of data searching, media analysis, and public surveys to track ideas, themes, and issues that may be relevant to their interests all over the world. They also rely on ongoing conversations with key stakeholders. Sometimes firms are com- pletely unaware of the issue before it emerges and must attempt to respond to mounting public pressure by activists or government regulators.
Consumer-health groups and the U.S. Food and Drug Administration (FDA) called on animal-breeding farms in the United States to reduce the use of antibiotics in
FIGURE 2.3 The Stakeholder Materiality Matrix
Source: Nestlé
Over- and under-nutritionHuman
rights Water
stewardship
Food and product safety
Climate change
Food and nutrition security
Women’s empowerment
Water, sanitation and hygiene
Responsible sourcing and traceability
Fair employment and youth employability
Employee safety, health, and wellness
Moderate
Lo w
S ta
ke h
o ld
e r
In te
re st
H ig
h
Significant
Environmental sustainability Our people, human rights, and complianceWaterRural developmentNutrition
Impact on Nestlé
Major
Natural resource stewardship
Rural development and poverty alleviation
Animal welfare
Business ethics
Responsible marketing
and influence
Resource e�ciency, (food) waste, and circular economy
Final PDF to printer
34 Part One Business in Society
law43665_ch02_025-046.indd 34 11/16/18 11:08 AM
their feed for cattle, hogs and chickens. Many poultry producers, for example, used antibiotics in their chickens’ feed since it increased their weight and prevented out- breaks of illnesses. But the consumer groups and the FDA charged that overuse of antibiotics also increased the development of potentially deadly bacteria that antibi- otics could not kill. These antibiotic-resistance bacteria could be transferred to peo- ple who ate the meat (or consumed the milk or eggs) of treated animals. Although the health risks were small, public outcry increased dramatically, and consumers called for action by the animal producers.10
The concern over increased health risk from antibiotics caught poultry producers by surprise, and many firms began an immediate investigation into the issue.
Analyze Issue Once an issue has been identified, its implications must be analyzed. Organizations must understand how the issue is likely to evolve, and how it is likely to affect them. For each company, the ramifications of the issue will be different.
Understanding how the use of antibiotics could affect the health of humans con- suming chickens was complex. On one hand, the company was concerned about the public’s safety, and did not want customers to become ill if they consumed chickens raised with antibiotics. On the other hand, antibiotics were a mainstay for most poultry producers in the United States. Bigger, healthier chickens trans- lated into greater profits. Poultry producers were unsure of the consequences of removing antibiotics for their companies, both in terms of their chickens’ health but also the firms’ profitability. One outbreak of illness could quickly spread throughout their entire flock of chickens, resulting in devastating costs for the
10 “Tyson Seeks Lead in No-Antibiotics Poultry,” The Wall Street Journal, February 21, 2017, www.wsj.com.
FIGURE 2.4 The Issue Management Process IDENTIFY
ISSUE ANALYZE
ISSUE
GENERATE OPTIONS
TAKE ACTION
EVALUATE RESULTS
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 35
law43665_ch02_025-046.indd 35 11/16/18 11:08 AM
firm. Yet, they could not ignore the rising outrage over the use of antibiotics in the raising of chickens.11
Generate Options An issue’s public profile indicates to managers how significant an issue is for the organi- zation, but it does not tell them what to do. The next step in the issue management process involves generating, evaluating, and selecting among possible options. This requires com- plex judgments that incorporate ethical considerations, the organization’s reputation and good name, and other nonquantifiable factors.
Many of the poultry producers started to investigate if there were alternatives avail- able to them to replace the use of antibiotics. Firms explored the use of organic and antibiotics-free production practices that could keep the flocks healthy and robust, while also keeping pace with the changing consumer demands. The use of probiotics—beneficial, plant-based bacteria that can strengthen immune systems— appeared to be a viable alternative.
Selecting an appropriate response often involves a creative process of considering vari- ous alternatives and rigorously evaluating them to see how they work in practice.
Take Action Once an option has been chosen, the organization must design and implement a plan of action. Sometimes there may be unintended consequences from the actions undertaken by the company.
Purdue Farms, the third-largest U.S. poultry producer, addressed emerging con- sumer concerns about antibiotics by announcing its “no antibiotics ever” policy. The firm stated it would eliminate, by June 2016, antibiotics in all chicken products sold in supermarkets across the United States. Other poultry producers quickly followed. Tyson Foods, the country’s largest poultry producer, announced in February 2017 that it would eliminate antibiotics used in its chicken products, including breasts, wings, and nuggets. “We believe our responsibility is to grow and grow responsibly,” said Tyson’s CEO Tom Hayes.12
Evaluate Results Once an organization has implemented the issue management program, it must continue to assess the results and make adjustments if necessary. Many managers see issue manage- ment as a continuous process, rather than one that comes to a clear conclusion.
Although specific results from the switch to chickens raised without antibiotics had not yet been fully studied, experts made some predictions. Some argued that the likelihood of serious illness, even death, caused by ingesting antibiotic-resistant bacteria would be reduced. Others argued that more medical research jobs would be created to study probiotics and other alternative treatments to keep poultry and livestock healthy and growing.
11 Ibid., The Wall Street Journal, February 21, 2017, and “Perdue to Eliminate Antibiotics in Some Chicken Products,” The Wall Street Journal, February 26, 2016, www.wsj.com. 12 Ibid., The Wall Street Journal, February 21, 2017, and “Adjuncts and Alternatives in the Time of Antibiotic Resistance and in Feed Antibiotic Bans,” Microbial Biotechnology, June 22, 2017, onlinelibrary.wiley.com.
Final PDF to printer
36 Part One Business in Society
law43665_ch02_025-046.indd 36 11/16/18 11:08 AM
This example illustrates the complexity of the issue management process. Figure 2.4 is deliberately drawn in the form of a loop. When working well, the issue management process continuously cycles back to the beginning and repeats, pulling in more informa- tion, generating more options, and improving programmatic response. Such was the case with the concern over the use of antibiotics in animals. Poultry producers stated they were committed to addressing the issue and knew that they needed to monitor the progress being made with the development of technologies and new medicines to fully address an emerg- ing public issue.
Contemporary issue management is truly an interactive process, as forward-thinking companies must continually engage in a dialogue with their stakeholders about issues that matter, as Purdue Farms, Tyson Foods, and other firms have learned. New challenges may emerge from anywhere in the world and at any time. Managers must not only implement programs, but continue to reassess their actions to be consistent with both ethical practices and long-term survival.
Organizing for Effective Issue Management
Who manages public issues? What departments and people are involved? There is no sim- ple answer to this question. Figure 1.5, presented in Chapter 1, showed that the modern corporation has many boundary-spanning departments. Which part of the organization is mobilized to address a particular emerging issue often depends on the nature of the issue itself. For example, if the issue has implications for public policy or government regula- tions, the public affairs or government relations department may take a leadership role. (The public affairs department is further discussed in Chapter 8.) If the issue is an environ- mental one, the department of sustainability or environment, health, and safety may take on this role. Some companies combine multiple issue management functions in an office of external relations or corporate affairs. The following example illustrates how one com- pany has organized to manage emerging public issues.
At Publix, the largest employee-owned grocery chain in the United States with revenues of over $34.6 billion in 2017, the coordination of public issues is handled by six different, yet related, teams: corporate communications, customer care, government relations, media and community relations, social media, and special projects. The corporate communications team handles a wide array of internal communications, including an eight-page monthly newsletter, Publix News. When customers contact the company with a potential public issue, the customer care team responds to resolve customer concerns and answer customer questions. If the public issue has a governmental element, then the government relations team is organized to communicate with federal, state, and local officials regarding matters affecting the company’s ability to effectively compete in the marketplace. Each division within the company has a media and community relations team who interacts with the news media and the communities served by the company to address any public issue. A social media team at Publix uses Facebook, Twitter, and other channels to monitor and handle any emerging public issues. And, finally, the special projects team preserves and promotes the company’s history as an important part of the Publix culture. The company relies on its tradition to guide responses to public issues as they arise.13
13 See the Publix Company website at corporate.publix.com.
Final PDF to printer
37
law43665_ch02_025-046.indd 37 11/16/18 11:08 AM
Public affairs professionals help companies and nonprofits manage their operations by anticipating governmental concerns and actions, understanding how stakeholders influence a firm’s license to operate, and helping their organization deal with emerging threats and opportunities. The Foundation for Public Affairs (FPA) reported in 2017 that “when politi- cal risk and economic uncertainty are high, . . . the public affairs function becomes even more indispensable.”14 FPA survey data showed that 56 percent of companies had increased their public affairs budgets in the previous three years and only 26 percent had experienced a decrease. And CEOs are increasingly getting involved in public affairs, with 57 percent engaged moderately or extensively and only 9 percent not engaged at all. One example of an exemplary corporate response to an important public issue is described in Exhibit 2.A.
What kinds of managers are best able to anticipate and respond effectively to emerging public issues? What skill sets are required? The European Academy of Business in Society (EABIS) undertook a major study of leaders in companies participating in the United Nations Global Compact. (This initiative is a set of basic principles covering labor, human rights, and environmental standards, to which companies can voluntarily commit.) The researchers were interested in the knowledge and skills required of what they called the “global leader of tomorrow.”
They found that effective global leadership on these public issues required three basic capabilities. The first was an understanding of the changing business context: emerging environmental and social trends affecting the firm. The second was an ability to lead in the face of complexity. Many emerging issues, the researchers found, were surrounded by ambiguity; to deal with them, leaders needed to be flexible, creative, and willing to learn from their mistakes. The final capability was connectedness: the ability to engage with external stakeholders in dialogue and partnership. More than three-fourths of executives polled said that these skills were important.15
14 Quotation from “The State of Corporate Public Affairs,” Foundation for Public Affairs, 2017. 15 European Academy of Business in Society, Developing the Global Leader of Tomorrow (United Kingdom: Ashridge, December 2008). Based on a global survey of 194 CEOs and senior executives in September–October 2008.
Coca-Cola Sets Recycling Goals
For many years, Coca-Cola was the target of environmental activists because the firm produced billions of plastic bottles that often ended up in landfills and oceans. In January 2018, the company announced an ambitious sustainability goal: it would collect and recycle the equivalent of all the packaging it put out into the world by 2030. The program was called “A World Without Waste” and included investing in more efficient packaging, local recycling programs, and consumer education. The program was announced shortly after Greenpeace, an environmental advocacy group, identified Coca-Cola, PepsiCo, and Nestlé as some of the world’s worst polluters. Greenpeace was also critical of Coca-Cola’s new sustainability initiative. “The plan failed to include any reduction of the company’s rapidly increasing use of single-use plastic bottles globally, which now stands at well over 110 billion annually,” according to a Greenpeace press release. Coca-Cola CEO James Quincey disagreed. “If we recollect all the bottles, there is no such thing a single use bottle. Every bottle comes back and every bottle has another life.” Rather than tackle the difficult task of collecting every bottle it produced, Coca-Cola aimed to collect an equivalent number of bottles. But, Quincey admitted that the biggest challenge for his company’s plan would be in developing countries that did not have modern systems of waste collection. “That’s clearly going to be a lot of groundwork with a lot of other organizations and the governments to start building that infrastructure.”
Source: “Coca-Cola, Criticized for Plastic Bottles, Sets Recycling Goals,” The Wall Street Journal, January 19, 2018, www.wsj.com.
Exhibit 2.A
Final PDF to printer
38 Part One Business in Society
law43665_ch02_025-046.indd 38 11/16/18 11:08 AM
Stakeholder Engagement
One of the key themes of this book is that companies that actively engage with stake- holders do a better job of managing a wide range of issues than companies that do not. The term stakeholder engagement is used to refer to this process of ongoing relationship building between a business and its stakeholders. In the animal-breeding farms example presented earlier in this chapter, the companies’ challenge was to engage with its various stakeholder groups, consumers, the media, government agencies, suppliers and others, in addressing an emerging issue of food product safety. This section will further explore the various forms the business–stakeholder relationship takes, when stakeholder engagement is likely to occur, what drives this engagement, and the expanding role assumed by social media in stakeholder engagement.
Stages in the Business–Stakeholder Relationship Over time, the nature of business’s relationship with its stakeholders often evolves through a series of stages. Scholars have characterized these stages as inactive, reactive, proactive, and interactive, with each stage representing a deepening of the relationship. Sometimes, companies progress through this sequence from one stage to the next; other companies remain at one stage or another, or move backward in the sequence.16
∙ Inactive companies simply ignore stakeholder concerns. These firms may believe— often incorrectly—that they can make decisions unilaterally, without taking into con- sideration their impact on others. Executives at Home Depot failed to listen to their employees’ concerns about potential breaches of the company’s data security systems and later experienced the theft of detailed consumer information from 56 million credit and debit cards. Their inactive response was costly: according to some estimates, the information from the stolen cards could be used to make $3 billion in illegal purchases.
∙ Companies that adopt a reactive posture generally act only when forced to do so, and then in a defensive manner. For example, in the film A Civil Action, based on a true story, W. R. Grace (a company that was later bought by Beatrice Foods) allegedly dumped toxic chemicals that leaked into underground wells used for drinking water, causing illness and death in the community of Woburn, Massachusetts. The company paid no attention to the problem until forced to defend itself in a lawsuit brought by a crusading lawyer on behalf of members of the community.
∙ Proactive companies try to anticipate stakeholder concerns. These firms use environ- mental scanning practices to identify emerging public issues. They often have special- ized departments, such as those at Publix, described earlier in the chapter. These firms are much less likely to be blindsided by crises and negative surprises. Stakeholders and their concerns are still, however, considered a problem to be managed, rather than a source of competitive advantage.
∙ Finally, an interactive stance means that companies actively engage with stakeholders in an ongoing relationship of mutual respect, openness, and trust. For example, in an effort to address continuing high unemployment rates, Starbucks teamed with Opportu- nity Finance Network, a group of community development financial institutions, to launch “Create Jobs for USA.” Donations from Starbucks customers, employees, and others were pooled into a nationwide fund to promote community business lending. The
16 This typology was first introduced in Lee Preston and James E. Post, Private Management and Public Policy (Englewood Cliffs, NJ: Prentice Hall, 1975). For a more recent discussion, see Sandra Waddock and Andreas Rasche, Building the Responsible Enterprise: Where Vision and Values Meet Value (Palo Alto: Stanford University Press, 2012).
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 39
law43665_ch02_025-046.indd 39 11/16/18 11:08 AM
focus of this program later expanded to include veterans with a goal of employing 10,000 veterans and active duty spouses by 2018.17
Firms with this approach recognize that positive stakeholder relationships are a source of value and competitive advantage for the company. They know that these relationships must be nurtured over time.
Drivers of Stakeholder Engagement When are companies most likely to engage with stakeholders, that is, to be at the interac- tive stage? What drives companies to go beyond an inactive or reactive stage to a proactive or interactive stage of stakeholder engagement?
Stakeholder engagement is, at its core, a relationship. The participation of a business orga- nization and at least one stakeholder organization is necessary, by definition, to constitute engagement. In one scholar’s view, engagement is most likely when the company and its stake- holders both have an urgent and important goal, the motivation to participate, and the organi- zational capacity to engage with one another. These three elements are presented in Figure 2.5.
Goals
For stakeholder engagement to occur, both the business and the stakeholder must have a problem that they want solved. The problem must be both important and urgent (the concept of stakeholder materiality was discussed earlier in this chapter). Business is often spurred to act when it recognizes a gap between its actions and public expectations, as discussed earlier. The company may perceive this gap as a reputational crisis or a threat to its license to operate in society. For their part, stakeholders are typically concerned about an issue important to them—whether child labor, animal cruelty, environmental harm, or something else—that they want to see addressed.
Motivation
Both sides must also be motivated to work with one another to solve the problem. For example, the company may realize that the stakeholder group has technical expertise to help it address an issue. Or, it needs the stakeholder’s approval, because the stakeholder is in a position to influence policymakers, damage a company’s reputation, or bring a law- suit. Stakeholders may realize that the best way actually to bring about change is to help a
17 These programs are profiled in Starbucks’ Global Responsibility Report at globalassets.starbucks.com/assets/.
FIGURE 2.5 Drivers of Stakeholder Engagement
Source: Adapted from Anne T. Lawrence, “The Drivers of Stakeholder Engagement: Reflections on the Case of Royal Dutch/ Shell,” Journal of Corporate Citizenship, Summer 2002, pp. 71–85.
Company Stakeholders(s)
Goal To improve corporate reputation; to earn a license to operate; to win approval of society
To change corporate behavior on an issue of concern
Motivation Needs stakeholder involvement because of their expertise or control of critical resources
Governmental campaigns, protest perceived as inadequate to change corporate behavior
Organizational capacity Top leaders committed to engagement; well-funded department of external (stakeholder) affairs
Experienced staff; core group of activists committed to dialogue with business
Final PDF to printer
40 Part One Business in Society
law43665_ch02_025-046.indd 40 11/16/18 11:08 AM
company alter its behavior. In other words, both sides depend on each other to accomplish their goals; they cannot accomplish their objectives on their own. (Theorists sometimes refer to this as interdependence.)
Organizational Capacity
Each side must have the organizational capacity to engage the other in a productive dia- logue. For the business, this may include support from top leadership and an adequately funded external affairs or comparable department with a reporting relationship to top exec- utives. It may also include an issue management process that provides an opportunity for leaders to identify and respond quickly to shifts in the external environment. For the stake- holder, this means a leadership or a significant faction that supports dialogue and individu- als or organizational units with expertise in working with the business community.
In short, engagement is most likely to occur where both companies and stakeholders perceive an important and urgent problem, see each other as essential to a solution, and have the organizational capacity to interact with one another.
The Role of Social Media in Stakeholder Engagement Social media plays an increasingly important role in businesses’ effort to address public issues and engage stakeholders. Beyond the common use of social media as an advertising tool, many companies now use social networks to identify and solve problems faster, share information better among their employees and partners, and bring customers’ ideas for new product designs to market earlier.
Experts argue that corporate social networking has its advantages and its disasdvan- tages. Some studies show that many employees enjoy creating a corporate social networking page that is separate from their public social networking profile. While adding work colleagues and supervisors to a public social networking group is pos- sible, many people prefer to keep their social lives separate from their work lives. In addition, creating internal blog posts, commenting on projects, and keeping up with work-related news is advantageous to some workers, supporting the building of social network pages at work.
Yet, experts also point out that a corporate social network can cost thousands of dollars to build. In order to erect an internal networking platform to house the employees’ social network pages, numerous specialists must be hired. Once a platform is con- structed, employees must spend the time to create profiles, maintain updates, and net- work within a corporate social networking group, generally all occurring on company time. Many employees do not want to spend the time or effort building a corporate net- working page. Since employees cannot access an internal social networking group after leaving a job, many employees feel as though spending time working on a networking page is futile. In addition, any information posted to a corporate social networking page remains the property of a company. Thus, most employees looking to gain recognition with new customers and new employers will not spend time building an internal social networking page.18
Despite some of the reservations voiced by employees, businesses and their public affairs managers have increasingly turned to social media platforms to engage with mul- tiple stakeholders, resulting in communication that has become faster and more effective.
18 Adapted from “What Is Social Networking?” Wisegeek, n.d., www.wisegeek.com.
Final PDF to printer
41
law43665_ch02_025-046.indd 41 11/16/18 11:08 AM
Stakeholder Dialogue
The process of engaging with stakeholders can take many forms, but it often eventually involves dialogue with stakeholders. One management theorist has defined dialogue as “the art of thinking together.”19 In stakeholder dialogue, a business and its stakeholders come together for face-to-face conversations about issues of common concern. There, they attempt to describe their core interests and concerns, define a common definition of the problem, invent innovative solutions for mutual gain, and establish procedures for imple- menting solutions. To be successful, the process requires that participants express their own views fully, listen carefully and respectfully to others, and open themselves to creative thinking and new ways of looking at and solving a problem. The promise of dialogue is that, together, they can draw on the understandings and concerns of all parties to develop solutions that none of them, acting alone, could have envisioned or implemented. A power- ful, global example of stakeholder dialogue leading to action is described in Exhibit 2.B.20
Stakeholder Networks Dialogue between a single firm and its stakeholders is sometimes insufficient to address an issue effectively. Corporations sometimes encounter public issues that they can address effectively only by working collaboratively with other businesses and concerned persons and organizations in stakeholder networks. One such issue that confronted Nike, Inc., was
19 William Isaacs, Dialogue and the Art of Thinking Together (New York: Doubleday, 1999). 20 This section draws on the discussion in Anne T. Lawrence and Ann Svendsen, The Clayoquot Controversy: A Stakeholder Dialogue Simulation (Vancouver: Centre for Innovation in Management, 2002). The argument for the benefits of stakeholder engagement is fully developed in Ann Svendsen, The Stakeholder Strategy: Profiting from Collaborative Business Relation- ships (San Francisco: Berrett-Koehler, 1998).
Merck and Access Accelerated
Around the world, approximately 400 million people lack access to effective and affordable health care. According to the World Health Organization, low- and middle-income countries bear about 90 percent of the world’s disease burden. Merck, a German-based multinational chemical, pharmaceutical, and life sci- ences company, began a global partnership program, Access Accelerated, to tackle this complex challenge by researching innovative solutions, developing new approaches, and improving existing programs to help people at the point of care. At the 2017 World Economic Forum, Merck convened with 21 other leading pharmaceutical companies and dozens of multilateral organizations, government agencies, and NGOs, as well as academic institutions, health industry associations, and experts from the private sector. They began a dialogue to explore accessing information on the world’s most pressing health issues and to design how to best launch global initiatives to focus on improving both treatment and prevention of noncommunicable diseases in low- and middle-income countries. By 2018, Merck and its business partners had joined the Kenya Ministry of Health, the World Bank Group, and AMPATH, a Kenyan hospital, to launch the first noncommunicable disease (NCD) county pilots. The pilots integrated NCD services into primary health care in two Kenyan counties: Busia and Trans Nzoia. In another effort, Celgene Corporation, a business partner in Access Accelerated, announced the launch of Celgene Cancer Care Links, a new grant program designed to support and enhance patient cancer care in resource-constrained countries.
Source: See Merck’s Corporate Responsibility Report at reports.emdgroup.com/2016/cr-report/products/access-to-health.html and the Access Accelerated website, accessaccelerated.org
Exhibit 2.B
Final PDF to printer
42 Part One Business in Society
law43665_ch02_025-046.indd 42 11/16/18 11:08 AM
a growing demand by environmentally aware consumers for apparel and shoes made from organic cotton.
Cotton, traditionally cultivated with large quantities of synthetic fertilizers, pesti- cides, and herbicides, is one of the world’s most environmentally destructive crops. In the late 1990s, in response both to consumer pressure and to its own internal commitments, Nike began for the first time to incorporate organic cotton into its sports apparel products. Its intention was to ramp up slowly, achieving 5 percent organic content by 2010. However, the company soon encountered barriers to achieving even these limited objectives. Farmers were reluctant to transition to organic methods without a sure market, processors found it inefficient to shut down production lines to clean them for organic runs, and banks were unwilling to loan money for unproven technologies. The solution, it turned out, involved extensive collaboration with groups throughout the supply chain—farmers, cooperatives, merchants, processors, and financial institutions—as well as other companies that were buyers of cotton, to facilitate the emergence of a global market for organic cot- ton. By 2015, 88 to 90 percent of Nike’s cotton-containing apparel used at least 5 percent organic cotton. Nike reported in its 2014–2015 sustainable business report that they are committed to their goal of “100% of our cotton more sustainably (certified organic, licensed to the Better Cotton Standard System for recycled cotton) across NIKE, Inc. by the end of calendar year 2020.”21
In this instance, Nike realized that in order to reach its objective, it would be necessary to become involved in building a multi-party, international network of organizations with a shared interest in the issue of organic cotton.
The Benefits of Engagement Engaging interactively with stakeholders—whether through dialogue, network building, or some other process—carries a number of potential benefits. Managers increasingly rec- ognize the critical nature of this corporate strategy as the number of stakeholders and the complexity of the issues involving stakeholders are increasing significantly, as one busi- ness consulting organization reports.22
In an era of hyper-transparency and intensifying political and social disruptions, companies are re-evaluating their purpose in society and the benefits of engaging with multiple stakeholders. There are growing calls from government and civil society for corporations to become partners in supporting a more inclusive econ- omy and sustainable environment and these expectations will only increase. More than ever before, companies face competitive pressure to integrate new ideas and voices into their work. These changes are adding significant value to the business and the communities in which they operate.23
Companies deeply engaging in stakeholder partnerships bring a number of dis- tinct strengths. Stakeholder groups are often aware of shifts in popular sentiment before
21 Nike’s description of its sustainability targets and measures are provided in Nike’s Sustainable Business Report, 2014–2015 found at about.nike.com. 22 For an overview of stakeholder engagement, see Michael Yaziji and Jonathan Doh, NGOs and Corporations: Conflict and Collaboration: (Cambridge, UK: Cambridge University Press, 2009), ch. 7, “Corporate-NGO Engagements: From Conflict to Collaboration,” pp. 123–45. 23 “The Future of Stakeholder Engagement,” BSR, October 2016, p. 3.
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 43
law43665_ch02_025-046.indd 43 11/16/18 11:08 AM
companies are, and are thus able to alert companies to emerging issues. For example, as described earlier in this chapter, Purdue Farms’ and Tyson Foods’ engagements with consumer-activist groups and government agencies helped raise its awareness of concerns about their antibiotic use in animals. Stakeholders often operate in networks of organi- zations very different from the company’s; interacting with them gives a firm access to information in these networks. As introduced at the beginning of this chapter, businesses took action against various social issues, joining social activist and community groups in protest of the government’s actions. Community groups raised important issues about gun violence and gun control after a school shooting in Florida, causing businesses to re-think their positions on these social issues, as discussed at the end of this chapter.
Firms are learning that their engagement with stakeholders is of critical importance to the organization and need to address multiple levels of engagement. This engagement should include both internal, as well as external, stakeholders and emphasize issues that directly affect corporate strategy. As the BSR report on stakeholder engagement points out, there are five drivers fueling a change in stakeholder engagement: communication, indi- vidual empowerment, automation of work, climate change and other sustainability issues, and supply chain impact.24
Companies are learning that it is important to take a strategic approach to the manage- ment of public issues, both domestically and globally. This requires thinking ahead, under- standing what is important to stakeholders, scanning the environment, and formulating action plans to anticipate changes in the external environment. Effective issue management requires involvement both by professional staff and leaders at top levels of the organiza- tion. It entails communicating across organizational boundaries, engaging with the public, and working creatively with stakeholders to solve complex problems.
24 Each of these drivers of stakeholder engagement are discussed in detail in “The Future of Stakeholder Engagement, Ibid.
∙ A public issue is an issue that is of mutual concern to an organization and one or more of the organization’s stakeholders. Stakeholders expect a level of performance by busi- nesses, and if it is not met a gap between performance and expectation emerges. The larger the gap, the greater risk of stakeholder backlash or missed business opportunity.
∙ The eight strategic radar screens (the customer, competitor, economic, technological, social, political, legal, and geophysical environments) enable public affairs manag- ers to assess and acquire information regarding their business environments. Manag- ers must also assess the importance or materiality of public issues to the firm and its stakeholders.
∙ The issue management process includes identification and analysis of issues, the gener- ation of options, action, and evaluation of the results.
∙ In the modern corporation, the issue management process takes place in many boundary- spanning departments. Some firms have a department of external affairs or corporate relations to coordinate these activities and top management support is essential for effective issue management.
∙ Stakeholder engagement involves building relationships between a business firm and its stakeholders around issues of common concern and is enhanced by understanding the goals, motivations, and organizational capacities relevant to the engagement. Social media is playing a more expansive role in stakeholder engagement.
∙ Stakeholder dialogue is central to good stakeholder engagement, supported by network building or partnerships.
Summary
Final PDF to printer
44 Part One Business in Society
law43665_ch02_025-046.indd 44 11/16/18 11:08 AM
Discussion Case: Businesses Respond to the Movement for School Safety
The quiet community of Parkland, Florida, was rocked in 2018 when a 19-year-old former student entered Marjory Stoneman Douglas High School with a duffel bag containing an AR-15-style rifle, a vest with additional magazines for the weapon, and a semi-automatic version of the M16 rifle used by the U.S. military. Within minutes, he had shot and killed 17 people, and the nation mourned another tragic school shooting.
In response, Parkland students launched the #NeverAgain movement and protested con- tinuing gun violence, especially in schools; the lack of gun control measures; and a mental health system that had allowed someone with a troubled history to purchase an assault rifle. A month later hundreds of thousands of people—children, parents, politicians, and celebrities—gathered for “The March For Our Lives” in Washington, DC, jamming onto Pennsylvania Avenue from the White House to the U.S. Capitol in what may have been the biggest rally for tighter gun control in American history. Other similar marches and pro- tests were held that day in nearly every major U.S. city. Many called on Congress to take action and pass strict gun control legislation, as had also occurred after prior mass shooting incidents in Las Vegas, Newtown, Orlando, and other cities and towns.
Some protesters simply called for a ban on assault rifles and more thorough back- ground checks for gun purchasers. Others specifically targeted the National Rifle Asso- ciation (NRA), an advocacy organization that had vigorously opposed any restrictions on gun ownership. In response to the Parkland students, NRA’s CEO Wayne LaPierre told an audience at the Conservative Political Action Conference that “as usual the opportunists wasted not one second to exploit tragedy for gain,” adding that gun control
Internet Resources
www.wn.com/publicissues World News, Public Issues www.nifi.org National Issues Forum www.un.org/en/globalissues United Nations, Global Issues www.issuemanagement.org Issue Management Council www.scip.org Strategic and Competitive Intelligence Professionals www.wfs.org World Future Society www.globalissues.org Global Issues millennium-project.org The Millennium Project www.cfr.org Council on Foreign Relations pac.org/fpa Foundation for Public Affairs, Public Affairs Council
Key Terms stakeholder engagement, 38 stakeholder dialogue, 41 stakeholder materiality, 32 stakeholder network, 41
competitive intelligence, 31 environmental analysis, 29 environmental intelligence, 29 issue management, 33
issue management process, 33 performance–expectations gap, 26 public issue, 26
Final PDF to printer
Chapter 2 Managing Public Issues and Stakeholder Relationships 45
law43665_ch02_025-046.indd 45 11/16/18 11:08 AM
advocates and the media “hate the NRA, they hate the Second Amendment [to the U.S. Constitution, which states the right of the people to keep and bear arms], [and] they hate individual freedom.”
In the wake of the Parkland shootings and subsequent protests, several companies broke their relationship with the NRA and its members. MetLife, a large insurance company, announced it would stop providing discounts for auto and home insurance for NRA mem- bers. “We value all our customers but have decided to end our discount program with the NRA,” the company announced in a press statement. The cybersecurity firm Syman- tec stopped its discount program for NRA members who purchased its LifeLock identity theft protection service and Norton antivirus software. SimpliSafe, a home security ser- vices company, ended its NRA promotions. Numerous rental car companies, including Hertz, Enterprise (which also operates Alamo and National), and Avis Budget, ended their NRA-membership discount programs.
The First National Bank of Omaha was among the first banks to end a Visa credit card with NRA branding that offered cardholders 5 percent cashback on gas and sporting goods purchases. Bank of America said they would no longer lend money to manufactur- ers of military-inspired firearms that civilians could use, such as AR-15-style rifles. Delta and United Airlines, two of America’s largest passenger airline carriers, cut ties with the NRA after a call to boycott the NRA became a top trend on Twitter. Both airline compa- nies ended discount programs for NRA members through their group travel programs, including United’s program to offer discounts to NRA members traveling to the NRA’s annual meeting. “Bank and other companies are sensitive to being on the wrong side of a social media campaign, which can spread pretty quickly these days,” said University of Michigan marketing professor Erik Gordon. “They don’t want to risk having people march or boycott.”
The NRA was quick to fire back. In an official statement, the organization said, “Some corporations have decided to punish NRA membership in a shameful display of political and civic cowardice. In time, these brands will be replaced.”
Some businesses experienced a backlash to their actions. Senator Michael Crapo, the head of the Senate banking committee, sent blistering letters to top executives at some major banks accusing them of using their market power to manage social policy. He warned them against developing ways to monitor gun transactions through their payments systems. The Georgia state legislature removed a provision in a tax bill which would have given Delta Airlines a $40 million airline fuel tax exemption. Analysts calculated that only 13 NRA members actually had used Delta’s group travel discount, resulting in a cost to Delta of more than $3 million per NRA passenger served. Delta’s CEO responded, “The decision [to cancel the NRA discount] was not made for economic gain and our values are not for sale.” Others argued that the so-called liberal reaction by businesses to join the gun protesters galvanized conservative groups, deepening their support of the NRA and their resolve to protect their right to bear arms.
Sources: “NRA-Affiliated Businesses Shed Ties after Parkland, Florida, School Shooting,” USA Today, February 23, 2018, www.usatoday.com; “Firms Reassess Involvement in Gun Industry in Wake of Florida Shooting,” The Wall Street Journal, February 25, 2018, www.wsj.com; “Banks Tried to Curb Gun Sales; Now Republicans Are Trying to Stop Them,” The New York Times, May 25, 2018, www.nytimes.com; and, “Only 13 NRA Members Used Delta’s Discount, It Cost the Airline a $40 Million Tax Break,” Washington Post, March 3, 2018, www.washingtonpost.com.
Final PDF to printer
46 Part One Business in Society
law43665_ch02_025-046.indd 46 11/16/18 11:08 AM
Discussion Questions
1. What was the public issue facing the companies in this case? 2. Describe the “performance–expectations gap” found in the case. What were the stake-
holders’ (community and school students) expectations, and how did they differ from businesses’ performance?
3. If you applied the strategic radar screens model to this case, which of the eight environ- ments would be most significant, and why?
4. Apply the issue management life cycle process model to this case. Which stages of the process can you identify?
5. In your opinion, did businesses respond appropriately to this issue? Why or why not? 6. If you had been a manager of one of the airlines or banks discussed in the case, what
would you have decided to do (or not do) in the face of emerging public concern about gun violence in schools?
Final PDF to printer
47
law43665_ch03_047-070.indd 47 11/15/18 08:16 AM
C H A P T E R T H R E E
Corporate Social Responsibility and Citizenship The idea that businesses bear broad responsibilities to society as they pursue economic goals is an age-old belief. Both market and nonmarket stakeholders expect businesses to act responsibly, and many companies have responded by making social goals a part of their overall business operations and adopting the goal of being a good corporate citizen. Businesses embracing these responsibili- ties often build positive relationships with stakeholders, discover business opportunities in serving society, and transform a concern for financial performance into a vision of integrated financial, social, and environmental performance. Business ventures of all sizes—entrepreneurial, small to medium business enterprises, and corporate endeavors—hold innate responsibilities to those they impact market and nonmarket stakeholders. Establishing effective structures and processes to meet a com- pany’s social and corporate citizenship responsibilities, assessing the results of these efforts, and reporting on the firm’s performance to the public are important challenges facing today’s managers and business owners.
This Chapter Focuses on These Key Learning Objectives:
LO 3-1 Understanding the role of big business and the responsible use of corporate power in a democratic society.
LO 3-2 Knowing when the idea of corporate social responsibility originated and investigating how a com- pany’s purpose or mission can integrate social objectives with economic and legal objectives.
LO 3-3 Examining the key arguments in support of and concerns about corporate social responsibility.
LO 3-4 Defining global corporate citizenship and recognizing the rapidly evolving management practices to support global citizenship.
LO 3-5 Examining businesses with an explicitly social mission, such as social ventures and B corporations.
LO 3-6 Distinguishing among the sequential stages of global corporate citizenship.
LO 3-7 Understanding how businesses assess and report their social performance.
Final PDF to printer
48 Part One Business in Society
law43665_ch03_047-070.indd 48 11/15/18 08:16 AM
Do managers have a responsibility to their shareholders? Certainly they do, because the owners of the business have invested their capital in the firm, exhibiting the ownership theory of the firm presented in Chapter 1. Do managers also have a responsibility, a social responsibility, to their company’s other market and nonmarket stakeholders—the people who live where the firm operates, who purchase the firm’s product or service, or who work for the firm? Does the stakeholder theory of the firm, described in detail in Chapter 1, expand a firm’s obligations to include multiple stakeholders present in an interactive social system? Generally, yes, but while managers may have a clear responsibility to respond to all stakeholders, just how far should this responsibility go? Consider the following examples:
Starbucks Coffee Company launched a $70 million initiative to help coffee farming communities around the world mitigate their climate change impacts and promote long-term crop stability. Starbucks transformed a 240-hectare farm located on the slopes of the Poas Volcano in Costa Rica into a global agronomy center, enabling the company to expand its Coffee and Farming Equity practices program (C.A.F.E.). Starbucks’ chairman Howard Schultz said, “This investment, and the cumulative impact it will have when combined with programs we have put into place over the last forty years, will support the resiliency of coffee farmers and their families as well as one million people that represent our collective coffee supply chain.”1
Joshua Shapiro visited three small villages in Uganda and was shocked by the unsafe cooking conditions he saw there. Kitchens were small, dark, and unventi- lated. People could barely breathe. According to the World Health Organization, around 3 billion people cook and heat their homes using open fires and simple stoves burning wood, animal dung, and crop waste for fuel. Shapiro, an engineer in Carnegie Mellon University’s CREATE lab, began working on an idea and returned five years later as part of the Toyota’s Ideas for Good project to install a half-dozen hand-built, solar-powered ventilation systems to clear the air in the kitchens. Schapiro and his venture partner, Mike Taylor, assembled and installed an addi- tional 25 systems during their second trip to Uganda and planned to construct hundreds more. These social entrepreneurs were funded by gifts and grants from various nonprofit organizations, corporations, and individuals.2
Are the efforts described above examples of social responsibility and citizenship prac- ticed by a corporation and social entrepreneurs? Do they represent a successful merger of social and economic objectives, or should these programs be questioned as inappropriate uses of business assets—finances, personnel, and products? How far should an organization or entrepreneur go to help those in society in need of their support? How much is too much?
This chapter describes the role business plays in society, introduces the concepts of cor- porate social responsibility and global citizenship, and describes how businesses implement them in practice. How organizations should balance their multiple responsibilities— economic, legal, and social—and become a valued corporate citizen is an ongoing chal- lenge. What are the advantages and drawbacks of being socially responsible? Should the purpose or mission of the business explicitly seek to integrate social objectives with eco- nomic objectives? How does a business become a better corporate citizen; what steps are necessary? What standards do businesses use to assess their social performance, and how do they report their performance to stakeholders?
1 “Starbucks Expands $70 Million Ethical Sourcing Program with New Global Agronomy Center,” Fort Mills Times, March 19, 2013, www.fortmilltimes.com. 2 “CMU Researchers Hope to Install Ventilation Systems to Remove Harmful Cooking Fumes,” Pittsburgh Post-Gazette, July 8, 2017, www.post-gazette.com.
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 49
law43665_ch03_047-070.indd 49 11/15/18 08:16 AM
CORPORATE POWER AND RESPONSIBILITY
Undeniably, businesses, especially large corporations—whether by intention or accident, and whether for good or evil—play a major role in all that occurs in society. The power exerted by the world’s largest business organizations is obvious and enormous. This influ- ence, termed corporate power, refers to the capability of corporations to influence govern- ment, the economy, and society, based on their organizational resources.
One way to get a sense of the economic power of the world’s largest companies is to compare them with nations. Figure 3.1 shows some leading companies alongside countries whose total gross domestic product is about the same as these companies’ revenue. The revenues of the wealthiest company in the world, Walmart, are about the same as the gross domestic product (GDP) of Belgium. China Natural Petroleum’s revenues are the same as Chile’s GDP; Apple’s revenues are the same as Vietnam’s GDP; Amazon’s revenues are the same as Hungary’s GDP; and BMW’s revenues are the same as Ukraine’s GDP.
The size and global reach of major international enterprises such as Walmart and the others listed in Figure 3.1 give them tremendous power. Through their ever-present mar- keting, they influence what people want and how they act around the world. We count on corporations for job creation; much of our community well-being; the standard of living
FIGURE 3.1 Comparison of Annual Sales Revenue and the Gross Domestic Product for Selected Multinational Enterprises and Nations in $ Billions*
Sources: “Fortune Global 500,” fortune.com; and World Bank data, databank.worldbank.org.
*2017 $ billions of sales compared to 2016 gross domestic product in $ billions.
Walmart
Toyota Motor
Apple
Exxon Mobil
General Motors
Amazon
Costco
China Mobile Communications
BMW
Ecuador
Ukraine
Romania
Qatar
Hungary
Kuwait
Morocco
Vietnam
Bangladesh
Chile
Philippines
Belgium486
315
263
255
216
205
166
135
118
107
104
Wells Fargo94
205
166
132
118
110
104
97
216
250
263
321
492
$ Billions of Sales (2017)
Gross Domestic Product, $ Billions (2016)
State Grid
China National Petroleum
Final PDF to printer
50 Part One Business in Society
law43665_ch03_047-070.indd 50 11/15/18 08:16 AM
we enjoy; the tax base for essential municipal, state, and national services; and our needs for banking and financial services, insurance, transportation, communication, utilities, entertainment, and a growing proportion of health care. These corporations have the resources to make substantial contributions to political campaigns, as discussed in Chapter 8, thus influencing the policies of governments. They dominate not only the traditional domains of product manufacture and service delivery, but also increasingly reach into such traditionally public sector activities as education, law enforcement, and the provision of social services.3
The following well-known quotation, frequently appearing in journals for business executives, challenges its readers to assume a responsible role for business in society:
Business has become . . . the most powerful institution on the planet. The dominant institution in any society needs to take responsibility for the whole. . . . Every deci- sion that is made, every action that is taken, must be viewed in light of that kind of responsibility.4
The tremendous power of the world’s leading corporations has both positive and neg- ative effects. A big company may have definite advantages over a small one. It can com- mand more resources, produce at a lower cost, plan further into the future, and weather business fluctuations somewhat better. Globalization of markets can bring new products, technologies, and economic opportunities to developing societies, and help those in need. For example, as discussed in Chapter 11, UPS teamed up with regional African health care providers to use drones for shipping needed medical supplies within minutes, rather than hours, to save lives.
Yet, the concentration of corporate power can also harm society. Huge businesses can disproportionately influence politics, shape tastes, and dominate public discourse. They can move production from one site to another, weakening unions and communities. These compa- nies can also use their economic influence to collude to fix prices, divide markets, and quash competition in ways that can negatively affect consumer choices, employment opportunities, or the creation of new businesses. The Carbon Majors Report released in 2017 claimed that, since 1988, just 100 companies had been the source of more than 70 percent of the world’s greenhouse gas emissions. Multinational energy companies, including ExxonMobil, Shell, BP, and Chevron, were identified as among the highest emitting investor-owned companies.5
The focused power found in the modern business corporation means that every action it takes can affect the quality of human life—for individuals, for communities, and for the entire globe. The obligation this gives rise to is the notion of the iron law of responsibility. The iron law of responsibility says that in the long run those who do not use power in ways that society considers responsible will tend to lose it.
Given the virtually immeasurable power in the hands of the leaders of large, global corporations, stakeholders throughout the social system expect business to take great care in wielding its power responsibly for the betterment of society. As a result, social responsi- bility has become a worldwide expectation.
3 For two classic analyses of corporate power, see Alfred C. Neal, Business Power and Public Policy (New York: Praeger, 1981); and Edwin M. Epstein and Dow Votaw, eds., Rationality, Legitimacy, Responsibility: Search for New Directions in Busi- ness and Society (Santa Monica, CA: Goodyear, 1978). More recent treatments may be found in Luis Suarez-Villa, Corporate Power, Oligopolies, and the Crisis of the State (Albany, NY: State University of New York Press, 2015) and Steve Coll, Private Empire” ExxonMobil and American Power (New York: Penguin Books, 2012). 4 David C. Korten, “Limits to the Social Responsibility of Business,” The People-Centered Development Forum, article 19, June 1, 1996. 5 “Just 100 Companies Responsible for 71% of Global Emissions, Study Says,” The Guardian, July 10, 2017, www.theguardian.com.
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 51
law43665_ch03_047-070.indd 51 11/15/18 08:16 AM
CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP
Corporate social responsibility (CSR) means that a corporation should act in a way that enhances society and its inhabitants and be held accountable for any of its actions that affect people, their communities, and their environment. This concept is based in the root of the term responsibility, meaning “to pledge back,” creating a commitment to give back to society and the organization’s stakeholders.6 It implies that harm to people and society should be acknowledged and corrected if possible. It may require a company to forgo some profits if its social impacts seriously hurt some of its stakeholders or if its funds can be used to have a positive social impact.
Being socially responsible does not mean that a company must abandon its other mis- sions. As discussed later in this chapter, a business has many responsibilities: economic, legal, and social; the challenge for management is to integrate them all into a coherent and comprehensive mission. As Axel Weber, chairman of UBS, a Swiss global financial ser- vices company, explained,
“I see it as my duty to understand the scope and scale of societal challenges. [At UBS] we consider the immediate and long-term effects of these challenges. We look at how they may impact the firm, our clients, and other stakeholders, and what action we may need to take in response. Acting responsibly, achieving a positive societal change—through our own activities as well as through the products, ser- vices and advice we offer to our clients—that’s one of our key roles.”7
More recently, many companies have adopted the term corporate citizenship to refer the actions they take to put their commitments to corporate social responsibility into practice. The term global corporate citizenship, similarly, refers to putting these commitments into practice worldwide, not only locally or regionally. Companies demonstrate their corporate citizenship by proactively building stakeholder partnerships, discovering business oppor- tunities in serving society, and transforming a concern for financial performance into a vision of integrated financial and social performance.
The Origins of Corporate Social Responsibility In the United States, the idea of corporate social responsibility appeared around the start of the 20th century. Corporations at that time came under attack for being too big, too pow- erful, and guilty of antisocial and anticompetitive practices. Critics tried to curb corporate power through antitrust laws, banking regulations, and consumer protection laws.
Faced with this social protest, a few farsighted business executives advised corporations to use their power and influence voluntarily for broad social purposes rather than for prof- its alone. Some of the wealthiest business leaders—steelmaker Andrew Carnegie is a good example—became great philanthropists who gave much of their wealth to educational and charitable institutions. Other business leaders, like automaker Henry Ford, developed paternalistic programs to support the recreational and health needs of their employees. These business leaders believed that business had a responsibility to society that went beyond their efforts to make profits.
Today a new cohort of philanthropists is emerging. Mark Zuckerberg, CEO of Face- book, and his wife, physician Priscilla Chan, announced that they would give away about
6 For a more complete discussion of the roots of corporate social responsibility and how it is practiced, see Jerry D. Goldstein and Andrew C. Wicks, “Corporate and Stakeholder Responsibility: Making Business Ethics a Two-Way Conversation,” Business Ethics Quarterly 17 (2007), pp. 375–98. 7 “Interview with Axel Weber on Corporate Culture and Responsibility at UBS,” UBS website, www.ubs.com.
Final PDF to printer
52 Part One Business in Society
law43665_ch03_047-070.indd 52 11/15/18 08:16 AM
99 percent of their Facebook shares through the Chan Zuckerberg Initiative. The initiative focused on “personalized learning, curing disease, connecting people and building strong communities.” Some have predicted that this new cohort of business executives could amass even greater wealth than their predecessors, through inheritance, entrepreneurial success, and other means. They will be in a position to transform charitable giving unlike any previous generation.8 Corporate philanthropy is discussed in more detail in Chapter 18.
William C. Frederick, a leading scholar and a coauthor of several earlier editions of this text- book, described how business’s understanding of corporate social responsibility has evolved over the past half century.9 During each of four historical periods, corporate social responsi- bility has had a distinct focus, set of drivers, and policy instruments, as shown in Figure 3.2. Corporate social responsibility is defined in its most basic form as “learning to live with, and respect, others.” In his view, corporate social responsibility evolved from a stewardship, to
8 “Facebook’s Mark Zuckerberg and Wife Giving Away 99% of Shares,” The Wall Street Journal, December 1, 2015, www.wsj.com; and, Portraits of Young Philanthropists: How Generation X and Generation Y Are Transforming Charitable Giving, (New York, The Economist, 2014). 9 For a comprehensive review of the history of corporate social responsibility see William C. Frederick, “Corporate Social Responsibility: From Founders to Millennials,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social Responsibility, pp. 3–38, (Bingley, UK: Emerald Publishers, 2018).
Phases of Corporate Social Responsibility CSR Drivers CSR Policy Instruments
CSR1 Early in the 20th century but formally in the 1950s–60s
CSR2 1960s–70s
CSR3 1980s–90s
CSR4 1990s–present
Corporate Social Stewardship Corporate philanthropy—acts of charity Managers as public Trustee-stewards Balancing social pressures
Corporate Social Responsiveness Social impact analysis Strategic priority for social response Organizational redesign and training for responsiveness Stakeholder mapping and implementation
Corporate/Business Ethics Foster an ethical corporate culture Establish an ethical organizational climate Recognize common ethical principles
Corporate/Global Citizenship Stakeholder partnerships Integrate financial, social, and environmental performance Identify globalization impacts Sustainability of company and environment
Executive conscience Company image/reputation
Social unrest/protest Repeated corporate misbehavior Public policy/government regulation Stakeholder pressures think tank policy papers
Religious/ethnic beliefs Technology-driven value changes Human rights pressures Code of ethics Ethics committee/o�cer/audits Ethics training Stakeholder negotiations
Global economic trade/investment High-tech communication networks Geopolitical shifts/competition Ecological awareness/concern NGO pressures
Philanthropic funding Public relations
Stakeholder strategy Regulatory compliance Social audits Public a�airs function Governance reform Political lobbying
Mission/vision/values Statements CEO leadership ethics
Intergovernmental compacts Global audit standards NGO dialogue Sustainability audits/ reports
FIGURE 3.2 Evolving Phases of Corporate Social Responsibility
Source: William C. Frederick, “Corporate Social Responsibility: Deep Roots, Flourishing Growth, Promising Future,” in Andrew Crane, Abagail Williams, Dirk Matten, Jeremy Moon, and Donald S. Siegel, (Editors), The Oxford Handbook of Corporate Social Responsibility (Oxford: Oxford University Press, 2008), pp. 522–532.
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 53
law43665_ch03_047-070.indd 53 11/15/18 08:16 AM
strategic responsiveness, to an ethics-based understanding based in culture, to what Frederick calls the most recent phase of corporate social responsibility: corporate citizenship.
BALANCING SOCIAL, ECONOMIC, AND LEGAL RESPONSIBILITIES
Being socially responsible by meeting the public’s continually changing expectations requires wise leadership at the top of the corporation. Companies with the ability to rec- ognize profound social changes and anticipate how they will affect operations have proven to be survivors. They get along better with government regulators, are more open to the needs of the company’s stakeholders, and often cooperate with legislators as new laws are developed to cope with social problems.
Nestlé, the world’s leading nutrition, health, and wellness company with its head- quarters in Switzerland, launched a large-scale research project on children’s nutrition leading to product modification or new product development. The global initiative focused on 10 countries and collaborated with over 240,000 public health opinion leaders, third-party organizations, and pediatricians around the world. The Kids Nutrition and Health Study targeted children’s nutrient intake, dietary pat- terns, and family lifestyle factors. The aim was to help parents ensure the healthy growth and development of their children, while also giving the company insights into how to modify existing product ingredients and develop new products.10
The actions taken by Nestlé are an example of a business organization’s leaders being guided by enlightened self-interest. This concept reflects the notion that providing value to stakeholders is in a business’s long run self-interest. Nestlé’s research initiative certainly cost the company money in the short run, but new product development and assistance to the families and children who used their products and the communities where they lived would also bring long-term benefits through enhanced reputation and customer loyalty.
Social responsibility is not a business organization’s sole responsibility. In addition, as members of civil society, organizations have legal obligations, as well as economic respon- sibilities, to their owners and other stakeholders affected by the financial well-being of the firm. Any organization or manager must seek to juggle these multiple responsibilities— economic, legal, and social. The belief that the business of business is solely to attend to shareholders’ return on investment and make a profit is no longer widely held and has no legal foundation, as discussed next in the chapter. Rather, many business executives believe the key challenge facing their organizations today is to meet their multiple economic and social responsibilities simultaneously.
THE CORPORATE SOCIAL RESPONSIBILITY QUESTION
As we have seen, there are various views about the expression of business’s social respon- sibilities and these views evolve over time. The arguments supporting corporate social responsibility and concerns about it are detailed next and summarized in Figure 3.3.
Support for Corporate Social Responsibility Many business executives believe that companies should make a profit but should balance this with their social responsibilities. Clearly, many stakeholder groups see the value in
10 “Nestlé in Society: Creating Shared Value and Meeting Our Commitments, 2016,” Nestlé’s Annual Social Report, 2016, www.nestle.com/csv.
Final PDF to printer
54 Part One Business in Society
law43665_ch03_047-070.indd 54 11/15/18 08:16 AM
corporate socially responsible action, since it preserves the environment, protects consum- ers, safeguards the safety and health of employees, and prevents job discrimination, but shareholders also expect business to maintain a strong return on their financial invest- ments. Government officials also support CSR in that it ensures corporate compliance with laws and regulations that protect the general public from abusive business practices. In other words, both businesspeople and stakeholders, and both supporters and critics of business, have reasons for wanting businesses to act in socially responsible ways.
Balances Corporate Power with Responsibility
Today’s business enterprise possesses much power and influence. Most people believe that responsibility must accompany power, whoever holds it. This obligation, presented earlier in this chapter, is the iron law of responsibility. Corporations’ reputations, especially in the banking industry, have taken a hit since the economic downturn of 2008–09. Half of American adults surveyed said their trust in banks had declined after the downturn, joining a growing distrust of Wall Street and mortgage lenders. This shows one example of how managers’ misuse of corporate power and their lack of responsibility as trustees of the public’s wealth can result in their loss of power.
Discourages Government Regulation
One of the most appealing arguments in support of CSR is that voluntary socially responsible acts may head off increased government regulation of business. Some regulation may reduce freedom for both business and society, and freedom is a desirable public good. In the case of business, regulations tend to add economic costs and restrict flexibility in decision making. From business’s point of view, participating in programs typically the focus for government efforts, can produce a unique business opportunity as the following example illustrates.
In the United States, food producers could use up to ten different label phrases on their packages, ranging from “expires on” to “better if used by.” Many consumers complained to the Department of Agriculture that they were increasingly confused by the different messages. In 2017, the Food Marketing Institute and the Grocery Manufacturers Association, the two largest trade groups for the U.S. grocery indus- try, announced they had adopted standardized, voluntary regulations to clear up what product date labels mean. Manufacturers would begin to put on their food packages “use by” or “best if used by.” This change was meant to explain to the consumer when the product would be at its peak flavor and safe to consume—and potentially stave off further government rules on labeling.11
11 “Changes Planned to Sell-by Dates on Food,” telegram.com, February 16, 2017, www.telegram.com.
In Support for Corporate Social Responsibility
Concerns about Corporate Social Responsibility
Balances corporate power with responsibility. Discourages government regulation. Promotes long-term profits for business. Improves stakeholder relationships. Enhances business reputation.
Lowers economic efficiency and profit. Imposes unequal costs among competitors. Imposes hidden costs passed on to stakeholders. Requires skills business may lack. Places responsibility on business rather than individuals.
FIGURE 3.3 The Support for and Concerns about Corporate Social Responsibility
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 55
law43665_ch03_047-070.indd 55 11/15/18 08:16 AM
Businesses may act in a socially responsible way to benefit its stakeholders, but also to fend off additional burdensome government regulations, as the example above illustrates. Therefore, if business by its own socially responsible behavior can discourage greater gov- ernment involvement in the business–consumer stakeholder relationship, it is accomplish- ing a public good as well as its own private good.
Promotes Long-Term Profits for Business
At times, social initiatives by business produce long-run business profits. In 1951, a New Jersey judge ruled in a precedent-setting case, Barlow et al. v. A.P. Smith Manufacturing, that a corporate donation to Princeton University was an investment by the firm, and thus an allowable business expense. The rationale was that a corporate gift to a school, though costly in the present, might later provide a flow of talented graduates to work for the com- pany. The court ruled that top executives must take “a long-range view of the matter” and exercise “enlightened leadership and direction” when it comes to using company funds for socially responsible programs.12
A classic example of the long-term benefits of social responsibility was the Johnson & Johnson Tylenol incident in the 1980s, when several people died after ingesting Extra-Strength Tylenol capsules laced with the poison cyanide. To ensure the safety of its customers, Johnson & Johnson immediately recalled the product, an action that cost the firm millions of dollars in the short term. The company’s production processes were never found defective. Customers rewarded Johnson & Johnson’s responsible actions by continuing to buy its products, and in the long run the com- pany once again became profitable.
Empirical evidence has supported this view. Studies generally have found that most of the time, more responsible companies also had better financial results; the statistical asso- ciation has been highly to modestly positive across the range of all prior studies. According to one recent study, when firms practice socially responsible activities the firm’s financial performance is enhanced, especially in a highly competitive industry environment.13
Improves Stakeholder Relationships
Managers often believe that developing a strong social agenda and series of social pro- grams will improve the firm’s stakeholder relationships. Whether it improved the qual- ity of people it attracted as employees, or appealed to consumers to purchase the firm’s product or services, or built strong ties with the community residents in which it oper- ated, or persuaded investors to purchase company stock, managers felt that social action by the firm was viewed positively by stakeholders. In a national survey of 1,000 executives, 70 percent said that company-sponsored social programs aided them in recruiting employ- ees and 68 percent reported that employees were more engaged in their work if they were involved in social-oriented projects on and off the job.14 As Doris Gonzalez, director of corporate citizenship at IBM, explained:
“Corporate Social Responsibility has long stopped being just a ‘nice to have’ set of programs that help companies tell their story of how they invest resources in a local community. These programs are at the core of employee engagement, retention
12 Barlow et al. v. A.P. Smith Manufacturing (1951, New Jersey Supreme Court), discussed in Clarence C. Walton, Corporate Social Responsibility (Belmont, CA: Wadsworth, 1967), pp. 48–52. 13 Kim Kwang-Ho, Kim MinChung, and Qian Cuili, “Effects of Corporate Social Responsibility on Corporate Financial Perfor- mance: A Competitive-Action Perspective,” Journal of Management, 44 (2018), pp. 1097–1118. 14 “Covestro Grant to Expand ‘Social Purpose’ Programs,” Pittsburgh Post-Gazette, April 6, 2018, www.post-gazette.com.
Final PDF to printer
56 Part One Business in Society
law43665_ch03_047-070.indd 56 11/15/18 08:16 AM
and recruiting, as well as making an impact in the community. Most importantly, in order to be sustainable, corporate responsibility programs must be aligned with business strategies. At IBM, the corporate giving programs make a difference in the communities where employees live and work as well as improve the skills and suc- cess of the staff, and ultimately, our business.”15
This belief was borne out in recent research where corporate social responsibility was analyzed in comparison to the relationships between the firm and various stakeholders. As one study concluded, “The quality of the relationship between the company and its stake- holders represents a key factor that affects the success of the company.” Managers must be acutely aware of these relationships and understand how best to manage them.16
Enhances Business Reputation
The social reputation of the firm is often viewed as an important element in establishing trust between the firm and its stakeholders. Reputation refers to desirable or undesirable qualities associated with an organization or its actors that may influence the organization’s relationships with its stakeholders.17 Reputation Institute created the RepTrak® model that examines 15 stakeholders in more than 25 industries, involving more than 7,000 compa- nies in 40 countries. Since 2005, Forbes Magazine has published its annual “World’s Most Reputable Companies” list to recognize firms with exemplary reputations.18
As further explored in Chapter 19, a firm’s reputation is a valuable intangible asset, as it prompts repeat purchases by loyal consumers and helps to attract and retain better employ- ees to spur productivity and enhance profitability. Employees who have the most to offer may be attracted to work for a firm that contributes to the social good of the community, or is more sensitive to the needs and safety of its consumers, or takes better care of its employees. Research has confirmed that a firm’s “good deeds” or reputation increases its attractiveness to employees.19 An example of a company that has embraced having a solid reputation when managing their stakeholders is described next.
Sodexo, a provider of integrated food and facilities management services through- out North America including many hospitals, senior living centers, colleges, uni- versities, and school districts, was committed to developing a positive reputation. “Being a responsible corporate citizen is at the core of Sodexo’s business,” declared the company’s website. “We set the benchmark in areas such as sustainability, diversity and inclusion, wellness, and the fight against hunger.” Sodexo’s “The Better Tomorrow Plan” impacted 80 countries at 30,600 locations and engaged the company’s 380,000 employees. The program addressed 14 different issues, such as reducing the firm’s carbon and water usage in all company operations and at all client’s locations, providing and promoting varied and balanced food options to
15 Doris B. Gonzalez, “The Role CSR Plays in Employee Engagement,” CRO Magazine, March/April 2016, www.thecro.com. 16 The quote is from Andrija Baric, “Corporate Social Responsibility and Stakeholders: Review of the Last Decade (2006–2015),” Business Systems Research 8 (2017), pp. 133–46. 17 The definition of reputation is adapted from John F. Mahon, “Corporate Reputation: A Research Agenda Using Strategy and Stakeholder Literature,” Business & Society 41, no. 4 (December 2002), pp. 415–45. For the “reputation index,” see Charles Fombrun, Reputation: Realizing Value from the Corporate Image (Cambridge, MA: Harvard University Press, 1996) and Rating Research LLC, www.ratingresearch.com. 18 See www.reputationinstitute.com and fortune.com/worlds-most-admired-companies. 19 Turhan Erkmen and Emel Esen, “The Mediating Role of Trust to Managers on the Relationship Between Corporate Reputa- tion Practices and Employees’ Course of Actions to Customers, Social Responsibility Journal 10 (2014), pp. 296–82.
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 57
law43665_ch03_047-070.indd 57 11/15/18 08:16 AM
its clients, increasing the purchase of products sourced from fairly and responsibly certified sources, and ensuring compliance with a Global Sustainable Supply Chain Code of Conduct.20
Concerns about Corporate Social Responsibility The economist Milton Friedman famously stated in 1970, “There is only one responsibility of business, namely to use its resources and engage in activities designed to increase its profits.” Some people in the business world—such as the 16 percent of CEOs in a McKinsey survey who believe that the appropriate role of business is to provide the highest possible returns to shareholders while obeying all laws and regulations—clearly agree with this view. According to some of the more radical critics of the private business system, social responsibility is noth- ing but a clever public relations smokescreen to hide business’s true intentions to make as much money as possible, often at the expense of workers, communities, and customers.21 See Figure 3.3 again for some of the concerns about corporate social responsibility, discussed next.
Lowers Economic Efficiency and Profits
According to one argument, when a business uses some of its resources for social pur- poses, it risks lowering its efficiency or even going out of business.
Life was very good for Aaron Feuerstein in the mid-1990s. His company, Malden Mills, was flourishing, despite a sharp decline in the textile industry in the United States. Malden Mills’ popular flagship product, Polartec, was widely used in high-performance athletic and aerobic apparel, outerwear products, and had even been adopted for military use. On December 11, 1995, as Feuerstein was returning from his 70th birthday party, he saw his factory burn to the ground. Critics thought Feuerstein should just accept the $300 million in insurance money and relocate or dissolve the business. Feuerstein was committed to his employees, so he vowed to keep them all on the payroll, at a cost of $1.5 million per week, and continue their benefits for at least 90 more days. The eventual cost of $25 million in employee wages, lawsuits filed by injured employees, and the $100 million cost to rebuild the factory turned out to be too much for Feuerstein’s company. By 2001, Malden Mills had filed for bankruptcy, and Feuerstein eventually lost control of the company.22
In this example, Feuerstein’s motives were admirable; his commitments to his employ- ees eventually became too costly and threatened the survival of the firm.
Business managers and economists argue that the business of business is business. Businesses are told to concentrate on producing goods and services and selling them at the lowest competitive price. When these economic tasks are done, the most efficient firms survive. Even though corporate social responsibility is well-intended, such social activities lower business’s efficiency, thereby depriving society of higher levels of economic produc- tion needed to maintain everyone’s standard of living.23
20 The quotation and information about Sodexo is from the company’s website, www.sodexousa.com. 21 For an investigation and critical analysis of the impact of corporate social responsibility see Daina Mazutis, “Much Ado about Nothing: The Glacial Pace of CSR Implementation in Practice,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social Responsibility, pp. 177–244, (Bingley, UK: Emerald Publishers, 2018). 22 “The Mensch of Malden Mills: CEO Aaron Feuerstein Puts Employees First,” CBS News 60 Minutes, July 3, 2003, cbsnews.com; and, David W. Gill, “Was Aaron Feuerstein Wrong?” Ethix, June 25, 2011, ethix.org. 23 This argument is most often attributed to Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970, pp. 33, 122–26.
Final PDF to printer
58 Part One Business in Society
law43665_ch03_047-070.indd 58 11/15/18 08:16 AM
Imposes Unequal Costs among Competitors
Another concern about social responsibility is that it imposes greater costs on more responsible companies, putting them at a competitive disadvantage. Consider the follow- ing scenario:
A manufacturer operating in multiple countries wishes to be more socially respon- sible worldwide and decides to protect its employees by installing more safety equipment at its plants than local law requires. Other manufacturers in competition with this company do not take similar steps, choosing to install only as much safety equipment as required by law. As a result, their costs are lower, and their profits higher. In this case, the socially responsible firm penalizes itself and even runs the risk of going out of business, especially in a highly competitive market.
This kind of problem becomes acute when viewed from a global perspective, where laws and regulations differ from one country to the next. If one nation requires higher and more costly pollution control standards, or stricter job safety rules, or more stringent pre- market testing of prescription drugs than other nations, it imposes higher costs on business. This cost disadvantage means that competition cannot be equal. Foreign competitors who are the least socially responsible will actually be rewarded because they will be able to capture a bigger share of the market.
Imposes Hidden Costs Passed On to Stakeholders
Many social proposals undertaken by business do not pay their own way in an economic sense; therefore, someone must pay for them. Ultimately, society pays all costs. For exam- ple, if a company chooses to install expensive pollution abatement equipment, the air may be cleaner, but ultimately someone will have to pay. Shareholders may receive lower div- idends, employees may be paid less, or consumers may be charged higher prices. If the public knew that it would eventually have to pay these costs, and if it knew how high the true costs were, it might not be so insistent that companies act in socially responsible ways. The same might be true of government regulations intended to produce socially desirable business behavior. By driving up business costs, these regulations often increase prices and lower productivity.
Requires Skills Business May Lack
Businesspeople are not primarily trained to solve social problems. They may know about supply chain management, marketing, accounting, finance, information technology, and per- sonnel work, but what do they know about inner-city issues or world poverty or violence in schools? Putting businesspeople in charge of solving such problems may lead to unnecessarily expensive and poorly conceived approaches. Business analysts might be tempted to believe that methods that succeed in normal business operations will also be applicable to complex social problems, even though different approaches may work better in the social arena.
A related idea is that public officials who are duly elected by citizens in a democratic society should address societal issues. Business leaders are not elected by the public and therefore do not have a mandate to solve social problems. In short, businesspeople do not have the expertise or the popular support required to address what are essentially issues of public policy.
Places Responsibility on Business Rather Than Individuals
The entire idea of corporate responsibility is misguided, according to some critics. Only individual persons can be responsible for their actions. People make decisions; organiza- tions do not. An entire company cannot be held liable for its actions, only those individuals
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 59
law43665_ch03_047-070.indd 59 11/15/18 08:16 AM
who are involved in promoting or carrying out a policy. Therefore, it is wrong to talk about the social responsibility of business when it is the social responsibility of individual busi- nesspersons that is involved. If individual business managers want to contribute their own personal money to a social cause, let them do so; but it is wrong for them to contribute their company’s funds in the name of corporate social responsibility.24 Together, the above argu- ments claim that the attempt to exercise corporate social responsibility places added bur- dens on both business and society without producing the intended effect of social improvement or produces it at excessive cost.
This view was challenged several years ago when a survey by the consulting firm McKinsey reported that a solid majority—84 percent—of business executives said that they believe that companies should balance their responsibility to their investors with their responsibilities of other business stakeholders. In another survey of executives, 80 percent said that companies must demonstrate a mission that balances profit and purpose to grow and be successful.25 Recently, senior executives from all over the world were asked about the role of corporate social responsibility as part of their business strategy. Their responses are shown in Figure 3.4.
SOCIAL ENTREPRENEURS AND B CORPORATIONS
Some businesses have a social mission at their very core. Two such businesses are ventures launched by social entrepreneurs and benefit corporations.
Social entrepreneurs are like traditional entrepreneurs who act boldly to pursue oppor- tunities, attract support, and build new organizations. Yet, unlike traditional entrepre- neurs, social entrepreneurs are typically driven by a core mission to create and sustain social rather than economic value. When a person or group of people identify a social need and use their entrepreneurial skills to address this need, this process is called social entrepreneurship, and the organizations they found are called social ventures. Although
24 This argument, like the “lowers economic efficiency and profits” argument, often is attributed to Friedman, “Social Respon- sibility of Business” Ibid. 25 “Covestro Grant Expand ‘Social Purpose’ Programs,” Pittsburgh Post-Gazette, April 6, 2018, www.post-gazette.com.
FIGURE 3.4 The Role of CSR in Business Strategy
Source: “Top Trends 2016,” Ethical Corporation, ethicalcorp.com.
Asia–Pacific executives
North American executives
European executives
90%
88%
10%
15%
0 20 40 60 80 100
85%
12%
No Yes
Senior executives were asked: Is CSR becoming an increasingly important part of your business strategy? Their responses were:
Final PDF to printer
60 Part One Business in Society
law43665_ch03_047-070.indd 60 11/15/18 08:16 AM
their primary purpose is to achieve a social or environmental objective, this focus does not preclude these entrepreneurs from creating an economically viable organization that can continue to address social needs.
B Corporations are businesses that focus on social responsibility and corporate citizen- ship by blending their social and environmental objectives with financial goals to use the power of business to solve social and sustainability challenges. To qualify for B Corpo- ration status, an organization must meet rigorous, independent social and environmental performance standards, assessed by the nonprofit organization, B Lab. The idea is that a business cannot just claim it is socially responsible, but it must prove it by meeting the B Lab standards. By 2018, there were 2,504 organizations, in more than 50 countries and 35 U.S. states among 130 industries that had received the B Corp certification. (Certified B Corporations are different from businesses that are chartered in a state as a “benefit corporation.” Benefit corporations use the protection afforded by state-driven statutes to enable the company to address social objectives, as well as financial objectives, without facing legal challenges by stockholders for shirking the firm’s financial responsibilities.)
Certified B Corporations are more likely to receive various government recognitions, such as the U.S. Drug Administration’s organic seal, or to qualify for a LEED certification for their buildings (designating environmental excellence), or to be certified as engaging in fair trade. B Corporations are subjected to random audits, and these reports are made pub- lic, adding a layer of transparency to the process and certification. In addition, B Corpora- tions must modify their company’s bylaws in order to formalize their social mission.26
The metrics used by B Lab to assess a company’s submission for review can be completed online in 1 to 3 hours, and include meeting rigorous standards that demonstrate a company’s leadership commitment to specific environmental and social commitments to improve their stakeholders’ well-being, including their workers and the community. In addition, these com- panies are held to specific standards of accountability for their actions and must demonstrate transparency of their decisions and practices regarding their stakeholder impacts.
Warby Parker is a B Corporation. Four college friends started the company to design, manufacture, and distribute high-quality eyeglasses selling for around $95 rather than the more common $500 price tag. Its founders also wanted to have a social impact, so they adopted the policy that for every pair of eyeglasses sold, one pair would be donated to someone in need. Warby Parker also pledged to become one of the few carbon-neutral eyewear brands in the world. “It was important to the four of us that if we are going to dedicate our life savings and our time to building an organization, we wanted to have a positive impact,” said Neil Blumenthal, one of the founders. This combination of economic and social objectives qualified Warby Parker for B Corporation certification.27
MANAGEMENT SYSTEMS FOR CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP
Corporate social responsibility and citizenship require more than espoused values; they require action. Companies must establish management processes and structures to carry out their citizenship commitments. This section describes some of the ways forward-thinking companies are changing to improve their ability to act as socially responsible citizens.
26 For an overview of the B Corporation movement see Caddie Putnam Rankin, “Safeguarding Corporate Social Responsi- bility: The Benefit Movement,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social Responsibility, pp. 245–64, (Bingley, UK: Emerald Publishers, 2018). 27 See the B Corporation website at www.bcorporation.net and the Warby Parker website at www.warbyparker.com.
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 61
law43665_ch03_047-070.indd 61 11/15/18 08:16 AM
BSR, a management consultancy formerly called Businesses for Social Responsibility, surveyed its more than 300 members and found that the goal of a global citizenship man- agement system was to integrate corporate responsibility and citizenship concerns into a company’s values, culture, operations, and business decisions at all levels of the organization. They also found that the CEO exerted the greatest influence over the company’s CSR agenda, more so than consumers, investors, employees or the government.28 Managers engaged in corporate citizenship are increasingly being tasked by executive leadership to work across departments and business units on a global basis to ensure the company has developed a strong approach to meeting a range of stakeholder expectations. This responsibility has evolved from overseeing programs targeted primarily toward the community and only uti- lizing philanthropy and volunteers, to a more integrated approach that leverages company skills and resources that impact society and drive stakeholder expectations.29
Corporate citizenship is a rapidly evolving area of managerial practice in many organi- zations. While businesses administer this corporate activity in different ways, Elin Wall- berg at Samsung Electronics provides one example of a manager with an extensive social program background who is directing her firm’s corporate citizenship strategy.
Elin Wallberg has served as the corporate citizenship officer of Samsung Elec- tronics Nordic since 2014. Wallberg is responsible for corporate citizenship in the Nordic region, which includes heading Samsung’s programs in technology, innova- tion, education, and learning, where young innovators create start-up firms aimed to benefit the next generation. Wallberg had over 10 years of experience in driving innovation in technology and partnerships in various organizations. Prior to joining Samsung, she was head of programs at Global Child Forum, where she ran the ini- tiative Children in a Digital World. Before that, she had been instrumental at Save the Children in setting up the Centre for Child Rights and Corporate Social Respon- sibility in Beijing.30
CEOs increasingly have accepted the multiple responsibilities of business notion— economic, social and legal—that make up the citizenship profile, as described by senior Walmart executives:
“Long-term capitalism takes a deeper view of business’s role in society, recognizing that, in the long run, the interests of stakeholders converge with the interests of the broader community. The actions of any one company may reverberate throughout the various systems in which it operates, generating second- and third-order ben- efits. . . . Under long-term capitalism, companies recognize that fact and, through concerted actions with otters of sufficient scale, work to ensure constant improve- ments to those systems.”31
Visionary CEOs clearly see citizenship as an opportunity to create value for their organization, gain a competitive advantage, and help address some of the world’s biggest challenges. As businesses have become more committed to citizenship, specialized con- sultancies and professional associations for managers with responsibility in this area have emerged. Many of these organizations, including BSR, whose study is cited earlier, are profiled in Exhibit 3.A.
28 “The State of Sustainable Business 2017,” BSR, July 2017, www.bsr.org. 29 “Best Practices in Corporate Citizenship Structures,” tcc group blog, December 18, 2017, www.tccgrp.com. 30 From www.crunchbase.com/person/elin-wallberg. 31 “Business and Society in the Coming Decades,” McKinsey & Company, April 2015, www.mckinsey.com.
Final PDF to printer
62
law43665_ch03_047-070.indd 62 11/15/18 08:16 AM
STAGES OF CORPORATE CITIZENSHIP
Companies do not become socially responsible or good corporate citizens overnight. The process takes time. New attitudes have to be developed, new routines learned, new policies and action programs designed, and new relationships formed. Many obstacles must be overcome. What process do companies go through as they proceed down this path? What factors push and pull them along?
Philip H. Mirvis and Bradley K. Googins of the Center for Corporate Citizenship at Boston College developed a five-stage model of global corporate citizenship, based on their work with hundreds of practitioners in a wide range of companies.32 In their view, firms typically pass through a sequence of five stages as they develop as corporate citizens. Each stage is characterized by a distinctive pattern of concepts, strategic intent, leadership, structure, issues management, stakeholder relationships, and transparency, as illustrated in Figure 3.5.
Elementary Stage. At this stage, citizenship is undeveloped. Managers are uninterested and uninvolved in social issues. Although companies at this stage obey the law, they do not move beyond compliance. Companies tend to be defensive; they react only when threatened. Communication with stakeholders is one-way: from the company to the stakeholder.
32 Philip H. Mirvis and Bradley K. Googins, Stages of Corporate Citizenship: A Developmental Framework (Chestnut Hill, MA: Center for Corporate Citizenship at Boston College, 2006). For a contrasting stage model, based on the experience of Nike, see Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review, December 2004, pp. 125–32.
Professional Associations and Consultancies in Corporate Social Responsibility and Citizenship
around the Globe
As the practice of corporate citizenship has spread, so have professional associations and consultancies serving managers in this arena. Among the leading organizations are these:
• In the United States, BSR (formerly Business for Social Responsibility) provides consulting services to its network of more than 250 member companies and other partners to build a just and sustainable world.
• Canadian Business for Social Responsibility seeks to accelerate and scale corporate social and environ- mental sustainability in Canada by strategically bringing together stakeholders to tackle key issues.
• The European Network for Corporate Social Responsibility Europe (CSR Europe) is the leading European business network with 48 multinational corporate members and 42 national partner organizations, repre- senting over 10,000 companies. It provides the opportunity for companies to share best practices on CSR and innovate with peers.
• Forum Empresa is an American alliance of CSR-based business organizations to promote CSR throughout the Americas, with over 133 independent organizations from more than 67 different countries. Forum Empresa’s programs reach over 6,000 companies around the world.
• Established in 2001 in South Africa, the African Institute of Corporate Citizenship is committed to being the center of excellence in corporate citizenship in Africa and it focuses on the role of business in building sustainable communities.
• From its origins as a sustainability pioneer in the region, CSR Asia has evolved to help hundreds of orga- nizations across Asia embrace sustainability at every level.
• Launched in 2002, the Asian Forum on Corporate Social Responsibility (AFCSR) is Asia’s leading annual conference and awards program on corporate social responsibility.
Source: More information about these organizations is available online at www.bsr.org, www.cbsr.ca, www.csreurope.org, www.csr360gpn.org, aiccafrica.org, csr-asia.com, and www.asianforumcsr.com.
Exhibit 3.A
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 63
law43665_ch03_047-070.indd 63 11/15/18 08:16 AM
Engaged Stage. At this second stage, companies typically become aware of changing public expectations and see the need to maintain their license to operate. Engaged companies may adopt formal policies, such as governing labor standards or human rights. They begin to interact with and listen to stakeholders, although engagement occurs mainly through established departments. Top managers become involved. Often, a company at this stage will step up its philanthropic giving or commit to specific environmental objectives. Brew Dog, a Scottish-based brewery and pub chain, announced that it would distribute 10 percent of its profits to its staff and another 10 percent to charities chosen by the company’s workers and investors. The company demonstrated philanthropy, supportive leadership, and interactive stake- holder relationships, all part of corporate citizenship at the engaged stage.33
Innovative Stage. At this third stage, organizations may become aware that they lack the capacity to carry out new commitments, prompting a wave of structural innovation. Departments begin to coordinate, new programs are launched, and many companies begin reporting their efforts to stakeholders. (Social reporting is discussed later in this chapter.) External groups become more influential. Companies begin to understand more fully the business reasons for engaging in citizenship. The actions taken by Nestlé and Sodexo, described earlier in this chapter, illustrate a company at this stage.
Integrated Stage. As they move into the fourth stage, companies see the need to build initiatives that are more coherent. Mirvis and Googins cite the example of Asea Brown Boveri (ABB), a Swedish–Swiss multinational pioneering technology leader, which carefully coordinates its many sustainability programs from the CEO level down to line officers in more than 100 countries where the company has a presence.
33 “Brew Dog Gives Away 20 Percent of Profits,” Ethical Performance, September 29, 2017, ethicalperformance.com.
Citizenship Content
Strategic Intent Leadership Structure
Issues Management
Stage 5: Transforming
Change the game
Market creation or social change
Visionary, ahead of the pack
Mainstream: business driven
Defining Multi- organization
Full disclosure
Stage 4: Integrated
Sustainability or triple bottom line
Value proposition
Champion, in front of it
Organizational alignment
Proactive, systems
Partnership alliance
Assurance
Stage 3: Innovative
Stakeholder management
Business case
Steward, on top of it
Cross- functional coordination
Responsive, programs
Mutual influence
Public reporting
Stage 2: Engaged
Philanthropy, environmental protection
License to operate
Supporter, in the loop
Functional ownership
Reactive, policies
Interactive Public relations
Stage 1: Elementary
Jobs, profits, and taxes
Legal compliance
Lip service, out of touch
Marginal, sta�-driven
Defensive Unilateral Flank protection
Transparency Stakeholder Relationships
FIGURE 3.5 The Stages of Global Corporate Citizenship
Source: Adapted from the Boston College Center for Corporate Citizenship’s “Stages of Corporate Citizenship: A Developmental Framework,” by Philip Mirvis, Ph.D. and Bradley K. Googins, Ph.D., 2006.
Final PDF to printer
64 Part One Business in Society
law43665_ch03_047-070.indd 64 11/15/18 08:16 AM
Integrated companies may adopt sustainability/triple bottom line measures, turn to external audits, and enter into ongoing partnerships with stakeholders.
Transforming Stage. This is the fifth and highest stage in the model. Companies at this stage have visionary leaders and are motivated by a higher sense of corporate purpose. They partner extensively with other organizations and individuals across business, industry, and national borders to address broad social problems and reach underserved markets.
Northwestern Mutual, a U.S. life insurance and financial services organization, illustrates the transforming stage of corporate citizenship. The company’s signature outreach program focused on fundraising to cure childhood cancer. A review of social issues that mattered to employees and representatives found that this program aligned with the company’s mission—helping others build a secure future. After selecting the childhood cancer focus, the company commissioned a survey to under- stand the current field of research. The survey discovered inadequate financial sup- port addressing this disease. Northwestern Mutual created a strategic philanthropy and community relations department to engage its employees with local neighbor- hoods, schools, and cultural programs and events—all to bring more attention to childhood cancer. “By involving multiple stakeholders in our corporate citizenship efforts, we foster transparent and synergistic relationships,” said John Kordsmeier, president of the Northwestern Mutual Foundation.34
The model’s authors emphasize that individual companies can be at more than one stage at once, if their development progresses faster in some areas than in others. For example, a company might audit its activities and disclose the findings to the public in social reports (transparency, stage 5), but still be interacting with stakeholders in a pattern of mutual influence (stakeholder relationships, stage 3). This is normal, the authors point out, because each organization evolves in a way that reflects the special challenges it faces. Nevertheless, because the dimensions of global corporate citizenship are linked, they tend to become more closely aligned over time.
ASSESSING AND REPORTING SOCIAL PERFORMANCE
As companies around the world expand their commitment to corporate responsibility and citizenship, they have also improved their capacity to measure performance and assess results. A social audit is a systematic evaluation of an organization’s social, ethical, and environmental performance.35
In a social audit, a company’s performance is evaluated relative to a set of externally imposed standards. The results of the audit are used to improve the firm’s performance and to communicate with stakeholders and the public. The scholar Simon Zadek has identified six benefits of social audits. They help businesses know what is happening within their firm, understand what stakeholders think about and want from the business, tell stakeholders what the business has achieved, strengthen the loyalty and commitment of stakeholders, enhance the organization’s decision making, and improve the business’s overall performance.
34 “The Corporate Citizen,” Boston College Center for Corporate Citizenship, Winter 2016, p. 28. 35 The concept of a social audit was first introduced in Howard R. Bowen, Social Responsibilities of the Businessman (New York: Harper, 1953).
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 65
law43665_ch03_047-070.indd 65 11/15/18 08:16 AM
Today, many businesses use social audits to measure the societal impact of their actions. In a world where the use of company resources must be justified, the greater the social equity documented, the stronger the argument a business can make that it is meeting its social obligations. Businesses also used their social audit results to minimize risks or cap- italize on opportunities. They see the process as fostering innovation within the company. Some believe that to communicate with the organization’s stakeholders in a transparent manner is simply the ethical thing to do.
Social Audit Standards In response to the emerging efforts by governments to promote global citizenship, a num- ber of different corporate citizenship standards have been developed that establish mea- sures or benchmarks against which a firm’s citizenship activities (or those of its suppliers or partners) can be compared in a social audit. Social audits look not only at what an orga- nization does, but also at the results of these actions. For example, if a company supports a tutorial program at a local school, the audit might not only look at the number of hours of employee volunteerism, but also assess changes in student test scores as an indicator of the program’s social impact.
Audit standards can be created in three different ways. Companies can develop stan- dards designed to set expectations of performance for themselves or their suppliers or partners. For example, Apple developed its own supplier code of conduct. Or, companies within an industry can agree on a common industrywide standard, as several high technol- ogy companies did when they agreed to the Responsible Business Alliance (RBS) Code of Conduct, formerly the Electronic Industry Citizenship Coalition.
The RBA Code of Conduct is a set of standards on social, environmental and ethi- cal issues in the electronics industry supply chain. The standards set out in the Code of Conduct reference international norms including the Universal Declaration of Human Rights, ILO International Labor Standards, OECD Guidelines for Multina- tional Enterprises, International Organisation for Standards, the Social Account- ability 8000, and many more (some of these standards are discussed next). The RBA Code of Conduct is reviewed every three years to ensure its relevance to inter- national norms and issues members may face in their supply chains.36
Both companywide and industrywide supply chain codes of conduct, as well as auditing processes, are further described in Chapter 17.
Finally, audit standards can be developed by global nongovernmental organizations or standard-setting organizations. A number of such organizations have developed standards to judge corporate performance. These include the International Organisation for Stan- dards (ISO 14001 and 26000), Social Accountability 8000, AccountAbility (or AA 1000), and the United Nations Global Compact and the Global Reporting Initiative, which is pro- filed in Exhibit 3.B.
Social Reporting When a company decides to publicize information collected in a social audit, this is called corporate social reporting. While there is a risk of incurring reputational damage from exposing any problems publicly, many companies see value in practicing transparency. The term trans- parency refers to a quality of complete clarity; a clear glass window, for example, is said to be transparent. When companies clearly and openly report their performance—financial,
36 See the Responsible Business Alliance website at responsiblebusiness.org.
Final PDF to printer
66
law43665_ch03_047-070.indd 66 11/15/18 08:16 AM
social, and environmental—to their various stakeholders, they are acting with transpar- ency. One region where the trend toward corporate reporting and transparency has been particular apparent is Australia and New Zealand.
By 2014, 99 percent of all Australian and New Zealand companies indicated that they would conduct an assessment of their business operations and publicly report the results that year, according to a study by the Australian Centre for Corporate Social Responsibility. They attributed their nearly unanimous preference for report- ing to the International Integrated Reporting Commission’s Integrated Reporting Framework and the new Global Reporting Initiative fourth generation (G4) guide- lines (see Exhibit 3.B). The companies surveyed said they believed in transparent reporting because they understood it could build a reputation for responsibility, contribute to the company’s brand, engage senior leadership in strategic conversa- tions, improve stakeholder engagement, and identify opportunities for improve- ment. According to Victoria Whitaker, head of GRI Focal Point Australia, “businesses around the world are recognizing that reporting can help them under- stand the context in which they operate and the stakeholders whom they serve. Done well it informs corporate strategy and decision making.”37
A survey of business firms by KPMG, an accounting and consulting firm, reported on the state corporate social reporting in 2017, as shown in Exhibit 3.C. This survey found that 93 percent of the world’s largest companies produced some type of a corporate social report for external stakeholders that covered social and environmental responsibility practices.
As noted in Exhibit 3.C, an emerging trend in corporate reporting is the integration of legally required financial information with social and environmental information into a sin- gle integrated report. By 2017, a majority of the largest companies included information of corporate responsibility in their annual financial reports. This reflected a dramatic rise in integrated reporting, from 8 percent in 2008 and 51 percent in 2013 to 78 percent by 2017.38
37 Information from “The 10th Year-Progress and Prospects for CSR in Australia and New Zealand,” Australian Centre for Corporate Social Responsibility, 2014. Also see Colin Higgins, Markus J. Milne, and Bernadine van Gramberg, “The Uptake of Sustainability Reporting in Australia,” Journal of Business Ethics, 2015, pp. 445–68. 38 KPMG report 2017, Ibid.
The Global Reporting Initiative (GRI)
The GRI is based on the belief that a sustainable global economy should combine long-term profitability with ethical behavior, social justice, and environmental care. This means that when companies and organizations consider sustainability—and integrate it into how they operate—they must consider four key areas of their performance and impacts: economic, environmental, social, and governance. GRI’s Sustainability Reporting Framework is a reporting system that enables all companies and organi- zations to measure, understand, and communicate this information using common metrics, so performance can be compared across firms and industries. The GRI Guidelines offer an international reference for all those interested in the disclosure of the governance approach and the environmental, social, and economic per- formance and impacts of organizations. The Guidelines are developed through a global multi-stakeholder process involving representatives from business, labor, civil society, and financial markets, as well as auditors and experts in various fields; and in close dialogue with regulators and governmental agencies in several countries.
Sources: See the Global Reporting Initiatives website at www.globalreporting.org.
Exhibit 3.B
Final PDF to printer
67
law43665_ch03_047-070.indd 67 11/15/18 08:16 AM
Why do companies publish social responsibility reports? According to one study, most firms (80 percent) are motivated by ethical concerns. Ethical drivers replaced economic considerations (80 percent versus 50 percent) as the primary motivator for publishing these reports, a complete reverse from a few years ago when economic considerations were viewed as the most important. Nearly two-thirds of the 250 firms worldwide reported that they engaged with their stakeholders in a structured way, up from 33 percent a decade ear- lier. These relevant stakeholder groups have expanded from social and environmental groups to include financial analysts and investors. Other firms pointed to increasing gov- ernmental regulatory pressure to report financial as well as nonfinancial data.39
In today’s business climate, multiple stakeholders demand that businesses adopt mea- surable standards for corporate responsibility and citizenship, audit their organizations according to these standards, and report the results to the public.
39 “Socially Responsible Investment Analysts Find More Large U.S. Companies Reporting on Social and Environmental Issues,” Social Investment Research Analysts Network report, www.kld.com; and KPMG report 2017, Ibid.
The State of Corporate Social Reporting, 2017
In the KPMG Survey of Corporate Responsible Reporting 2017, the following trends were noted:
• Corporate responsibility (CR) reporting has filtered down from large companies to mid-sized companies, as 75 percent of the 4,900 large and mid-cap firms surveyed issued CR reports.
• Across all industry sectors, CR reporting was more than 60 percent, the first time in the survey’s history. • Companies in Latin America reported a large surge in CR reporting, driven by regulation, foreign investor
demands, and the need to build and protect public trust. • Integrated Reporting has taken off in Japan, Brazil, Mexico, and Spain. Most of the largest companies,
78 percent, integrate financial and nonfinancial data in their reports, suggesting they believe that CR information is relevant for investors.
• Around two-thirds of all reports utilize the Global Reporting Initiative (GRI) G4 Guidelines or Standards.
Exhibit 3.C
∙ The world’s largest corporations are capable of wielding tremendous influence, at times even more than national governments, due to their economic power. Because of this potential influence, the organizations’ stakeholders expect businesses to enhance soci- ety when exercising their power.
∙ The idea of corporate social responsibility was adopted by business leaders in the United States in the early 20th century. It has evolved from a notion of stewardship and strate- gic responsiveness to an ethics-based understanding found in culture and the practice of corporate citizenship. Socially responsible businesses attempt to balance economic, legal, and social obligations. Following an enlightened self-interest approach, a firm may be economically rewarded while society benefits from the firm’s actions.
∙ Corporate social responsibility is a controversial notion. Some argue that its benefits include discouraging government regulation, promoting long-term profitability for the firm, and enhancing the company’s stakeholder relationships and business reputation. Others believe that it lowers efficiency, imposes undue costs, and shifts unnecessary obligations to business. Most executives believe that they should use their corporate
Summary
Final PDF to printer
68 Part One Business in Society
law43665_ch03_047-070.indd 68 11/15/18 08:16 AM
Internet Resources
www.bsr.org BSR: The business of a better world www.businessinsociety.eu The Business in Society Gateway www.bcorporation.net Certified B Corporation www.csrwire.com The Corporate Social Responsibility Newswire consciouscompanymedia.com Conscious Company Media www.3blassociation 3BL Association www.unicef.org/csr UNICEF and Corporate Social Responsibility www.globalreporting.org Global Reporting Initiative www.unglobalcompact.org United Nations Global Compact
power and influence to balance their response to multiple stakeholders rather than max- imize stockholders’ return alone.
∙ Global corporate citizenship refers to putting a commitment to serving various stake- holders into practice by building stakeholder partnerships, discovering business oppor- tunities in serving society, and transforming a concern for financial performance into a vision of integrated financial and social performance worldwide. Global corporate citizenship programs can be considered a strategic investment by the firm.
∙ Social entrepreneurs incorporate social and environmental benefit into their core busi- ness mission. B Corporations, similarly, are businesses that seek and achieve certifi- cation, through rigorous assessments by the nonprofit B Lab organization, gained via specific social and environmental standards.
∙ Companies progress through five distinct stages as they develop as global corporate citizens; these are termed the elementary, engaged, innovative, integrated, and trans- forming stages. A specific company may be at more than one stage at once, as it may be progressing more quickly on some dimensions than on others.
∙ Many companies have created systemic audits of their social, ethical, and environmen- tal performance, measured against industrywide performance expectations as well as auditing standards developed by global standard-setting organizations. An emerging trend is the practice of communicating social, environmental, and financial results to stakeholders through an integrated corporate report.
Key Terms social audit, 64 social entrepreneurs, 59 social entrepreneurship, 59 social venture, 59 transparency, 65
B Corporation, 60 corporate citizenship, 51 corporate power, 49 corporate social reporting, 65 corporate social responsibility, 51
enlightened self-interest, 53 integrated report, 66 iron law of responsibility, 50 reputation, 56
Final PDF to printer
Chapter 3 Corporate Social Responsibility and Citizenship 69
law43665_ch03_047-070.indd 69 11/15/18 08:16 AM
Discussion Case: Corporate Social Responsibility at Gravity Payments
Dan Price, the founder of Gravity Payments, a small, privately owned company that pro- vided high-service and low-cost credit card processing, surprised his 120-person staff when he announced in 2015 that over the next three years he would raise the salary of all employees, even the lowest paid clerk, customer service representative, and salesperson, to a minimum of $70,000. The average annual salary at that time at Gravity was around $48,000, so the increase would nearly double some employees’ salaries. Price explained that he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit.
Price’s announcement was met with mixed reactions. Some employees were thrilled, clapping and whooping when they heard the announcement. “I’m freaking out,” said one employee. Others—many from the financial services community—said that this was just a costly publicity stunt. The conservative radio show host Rush Limbaugh said he “smelled a socialist agenda.” However, others were supportive. Other talk show hosts lined up inter- views with Price. Job seekers by the thousands sent in résumés. Harvard business profes- sors flew out to Gravity Payment’s headquarters to conduct a case study. Third graders wrote Price thank-you notes, and single women wanted to date him.
Price was no stranger to the spotlight. He had earned the honor of Entrepreneur of the Year in 2014 from Enterprise Magazine. GeekWire named Price its Young Entrepreneur of the Year in 2013, and in 2010 he received the Small Business Administration’s National Young Entrepreneur of the Year award. Price also annually donated 10 percent of Gravity’s profits to charity. The equitable employee salary announcement seemed like another step toward achieving Price’s goals as a business owner.
Price launched Gravity (a name, Price explained, that was selected since “you could understand [it] on the phone”) while attending college, but the firm actually grew out of a technology consulting business he created while in high school. His goal was to manage credit card transactions for small businesses, like coffeehouses, in a more affordable and transparent way. “I never intended to make a lot of money, or really any,” said Price. “I was really upset at this industry for the way they were treating my [consulting] clients, and I just wanted to blow the thing up. So I was like, ‘I’m going to charge a third of what everyone [else does].’”
Financial analysts recognized Gravity Payments’ success; his company processed nearly $10 billion in credit card transactions and generated revenues of about $150 million annually. When asked why he did not “cash out,” Price responded, “I’ll ask my friends who have sold their businesses, ‘Did that business get to the goal that you originally had in mind?’ And they’re all happy they sold because of the phenomenal financial outcome. But when I ask them, ‘Did you actually accomplish the nonfinancial goal that you set out in starting a business?’ . . . they almost all say no.”
Price encountered hard times in 2008 when Gravity lost 20 percent of its revenue nearly overnight because customers were running less volume through the system during the eco- nomic recession. Price recalled that half of his staff was in his office asking for raises and the other half was definitely afraid they were going to lose their jobs. So, he called his employees together and explained that the company had eight months of cash in the bank. “If we hold our expenses steady and just sell the same amount every month for five months, we’ll get back to break-even and not have to do any benefit cuts, any layoffs, anything like that,” he told his staff. Given Price’s response during the economically challenging times,
Final PDF to printer
70 Part One Business in Society
law43665_ch03_047-070.indd 70 11/15/18 08:16 AM
it did not surprise his employees when he took the bold move of promising every employee a salary of $70,000 annually.
Price’s commitment to a new company minimum wage captured national attention given the soaring disparity between executives’ pay and that of their employees. In the United States, where the pay gap was the greatest for any country, chief executives earned more than 300 times what the average worker made (as discussed in more detail in Chapter 13). Some people, like Gilded Age’s executive J. Pierpont Morgan and management scholar Peter Drucker, advocated a 20-to-1 executive to average employee ratio. Price’s 1-to-1 ratio was unprecedented in the business community. “The market rate for me as a CEO com- pared to a regular person is ridiculous, it’s absurd,” explained Price, who admitted that his only main extravagances were snowboarding and picking up the bar bill for his friends. He drove a 12-year-old Audi, which he received in a barter for service from the local dealer. “As much as I’m a capitalist, there is nothing in the market that is making me do it,” said Price, referring to paying wages that would make it possible for his employees “to go after their own American dream, buy a house and pay for their children’s education.”
Price admitted that hearing his employees’ problems with making ends meet on wages that were well above the $7.50 per hour minimum wage or even at $40,000 a year “just eats at me inside.” He wanted to address the social issue of wage inequality and felt that as a business leader he was in a position to do something, but he wanted to do something that would not result in raising prices for his customers or cutting back on services. Hayley Vogt, a 24-year-old communications coordinator at Gravity who earned $45,000 annually, said, “I’m completely blown away right now [after hearing Price’s announcement].” She said she had worried about covering rent increases and a recent emergency room bill. “Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work some- place where someone is actually doing something about it and not just talking about it.”
Fifteen months after Price’s unprecedented announcement, his employees decided that he should not be driving around in his outdated Audi, so they bought him a Tesla. Price posted to his Facebook page, “Gravity employees saved up and pitched in over the past six months and bought me my dream car. A brand new, gorgeous blue #Tesla. Still in shock. How do I even begin to say thank you?” As for the pay raises, commentators remained divided. Paul Davidson, of USA Today, commented, “Big pay hikes may yield surprisingly beneficial results, especially in the current tight labor market.” Yet, other experts said that the outsized, across-the-board increase Price shelled out should not set a benchmark for most companies.
Sources: “One Company’s New Minimum Wage: $70,000 a Year,” The New York Times, April 13, 2015, www.nytimes.com; “A Company Copes with Backlash Against the Raise that Roared,” The New York Times, July 31, 2015, www.nytimes.com; “Employees Just Bought a Tesla for their CEO Because He Raised Minimum Salaries to $70,000,” Business Insider, July 14, 2016, www.businessinsider.com; and, “Does a $70,000 Minimum Wage Work?” USA Today, May 26, 2016, www.usatoday.com.
Discussion Questions
1. Is Price demonstrating elements of corporate social responsibility by his actions in this case, or not?
2. How is Price exhibiting the fourth Phase of Corporate Citizenship (Figure 3.2, 1990s to present: Corporate/Global Citizenship) in his actions at Gravity Payments?
3. What arguments in support of, or concerns about, corporate social responsibility (refer- ring to Figure 3.3) are relevant to this case?
4. Is Price acting like an executive of a firm that could be certified as a B corporation? 5. What stage of global corporate citizenship (using Figure 3.5) is Gravity Payments oper-
ating at, and why do you think so?
Final PDF to printer
71
law43665_ch04_071-092.indd 71 11/15/18 08:10 AM
C H A P T E R F O U R
Business in a Globalized World The world economy has become increasingly integrated, and many businesses have extended their reach beyond national borders. Yet the process of globalization is controversial, and the involve- ment of corporations in other nations is not always welcome. Doing business in diverse political and economic systems and in societies with stark differences in wealth and income poses difficult challenges. When a multinational corporation buys resources, manufactures products, or sells goods and services in multiple countries, it is inevitably drawn into a web of global social and ethical issues. Understanding what these issues are and how to manage them through collaborative action with governments and civil society organizations is a vital skill for today’s managers.
This Chapter Focuses on These Key Learning Objectives:
LO 4-1 Defining globalization and classifying the major ways in which companies enter the global marketplace.
LO 4-2 Identifying the international financial and trade institutions that have shaped the globalization pro- cess in recent decades.
LO 4-3 Analyzing the benefits and costs of the globalization of business.
LO 4-4 Identifying the major types of political and economic systems in which companies operate across the world.
LO 4-5 Understanding global inequalities of wealth and income and analyzing the special challenges of serving those at the “bottom of the pyramid.”
LO 4-6 Assessing how businesses can work collaboratively with governments and the civil sector to address global social issues.
Final PDF to printer
72 Part One Business in Society
law43665_ch04_071-092.indd 72 11/15/18 08:10 AM
In 2016, Uber finally gave up on its quest to dominate the huge Chinese market for ride- hailing services. After two years of bruising competition, during which it lost $2 billion, Uber threw in the towel and agreed to sell its business there to its Chinese competitor, Didi Chuxing. In exchange, Uber received $1 billion and a 20 percent minority stake in Didi, and both companies agreed to give the other’s CEO a seat on its board. Uber had made an enormous effort, but in the end, could not overcome the many obstacles to besting its local rival. The U.S.–based company had struggled to set up in-country servers to get around China’s Internet firewall, deal with Chinese customers’ aversion to paying by credit card, and comply with government regulations that pressured the company to collaborate with municipal taxi companies. Didi, by contrast, was able to leverage its local connections and financing to become a formidable opponent, even against the ride-hailing industry’s world leader. Commented the author of Global Vision: How Companies Can Overcome the Pit- falls of Globalization, “China is an incredibly complex market that differs culturally, polit- ically, and economically from the United States.”1
In 2018, the process of globalization was in some ways at a crossroads. In many respects, the world’s economy remained as deeply integrated and interdependent as ever. Multinational enterprises continued to deliver much-needed technical know-how, capital, managerial experience, products, and services across national borders. At the same time, populist political movements in the United States, Europe, and elsewhere had pushed back against international trade agreements and common markets, citing the costs of globaliza- tion to their own industries and citizens. Some firms, like Uber, were pulling back from expensive foreign commitments, and the profits of multinationals compared with domestic firms were dropping.2 How companies can best deal with the challenges of doing business in a world of great complexity and flux is the subject of this chapter. It will also examine the respective roles of business, civil society organizations, and governments in addressing common global problems.
The Process of Globalization
Globalization refers to the increasing movement of goods, services, capital, and labor across national borders. Globalization is a process, that is, an ongoing series of interrelated events. International trade and financial flows integrate the world economy, leading to the spread of technology, culture, and politics. Thomas Friedman, a columnist for The New York Times and a well-known commentator, has described globalization as a system with its own internal logic:
Globalization is not simply a trend or a fad but is, rather, an international system. It is the system that has now replaced the old Cold War system, and, like that Cold War system, globalization has its own rules and logic that today directly or indi- rectly influence the politics, environment, geopolitics, and economics of virtually every country in the world.3
1 “Why Uber Couldn’t Crack China,” Fortune, August 7, 2017; “The Real Reason Uber is Giving Up in China,” Harvard Busi- ness Review, August 2, 2016; and “Uber Slayer: How China’s Didi Beat the Ride-Hailing Superpower,” October 6, 2016, at www.bloomberg.com. See also Robert Salomon, Global Vision: How Companies Can Overcome the Pitfalls of Globalization (Basingstoke, UK: Palgrave Macmillan, 2016). 2 “Multinationals: The Retreat of the Global Economy,” The Economist, January 28, 2017. 3 Thomas L. Friedman, The Lexus and the Olive Tree (New York: Anchor Books, 2000), p. ix.
Final PDF to printer
Chapter 4 Business in a Globalized World 73
law43665_ch04_071-092.indd 73 11/15/18 08:10 AM
The process of globalization is so pervasive that it affects all businesses—whether they are small or large, local or multinational, or an employer of one or many.
Firms can enter and compete in the global marketplace in several ways. Many compa- nies first build a successful business in their home country, and then export their products or services to buyers in other countries. In other words, they develop global market chan- nels for their products. Nestlé, for example, began in Switzerland, but now sells its food and beverage products all over the world. An emerging trend is what The Economist mag- azine has called a rising cohort of small companies that, while remaining local, have suc- cessfully used e-commerce platforms to sell to customers around the world. PayPal, the digital payments firm, has reported that it facilitates $80 billion a year in cross-border transactions, many of which are of this type.4
Other firms begin in their home country but realize that they can cut costs by locating some or all of their global operations in another country. This decision leads to estab- lishing manufacturing plants or service operations abroad. For example, BMW, which is headquartered in Germany, has manufacturing facilities in 15 countries, including Brazil, Thailand, Egypt, Indonesia, and the United States. Finally, a third strategy involves sub- contracting manufacturing to suppliers located abroad. In other words, these companies develop global supply chains. For example, in the apparel and shoe industries, companies such as Nike, Gap, and Abercrombie & Fitch have extensive networks of suppliers outside the United States—mostly in Asia—that make products of their design. Suppliers and their relationship to lead firms are further discussed in Chapter 17.
These three strategies of globalization can be summarized in three words: sell, make, and source. Today, many companies have all three elements of global business—market channels, manufacturing operations, and supply chains.
Major Multinational Enterprises A multinational enterprise (MNE) is a firm with significant foreign assets or revenues, or that has subsidiaries outside its home country. Although only one in a thousand of the world’s businesses are multinational, because they are among the largest, they have an outsized impact. By some estimates, MNEs account for more than half of world trade, comprise 40 percent of the world’s stock value, and own much of its intellectual prop- erty.5 Their affiliates—meaning suppliers, subcontractors, retailers, and other entities with which they have some business relationship—collectively produce 10 percent of global gross domestic product (GDP).6
Although many firms conduct business across national boundaries, most global com- merce is carried out by a small number of powerful firms. (Corporate power is further discussed in Chapter 3.) Who are these leading multinational enterprises? Figure 4.1 lists the top 10 nonfinancial MNEs, ranked in order of the value of the foreign assets they con- trol. Leading the list is Royal Dutch Shell, the international petroleum company. Rounding out the group are several of the world’s leading automakers, other petroleum companies, a food and beverage maker, and a telecommunications firm.7 Although Figure 4.1 does not include any information technology firms (such as Google, Apple, and Microsoft), the number of such firms in the top 100 has more than doubled in the past five years. For their
4 “Multinationals: The Retreat of the Global Economy,” The Economist, January 28, 2017. 5 Ibid. 6 “Globalization in the Age of Trump,” Harvard Business Review, July–August 2017. 7 United Nations Conference on Trade and Development, World Investment Report 2017, www.unctad.org. Data are for 2016.
Final PDF to printer
74 Part One Business in Society
law43665_ch04_071-092.indd 74 11/15/18 08:10 AM
part, the world’s major financial institutions also extend across the globe; four of the five largest banks in the world, ranked by assets, are in China.8 JP Morgan Chase, the largest U.S.–based bank, operates in more than 60 countries.
Although much of global commerce is carried out by a small number of large firms, globalization affects almost all businesses, whatever their size and reach. Even small, local firms use products and services that originate abroad, and they often compete with other businesses from around the world.
Another important aspect of globalization is the worldwide flow of capital. Foreign direct investment (FDI) occurs when a company, individual, or fund invests money in another coun- try, for example, by buying shares of stock in or loaning money to a foreign firm. The world economy is bound together by such cross-border flows of capital. In 2016, FDI was $1.75 trillion, still below its average right before the financial crisis of 2008.9 An emerging trend in foreign direct investment is the rise of sovereign wealth funds. These are funds oper- ated by governments to invest their foreign currency reserves. They are most commonly operated by nations that export large amounts of oil and manufactured goods; the largest are run by Norway, the United Arab Emirates (Abu Dhabi), China, Kuwait, and Saudi Arabia. In recent years, sovereign wealth funds have made significant cross-border investments.
In past years, some U.S. companies sought to avoid corporate taxes by merging with companies located in other countries with lower tax rates and shifting their headquarters there, in a phenomenon known as inversion. For example, in 2014 Burger King (based in the United States) acquired Tim Horton’s, a Canadian coffee-and-donut chain, for $11.5 billion. After the acquisition, Burger King reincorporated in Canada and renamed itself Restaurant Brands International, saving the company an estimated $275 million in U.S. taxes over the next three years. Many commentators expected this trend would slow after the implementation in 2018 of new tax legislation in the United States, which reduced corporate tax rates from 35 percent to 21 percent.
8 “Bank Rankings: Top Banks in the World,” www.accuity.com. Data are as of February 2017. 9 UNCTAD, “World Investment Report 2017,” www.unctad.org.
Corporation Home Economy Industry Foreign Assets (in $ millions)
Royal Dutch Shell United Kingdom Petroleum $349,720
Toyota Motor Japan Motor vehicles 303,678
BP United Kingdom Petroleum 235,124
Total France Petroleum 233,217
Anheuser-Busch InBev Belgium Food & Beverages 208,012
Volkswagen Group Germany Motor vehicles 197,254
Chevron United States Petroleum 189,116
General Electric United States Industrial and Commercial Machinery
178,525
Exxon Mobil Corporation United States Petroleum 165,969
Softbank Corp Japan Telecommunications 145,611
FIGURE 4.1 The World’s Top 10 Nonfinancial Multinational Enterprises, Ranked by Foreign Assets
Source: United Nations, “The World’s Top 100 Non-Financial MNEs, Ranked by Foreign Assets, 2016,” www.unctad.org. All data are for the year 2016.
Final PDF to printer
Chapter 4 Business in a Globalized World 75
law43665_ch04_071-092.indd 75 11/15/18 08:10 AM
Finally, globalization involves the movement of people across national borders. Although recent political movements in some countries have sought to block or reduce the inflow, human migration has continued. In 2017, 258 million persons—about 3.4 percent of the world’s population—were living in countries other than those in which they were born. The proportion was higher—12 percent—in developed countries. More than half of the world’s migrants were living in just ten countries, topped by Saudi Arabia (37 percent of its population), Canada (22 percent), and the United States and Germany (15 percent each).10 Some of these people had migrated legally, some illegally; some were seeking economic opportunity, while others were fleeing war or persecution. In the mid to late 2010s, as many as 800,000 people a year poured out of Syria to escape brutal armed conflict, many settling in Europe.
How did European businesses respond to this influx of refugees from Syria and nearby countries? In 2015, dozens of German companies joined together as Wir Zusammen, or “We Together,” under the leadership of the CEO of the country’s largest Internet provider, to pool their resources to help integrate migrants. This was potentially a boon to an economy in which more than a million jobs were unfilled. The idea was for the companies to collaborate in providing language training, housing, and training—and even sports leagues. For example, ThyssenKrupp, a major conglomerate and member of the group, created hundreds of internships and apprenticeships for refugees. Wir Zusammen also ran an ad campaign designed to encourage Germans to see migrants as partners, not threats.11
A study of 300 companies in Germany found that integrating these workers was chal- lenging, because of language barriers and lack of documentation. But the companies reported that many refugee employees had succeeded when given appropriate support.12
The role of businesses in employing immigrant workers is further explored in Chapter 16.
International Financial and Trade Institutions Global commerce is carried out in the context of a set of important international financial and trade institutions (IFTIs). The most important of these are the World Bank, the Inter- national Monetary Fund, and the World Trade Organization. By setting the rules by which international commerce is transacted, these institutions increasingly determine who wins and who loses in the global economy.
The World Bank (WB) was set up in 1944, near the end of World War II, to provide economic development loans to its member nations. Its main motivation at that time was to help rebuild the war-torn economies of Europe. Today, the World Bank is one of the world’s largest sources of economic development assistance; it provided $61 billion in loans, grants, equity investments and guarantees in 2016 for roads, dams, power plants, and other infrastructure projects, as well as for education, health, and social services. The bank gets its funds from dues paid by its member countries and from money it borrows in the international capital markets. Representation on the bank’s governing board is based on economic power; that is, countries have voting power based on the size of their economies.
10 “Migrants Are on the Rise Around the World, and Myths About Them Are Shaping Attitudes,” The New York Times, June 20, 2018. 11 “German Billionaire Rallies Business to Migrant Cause,” Financial Times, January 7, 2017. 12 “International Migration Report 2017,” United Nations Department of Economic and Social Affairs, December 2017; “How 300 Companies Integrated 2,500 Refugees into Germany’s Labor Market,” Boston Consulting Group, May 30, 2017, www.bcg.com; and “Germany Bets on Second Time Lucky with Migrant Workers,” Reuters, August 18, 2017.
Final PDF to printer
76 Part One Business in Society
law43665_ch04_071-092.indd 76 11/15/18 08:10 AM
As the United States—the bank’s largest shareholder—became increasingly reluctant to support the bank’s mission during the Trump administration, the bank’s leadership began to turn to partnerships with private investors to fund various development projects.13
The World Bank’s sister organization is the International Monetary Fund (IMF). Founded at the same time as the bank (and today residing across the street from it in Washington, DC), the IMF has a somewhat narrower purpose: to stabilize the system of currency exchange rates and international payments to enable member countries to participate in global trade. It does this by lending foreign exchange to member countries. Like the World Bank, the IMF sometimes imposes strict conditions on governments that receive its loans. These conditions may include demands that governments cut spending, devalue their currencies, increase exports, liberalize financial markets, and reduce wages. These conditions often lead to hardship.
One country that was particularly hard hit by loan conditions was Greece, one of the poorest nations in the European Union. Beginning in 2010, the IMF, the European Central Bank, and several European countries made a series of multibillion-dollar loans to Greece to enable it to pay its bills and service its debts. In exchange, the lenders imposed severe conditions, including sharp cuts in govern- ment spending and the sale of public assets. The Greek economy shrank by a quarter, the unemployment rate rose to 27 percent, and half its young people were thrown out of work. Public pensions and salaries were slashed. The Greek people voted in a new government whose candidates had called the austerity measures “waterboarding” and advocated for a restructuring of the country’s debt. By 2018, Greece’s economy had finally improved somewhat, and the nation hoped to be able to renegotiate its loans on more favorable terms.14
Significant progress has been made to reduce indebtedness by poor countries. By the mid-2000s, many developing countries had accumulated huge debts to the World Bank, the IMF, and other lenders. The total amount of money owed was almost $3 trillion. One of the unintended consequences of past loans was persistent poverty, because a large share of many nations’ earnings went to pay off debt rather than to develop the economy or improve the lives of citizens. In response, many industrialized nations extended aid to heavily indebted countries to enable them to pay down loans to the World Bank, IMG, and other lenders. By 2017, more than $77 billion in debt relief had been extended to 36 heav- ily indebted countries, significantly reducing these nations’ payments and enabling them to direct more resources to alleviating poverty.15
However, problems remained. Poor countries still owed billions more, and the world financial crisis weakened their ability to pay—and the ability of developed countries to offer aid. And, so-called vulture funds sought to take advantage of the indebted countries, a situation that is profiled in Exhibit 4.A.
The final member of the triumvirate of IFTIs is the World Trade Organization (WTO). The WTO, founded in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT), is an international body that establishes the ground rules for trade among nations. Most of the world’s nations are members of the WTO, which is based in Switzerland.
13 “The World Bank is Remaking Itself as a Creature of Wall Street,” The New York Times, January 25, 2018. 14 “Plausible that Greece Will Exit Bailout Programme This Year,” Financial Times, January 4, 2018; and “Explaining Greece’s Debt Crisis,” The New York Times, June 17, 2016. 15 “Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, Statistical Update,” (Washington, D.C.: International Monetary Fund, September 1, 2017).
Final PDF to printer
77
law43665_ch04_071-092.indd 77 11/15/18 08:10 AM
Its major objective is to promote free trade; that is, to eliminate barriers to trade among nations, such as tariffs. A tariff is a tax on an imported (or sometimes exported) product, often imposed by governments to protect their own industries from foreign competition. Unlike the WB and the IMF, the WTO does not lend money or foreign exchange; it simply sets the rules for international trade. The WTO conducts multiyear negotiations, called rounds, on various trade-related topics, rotating its meetings among different cities.
Under the WTO’s most favored nation rule, member countries may not discriminate against foreign products. Most import restrictions (such as protective tariffs) are illegal. Under rare circumstances, they are permitted to protect a nation from an imported prod- uct scientifically proven to be unsafe—or to safeguard a nation’s industry from a sudden, unforeseen, and damaging surge in imports. The Trump administration cited the latter exception when it imposed tariffs on imported solar panels in 2018, saying the restrictions were needed to protect American industry from unfair foreign competition. Exhibit 4.B explores whether jobs were gained or lost because of this protectionist policy. (Trade pol- icy is further discussed in Chapter 7, and corporate efforts to obtain protective tariffs are described in the discussion case at the end of Chapter 8.)
If countries disagree about the interpretation of this or any other WTO rule, they can bring a complaint before the WTO’s Dispute Settlement Body (DSB), a panel of appointed experts, which meets behind closed doors. Usually, member countries comply voluntarily with the DSB’s rulings. If they do not, the DSB can allow the aggrieved nation to take retaliatory measures, such as imposing their own tariffs. Rulings are binding; the only way a decision can be overruled is if every member country opposes it.
These three international financial and trade institutions are important because no busi- ness can operate across national boundaries without complying with the rules set by the WTO, and many businesses in the developing world are dependent on World Bank and IMF loans for their very lifeblood. The policies these institutions adopt, therefore, have much to do with whether globalization is perceived as a positive or negative force, a sub- ject to which we turn next.
Vulture Funds and Heavily Indebted Nations
A “vulture fund” is a private equity fund (also called a hedge fund) that buys the debt of weak companies or heavily indebted countries with the intention of making a profit. (The term analogizes these investors to vultures, birds of prey that feed on dead or dying animals.) For example, when Argentina defaulted on about $81 billion of loans in 2001, a hedge fund called Elliott Management bought some of these defaulted loans at a deep discount. It then sued, demanding that Argentina pay back the loans at full face value with inter- est, much more than it had paid. In 2012, a U.S. judge ruled in favor of the hedge fund—and said that until Argentina paid what it owed to Elliott Management, it was barred from paying any of its creditors (who had already agreed to accept less). In 2016, Argentina finally capitulated, agreeing to pay $2.4 billion to settle debt that Elliott Management had purchased 15 years earlier for just $117 million, generating an enormous windfall. Both the IMF and the World Bank said that the behavior of vulture funds like Elliott Management threatened the financial recovery of fragile economies. “When vulture funds sue for such exorbitant amounts, it’s clearly taking away money that should be invested in health, education, infrastructure, and other social problems, and goes to line the pockets of already wealthy investors,” said a representative of the nongovern- mental organization (NGO) Africa Action.
Sources: “How One Hedge Fund Made $2 Billion from Argentina’s Economic Collapse,” The Washington Post, March 29, 2016; and “A Good Week for Vulture Funds,” The New Yorker, March 5, 2016.
Exhibit 4.A
Final PDF to printer
78
law43665_ch04_071-092.indd 78 11/15/18 08:10 AM
The Benefits and Costs of Globalization
Globalization has both benefits and costs, and not all countries and stakeholders are affected equally. In this section, we present some of the arguments advanced by both sides in the debate over this important issue.
Benefits of Globalization Proponents of globalization point to its many benefits. One of the most important of these is that globalization tends to increase economic productivity. That means, simply, that more is produced with the same effort.
Why should that be? As the economist David Ricardo first pointed out, productivity rises more quickly when countries produce goods and services for which they have a nat- ural talent. He called this the theory of comparative advantage. Suppose, for example, that one country had a climate and terrain ideally suited for raising sheep, giving it an advantage in the production of wool and woolen goods. A second country had a favorable combination of iron, coal, and water power that allowed it to produce high-grade steel. The first country would benefit from trading its woolen goods for the second country’s steel, and vice versa; and the world’s economy overall would be more productive than if both countries had tried to make everything they needed for themselves. In other words, in the context of free trade, specialization (everyone does what they are best at) makes the world economy as a whole more efficient, so living standards rise.
Many countries today have developed a specialization in one or another skill or industry. India, with its excellent system of technical education, has become a world
Tariffs on Solar Panels: Job Creator or Job Destroyer?
In 2018, President Trump imposed a 30 percent tariff on imported solar panels and cells, set to phase out after four years. “Our companies have been decimated,” the president said, “and those companies are going to be coming back strong.” The immediate effect of the tariff was to raise the prices of imported solar panels and cells, most of which came from China, South Korea, and Malaysia. Two U.S.–based solar equipment manufacturers responded enthusiastically. Suniva praised the move for “holding China and its proxies accountable,” and SolarWorld said it was “hopeful [the tariffs] will be enough.” How many U.S. jobs were protected or created? According to the Solar Foundation, although 38,000 American workers were employed in all aspects of solar manufacturing, only 2,000 made solar panels and cells. One foreign solar-panel maker reportedly contacted the city of Jacksonville, Florida, after the tariff announcement to discuss opening a manufacturing plant there, promising as many as 800 new jobs. Other companies opposed the tariffs, saying they would eliminate the jobs of many Americans who installed and maintained solar systems for businesses, homes, and utilities. Almost 90 percent of solar panels were imported, and as their prices rose, demand for these systems was expected to fall. The Solar Energy Industries Association, a trade group, estimated that the tariffs would lead to the loss of 23,000 U.S. jobs in 2018 alone as solar investments were cancelled or delayed. The chief executive of SunPower, a U.S. firm that sourced its panels from Asia, commented that tariffs would “burden domestic manufacturers and suppliers of other key components, raise prices for customers, and eliminate tens of thousands of jobs.” And some feared that the Administration’s move would prompt retaliation from Asian countries, hurting U.S. exporters. “This is now really starting to escalate,” said one prominent economist.
Sources: “Manufacturers Fight Over New Tariffs’ Effect on U.S. Jobs,” The Wall Street Journal, January 23, 2018; “Job Creator, or Job Killer? Trump Angers Solar Installers with Panel Tariff” and “Q&A: Winners, Losers of Trump’s Solar Panel Tariff,” The New York Times, January 23, 2018; “Trump Says Solar Tariff Will Create ‘Lots of Jobs.’ But It Could Wipe Out Many More,” The Washington Post, January 29, 2018; and “President Trump’s Solar Tariffs Are a Big Blow to Renewables,” Fortune, January 22, 2018.
Exhibit 4.B
Final PDF to printer
Chapter 4 Business in a Globalized World 79
law43665_ch04_071-092.indd 79 11/15/18 08:10 AM
powerhouse in the production of software engineers. China has become expert in electronics manufacturing. France and Italy, with their strong networks of skilled craftspeople and designers, are acknowledged leaders in the world’s high fashion and footwear design industries. The United States, with its concentration of actors, directors, special effects experts, and screenwriters, is the global headquarters for the movie industry.
Comparative advantage can come from several possible sources, including natural resources; the skills, education, or experience of a critical mass of people; or an existing production infrastructure.
Globalization also tends to reduce prices for consumers. If a shopper in the United States goes into Walmart to buy a shirt, he or she is likely to find one at a very reason- able price. Walmart sources its apparel from all over the world, enabling it to push down production costs. Globalization also benefits consumers by giving them access to a wide range of diverse goods and the latest “big thing.” Teenagers in Malaysia can enjoy the lat- est Johnny Depp or Jennifer Lawrence movie, while American children can play with new Sony PlayStation games from Japan.
For the developing world, globalization also brings benefits. It helps entrepreneurs the world over by giving all countries access to foreign investment funds to support economic development. Globalization also transfers technology. In a competitive world marketplace, the best ideas and newest innovations spread quickly. Multinational corporations train their employees and partners how to make the fastest computer chips, the most productive food crops, and the most efficient light bulbs. In many nations of the developing world, global- ization has meant more manufacturing jobs in export sectors and training for workers eager to enhance their skills.
The futurist Allen Hammond identifies two additional benefits of globalization. First, he says that world trade has the potential of supporting the spread of democracy and freedom.
The very nature of economic activity in free markets. . . requires broad access to information, the spread of competence, and the exercise of individual decision mak- ing throughout the workforce—conditions that are more compatible with free soci- eties and democratic forms of government than with authoritarian regimes.16
Second, according to Hammond, global commerce can reduce military conflict by acting as a force that binds disparate peoples together on the common ground of business interac- tion. “Nations that once competed for territorial dominance,” he writes, “will now compete for market share, with money that once supported military forces invested in new ports, telecommunications, and other infrastructure.” In this view, global business can become both a stabilizing force and a conduit for Western ideas about democracy and freedom.
Costs of Globalization If globalization has all these benefits, why are so many individuals and organizations so critical of it? The answer is complex. Just as some gain from globalization, others are hurt by it. From the perspective of its victims, globalization does not look nearly so attractive.
One of the costs of globalization is job insecurity. As businesses move manufacturing across national borders in search of cheaper labor, workers at home are laid off. Jobs in the domestic economy are lost as imports replace homemade goods and services. In the American South, for example, tens of thousands of jobs in the textile industry have been lost, as jobs have shifted to low-labor cost areas of the world, leaving whole communities
16 Allen Hammond, Which World? Scenarios for the 21st Century (Washington DC: Island Press, 1998), p. 30.
Final PDF to printer
80 Part One Business in Society
law43665_ch04_071-092.indd 80 11/15/18 08:10 AM
devastated. In the past, mainly manufacturing was affected by the shift of jobs abroad; more recently, clerical, white-collar, and professional jobs have also been “offshored.” Many customer service calls originating in the United States are now answered by opera- tors in the Philippines and India. The back-office operations of many banks—sorting and recording check transactions, for example—are done in India and China. Aircraft manu- facturers are using aeronautical specialists in Russia to design parts for new planes. Even when jobs are not actually relocated, wages may be driven down because companies facing foreign competition try to keep their costs in check. Much of the opposition to globaliza- tion in affluent nations comes from people who feel their own jobs, pay, and livelihoods threatened by workers abroad who can do their work more cheaply.
Some evidence suggests a countertrend, as some companies have moved produc- tion back to the United States, in part to gain greater control over the supply chain. Wages have increased in China and many other developing nations, while wages in the United States have stagnated. Productivity is considerably higher in the United States than in China. And, some small businesses have found that solving everyday production problems with a contractor halfway around the globe can be daunting. “If we have an issue in manufacturing, in America we can walk down to the plant floor,” explained the founder of a business called LightSaver Technologies that made emer- gency lights for homeowners. “We can’t do that in China.” The company had recently relocated production from China to a facility near its headquarters in California.17
Not only workers in rich countries are affected by globalization. When workers in Indo- nesia began organizing for higher wages, Nike Corporation moved much of its production to Vietnam and China. Many Indonesian workers lost their jobs. Some call this feature of global capitalism the race to the bottom.
Another cost of globalization is that environmental and labor standards may be weak- ened as companies seek manufacturing sites where regulations are most lax. Just as com- panies may desire locations offering the cheapest labor, they may also search for locations with few environmental protections; weak regulation of occupational health and safety, hours of work, and discrimination; and few rights for unions. A related concern is that the World Trade Organization’s most favored nation rules make it difficult for individual nations to adopt policies promoting environmental or social objectives, if these have the effect of discriminating against products from another country.
For example, the United States banned the importation of Indonesian clove ciga- rettes, saying that the sweet-flavored cigarettes attracted younger smokers, drawing them into nicotine addiction and violating U.S. tobacco control laws. Indonesia brought a complaint before the WTO’s dispute settlement body. The WTO ruled in Indonesia’s favor, saying that because the United States permitted the sale of another flavored cigarette—menthols—it had acted in a discriminatory way by excluding Indonesian clove cigarettes. The dispute was finally settled after Indonesia agreed to the ban in exchange for other concessions from the United States.18
Critics of globalization say that incidents such as this one show that free trade rules are being used to restrict the right of sovereign nations to make their own laws setting health or environmental standards for imported products.
17 “Small U.S. Manufacturers Give Up on ‘Made in China,’” Bloomberg Businessweek, June 21, 2012. 18 “U.S., Indonesia Settle Fight over Clove Cigarettes,” The Hill, October 3, 2014. Details on this and other cases before the WTO’s dispute settlement body are available at www.wto.org.
Final PDF to printer
Chapter 4 Business in a Globalized World 81
law43665_ch04_071-092.indd 81 11/15/18 08:10 AM
Another cost of globalization is that it erodes regional and national cultures and under- mines cultural, linguistic, and religious diversity. In other words, global commerce makes us all very much the same. Is a world in which everyone is drinking Coke, watching Holly- wood movies, texting on an iPhone, and wearing Gap jeans a world we want, or not? Some have argued that the deep anti-Americanism present in many parts of the world reflects resentment at the penetration of the values of dominant U.S.–based multinational corpora- tions into every corner of the world.
With respect to the point that globalization promotes democracy, critics charge that market capitalism is just as compatible with despotism as it is with freedom. Indeed, mul- tinational corporations are often drawn to nations that are governed by antidemocratic or military regimes, because they are so effective at controlling labor and blocking efforts to protect the environment. For example, Unocal’s joint-venture collaboration to build a gas pipeline with the military government of Myanmar (Burma), a notorious abuser of human rights, may have brought significant financial benefits to the petroleum company.
Figure 4.2 summarizes the major points in the discussion about the costs and benefits of globalization.
This discussion raises the very real possibility that globalization may benefit the world economy as a whole, while simultaneously hurting many individuals and localities. An ongoing challenge to business, government, and society is to find ways to extend the bene- fits of globalization to all, while mitigating its adverse effects.19
Doing Business in a Diverse World
Doing business in other nations is much more than a step across a geographical boundary; it is a step into different social, political, cultural, and economic realities. As shown in Chapters 1, 2, and 3, even businesses operating in one community or one nation cannot function successfully without considering a wide variety of stakeholder needs and inter- ests. When companies operate globally, the number of stakeholders to be considered in decision making, and the diversity of their interests, increases dramatically.
19 For arguments for and against globalization, and on strategies to make the world’s governing institutions more effective, see Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: W.W. Norton, 2011); Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press, 2007); and Joseph E. Stiglitz, Mak- ing Globalization Work (New York: W.W. Norton, 2007).
Benefits of Globalization Costs of Globalization
Increases economic productivity. Causes job insecurity.
Reduces prices for consumers. Weakens environmental and labor standards.
Gives developing countries access to foreign investment funds to support economic development.
Prevents individual nations from adopting policies promoting environmental or social objectives, if these discriminate against products from another country.
Transfers technology. Erodes regional and national cultures and undermines cultural, linguistic, and religious diversity.
Spreads democracy and freedom, and reduces military conflict.
Is compatible with despotism.
FIGURE 4.2 Benefits and Costs of Globalization
Final PDF to printer
82 Part One Business in Society
law43665_ch04_071-092.indd 82 11/15/18 08:10 AM
Comparative Political and Economic Systems The many nations of the world differ greatly in their political, social, and economic sys- tems. One important dimension of this diversity is how power is exercised, that is, the degree to which a nation’s people may freely exercise their democratic rights. Democracy refers broadly to the presence of political freedom. Arthur Lewis, a Nobel laureate in eco- nomics, described it this way: “The primary meaning of democracy is that all who are affected by a decision should have the right to participate in making that decision, either directly or through chosen representatives.” According to the United Nations, democracy has four defining features:20
∙ Fair elections, in which citizens may freely choose their leaders from among candidates representing more than one political party.
∙ An independent media, in which journalists and citizens may express their political views without fear of censorship or punishment.
∙ Separation of powers among the executive, legislative, and judicial branches of government. ∙ An open society where citizens have the right to form their own independent organiza-
tions to pursue social, religious, and cultural goals.
During much of the twentieth century, democratic rights spread for the first time to many nations around the world. Consider, for example, that at the beginning of the 20th century no country in the world had universal suffrage (all citizens can vote); today, a majority of countries do. The collapse of communist party rule in the former Soviet Union and its satellites in eastern and central Europe in the early 1990s was followed by the first open elections ever in these countries. These changes led some observers to call the end of the 20th century the “third wave of democracy.”
Somewhere after the turn of the century, however, the trend toward democratization seemed to stall. According to a study by Freedom House, a nongovernmental research organization, 2017 marked the eleventh consecutive year in which more of the world’s nations experienced declines in political rights and civil liberties than experienced improve- ments. In some countries that already lacked freedom, authoritarian leaders further consol- idated their power. For example, in China, the regime placed further restrictions on dissent within the ruling Communist Party; and in Russia, the regime intimidated opponents and repressed free elections. Perhaps more surprisingly, formerly free countries suffered set- backs. In Venezuela, which had been democratic for more than 40 years, the elected presi- dent stripped the legislature of power, killed demonstrators, and imprisoned political opponents, effectively ushering in authoritarian rule. Declines in democratic rights also occurred in Turkey, Ethiopia, Hungary, and other nations. In all, Freedom House concluded that in 2017 one quarter of the world’s nations were “not free,” when rated on their political rights and civil liberties; an additional 30 percent were only “partly free.”21
The degree to which human rights are protected also varies widely across nations. Human rights, further discussed in Chapters 5 and 17, refer broadly to the rights and priv- ileges accorded to all people, simply by virtue of being human, for example, the rights to a decent standard of living, free speech, religious freedom, and due process of law, among others. Fundamental human rights have been codified in various international agreements,
20 United Nations Development Programme, Human Development Report 2000 (New York: Oxford University Press, 2000), Ch. 3, “Inclusive Democracy Secures Rights,” pp. 56–71. The quotation from Arthur Lewis appears on p. 56. 21 Freedom House, “Freedom in the World 2017: Populists and Autocrats, the Dual Threat to Global Democracy,” at http:// freedomhouse.org. See also: “How Stable Are Democracies? ‘Warning Signs Are Flashing Red,’” The New York Times, November 29, 2016.
Final PDF to printer
Chapter 4 Business in a Globalized World 83
law43665_ch04_071-092.indd 83 11/15/18 08:10 AM
the most important of which is the Universal Declaration of Human Rights of 1948.22 The second half of the 20th century was a period of great advances in human rights in many regions, and over half of the world’s nations have now ratified all of the United Nations’ human right covenants. Nonetheless, many human rights problems remain. Consider the following examples:
∙ More than 5 million children die each year before their fifth birthday. Most of these deaths are due to diseases such as pneumonia, diarrhea, and malaria, which are prevent- able with proper vaccinations, nutrition, and basic medical care. Although this number has fallen by more than half since 1990, it is still tragically high.23
∙ Gross violations of human rights have not been eliminated. Genocide, mass murder of innocent civilians, has occurred all too recently in Syria, Rwanda and Burundi, Iraq, Bosnia and Herzegovina, Democratic Republic of the Congo, Somalia, East Timor, and Sudan.
∙ The International Labor Organization estimated in 2017 that 25 million people world- wide were victims of forced labor, trafficking, and human slavery. Their labor generated annual profits of $150 billion. (The topic of forced labor is further explored in Chapter 17.) More than half of them were women and girls, who had been forced into prostitution or domestic work.24 The efforts of a major hotel chain, The Carlson Companies, to prevent the use of their facilities for prostitution or child trafficking is described in a case at the end of this book.
∙ Minority groups and indigenous peoples in many nations still lack basic political and social rights. In Nepal, the life expectancy of “untouchables,” the lowest caste, is fully 15 years less than that of Brahmins, the highest caste.
The absence of key human rights in many nations remains a significant issue for com- panies transacting business there.
Another dimension of difference among nations today is how economic assets are con- trolled, that is, the degree of economic freedom. On one end of the continuum are societies in which assets are privately owned and exchanged in a free and open market. Such free enterprise systems are based on the principle of voluntary association and exchange. In such a system, people with goods and services to sell take them voluntarily to the market- place, seeking to exchange them for money or other goods or services. Political and eco- nomic freedoms are related: as people gain more control over government decisions they often press for greater economic opportunity; open markets may give people the resources to participate effectively in politics. But this is not always the case. The special situation of China with respect to political and economic freedom is explored in Exhibit 4.C.
At the other end of the continuum are systems of central state control, in which eco- nomic power is concentrated in the hands of government officials and political authorities. The central government owns the property that is used to produce goods and services. Pri- vate ownership may be forbidden, or greatly restricted, and most private markets are ille- gal. Very few societies today operate based on strict central state control of the economy. More common is a system of mixed free enterprise and central state control in which some industries are state controlled, and others are privately owned. For example, in Nigeria, the
22 For more information on the Universal Declaration of Human Rights and other United Nations agreements on human rights, see the website of the U.N. High Commissioner for Human Rights at www.unhchr.org. 23 United Nations Children’s Fund (UNICEF) data on child mortality are available online at https://data.unicef.org. 24 ILO and Walk Free Foundation, Global Estimates of Modern Slavery: Forced Labour and Forced Marriage (2017); and ILO, Profits and Poverty: The Economics of Forced Labour (2014).
Final PDF to printer
84
law43665_ch04_071-092.indd 84 11/15/18 08:10 AM
oil industry is controlled by a government-owned enterprise that operates in partnership with foreign companies such as Shell and Chevron, but many other industries are privately controlled. In the social democracies of Scandinavia, such as Norway, the government operates some industries but not others. In the United States, the government temporarily took partial ownership in some banks, including Citigroup, as they faltered during the financial crisis.
The Heritage Foundation, a conservative think tank, has scored the nations of the world according to an index of economic freedom defined as “the fundamental rights of every human being to control his or her own labor and property.” In eco- nomically free societies, governments “refrain from coercion or restraint of liberty beyond the extent necessary to protect and maintain liberty itself.” Among the freest nations in 2018, by this measure, were Hong Kong, Singapore, and Canada; among the most repressed were Iran, Venezuela, and—the least free in the world—North Korea. The United States ranked 48th out of 183 countries.25
Global Inequality and the Bottom of the Pyramid Nations also differ greatly in their overall levels of economic and social development. Ours is a world of great inequalities. Nations themselves differ in economic development, and individual wealth and income varies widely within and among nations.
Inequality may be measured in two ways: by wealth and income. Wealth refers to assets that a person accumulates and he or she owns at a point in time.
Levels of wealth can be expressed as a pyramid, as shown in Figure 4.3. Most of the world’s
25 Available at www.heritage.org.
China: A Case of Authoritarian Capitalism?
Democracy, a political system in which citizens choose their own leaders and may openly express their ideas, and capitalism, an economic system in which the means of creating wealth are privately owned and con- trolled, have historically often developed in tandem. The two are not always coupled, however. During the early years of the 20th century, for example, capitalism coexisted with nondemocratic, fascist governments in Germany, Spain, and Japan. More recently, scholars have coined the term “authoritarian capitalism” to refer to modern states that combine elements of a market economy with political control by nonelected elites. A prime example is China. In its drive for economic development, the Chinese government has granted consid- erable freedom to private individuals to own property, invest, and innovate. The result has been very rapid growth in much of the country over the past two decades. At the same time, the Chinese communist authori- ties have vigorously held onto political power and suppressed dissent. As further explored in Chapter 12, the Chinese government operates one of the most sophisticated systems of Internet censorship in the world, restricting its citizens’ ability to search using Google, connect with friends on Facebook, and access the websites of organizations out of favor with the authorities. It has also held onto ownership of some big companies, such as the China National Petroleum Corporation and China Mobile. In what direction will China and other authoritarian capitalist nations evolve in the future? “Some believe these countries could ultimately become liberal democracies through a combination of internal development, increasing affluence, and out- side influence,” commented the political scientist Azar Gat. “Alternatively, they may have enough weight to create a new nondemocratic but economically advanced Second World.”
Sources: “The Rise of State Capitalism,” The Economist, January 21, 2012; Azar Gat, “The Return of the Authoritarian Capitalists,” International Herald Tribune, June 14, 2007; and “The Return of Authoritarian Great Powers,” Foreign Affairs, July/August 2007.
Exhibit 4.C
Final PDF to printer
Chapter 4 Business in a Globalized World 85
law43665_ch04_071-092.indd 85 11/15/18 08:10 AM
population—about 70 percent—are at the base, or bottom, of the pyramid, owning less than $10,000 worth of assets. They might own some work tools, household furnishings, and a bicycle or used car. More than 90 percent of adults in India and Africa (and only 20 percent of adults in developed countries) are at the bottom of the pyramid. About a fifth of the world’s people are considered middle class, with assets between $10,000 and $100,000. This group is present in all countries, but is growing especially fast in China (whose share of the world’s middle class has more than doubled since 2000). These individuals might have equity in a home and some retirement savings. High wealth individuals, with assets above $100,000, are concentrated in the United States, Europe, Japan, and Australia. At the top of the pyramid—just over one-half of 1 percent of the world’s population—are million- aires. Forty-three percent of these millionaires reside in the United States. Not reported separately in Figure 4.3 are so-called ultra-high net worth individuals, with wealth above $50 million. In 2017, about 148,000 people worldwide were in this category.26
Another way to conceptualize inequality is in terms of income—how much a person earns in a day or a year. Some theorists have defined the bottom of the pyramid as individ- uals who earn below $3,000 a year (or about $8 a day) in local purchasing power. By this measure, about 4 billion people globally are part of this segment.27
Whether measured by assets or income, historically, major multinational corporations have focused most of their attention on the top of the pyramid and, to some extent, the middle. But today, they are increasingly facing the challenge of bringing products, ser- vices, and employment to the many at the bottom of the pyramid. As the scholar C. K. Prahalad argued in his book The Fortune at the Bottom of the Pyramid, this group, while often overlooked, represents an incredible business opportunity. Although the poor earn
26 Data in this paragraph are drawn from Credit Suisse, Global Wealth Report 2017, “The Global Wealth Pyramid,” November 2017. 27 This definition was first proposed in World Resources Institute and International Finance Corporation, “The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid,” March 2007, www.wri.org.
FIGURE 4.3 The Global Wealth Pyramid
Source: Adapted from Credit Suisse, Global Wealth Report 2017, Figure 1, p. 21.
High Wealth 391 million people (8 percent)
$100,000 to $1 million
Middle Class 1,054 million people (21%)
Assets $10,000 to $100,000
Base of the Pyramid 3,474 million people (70%) Assets less than $10,000
Top of the
Pyramid 36 million
people (<1 percent) >$1 million
Final PDF to printer
86 Part One Business in Society
law43665_ch04_071-092.indd 86 11/15/18 08:10 AM
little individually, collectively they represent a vast market—and they often pay a “poverty premium,” creating an opening for companies able to deliver quality products at lower prices. The size of this market has been estimated at as high as $5 trillion.28 Many busi- nesses are learning that focusing on the bottom of the pyramid can foster social develop- ment and provide employment in underserved communities—and reap profits.
For example, S.C. Johnson, a global manufacturer of household cleaning supplies and other consumer chemicals, launched a business called WOW in rural Ghana. In partnership with the Gates Foundation and the Center for Sustainable Global Enter- prise, the company developed a packet of products specifically designed to help poor families prevent malaria, an illness spread by mosquitos. Insect repellants and cleaning products were provided in refillable containers and sold by subscription in small amounts to groups of homemakers, village by village. “Since our initial launch of WOW, we’ve learned so much about what consumers in Ghana want and how to construct a sustainable business model in the process,” said the company’s vice president of international markets marketing.29
One product that people in poor countries often desperately need is loans with which to operate or expand their farms or small businesses. Commercial banks have historically been reluctant to make small loans to people with little or no collateral. In response to this need, a new system has emerged called microfinance. This occurs when financial organi- zations provide loans to low-income clients or solidarity lending groups (a community of borrowers) who traditionally lack access to banking or related services.
In Indonesia, a midsized bank called BTPN grew rapidly after it decided in 2008 to expand into microloans to what its executives called the “productive poor.” BTPN set up numerous small branches in rural areas and equipped staff with portable devices that could scan fingerprints, to facilitate doing business with illiterate cus- tomers. Typical loans were for $4,000 or less, with a term of a year or two, made to traders and small shopkeepers. As the economy rebounded from the global finan- cial crisis, many entrepreneurs were eager to grow their businesses. BTPN’s model benefited both these customers and the bank, which by 2011 had become one of the most profitable in Indonesia.30
One of the most recognized microfinance institutions is the Grameen Bank in Bangla- desh. Grameen Bank has had amazing results; by 2018, it had made 1.7 million micro- loans, helping nearly 10 million people. Grameen Foundation and its affiliates and partners have spread this approach to millions more across Asia, Africa, and Latin America.31
Collaborative Partnerships for Global Problem Solving
As the preceding section suggested, doing business in a diverse world is exceptionally challenging for businesses. One solution to the challenging questions facing transnational
28 C.K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia: Wharton School Publishing, 2004). See also C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy + Business, No. 26, 2002. 29 “SC Johnson Expands WOW Business Concept in Ghana,” press release, October 8, 2014, and “Reality Check at the Bottom of the Pyramid,” Harvard Business Review, June 2012. 30 Gardner Bell, Ryan Nelson, and Carl Zeithaml, “BTPN (A): Banking for the Bottom of the Pyramid in Indonesia,” William Davidson Institute of the University of Michigan, January 26, 2015; and The Economist, “Rich Pickings: Microlending Has Helped Make BTPN One of Asia’s Most Profitable Banks,” April 20, 2011. 31 Data available at www.grameen.com and www.grameenfoundation.org.
Final PDF to printer
Chapter 4 Business in a Globalized World 87
law43665_ch04_071-092.indd 87 11/15/18 08:10 AM
corporations is to approach them collectively, through a collaborative process. An emerg- ing trend is the development of collaborative, multisector partnerships focused on specific social issues or problems in the global economy. These partnerships have been termed global action networks (GANs).32 This final section of Chapter 4 describes this approach.
A Three-Sector World The term sector refers to broad divisions of a whole. In this context, it refers to major parts or spheres of society, such as business (the private sector), government (the public sec- tor), and civil society. Civil society comprises nonprofit, educational, religious, community, family, and interest-group organizations; that is, social organizations that do not have a commercial or governmental purpose.
The process of globalization has spurred development of civil society. In recent decades, the world has witnessed the creation and growth of large numbers of nongovernmental organizations (NGOs) concerned with such issues as environmental risk, labor practices, worker rights, community development, and human rights. (NGOs are also called civil society organizations or civil sector organizations.) The number of NGOs accredited by the United Nations has soared in recent years, rising from 1,000 in 1996 to more than 4,500 in 2016. This figure counts just major organizations.33 Worldwide, the total number of international NGOs is estimated to be around 55,000.34 (Many millions more NGOs operate regionally or locally.)
Experts attribute the growth of NGOs to several factors, including the new architec- ture of global economic and political relationships. As the Cold War has ended, with democratic governments replacing dictatorships, greater openness has emerged in many societies. More people, with more views, are free to express their pleasure or displeasure with government, business, or one another. NGOs form around specific issues or broad concerns (environment, human rights) and become voices that must be considered in the public policy debates that ensue.
Each of the three major sectors that participate in global action networks—business, government, and civil society—has distinctive resources and competencies, as well as weaknesses. For example, businesses have access to capital, specialized technical knowl- edge, networks of commercial relationships, and the management skills to get projects completed on time and on budget. On the other hand, the short-term orientation of many businesses may lead them to disregard the long-term impacts of their actions on others. For their part, government agencies have knowledge of public policy, an ability to enforce rules, and revenue from taxation, but are often inflexible, slow to mobilize, and poorly coordinated. Finally, NGOs often enjoy strong community knowledge, volunteer assets, and inspirational leaders, but may lack financial resources and technical skill and may suffer from a narrow, parochial focus.35 One model highlighting various attributes of the business, government, and civil society sectors is presented in Figure 4.4.
Many businesses have realized that these differences across sectors can be a resource to be exploited. In this view, global action networks—alliances among organizations from the
32 Steve Waddell, Global Action Networks: Creating Our Future Together (New York: Palgrave Macmillan, 2011). 33 Data available at http://csonet.org/. 34 Global Civil Society 2012 (London: Palgrave Macmillan, 2012). 35 This paragraph draws on Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collabo- rations,” Journal of Corporate Citizenship, Autumn 2002, pp. 43–56.
Final PDF to printer
88 Part One Business in Society
law43665_ch04_071-092.indd 88 11/15/18 08:10 AM
three sectors—can draw on the unique capabilities of each and overcome specific weak- nesses that each has.
One example of a global action network was the Kimberley Process, an initiative to end the trade in conflict diamonds—gemstones that had been mined or stolen by rebels fighting internationally recognized governments. The problem was that com- batants in civil wars in Africa had seized control of diamond mines in Sierra Leone, Angola, and the Congo, and were selling uncut diamonds to fund their operations. Concerned that the image of diamonds as a symbol of romance would be tarnished, the World Diamond Congress and the international diamond company DeBeers joined forces with the governments of nations with legitimate diamond industries and NGOs campaigning to end civil violence. Together, these parties developed the Kimberley Process, a system for tracking diamonds all the way from the mine to the jewelry shop, so that consumers could be assured that their gem was “conflict-free.”
In this case, although the interests of the parties were somewhat different, they were each able to bring their distinctive capabilities to bear to accomplish a common objec- tive. A similar multiparty effort to ban conflict minerals—ones mined in war-torn areas of the Congo—is profiled in the discussion case at the end of this chapter. Other appli- cations of the principle of cross-sector networks and collaborations are explored in Chapters 10 and 17.
The process of globalization presents today’s business leaders with both great promise and great challenge. Despite periodic global economic downturns and the ever-present threat of war and terrorism, the world’s economy continues to become more integrated and interdependent. Multinational corporations, with their financial assets and technical and managerial skills, have a great contribution to make to human betterment. Yet, they must operate in a world of great diversity, and in which their presence is often distrusted or feared. Often, they must confront situations in which political and economic freedoms are lacking and human rights are routinely violated. The challenge facing forward-looking companies today is how to work collaboratively with stakeholders to promote social and economic justice, while still achieving strong bottom-line results.
Business Government Civil Society
Organizational form For-profit Governmental Nonprofit
Goods produced Private Public Group
Primary control agent Owners Voters/rulers Communities
Primary power form Money Laws, police, fines Traditions, values
Primary goals Wealth creation Societal order Expression of values
Assessment frame Profitability Legality Justice
Resources Capital assets, technical knowledge, production skills
Tax revenue, policy knowledge, regulatory and enforcement power
Community knowledge, inspirational leadership
Weaknesses Short-term focus, lack of concern for external impacts
Bureaucratic, slow-moving, poorly coordinated internally
Amateurish, lack of financial resources, parochial perspective
FIGURE 4.4 Distinctive Attributes of the Three Major Sectors
Source: Adapted from Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collaborations,” Journal of Corporate Citizenship, Autumn 2002, pp. 43–56, Tables 1 and 2.
Final PDF to printer
Chapter 4 Business in a Globalized World 89
law43665_ch04_071-092.indd 89 11/15/18 08:10 AM
∙ Globalization refers to the increasing movement of goods, services, capital, and labor across national borders. Firms can enter and compete in the global marketplace by exporting products and services; locating operations in another country; or buying raw materials, components, or supplies from sellers abroad.
∙ The process of globalization is driven by technological innovation, improvements in transportation, the rise of major multinational enterprises, and social and political reforms.
∙ Globalization brings both benefits and costs. On one hand, it has the potential to pull nations out of poverty, spread innovation, and reduce prices for consumers. On the other hand, it may also produce job loss, reduce environmental and labor standards, and erode national cultures. An ongoing challenge is to extend the benefits of globalization to all, while mitigating its adverse effects.
∙ Multinational enterprises operate in nations that vary greatly in their political, social, and economic systems. They face the challenge of deciding how to do business in other nations, while remaining true to their values.
∙ In a world of great inequalities of wealth and income, businesses are making progress in understanding how to serve the poor to aid social development while earning a profit.
∙ Businesses can work with governments and civil society organizations around the world in collaborative partnerships that draw on the unique capabilities of each to address common problems.
Summary
Internet Resources
www.wto.org World Trade Organization www.imf.org International Monetary Fund www.worldbank.org World Bank www.ifg.org International Forum on Globalization www.globalpolicy.org Global Policy Forum www.weforum.org The World Economic Forum www.un.org/en/sections/resources-different- audiences/civil-societyx United Nations and Civil Society
Key Terms multinational enterprise (MNE), 73 nongovernmental organizations (NGOs), 87 race to the bottom, 80 tariff, 77 World Bank (WB), 75 World Trade Organization (WTO), 76
anti-Americanism, 81 bottom of the pyramid, 85 central state control, 83 civil society, 87 debt relief, 76 democracy, 82 foreign direct investment (FDI), 74 free enterprise system, 83
global action network (GAN), 87 globalization, 72 international financial and trade institution (IFTI), 75 International Monetary Fund (IMF), 76 microfinance, 86
Final PDF to printer
90 Part One Business in Society
law43665_ch04_071-092.indd 90 11/15/18 08:10 AM
Discussion Case: Intel and Conflict Minerals In 2017, Intel joined more than two dozen other companies, nongovernmental organiza- tions, and government entities in launching the second phase of the Public-Private Alliance for Responsible Minerals Trade (PPA). The company had been an early leader in the effort to bring social responsibility to its minerals supply chain: in 2014, Intel had become the first electronics firm to announce that its products would be certified as conflict-free. This meant they would contain no conflict minerals—tantalum, tungsten, tin, or gold sourced from mines that financed horrific civil conflict in the Democratic Republic of the Congo (DRC) and nearby countries. “The solution isn’t easy,” Intel’s CEO had noted at the time. “But nothing worthwhile ever is.”
Of the four conflict minerals, the one most important to Intel and other electronics com- panies is tantalum. Columbite-tantalite, commonly known as “coltan,” is a black metallic ore. When refined, it produces tantalum, which is used to regulate electricity in portable con- sumer electronics, such as smartphones, laptops, play stations, and digital cameras. The larg- est share of coltan comes from Africa; other sources include Australia, Brazil, and Canada.
In the late 2000s, a common goal to ban conflict minerals emerged among members of an oddly matched group—the electronics industry, the United Nations, governments, and human rights organizations. Their efforts led, ultimately, to a set of international guidelines, national laws, and voluntary initiatives whose goal was to keep the electronics industry and its customers from inadvertently supporting killing, sexual assault, and labor abuses.
The Democratic Republic of the Congo is a nation of 79 million people in central Africa, covering a vast region the size of Western Europe. Since the late 1990s, the DRC has been the site of a brutal regional conflict, in which armed militias, including some from neighboring states, have fought for control. Despite the presence of United Nations troops, as many as 5 million people have died—the most in any conflict since World War II. Warring groups have used sexual assault as a weapon to control the population; an estimated 200,000 Congolese women and girls have been raped, often in front of their husbands and families.
The United Nations and several NGOs reported that militias had systematically looted coltan and other minerals from eastern Congo, using the profits to fund their operations. According to the human rights group Global Witness:
In the course of plundering these minerals, rebel groups and the Congolese army have used forced labor (often in extremely harsh and dangerous conditions), carried out systematic extortion, and imposed illegal “taxes” on the civilian population. They have also used violence and intimidation against civilians who attempt to resist working for them or handing over the minerals they produce.
Said a representative of The Enough Project, another human rights group, “In eastern Congo, you see child miners [with] no health or safety standards. Minerals are dug by hand, traded in sacks, smuggled across borders.”
Once mined—whether in the Congo or elsewhere—raw coltan made its way through a complex, multistep global supply chain. Local traders sold to regional traders, who shipped the ore to processing companies such as H.C. Starck (Germany), Cabot Corporation (United States), and Ningxia (China). Their smelters produced refined tantalum powder, which was then sold to parts makers such as Kemet (United States), Epcos (Germany), and Flextronics (Singapore). They sold, in turn, to original equipment manufacturers such as Dell (United States), Sony (Japan), and Nokia (Finland).
By the time coltan reached the end of this convoluted supply chain, determining its source was nearly impossible. Steve Jobs, then the CEO of Apple, commented in an e-mail in 2010, “We require all of our suppliers to certify in writing that they use conflict-free
Final PDF to printer
Chapter 4 Business in a Globalized World 91
law43665_ch04_071-092.indd 91 11/15/18 08:10 AM
materials. But honestly there is no way for them to be sure. Until someone invents a way to chemically trace minerals from the source mine, it’s a very difficult problem.”
As public awareness of atrocities in the Congo grew, governments began to act. The Organization for Economic Cooperation and Development, an alliance of mostly European nations, issued guidance for companies that wished to responsibly source min- erals. In 2010, the U.S. Congress passed the Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act, and further discussed in Chapters 7 and 13). This law included a provision, Section 1502, which required companies to disclose whether tan- talum, tin, tungsten, and gold used in their products had come from the DRC or adjoining countries. Although the Securities and Exchange Commission (SEC) announced in 2017 that it no longer intended to enforce this provision, the matter remained in legal limbo, and many firms continued to collect and disclose this information.
Along with governments, companies also acted. For its part, Intel sent teams to visit 107 different smelters and refiners in 23 countries, educating their partners about conflict minerals and collecting information about the origin of raw materials they processed. The company collaborated with other companies in the Electronics Industry Citizenship Coali- tion (EICC) to develop a Conflict-Free Smelter Assessment Program, a voluntary system in which an independent third-party auditor evaluated smelters and refiners and designated them as conflict-free. Minerals would be “bagged and tagged” and then tracked through each step of the supply chain. By 2017, this program had certified 247 smelters and refiners.
Intel and other companies in the coalition were particularly concerned that they remove from their products only conflict minerals, not minerals coming from legitimate mines in conflict areas. To this end, they worked with government agencies and civil society organi- zations, including the U.S. State Department and RESOLVE, an NGO working to map the conflict mineral supply chain, to form the Public-Private Alliance for Responsible Miner- als Trade. This multisector initiative worked to support responsible mines and to develop effective chain-of-custody programs in the Congo. Evidence suggested that these collab- orative efforts had enjoyed some success: by 2016, over three-quarters of the tantalum, tungsten, and tin mines in eastern Congo surveyed by the International Peace Information Service were found free of control by armed groups.
Sources: “Intel’s Efforts to Achieve a Conflict-Free Supply Chain,” White Paper, May 2017, www.intel.com; “Conflict Minerals Rule—Will It Stay or Will It Go?” May 11, 2017, www.conflictmineralslaw.com; The Enough Project, Demand the Supply: Ranking Consumer Electronics and Jewelry Retail Companies on Their Efforts to Develop Conflict-Free Minerals Supply Chains from Congo, November 2017, www.enoughproject.org; Peter Eichstaedt, Consuming the Congo (Chicago: Lawrence Hill, 2011); and Michael Nest, Coltan (Cambridge, UK: Polity Press, 2011). More information on the Public-Private Alliance for Responsible Minerals Trade is available at www.resolv.org.
Discussion Questions
1. How do conflict minerals, and in particular, conflict coltan get their name? What groups benefited from the trade in conflict minerals? What groups were hurt by it?
2. Consider the three sectors discussed in this chapter (business, government, and civil society). What were the interests of each, with respect to conflict coltan, and in what ways did their interests converge?
3. Why was Intel unable to eliminate conflict minerals from its supply chain unilaterally, that is, without the help of others?
4. In what ways did Intel collaborate with other sectors (governments and civil society) in its efforts to eliminate conflict minerals from its products? What strengths and weak- nesses did each sector bring to the task?
5. What further steps could be taken by governments, NGOs, and companies to strengthen the process to exclude conflict minerals from the global supply chain?
Final PDF to printer
law43665_ch04_071-092.indd 92 11/15/18 08:10 AM
Final PDF to printer
P A R T T W O
law43665_ch05_093-114.indd 93 11/16/18 11:10 AM
Business and Ethics
Final PDF to printer
94
law43665_ch05_093-114.indd 94 11/16/18 11:10 AM
C H A P T E R F I V E
Ethics and Ethical Reasoning People who work in business frequently encounter and must deal with on-the-job ethical issues. Being ethical is important to the individual, the organization, and the global marketplace in today’s business climate. Managers and employees alike must learn how to recognize ethical dilemmas and know why they occur. In addition, they need to be aware of the role their own ethical character plays in their decision-making process, as well as the influence of the ethical character of others. Finally, managers and employees must be able to analyze the ethical problems they encounter at work to determine an ethical resolution to these dilemmas.
This Chapter Focuses on These Key Learning Objectives:
LO 5-1 Defining ethics and business ethics.
LO 5-2 Evaluating why businesses should be ethical.
LO 5-3 Knowing why ethical problems occur in business.
LO 5-4 Identifying managerial values and people’s spirituality as influences on ethical decision making.
LO 5-5 Understanding stages of moral reasoning.
LO 5-6 Analyzing ethical problems using generally accepted ethics theories.
LO 5-7 Understanding how moral intensity affects ethical decision-making.
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 95
law43665_ch05_093-114.indd 95 11/16/18 11:10 AM
Qualcomm, the U.S.–based multinational communication giant, was fined $853 million by a South Korean regulator for alleged antitrust violations, the high- est penalty ever imposed on any company operating in South Korea. The three-year investigation by the Korea Fair Trade Commission claimed that Qualcomm used its dominant market position as leverage in negotiations with mobile-phone makers to force them to accept unfair contractual terms. The commission stated that Qual- comm’s contracts were unfair because it required mobile-phone makers to purchase comprehensive wireless-technology licenses, including ones they would never use. The agreements also required these makers to provide their patents to Qualcomm free of charge.1
The former owner of the Peanut Corporation of America, Stewart Parnell, was sentenced to 28 years in prison when found guilty of multiple felony counts for conspiring to hide that his company’s products had salmonella contamination. Over a two-year period, nine people died and 700 customers became seriously ill from consuming the company’s food. Under Parnell’s direction, Peanut Corporation executives falsified lab test results on their products, explicitly stating that the food was safe to eat. In a shortsighted effort to save the company, Parnell caused injury or death to hundreds of people, violated customers’ right to safety, and breached their trust in the company. The severity and breadth of the effects of Parnell’s deci- sions contributed to his long prison sentence.2
Certainly, the actions taken by executives at Qualcomm and the Peanut Corporation were highly unethical. What does it mean for an action to be ethical or unethical? This chapter explains the meaning of ethics, explains why businesses and managers should be ethical, and identifies the different types of ethical problems that occur in business. It also presents several ethical decision-making frameworks and shows how decisions are influ- enced both by the core elements of an individual’s ethical character and the moral intensity of the dilemma. Then, Chapter 6 builds on this foundation with a discussion of how ethical performance in business can be improved by strengthening the organization’s culture and climate and by providing organizational safeguards, such as policies, training, and report- ing procedures.
The Meaning of Ethics
Ethics is a conception of right and wrong conduct. It tells us whether our behavior is moral or immoral and deals with fundamental human relationships—how we think and behave toward others and how we want them to think and behave toward us. Ethical principles are guides to moral behavior. For example, in most societies lying, stealing, deceiving, and harming others are considered to be unethical and immoral. Honesty, keeping promises, helping others, and respecting the rights of others are considered to be ethically and mor- ally desirable behavior. Such basic rules of behavior are essential for the preservation and continuation of organized life everywhere.
These notions of right and wrong come from many sources. Religious beliefs are a major source of ethical guidance for many. The family institution—whether two parents, a single parent, or a large family with brothers and sisters, grandparents, aunts, cousins, and
1 “Qualcomm Faces $853 Million Fine from South Korea over Alleged Antitrust Violations,” The Wall Street Journal, December 28, 2016, www.wsj.com. 2 “Ex-Peanut Executive Sentenced to 28 years in Prison for Salmonella Coverup,” Wall Street Journal, September 21, 2015, www.wsj.com.
Final PDF to printer
96 Part Two Business and Ethics
law43665_ch05_093-114.indd 96 11/16/18 11:10 AM
other kin—imparts a sense of right and wrong to children as they grow up. Schools and schoolteachers, neighbors and neighborhoods, friends, admired role models, ethnic groups, and the ever-present electronic media and the Internet influence what we believe to be right and wrong in life. The totality of these learning experiences creates in each person a con- cept of ethics, morality, and socially acceptable behavior. This core of ethical beliefs then acts as a moral compass that helps guide a person when ethical puzzles arise.
Ethical ideas are present in all societies, organizations, and individual persons, although they may vary greatly from one to another. Your ethics may not be the same as your neigh- bor’s; one particular religion’s notion of morality may not be identical to another’s; or what is considered ethical in one society may be forbidden in another society. These differences raise the important and controversial issue of ethical relativism, which holds that ethical principles should be defined by various periods of time in history, a society’s traditions, the special circumstances of the moment, or personal opinion. In this view, the meaning given to ethics would be relative to time, place, circumstance, and the person involved. In that case, the logical conclusion would be that there would be no universal ethical stan- dards on which people around the globe could agree. However, for companies conducting business in several societies at one time, whether or not ethics is aligned can be vitally important; we discuss these issues in more detail in Chapter 6.
For the moment, however, we can say that despite the diverse systems of ethics that exist within our own society and throughout the world, all people everywhere do depend on ethical systems to tell them whether their actions are right or wrong, moral or immoral, approved or disapproved. Ethics, in this basic sense, is a universally common human con- dition, found everywhere.
Are ethics the same as laws? In other words, can we determine what is right or moral by asking what is legal? Some people have argued that the best way to assure ethical business conduct is to insist that business firms obey society’s laws. However, laws and ethics are not quite the same. Laws are society’s formal written rules about what constitutes right and wrong conduct in various spheres of life. For example, hydraulic fracturing in oil drilling operations is legal in many communities but some argue it is unethical due to its potential for destroying the environment. While it may be illegal for environmentalists to attempt to stop work operations by blockading a drilling location, they believe they are acting ethi- cally by protecting the environment.
Laws are similar to ethics because both define proper and improper behavior. Yet, eth- ical concepts—like the people who believe in them—are more complex than written rules of law. As we see in the Qualcomm and Peanut Corporation examples at the beginning of this chapter, both cases involved legal violations. However, they also involved ethical issues concerning the proper treatment of organizational stakeholders. Ethics deal with human dilemmas that frequently go beyond the formal language of law and the meanings given to legal rules.
What Is Business Ethics? Business ethics is the application of general ethical ideas to business behavior. Business ethics is not a special set of ethical ideas different from ethics in general and applicable only to business. If dishonesty is considered to be unethical and immoral, then anyone in busi- ness who is dishonest with stakeholders—employees, customers, suppliers, shareholders or competitors—is acting unethically and immorally. If protecting others from harm is con- sidered to be ethical, then a company that recalls a dangerously defective product is acting in an ethical way. To be considered ethical, business must draw its ideas about what is proper behavior from the same sources as everyone else in society. Business should not try
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 97
law43665_ch05_093-114.indd 97 11/16/18 11:10 AM
to make up its own definitions of what is right and wrong. Employees and managers may believe at times that they are permitted or even encouraged to apply special or weaker eth- ical rules to business situations, but society does not condone or permit such an exception.
How common are such exceptions? The Ethics and Compliance Initiative has tracked observations of unethical behavior in the workplace since 2000. Its reports show that consis- tently about half of all employees’ surveyed report observing unethical practices at work, year after year. In 2017, employees stated that lying to employees and external stakeholders was the most common unethical practice they observed (26%), followed by abusive behavior (21%), Internet abuse (16%), and conflicts of interest and health violations (each at 15%). This report implies that pressure on managers to act unethically remains a serious problem for businesses. The Institute for Leadership and Management reported that 63 percent of managers said they were expected to behave unethically at some point in their careers.3
Why Should Business Be Ethical? Why should business be ethical? What prevents a business firm from piling up as much profit as it can, in any way it can, regardless of ethical considerations? Figure 5.1 lists the major reasons why business firms should promote a high level of ethical behavior.
Enhance Business Performance
Some people argue that one reason for businesses to be ethical is that it enhances the firm’s performance, or simply: ethics pays.
Empirical studies have supported the economic benefits of being perceived as an ethical company. Ethisphere also found a strong link between ethics and financial performance. Companies that were on Ethisphere’s 2017 list of the World’s Most Ethical Companies outperform the Standard and Poor’s 500 by 3.3 percent with five-year annual returns exceeding 16 percent.4 This positive relationship between ethics and profits can be seen in Figure 5.2.
Businesses increasingly are recognizing that ethics pays and are encouraging ethi- cal behavior by their employees. Business executives recognize that ethical actions can directly affect their organization’s bottom line.
Costs to business of unethical behavior go far beyond government fines. News reports of a company’s ethical or unethical behavior has been shown to affect its share price in either direction, respectively. According to the Ethical Investment Research Service, such reports influence a firm’s share price between 0.5 percent and 3 percent.5
3 See the Ethics Resource Center’s studies, such as “The 2013 National Business Ethics Survey of the U.S. Workforce,” Ethics Resource Center, Washington, D.C., 2014, and “Three Out of Five Managers Pressured to Behave Unethically at Work, According to New Research,” Institute of Leadership and Management, June 10, 2013, press release. 4 “A Clear Correlation: Ethical Companies Outperform,” Ethisphere, June 9, 2017, insights.ethisphere.com. 5 “How Do Ethics Affect the Financial Results of a Company?” Chron, n.d., smallbusiness.chron.com.
To enhance business performance.
To comply with legal requirements.
To prevent or minimize harm.
To meet demands of business stakeholders.
To promote personal morality.
FIGURE 5.1 Why Should Business Be Ethical?
Final PDF to printer
98 Part Two Business and Ethics
law43665_ch05_093-114.indd 98 11/16/18 11:10 AM
Companies with bad reputations face increased recruiting costs, especially when recruiting women and more experienced employees. According to a survey by Career Builder, 71 percent of United States workers claim they would not apply for a job at a com- pany with a bad reputation.6 By contrast, companies with good reputations find it easier to recruit desirable employees, enjoy lower costs to bring these candidates on board, and have greater retention among employees, according to a report by Alexander Mann Solutions, a leader of talent acquisition and management services.7
Comply with Legal Requirements
Doing business ethically is also often a legal requirement. Two legal requirements, in par- ticular, provide direction for companies interested in being more ethical in their business operations. Although they apply only to U.S.–based firms, these legal requirements also provide a model for firms that operate outside the United States.
The first is the U.S. Corporate Sentencing Guidelines, which provide a strong incentive for businesses to promote ethics at work.8 The sentencing guidelines come into play when a firm has been found guilty of criminal wrongdoing and is facing sentencing for the crim- inal act. To determine the sentencing, the judge computes a culpability (degree of blame) score using the guidelines, based on whether or not the company has:
1. Established standards and procedures to reduce criminal conduct. 2. Assigned high-level officer(s) responsibility for compliance. 3. Not assigned discretionary authority to “risky” individuals. 4. Effectively communicated standards and procedures through training.
6 “71 Percent of U.S. Workers Would Not Apply to a Company Experiencing Negative Publicity,” Career Builder, July 20, 2017, press.careerbuilder.com. 7 “The Cost of Bad Reputation,” Corporate Responsibility Magazine, October 2014. 8 For a thorough discussion of the U.S. Corporate Sentencing Guidelines, see Dan R. Dalton, Michael B. Metzger, and John W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-Up Call for Corporate America,” Academy of Management Executive, 1994, pp. 7–13; and Jillian Hewitt, “Fifty Shades of Gray: Sentencing Trends in Major White-Collar Cases,” The Yale Law Journal, Feb 2016, pp. 1018–71.
FIGURE 5.2 World’s Most Ethical Index versus S&P 500 and FTSE 100, 2006–2017
Source: The pre-2012 financial data was from www.ethisphere. com/2011-worlds-most- ethical-companies. Additional data collected from publicly available financial data sources.
S&P 500
WME Index FTSE 100
–20%
–10%
0%
10%
20%
30%
40%
50%
60%
70%
2006 2008 2010 2012 2014 2016
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 99
law43665_ch05_093-114.indd 99 11/16/18 11:10 AM
5. Taken reasonable steps to ensure compliance—monitor and audit systems, maintain and publicize reporting system.
6. Enforced standards and procedures through disciplinary mechanisms. 7. Following detection of offense, responded appropriately and prevented reoccurrence.
The U.S. Sentencing Commission reviewed and made important revisions to the Sen- tencing Guidelines in 2004 and each year from 2010 through 2016, yet the “seven steps” described above remain the blueprint for many businesses in designing their ethics and compliance program.9
Another legal requirement imposed upon U.S. businesses is the Sarbanes-Oxley Act of 2002 (often referred to as SOX).10 Born from the ethics scandals at Enron, WorldCom, Tyco, and others, this law seeks to ensure that firms maintain high ethical standards in how they conduct and monitor business operations. For example, the Sarbanes-Oxley Act requires executives to vouch for the accuracy of a firm’s financial reports and requires them to pay back bonuses based on earnings that are later proved fraudulent, called claw- back. The act also established strict rules for auditing firms.11
Fifteen years after its creation, some financial experts questioned if SOX was effective or not. Some pointed to the fact that the Act has not totally eliminated fraudulent financial reports since the Enron and Arthur Andersen debacles that gave rise to SOX in 2002. Other experts found, however, that many corporations had become more committed to enhancing their corporate culture, which better guaranteed that employees did the right thing, treated customers fairly, and did not take short cuts.12
Prevent or Minimize Harm
Another reason businesses and their employees should act ethically is to prevent harm to the general public and the corporation’s many stakeholders. One of the strongest ethical principles is stated very simply: Do no harm. The notorious examples of outright greed and other unethical behavior by managers in the financial community contributed in part to the long-lasting Great Recession in the United States and around the world. These manag- ers’ unethical actions were responsible for significant harm to many stakeholders in soci- ety. Investors’ portfolios dropped in value, retirees saw their nest eggs dwindle, hundreds of thousands of employees lost their jobs, and many small businesses failed. The “do no harm” principle encompasses more than economic consequences to stakeholders. The loss of salary, retirement funds, and investment value indeed generate significant economic harm to the employees and investors affected by organizational indiscretions. But, research has shown that psychological and emotional harm is likely to manifest as well.
According to a 2013 Gallup poll, the longer an individual is unemployed, the more likely that person is to experience poor psychological well-being.13 In a 2014 meta-analysis of studies examining the effects of unemployment on mental health,
9 For a discussion of the most recent sentencing guidelines amendments, see www.ussc.gov. 10 Banerjee Gaurango and Halil D. Kaya, “Short-Term and Long-Term Impact of Sarbanes-Oxley Act on Director Commitment and Composition of Corporate Board Committees,” Journal of Financial Management & Analysis, January–June 2017, pp. 1–11, and Matthew Hoag, Mark Myring and Joe Schroeder, “Has Sarbanes-Oxley Standardized Audit Quality? American Journal of Business, 2017, pp. 2–23. 11 See www.sarbanes-oxley-association.com/Sarbanes_Oxley_News. 12 “Law’s Big Weapon Sits Idle,” The Wall Street Journal, July 29, 2012, online.wsj.com and “Sarbanes-Oxley: 14 Years On,” International Banker, June 30, 2016, internationalbanker.com. 13 “In U.S., Depression Rates Higher for Long-Term Unemployed,” Gallup, 2013, news.gallup.com.
Final PDF to printer
100 Part Two Business and Ethics
law43665_ch05_093-114.indd 100 11/16/18 11:10 AM
it was found that an average of 34 percent of unemployed workers experienced psy- chological problems compared to 16 percent among employed workers.14
Another workplace behavior that exemplifies physical, economic, and psychological harm in organizations is sexual harassment. This issue has received increased attention in the press due to the allegations of sexual harassment and assault by executives and super- visors in many business corporations. Recently, the car-share company, Uber, for example, fired 20 employees for sexual harassment amidst a probe over 200 employees alleged to be involved in sexist behavior in the organization. The increased attention to the harms caused by sexual harassment focuses on not only the economic harm to the victims but also the physical and psychological damage to those harassed. This issue is discussed in greater detail in Chapter 16.15
Meet Demands of Business Stakeholders
Another reason businesses should be ethical is that stakeholders demand it. As discussed in Chapter 3, organizational stakeholders expect that companies will exhibit high levels of ethical performance and social responsibility. If employees view their company as ethical, they likely take greater pride in working there, have higher overall work satisfaction, and are willing to recommend the company as a good place to work. Scholars reviewing work in this field found that consumers who considered companies as being ethical or involved in socially responsible programs are more inclined to purchase these companies’ products.16
Promote Personal Morality
A final reason for promoting ethics in business is a personal one. Most people want to act in ways that are consistent with their own sense of right and wrong. It shows how a lack of personal morality by the firm’s leader can adversely affect employees. Being pressured to contradict their personal values creates emotional stress. Knowing that one works in a supportive ethical climate contributes to one’s sense of psychological security.
According to a 2015 report by the Institute for Business Ethics, British employees have a negative perception of corrupt business practices they saw at work–ranging from the misuse of company resources to cheating on travel expenses to nepotism. More than 50 percent of the employees surveyed considered these workplace prac- tices unacceptable. The survey found that since 2005, British workers had devel- oped attitudes increasingly critical of work actions that appeared to be unethical.17
The Ethics and Compliance Initiative, cited earlier in this chapter, stated in their 2017 report that “employees are reporting misconduct at the highest rates ever,” noting that 69 percent of employees responding to their survey indicated they had reported the mis- conduct they had observed at work. Some of the most common types of misconduct reported included misuse of confidential information, giving or accepting bribes or kick- backs, stealing company property, and sexual harassment.18
14 Paul Karsten and Klaus Moser, “Unemployment Impairs Mental Health: Meta-Analyses,” Journal of Vocational Behavior, 2014, pp. 264–82. 15 Michelle Paludi and Richard Barickman, “Definitions and Incidence of Academic and Workplace Sexual Harassment,” Aca- demic and Workplace Sexual Harassment: A Resource Manual (Albany, New York: SUNY Press. 1991), pp. 2–5, and “Uber Fires 20 Employees in Sexual Harassment Probe,” CNN Tech, June 6, 2017, money.cnn.com. 16 Omer Farooq, Marielle Payaud, Dwight Merunka, and Pierre Valette-Florence, “The Impact of Corporate Social Responsibil- ity on Organizational Commitment: Exploring Multiple Mediation Mechanisms,” Journal of Business Ethics, 2014, pp. 563–80. 17 “Surveys on Business Ethics, 2017,” Institute for Business Ethics, February 8, 2018, www.ibe.org.uk. 18 Ibid., “The State of Ethics and Compliance in the Workplace, 2018, p. 7.
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 101
law43665_ch05_093-114.indd 101 11/16/18 11:10 AM
Why Ethical Problems Occur in Business
If businesses have so many reasons to be ethical, why do ethical problems occur? Although not necessarily common or universal, ethical problems occur frequently in business. Find- ing out what causes them is one step toward minimizing their impact on business opera- tions and on the people affected. Some of the main reasons are summarized in Figure 5.3 and are discussed next.
Personal Gain and Selfish Interest Desire for personal gain, or even greed, causes some ethics problems. Businesses sometimes employ people whose personal values are less than desirable, who will put their own welfare ahead of all others, regardless of the harm done to other employees, the company, or society.
A manager or employee who puts his or her own self-interest above all other consider- ations is called an ethical egoist.19 Self-promotion, a focus on self-interest to the point of selfishness, and greed are traits commonly observed in an ethical egoist. The ethical egoist tends to ignore ethical principles accepted by others, believing that ethical rules are made for others. Altruism—acting for the benefit of others when self-interest is sacrificed—is seen to be sentimental or even irrational. “Looking out for number one” is the ethical ego- ist’s motto, as demonstrated by the Parnell example at the beginning of this chapter and the following story:
Former Fiat Chrysler Automobiles executive, Alphons Iacobelli, was indicted in 2017 on charges that he used millions of dollars of company money designated for a union account to pay for his own lavish expenses. Iacobelli diverted funds earmarked for a union training center to purchase a $350,000 Ferrari and two gold Montblanc pens worth over $70,000 for himself. Additionally, during this period, he remodeled his kitchen and built a swimming pool for his home.20
19 For a compact discussion of ethical egoism, see Denis G. Arnold, Tom L. Beauchamp, and Norman E. Bowie, Ethical Theory and Business, 9th ed. (Upper Saddle River, NJ: Pearson, 2012), pp. 12–17; and Laura P. Hartman, Joe DesJardins, and Chris MacDonald, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, 4th ed. (New York: McGraw-Hill, 2017), p. 70. 20 “Ex-Fiat Chrysler Executive Accused of Siphoning Millions with Union Leader.” The New York Times, July 26, 2017, www.nytimes.com.
FIGURE 5.3 Why Ethical Problems Occur in Business
Reason Nature of Ethical Problem Typical Approach Attitude
Personal gain and selfish interest
Selfish interest versus others’ interests
Egotistical mentality “I Want it!”
Competitive pressures on profits
Firm’s interest versus others’ interests
Bottom-line mentality “We have to beat the others at all costs!”
Conflicts of interest Multiple obligations or loyalties
Favoritism mentality “Help yourself and those closest to you!”
Cross-cultural contradictions
Company’s interests versus diverse cultural traditions and values
Ethnocentric mentality “Foreigners have a funny notion of what’s right and wrong.”
Final PDF to printer
102 Part Two Business and Ethics
law43665_ch05_093-114.indd 102 11/16/18 11:10 AM
Competitive Pressures on Profits When companies are squeezed by tough competition, they sometimes engage in unethical activities to protect their profits. This may be especially true in companies whose financial performance is already substandard. Research has shown that managers of poor financial performers and companies with financial uncertainty are more prone to commit illegal acts. In addition, intense competitive pressure in the global marketplace has resulted in unethical activity, such as price fixing, falsifying documents, or the use of kickbacks or bribes.
In a misguided and unethical effort to boost sales, Tenet Healthcare Corporation gave kickbacks to hospitals and medical clinics for obstetric referrals in its hospital network. In 2016, the hospital chain pleaded guilty to criminal fraud and bribery charges also involving two of their subsidiaries, Atlanta Medical Center and North Fulton Medical Center, and agreed to pay $524 million to the states of Georgia and South Carolina and to the federal government. Georgia Attorney General Olens claimed that the company took advantage of vulnerable pregnant women by push- ing for these referrals to be brought into their hospital network.21
Conflicts of Interest Ethical challenges in business often arise in the form of conflicts of interest. A conflict of interest occurs when an individual’s self-interest conflicts with acting in the best interest of another, when the individual has an obligation to do so.22 For example, if a purchasing agent directed her company’s orders to a firm from which she had received a valuable gift, regardless if this firm offered the best quality or value, she would have acted unethically because of a conflict of interest. In this situation, she would have acted to benefit herself, rather than in the best interests of her employer. A failure to disclose a conflict of interest may represent deception in and of itself and may hurt the person or organization on whose behalf judgment has been exercised. Many ethicists believe that even the appearance of a conflict of interest should be avoided, because it undermines trust.
Many cases of unethical activity illustrate conflicts of interest, in which opportunities for organizational self-enrichment conflict with the long-term viability of the firm and the best interests of employees, customers, suppliers, and stockholders. The situation at Peanut Cor- poration, introduced at the beginning of this chapter, describes an organizational conflict of interest where executives falsified lab test results on their products that exposed its con- sumers to salmonella contamination in order to maintain short-term company profitability. Many firms seek to guard against the dangers inherent in conflicts of interest by including prohibitions of any such practices in their codes of ethics, as discussed in Chapter 6.
Cross-Cultural Contradictions Some of the knottiest ethical problems occur as corporations do business in other societies where ethical standards differ from those at home. Today, policymakers and strategic plan- ners in all multinational corporations, regardless of the nation where they are headquar- tered, often face this kind of ethical dilemma. Consider the following situation:
For decades the Great Britain-based pesticide manufacturer, Syngenta, has produced a lethal weed killer, Paraquat. Only one sip of Paraquat can cause death.
21 “Tenet Healthcare to Pay $515 Million to Settle Kickback Allegations.” The Wall Street Journal, October 3, 2016, www.wsj.com. 22 Based on John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ: Pearson, 2016).
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 103
law43665_ch05_093-114.indd 103 11/16/18 11:10 AM
The product is banned in the European Union, China, and many other countries— but not the United States. In 2016, the U.S. Environmental Protection Agency reported that the pesticide was linked to Parkinson’s disease, resulting in a further review of its use. But according to the U.S. Department of Agriculture, the use of this chemical remains widespread in the United States because paraquat is highly successful at killing and preventing the spread of weeds in agricultural applications. Syngenta’s decision to continue its production and sale in the United States is cer- tainly linked to economic benefits for the company.23
This episode raises the issue of ethical relativism, which was defined earlier in this chapter. Although the sale of the pesticide paraquat in the United States was still legal, was it ethical? Is the selling of unsafe products by any measure ethical if it is not forbidden by the receiving nation, especially if the company knows that the products are exported to another country where others are exposed to serious health risks?
As business becomes increasingly global, with more and more corporations penetrating overseas markets where cultures and ethical traditions vary, these cross-cultural questions will occur more frequently.
The Core Elements of Ethical Character
The ethical analysis and resolution of ethical dilemmas in the workplace significantly depend on the ethical character and moral development of managers and other employees. Good ethical practices not only are possible, but also become normal with the right com- bination of these components.
Managers’ Values Managers are key to whether a company and its employees will act ethically or unethically. The values held by managers, especially the top-level managers, serve as models for others who work at the company. Unfortunately, according to a 2017 survey Americans hold a dim view of business executives’ and managers’ values. Forty-five percent of those polled believe that corporate CEOs should be fired for unethical transgressions in their compa- nies. In this same survey, the public shared that a violation of trust between a company and its customers is the most serious ethical offense, with 61 percent indicating that the CEO should be terminated for such behavior.24
In an annual Gallup poll that rated 22 occupations for honesty and ethics, nurses— for the sixteenth straight year—came out on top. In 2017, only 16 percent of those surveyed saw business executives as having “very high” or “high” ethical standards or honesty. This placed executives below clergy, lawyers, and bankers on this list. Advertising practitioners ranked lower than business executives, with car salespeo- ple, members of Congress, and lobbyists at the bottom of the list.25
How do executives view their own values? Studies generally show that most U.S. man- agers focus on themselves and place importance on values such as having a comfortable and exciting life. Researchers also found that new CEOs tend to be more self-interested and
23 “This Pesticide Is Prohibited in Britain. Why Is It Still Being Exported?” The New York Times, December 20, 2016, www.nytimes.com. 24 “Punishing CEOs for Bad Behavior: 2017 Public Perception Survey,” Rock Center for Corporate Governance, Stanford Uni- versity, February 2017, www.gsb.stanford.edu. 25 “Honesty/Ethics in the Professions,” Gallup Poll, December 4–11, 2017, www.gallup.com.
Final PDF to printer
104 Part Two Business and Ethics
law43665_ch05_093-114.indd 104 11/16/18 11:10 AM
short-term focused, possibly in an effort to immediately drive up company profits, rather than valuing long-term investments in research and development or capital expenditures. However, a recent study found that today’s managers place slightly more importance on moral values, such as honesty and forgiveness, than managers did in the 1980s, who focused more on competency values, like capability and independence. Interestingly, the study also compared the personal values orientations of managers from the 1980s and today to those of Millennials (individuals born between 1980 and 2000). While generally, Millennials’ personal values orientations were discovered to be consistent with those of managers from the 1980s and 2010s, they did indicate a greater self-focused preference than managers from previous research.26
Spirituality in the Workplace A person’s spirituality—that is, a personal belief in a supreme being, religious organiza- tion, or the power of nature or some other external, life-guiding force—has always been a part of the human makeup. In 1953, Fortune published an article titled “Businessmen on Their Knees” and claimed that American businessmen (women generally were excluded from the executive suite in those days) were taking more notice of God. More recently, cover stories in Fortune, Bloomberg Businessweek, and other business publications have documented a resurgence of spirituality or religion at work.
As far back as 1976, scholars have found a positive relationship between an organi- zation’s economic performance and attention to spiritual values. They have shown that spirituality positively affects employee and organizational performance by enhancing intu- itive abilities and individual capacity for innovation, as well as increasing personal growth, employee commitment, and responsibility. Spirituality also helps employees who are deal- ing with workplace stress. In a study on workplace spirituality in the United States and Mexico, meaningful work was found to be directly related to reduced workplace stress.27
Organizations have responded to the increased attention to spirituality and religion at work by acting to accommodate their employees’ spiritual needs.
The chief diversity officer at PricewaterhouseCoopers found office space in their Asia-Pacific region facility to provide a prayer room for their Muslim employees. In the United States, employers are required by law to make substantial accommo- dations for their employees’ religious practices, as long as it does not create major hardships for the organization. Ford’s Interfaith Network, a group of employees focusing on religious issues, successfully lobbied the company to install sinks designed for the religious washings that Muslim employees perform.28
However, others disagree with the trend toward a stronger presence of religion in the workplace. They hold the traditional belief that business is a secular—that is,
26 James Weber, “Discovering the Millennials’ Personal Values Orientation: A Comparison to Two Managerial Populations,” Journal of Business Ethics, 2017, 4, 143, pp. 517–29. 27 For a study establishing a link between spirituality and economic performance, see Christopher P. Neck and John F. Milliman, “Thought Self-Leadership: Finding Spiritual Fulfillment in Organizational Life,” Journal of Managerial Psychology, 1994, pp. 9–16; and for studies showing how promoting spirituality as a way to reduce workplace stress, see Amal Altaf and Mohammad Atif Awan, “Moderating Effect of Workplace Spirituality on the Relationship of Job Overload and Job Satisfac- tion,” Journal of Business Ethics, 2011, pp. 93–99; and “Workplace Spirituality and Stress: Evidence from Mexico and US,” Management Research Review, 2015, pp. 29–43. 28 “When Religious Needs Test Company Policy,” The New York Times, February 25, 2007, www.nytimes.com; and “More Businesses Turning to Workplace Chaplains,” PilotOnline.com, October 30, 2011, pilotonline.com.
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 105
law43665_ch05_093-114.indd 105 11/16/18 11:10 AM
nonspiritual—institution. They believe that business is business, and spirituality is best left to churches, synagogues, mosques, and meditation rooms, not corporate boardrooms or shop floors. This, of course, reflects the separation of church and state in the United States and many other countries.
Beyond the philosophical opposition to bringing spirituality into the business environ- ment, procedural or practical challenges arise. Whose spirituality should be promoted? The CEO’s? With greater workplace diversity comes greater spiritual diversity, so which organized religion’s prayers should be cited or ceremonies enacted? How should busi- nesses handle employees who are agnostics or atheists (who do not follow any religion)?
Just as personal values and character strongly influence employee decision making and behavior in the workplace, so does personal spirituality, from all points on the religious spectrum, impact how businesses operate.
Managers’ Moral Development People’s values and spirituality exert a powerful influence on the way ethical work issues are treated. Since people have different personal histories and have developed their values and spirituality in different ways, they are going to think differently about ethical prob- lems. This is as true of corporate managers as it is of other people. In other words, the managers in a company are likely to be at various stages of moral development. Some will reason at a high level, others at a lower level.
A summary of the way people grow and develop morally is diagrammed in Figure 5.4. From childhood to mature adulthood, most people move steadily upward in their moral reasoning capabilities from stage 1. Over time, they become more developed and are capa- ble of more advanced moral reasoning, although some people never use the most advanced stages of reasoning in their decision processes.
At first, individuals are limited to an ego-centered focus (stage 1), fixed on avoiding punishment and obediently following the directions of those in authority. (The word ego means “self.”) Slowly and sometimes painfully, the child learns that what is considered to be right and wrong is pretty much a matter of reciprocity: “I’ll let you play with my toy if I can play with yours” (stage 2). At both stages 1 and 2, however, the individual is mainly
Age Group Development Stage and Major Ethics Referent Basis of Ethics Reasoning
Mature adulthood Stage 6 Universal principles: justice, fairness, universal human rights
Principle-centered reasoning
Mature adulthood Stage 5 Moral beliefs above and beyond specific social custom: human rights, social contract, broad constitutional principles
Principle-centered reasoning
Adulthood Stage 4 Society at large: customs, traditions, laws
Society- and law-centered reasoning
Early adulthood, adolescence
Stage 3 Social groups: friends, school, coworkers, family
Group-centered reasoning
Adolescence, youth Stage 2 Reward seeking: self-interest, own needs, reciprocity
Ego-centered reasoning
Childhood Stage 1 Punishment avoidance: avoid harm, obedience to power
Ego-centered reasoning
FIGURE 5.4 Stages of Moral Development and Ethical Reasoning
Source: Adapted from Lawrence Kohlberg, The Philosophy of Moral Development (New York: Harper & Row, 1981).
Final PDF to printer
106 Part Two Business and Ethics
law43665_ch05_093-114.indd 106 11/16/18 11:10 AM
concerned with his or her own pleasure. The self-dealings of Alphons Iacobelli, described earlier in this chapter, exemplify ego-centered reasoning. By taking money from his com- pany for personal use, he personally benefited, without apparent concern for others.
In adolescence the individual enters a wider world, learning the give-and-take of group life among small circles of friends, schoolmates, and similar close-knit groups (stage 3). Studies have reported that interaction within groups can provide an environment that improves the level of moral reasoning. This process continues into early adulthood. At this point, pleasing others and being admired by them are important cues to proper behav- ior. Most people are now capable of focusing on other-directed rather than self-directed perspectives. When a manager “goes along” with what others are doing or what the boss expects, this would represent stage 3 behavior. On reaching full adulthood—the late teens to early 20s in most modern, industrialized nations—most people are able to focus their reasoning according to society’s customs, traditions, and laws as the proper way to define what is right and wrong (stage 4). At this stage, a manager would seek to follow the law; for example, he or she might choose to curtail a chemical pollutant because of government regulations mandating this.
Stages 5 and 6 lead to a special kind of moral reasoning. At stage 5, individuals apply their moral beliefs above and beyond specific social custom and consider changing law based on rational reflection of social utility. Stage 6 emphasizes ethical reasoning using broad principles and relationships, such as human rights and constitutional guarantees of human dignity, equal treatment, and freedom of expression. For example, at this stage, an executive might decide to pay wages above the minimum required by law, because this is the morally just thing to do.29
Researchers have consistently found that most managers typically rely on criteria asso- ciated with reasoning at stages 3 and 4, although some scholars argue that these results may be slightly inflated.30 Although they may be capable of more advanced moral reason- ing that adheres to or goes beyond society’s customs or law, managers’ ethical horizons most often are influenced by their immediate work group, family relationships, or compli- ance with the law.
The development of a manager’s moral character can be crucial to a company. Some ethics issues require managers to move beyond selfish interest (stages 1 and 2), beyond company interest (stage 3 reasoning), and even beyond sole reliance on society’s customs and laws (stage 4 reasoning). Needed is a manager whose personal character is built on a caring attitude toward all affected, recognizing others’ rights and their essential humanity (a combination of stage 5 and 6 reasoning). The moral reasoning of upper-level manag- ers, whose decisions affect companywide policies, can have a powerful and far-reaching impact both inside and outside the company.
Analyzing Ethical Problems in Business
Underlying an ethical decision framework is a set of universal ethical values or principles, notions that most people anywhere in the world would hold as important. While a list of ethical principles may be exhaustive, these values seem to be generally accepted: do no
29 For details and research findings, see Lawrence Kohlberg, The Philosophy of Moral Development (San Francisco: Harper & Row, 1981); and Anne Colby and Lawrence Kohlberg, The Measurement of Moral Judgment, Volume I: Theoretical Founda- tions and Research Validations (Cambridge: Cambridge University Press, 1987). 30 James Weber and Janet Gillespie, “Differences in Ethical Beliefs, Intentions, and Behaviors,” Business & Society, 1998, pp. 447–67; and James Weber and David Wasieleski, “Investigating Influences on Managers’ Moral Reasoning,” Business & Society, 2001, pp. 79–111.
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 107
law43665_ch05_093-114.indd 107 11/16/18 11:10 AM
harm; be compassionate, fair, and just, and honest; respect others’ rights; and do your duty/ act responsibly.31 Business managers and employees need a set of decision guidelines that will shape their thinking when on-the-job ethics issues occur. The guidelines should help them (1) identify and analyze the nature of an ethical problem and (2) decide which course of action is likely to produce an ethical result. The following four methods of ethical rea- soning can be used for these analytical purposes, as summarized in Figure 5.5.
Virtue Ethics: Pursuing a “Good” Life Some philosophers believe that the ancient Greeks, specifically Plato and Aristotle, devel- oped the first ethical theory, which was based on values and personal character. Commonly referred to as virtue ethics, it focuses on character traits that a good person should possess, theorizing that moral values will direct the person toward good behavior. Aristotle argued, “Moral virtue is a mean between two vices, one of excess and the other of deficiency, and it aims at hitting the mean in feelings, desires, and action.”32 A variety of people have sug- gested lists of moral values over the years as shown in Figure 5.6.
As indicated by the different views expressed in Figure 5.6, to some extent what counts as a moral virtue depends on one’s personal beliefs and is often influenced by an organi- zation or society.
When placing virtue ethics in a business context, ethicist Robert Solomon explains, “The bottom line of the Aristotelian approach to business ethics is that we have to get away from ‘bottom line’ thinking and conceive of business as an essential part of the good life, living well, getting along with others, having a sense of self-respect, and being a part of something one can be proud of.”33
However, others argue that virtue ethics is not a thoroughly developed ethical system of rules and guidelines, but rather a system of values that form good character. Scholars posit that virtue ethics emphasizes how a person lives. This notion is centered on the character- istics of the person committing the action. If an agent is virtuous, then the actions that
31 See Rushworth Kidder, Moral Courage (New York: HarperCollins, 2005). 32 For discussions of virtue ethics, see Laura P. Hartman, Joe DesJardins, and Chris MacDonald, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, 4th ed. (New York: McGraw-Hill, 2017), pp. 85–89. 33 Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (New York: Oxford University Press, 1992), p. 104.
FIGURE 5.5 Four Methods of Ethical Reasoning
Method Critical Determining Factor
An Action Is Ethical When . . . Limitations
Virtues Values and character It aligns with good character
Subjective or incomplete set of good virtues
Utilitarian Comparing benefits and costs
Net benefits exceed net costs
Difficult to measure some human and social costs; majority may disregard rights of the minority
Rights Respecting entitlements
Basic human rights are respected
Difficult to balance conflicting rights
Justice Distributing fair shares
Benefits and costs are fairly distributed
Difficult to measure benefits and costs; lack of agreement on fair shares
Final PDF to printer
108 Part Two Business and Ethics
law43665_ch05_093-114.indd 108 11/16/18 11:10 AM
individual takes should be acceptable.34 Yet, virtue ethics also suffers from this challenge: whose values? Does a set of values provide a sufficient framework to resolve the most complex ethical dilemmas found in global business? Does a manager sometimes have to be or seem to be “the bad person” or do or seem to do “a bad thing” for the sake of some ulti- mate ethical good? Would this be virtuous or vicious?35
Utility: Comparing Benefits and Costs Another approach to ethics emphasizes utility, or the overall amount of good that can be produced by an action or a decision. This ethical approach is called utilitarian reasoning. It is often referred to as cost–benefit analysis because it compares the costs and benefits of a decision, a policy, or an action, as shown in Figure 5.5. These costs and benefits can be economic (expressed in dollar amounts), social (the effect on society at large), or human (usually a psychological or emotional impact). After business managers add up all the costs and benefits and compare them with one another, the net cost or the net benefit should be apparent. For a utilitarian, the alternative where the benefits most outweigh the costs is the ethically preferred action because it produces the greatest good for the greatest number of people in society.
The main drawback to utilitarian reasoning is the difficulty of accurately measuring both costs and benefits. Some things can be measured in monetary terms—goods pro- duced, sales, payrolls, and profits—but others that are less tangible, such as employee morale, psychological satisfaction, or the worth of a human life, are trickier. Human and social costs are particularly difficult to measure with precision. But unless they can be measured, the cost–benefit calculations will be incomplete, and it will be difficult to know whether the overall result is good or bad, ethical or unethical. Another limitation of utili- tarian reasoning is that the majority may override the rights of those in the minority. Since utilitarian reasoning is primarily concerned with the end results of an action, managers
34 Miguel Alzola, “Virtuous Persons and Virtuous Actions in Business Ethics and Organizational Research,” Business Ethics Quarterly, 2015, pp. 287–318. 35 For a critique of virtue ethics, see John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ: Pearson, 2016).
FIGURE 5.6 Lists of Moral Values across Time
Plato and Aristotle, 4th century BC
St. Thomas Aquinas, 1225–1274
Benjamin Franklin, 1706–1790
Robert Solomon, 1942–2007
• Courage • Self-control • Generosity • Magnificence • High-mindedness • Gentleness • Friendliness • Truthfulness • Wittiness • Modesty
• Faith • Hope • Charity • Prudence • Justice • Temperance • Fortitude • Humility
• Cleanliness • Silence • Industry • Punctuality • Frugality
• Honesty • Trust • Toughness
Sources: Plato and Aristotle’s values are from Steven Mintz, “Aristotelian Virtue and Business Ethics Education,” Journal of Business Ethics, 1996; St. Thomas Aquinas’s values are from Manuel G. Velasquez, Business Ethics: Concepts and Cases, 9th ed. (Upper Saddle River, NJ: Pearson, 2012); Benjamin Franklin’s values, from the American Industrial Revolution era, are from Peter McMylor, Alisdair MacIntyre: Critic of Modernity (London: Routledge, 1994); and Robert Solomon’s moral values can be found in Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (New York: Oxford University Press, 1992).
Final PDF to printer
109
law43665_ch05_093-114.indd 109 11/16/18 11:10 AM
using this reasoning process often fail to consider the means taken to reach the end. Some of these challenges are evident in Exhibit 5.A.
Despite these drawbacks, cost–benefit analysis is widely used in business. Because this method works well when used to measure economic and financial outcomes, business managers sometimes are tempted to rely on it to decide important ethical questions with- out being fully aware of its limitations or the availability of still other methods that may improve the ethical quality of their decisions.
Rights: Determining and Protecting Entitlements Human rights are another basis for making ethical judgments. A right means that a person or group is entitled to something or is entitled to be treated in a certain way, as shown in Figure 5.5. The most basic human rights are the rights to life, safety, free speech, freedom, being informed, due process, and property, among others. Denying those rights or failing to protect them for other persons and groups is normally considered to be unethical and is the core of the debate over the “Right to Try” controversy profiled in Exhibit 5.A. This approach to ethical reasoning holds that individuals are to be treated as valuable ends in themselves just because they are human beings. Using others for your own purposes is unethical if, at the same time, you deny them their goals and purposes.
Do Patients Have the “Right to Try”
By 2018, 38 states had enacted “Right to Try” laws and more were considering such legislation. These efforts catapulted this ethical question into national prominence and touches on some of the methods for ethical reasoning discussed in this chapter. At the core of this debate is whether or not terminally ill patients have the ethical right to try therapy or experimental drugs that are still in the testing phase at pharmaceutical companies in the hope of stopping the spread of their disease or possibly saving their lives. Patients were often naturally focused on the potential benefits of using these drugs, even if they were still under development and might be risky or ineffective. An executive at The Goldwater Institute, a libertarian group supporting Right to Try laws, explained, “The goal is for terminally ill patients to have choice when it comes to end-stage disease. Right to Try is something that will help terminally ill people all over the country.” These sentiments were echoed by Larry Kutt, a 65-year- old man with an advanced blood cancer hoping to gain access to a therapy currently being tested by several pharmaceutical companies, who said, “It’s my life and I want the chance to save it.” Critics have called efforts to create a federal Right to Try statue “a cruel shame,” causing more harm than good by creating false hope. Dr. David Gorski, a Michigan surgeon, argued that releasing unapproved therapies could cause untold pain in a person’s final days, even hastening death. Focusing on a benefits- versus-harms perspective, Dr. Gorski explained, “They are far more likely to harm patients than to help them.” The formal legal position in the United States was based on a 2007 court ruling that stated patients did not have a constitutional right to medicines that were not federally approved. The Food and Drug Admin- istration had a program under which terminally ill patients, who had exhausted their treatment options, could try to obtain therapies that had passed at least the first of three FDA investigation phases. But, the law did not require pharmaceutical companies to provide the treatment, nor did it mandate that insur- ance companies cover these therapies. Also, the law did allow insurance companies to deny coverage to patients while they use drugs under investigation. In 2015, Johnson & Johnson created a panel of bioeth- icists to study patients’ requests for potentially lifesaving medicines and make recommendations to the pharmaceutical firm.
Sources: “Patients Seek ‘Right to Try’ New Drugs,” The New York Times, January 10, 2015, www.nytimes.com; “Federal ‘Right to Try’ Bill: Wrong on the Law, and Wrong for Patients,” The Hill, June 28, 2016, thehill.com; and, “U.S. Senator Introduces a ‘Right to Try’ Bill for Desperate Patients,” Stat, May 10, 2016, www.statnews.com.
Exhibit 5.A
Final PDF to printer
110 Part Two Business and Ethics
law43665_ch05_093-114.indd 110 11/16/18 11:10 AM
The main limitation of using rights as a basis of ethical reasoning is the difficulty of balancing conflicting rights. For example, an employee’s right to privacy may be at odds with an employer’s right to protect the firm’s assets by testing the employee’s honesty. Rights also clash when U.S. multinational corporations move production to a foreign nation, causing job losses at home but creating new jobs abroad. In such cases, whose job rights should be respected?36
Despite this kind of problem, the protection and promotion of human rights is an important ethical benchmark for judging the behavior of individuals and organizations. Surely most people would agree that it is unethical to deny a person’s fundamental rights to life, freedom, privacy, growth, and human dignity. By defining the human condition and pointing the way to a realization of human potentialities, such rights become a kind of common denominator of ethical reasoning, setting forth the essential conditions for ethical actions and decisions.
Justice: Is It Fair? A fourth method of ethical reasoning concerns justice. As shown in Figure 5.5, a common question in human affairs is, Is it fair or just? Employees want to know if pay scales are fair. Consumers are interested in fair prices when they shop. When new tax laws are pro- posed, there is much debate about their fairness—where will the burden fall, and who will escape paying their fair share?37 After the U.S. government bailed out several big banks and insurance companies in 2008–9, many people wondered if it was fair that some of their top executives continued to receive big bonuses while their employees, shareholders, and bondholders suffered—and taxpayers absorbed the cost.
Justice, or fairness, exists when benefits and burdens are distributed equitably and according to some accepted rule. For society as a whole, social justice means that a society’s income and wealth are distributed among the people in fair proportions. A fair distribution does not necessarily mean an equal distribution. Most societies try to consider people’s needs, abilities, efforts, and the contributions they make to society’s welfare. Since these factors are seldom equal, fair shares will vary from person to person and group to group.
Justice reasoning is not the same as utilitarian reasoning. A person using utilitarian reasoning adds up costs and benefits to see if one is greater than the other; if benefits exceed costs, then the action would probably be considered ethical. A person using justice reasoning considers who pays the costs and who gets the benefits; if the shares seem fair (according to society’s rules), then the action is probably just.
Applying Ethical Reasoning to Business Activities Anyone in the business world can use these four methods of ethical reasoning to gain a better understanding of ethical issues that arise at work. Usually, all four can be applied at the same time. Using only one of the four methods is risky and may lead to an incomplete understanding of all the ethical complexities that may be present. It also may produce a lopsided ethical result that will be unacceptable to others.
Once the ethical analysis is complete, the decision maker should ask this question: Do all of the ethics approaches lead to the same decision? If so, then the decision, policy, or activity is probably ethical. If the application of all ethics theories result in a “no, this is not ethical,” then it is probably unethical. The reason you cannot be absolutely certain is
36 For a discussion of ethical rights, see John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ: Pearson, 2016); and Velasquez, Business Ethics: Concepts and Cases, pp. 90–98. 37 For an interesting discussion of “what is fair?” see Patrick Primeaux and Frank P. LeVeness, “What is Fair: Three Perspec- tives,” Journal of Business Ethics 84 (2009), pp. 89–102.
Final PDF to printer
Chapter 5 Ethics and Ethical Reasoning 111
law43665_ch05_093-114.indd 111 11/16/18 11:10 AM
that different people and groups (1) may honestly and genuinely use different sources of information, (2) may rely on different values or definitions of what is a virtuous character, (3) may measure costs and benefits differently, (4) may not share the same meaning of justice, or (5) may rank various rights in different ways. Nevertheless, any time an analyst obtains a consistent result when using all of the approaches, it indicates that a strong case can be made for either an ethical or an unethical conclusion.
What happens when the application of the four ethical approaches does not lead to the same conclusion? A corporate manager or employee then has to assign priorities to each method of ethical reasoning. What is most important to the manager, to the employee, or to the organization—virtue, utility, rights, or justice? What ranking should they be given? A judgment must be made, and priorities must be determined. These judgments and prior- ities will be strongly influenced by a company’s culture and ethical climate. Some will be sensitive to people’s needs and rights; others will put themselves or their company ahead of all other considerations.
The Moral Intensity of an Ethical Issue
Studies have shown that individuals make decisions differently based on the characteristics or type of ethical dilemma they face. Moral intensity refers to a person’s perception of how mor- ally severe an ethical issue is.38 This simple insight appears to profoundly affect individuals’ decisions and actions. Generally, issues that have high moral intensity evoke greater ethical attention and consideration by the decision maker than issues with low moral intensity.
Several factors contribute to the moral intensity of an issue.
∙ The magnitude of consequences. For example, issues that involve a life-or-death com- ponent, where serious physical harm could result from a decision that is made (such as Parnell’s decision involving salmonella described at the beginning of this chapter) would normally be thought of as having higher moral intensity than an issue involving minor economic harm (such as stealing paper clips from the company supply closet).
∙ Issues are also different based on how close the decision maker feels to the people affected by the decision—the issue’s proximity. Proximity refers to the social, physical, and psychological distance decision makers perceive themselves to have from those affected by the decision. Alphons Iacobelli’s decision to use millions of dollars of com- pany money designated for a union account to pay for his own lavish expenses would be considered an issue with very high moral intensity.
∙ Social consensus refers to the degree of social agreement that a proposed act is either acceptable or unacceptable. For example, the social consensus that sexual harassment is unacceptable has increased because of the “#MeToo” social movement, discussed earlier in this chapter.
∙ Moral intensity is also influenced by the probability that a decision maker’s action will lead to the consequences predicted. The likelihood that people will die if they ingest paraquat is very high. But, the chance that they will contract Parkinson’s disease from long-term exposure is still not verified by scientific research. Thus, the moral intensity of the former situation is higher than the latter.
∙ Finally, ethical issues vary in terms of how quickly the effects of the consequences of the decision take effect. Temporal immediacy refers to the length of time that the predicted
38 This notion was first introduced by Thomas Jones in “Ethical Decision Making by Individuals in Organizations: An Issue- Contingent Model,” Academy of Management Review, 1991, 16, pp. 366–95.
Final PDF to printer
112 Part Two Business and Ethics
law43665_ch05_093-114.indd 112 11/16/18 11:10 AM
consequences will occur from the present moment of the decision. As discussed in the “Right to Try” example, terminally ill patients feel a greater temporal immediacy given the short time they have left to live. Decisions that involve immediate consequences are more morally intense than decisions where the effects will occur in the distant future.
Research has shown that the moral intensity characteristics of an ethical issue influence the entire ethical decision-making process, from moral sensitivity and awareness to moral intention and judgment. Managers and business students alike show that their ethical rea- soning is strongly influenced by the moral intensity of the ethical dilemmas they face.39
39 James Weber, “Influences Upon Managerial Moral Decision Making: Nature of Harm and Magnitude of Consequences,” Human Relations, 1996, pp. 1–16; Tara J. Shawver and William F. Miller, “Moral Intensity Revisited: Measuring the Benefit of Accounting Ethics Interventions,” Journal of Business Ethics, 2017, pp. 587–603; and Robert E. Crossler, James H. Long, Tina M. Loraas, and Brad S. Trinkle, “The Impact of Moral Intensity and Ethical Tone Consistency on Policy Compliance,” Journal of Information Systems; pp. 49–64.
∙ Ethics is a conception of right and wrong behavior, defining for us when our actions are moral and when they are immoral. Business ethics is the application of general ethical ideas to business behavior.
∙ Ethical business behavior enhances business performance, complies with legal require- ments, prevents or minimizes harm, is demanded by business stakeholders, and pro- motes personal morality.
∙ Ethics problems occur in business for many reasons, including the selfishness of a few, competitive pressures on profits, the clash of personal values and business goals, and cross-cultural contradictions in global business operations.
∙ Managers’ on-the-job values tend to be company-oriented, assigning high priority to company goals. Managers often value being competent and place importance on having a comfortable or exciting life, among other values. In addition, individual spirituality can greatly influence how a manager understands ethical challenges; increasingly, it is rec- ognized that organizations must acknowledge employees’ spirituality in the workplace.
∙ Individuals reason at various stages of moral development, with most managers focus- ing on personal rewards, recognition from others, or compliance with company rules as guides for their reasoning.
∙ People in business can analyze ethics dilemmas by using four major types of ethical reasoning: virtue ethics, utilitarian reasoning, rights reasoning, and justice reasoning.
∙ The perceived moral intensity of an issue, as determined by the issue’s characteristics, affects how individuals make ethical decisions.
Summary
Key Terms stages of moral development, 105 U.S. Corporate Sentencing Guidelines, 98 utilitarian reasoning, 108 virtue ethics, 107
business ethics, 96 conflict of interest, 102 ethical egoist, 101 ethical principles, 95 ethical relativism, 96 ethics, 95
human rights, 109 justice, 110 laws, 96 moral intensity, 111 Sarbanes-Oxley Act, 99 spirituality, 104
Final PDF to printer
law43665_ch05_093-114.indd 113 11/16/18 11:10 AM
Internet Resources
www.ethics.org Ethics and Compliance Initiative www.ibe.org.uk Institute for Business Ethics www.business-ethics.org International Business Ethics Institute www.soxlaw.com Sarbanes-Oxley Act www.sarbanes-oxley-association.com Sarbanes Oxley Compliance Professionals Association www.oge.gov United States Office of Government Ethics www.ussc.gov United States Sentencing Commission www.cfsaw.org Center for Spirituality at Work
Chapter 5 Ethics and Ethical Reasoning 113
Discussion Case: LafargeHolcim and ISIS in Syria In 2017, French authorities investigated and indicted several former executives of the world’s largest cement manufacturer, LafargeHolcim (Lafarge), for paying the Islamic State terrorist group to protect their factory in Syria and its workers. The indictment charged Bruno Lafont and Eric Olsen—two former CEOs—and the former senior exec- utive of Syrian operations, Christian Herrault, with financing a terrorist organization and endangering the lives of others.
Lafarge was a major multinational cement company based in France, employing 81,000 workers at 2,300 sites in 80 countries around the world. The company had maintained operations in Syria since 2010, after investing more than $708 million to refurbish a fac- tory in Jalabiyeh, a town near the Turkish border. This plant created hundreds of jobs for local residents, generated thousands of tons of cement every day, and supported other businesses nearby.
Just a year after Lafarge started operations in Jalabiyeh, civil war broke out between President Bashar al-Assad’s government and various rebel factions. Between 2011 and 2013, the area near the factory was occupied by a succession of armed military groups before the Islamic State (also known as ISIS) seized control. During this period, militants intercepted and detained Lafarge employees as they came and went from work, making it dangerous for employees and difficult for managers to run the plant efficiently.
In 2011, Lafarge management started paying the militants through intermediaries, essentially to leave the company alone and allow it to operate. The company’s subsidiary in Syria, Lafarge Cement Syria (LCS), paid about $15.2 million for this purpose between 2011 and 2014; a large part of this money went directly to ISIS. Herrault admitted that Lafarge was involved in a “racket,” but said that he regularly informed top managers of the company and that everything was under control.
In an official statement justifying management’s decision to pay off the militant groups, the company stated, “Very simply, chaos reigned, and it was the task of local management to ensure that the intermediaries did whatever was necessary to secure its supply chains and the free movement of its employees.” Lafarge said that they did not think they had any other options to keep the plant operational and minimize risks to their employees.
The company also took other steps to protect its workers and keep the militants at bay. After militant forces kidnapped nine Lafarge employees and transferred them to local mili- tia camps, local managers spent more than $200,000 to secure their release. Lafarge also attempted to ease tensions by purchasing raw materials from ISIS-held areas to support the region’s economy. In 2013, a Lafarge memo emphasized the threat posed by terrorists. “It becomes more and more difficult to operate without being required to directly or indirectly
Final PDF to printer
114 Part Two Business and Ethics
law43665_ch05_093-114.indd 114 11/16/18 11:10 AM
negotiate with these [ISIS] networks classified as terrorists’ networks by international organizations and the USA,” the memo concluded.
Despite the company’s efforts, workers continued to be at risk. French courts reviewed charges submitted by 11 Lafarge workers through Sherpa, a French law association whose primary mission was the protection of workers, that Lafarge placed them in a high-risk environment and put their lives in danger. “Lafarge acted as if it was above the law,” said Marie-Laure Guislain, the head of litigation at Sherpa. “But it played a role in an armed conflict, as well as in the violation of human rights, and must be held accountable.”
Olsen resigned as CEO amidst an internal investigation of the firm’s top management that found that the money funneled to the terrorist groups was used, in part, to permit factory workers to move to and from the facility. This inquiry also found that Olsen was not responsible for, or aware of, the activity. According to extensive testimony and eyewit- ness accounts of former and current employees as well as a review of internal company correspondence, the payments to the militant groups did not guarantee the safety of plant employees. More than twelve workers were kidnapped between 2012 and 2014. There were multiple accounts of employees being held at gunpoint on their way to and from work.
In 2014, ISIS forces declared a caliphate, asserting their control over a region, includ- ing parts of Syria. Within weeks, as the fighting for territory continued, air strikes were heard outside the Lafarge plant. When ISIS militants claimed responsibility for the truck bombing at a Turkish-owned cement plant nearby, Lafarge temporarily halted production and told its workers to stay home. Some workers, considered nonessential by manage- ment, were ferried by bus to operations in Manbji, a city in northern Syria. Yet, managers ordered about 30 workers to report to work to keep the Jalabiyeh plant operating.
Ultimately, in 2015, as a team of employees and managers gathered for work one morning outside the plant, the factory’s doctor warned that ISIS had just captured a nearby village. “You’ve got to get out of here,” he warned. “ISIS is coming!” When the workers discov- ered that evacuation buses promised by management were not there, they escaped in their own vehicles. ISIS captured the factory that evening. “What I want to know,” Mostafa Haji Mohamad, a medical worker at the Syrian factory, said of Lafarge in an interview, “is why did they leave us there to face our deaths? The factory was the only thing they cared about.”
Sources: “France Investigates Lafarge Executives for Terrorist Financing,” The New York Times, December 8, 2017, www.nytimes.com; “Former LafargeHolcim CEO Charged with Syria Terrorism Funding,” Bloomberg, December 8, 2017, www.bloomberg.com; “Top Lafarge Executives, Including Former CEO, Indicted on Terror Financing Charges,” France24, December 9, 2017, www.france24.com; and, “Lafarge Paid 13 Million Euros to Armed Groups to Keep Operating in Syria,” Reuters, December 12, 2017, www.reuters.com; and “‘ISIS Is Coming!’ How a French Company Pushed the Limits in War-Torn Syria,” The New York Times, March 10, 2018, www.nytimes.com.
Discussion Questions
1. Do you agree with the French government’s charges against Lafarge and its managers? Why or why not?
2. What arguments did Lafarge managers make to justify their decision to pay terrorist groups in Syria? Do you believe that these were their real reasons?
3. Do you believe that Lafarge’s actions in Syria were ethical or unethical? Use the four methods of ethical reasoning (see Figure 5.5) to support your view.
4. Evaluate the moral intensity of the decision Lafarge managers made, based on the dimensions of moral intensity.
5. Is there anything Lafarge could have done to protect its employees adequately without paying terrorists?
Final PDF to printer
115
law43665_ch06_115-136.indd 115 11/14/18 01:42 PM
C H A P T E R S I X
Organizational Ethics
Faced with increasing pressure to create an ethical environment at work, businesses can take tangible steps to improve their ethical performance. The organization’s culture and ethical work climate play a central role in promoting ethics at work. Ethical situations arise in all areas and func- tions of business, and often professional associations seek to guide managers in addressing these challenges. Corporations can also implement ethical safeguards to create a comprehensive ethics program. This can become a complex challenge when facing different customs and regulations around the world.
This Chapter Focuses on These Key Learning Objectives:
LO 6-1 Classifying an organization’s culture and ethical climate.
LO 6-2 Recognizing ethics challenges across the multiple functions of business.
LO 6-3 Creating effective ethics policies and identifying responsible individuals to become the organization’s ethics and compliance officer.
LO 6-4 Constructing successful ethics reporting mechanisms, ethics training programs, and similar safeguards.
LO 6-5 Understanding how to conduct business ethically in the global marketplace.
Final PDF to printer
116 Part Two Business and Ethics
law43665_ch06_115-136.indd 116 11/14/18 01:42 PM
In 2016, British regulators fined the U.S. pharmaceutical giant Pfizer $107 million for overcharging 48,000 patients in their national health care system for the generic version of the epilepsy drug phenytoin sodium. Pfizer had worked with the drug distribution com- pany, Flynn Pharma Limited, to de-brand the drug in 2012 in order to raise the price to insurers. Generic drugs are not normally subject to government—pharmaceutical com- pany negotiations, so the prices could be freely determined by Pfizer. The drug company charged wholesalers and pharmacies a price 17 times higher than the amount it had charged before 2012.1
In 2016, Wells Fargo, a global banking and financial giant, was fined $185 million for issuing credit cards to consumers without their consent. Over a period of five years, Wells Fargo employees opened around 1.5 million unauthorized bank accounts and issued over half a million credit cards fraudulently. Over time, consumers started to accumulate banking fees for accounts they did not want or know about. Some of the victims were even contacted by debt collectors for not paying their fees. Wells Fargo refunded approximately $2.6 million to the affected consumers, but the damage to these individuals’ credit ratings lingered on. Over 5,300 Wells Fargo employees and managers involved in the scandal were fired as the firm cited major weaknesses in the company’s corporate culture.2
Pfizer and Wells Fargo are just two of many companies from around the world that over the years have been charged with excessive pricing, defrauding their customers, lying about their finances, mishandling investors’ funds, jeopardizing the safety of consumers, and many other illegal and unethical activities. Why are business executives, managers, and employees repeatedly being caught conducting illegal and unethical activities? What can firms do to minimize or prevent the unethical activities perpetrated by their executives and employees? Can companies set in place systems or programs to monitor workplace activities to detect illegal or unethical behavior?
Corporate Ethical Climates
Personal values and moral character play key roles in improving a company’s ethical per- formance, as discussed in Chapter 5. However, they do not stand alone, because personal values and character can be affected by a company’s culture and ethical climate.
The terms culture and climate are often used interchangeably and, in fact, are highly interrelated. Corporate culture is a blend of ideas, customs, traditional practices, company values, and shared meanings that help define normal behavior for everyone who works in a company. Culture is “the way we do things around here.” Erica Salmon Byrne, executive vice president, governance and compliance for The Ethisphere Institute, warns businesses and the public:
“This is a lesson we have learned, re-learned, and will likely learn again. Regulators around the globe are increasingly calling on organizations to examine their cul- ture. From Enron to Volkswagen, the Challenger to WorldCom, there are multiple examples of organizations with formal systems that say one thing and cultures that promote another. When those kinds of alignment gaps are allowed to persist, you eventually have a failure of one variety or another: ethics, quality, safety, or a combination of all three .”3
1 “Pfizer Fined $107 Million for Overcharging U.K. for Epilepsy Drug,” The Wall Street Journal, December 7, 2016, www.wsj.com. 2 “Wells Fargo Fined $185 Million for Fraudulently Opening Accounts,” The New York Times, September 8, 2016, Page B1, www.nytimes.com. 3 Erica Salmon Byrne, “Culture Matters,” Ethikos, September–October 2016, pp. 1–2.
Final PDF to printer
Chapter 6 Organizational Ethics 117
law43665_ch06_115-136.indd 117 11/14/18 01:42 PM
The Ethics Resource Center (ERC) observed that a “strong ethical culture in a company has a profound impact on the kinds of workplace behavior that can put a business in jeop- ardy.” Weak ethical cultures can foster ongoing bad behavior. In a national business ethics survey conducted by the Ethics and Compliance Initiative, 26 percent of employees reported that misconduct they had observed in their companies was part of an ongoing pattern. Forty-one percent claimed that the unethical behavior was repeated a second time, indicating a weak ethical work culture.4
Most companies have a kind of moral atmosphere. People can feel which way the ethi- cal winds are blowing. They pick up subtle hints and clues that tell them what behavior is approved and what is forbidden. The ethical climate represents an unspoken understanding among employees of what is and is not acceptable behavior based on the expected stan- dards or norms used for ethical decision making. It is the part of broader corporate culture that sets the ethical tone in a company. One way to view ethical climates is diagrammed in Figure 6.1. Three distinct ethical criteria are egoism (self-centeredness), benevolence (con- cern for others), and principle (respect for one’s own integrity, for group norms, and for society’s laws). (These parallel the levels of moral development developed by Lawrence Kohlberg that are discussed in Chapter 5.) These ethical criteria can be used to describe how individuals, a company, or society at large approach various moral dilemmas.
For example, if a company approaches ethics issues with benevolence in mind, it would emphasize friendly relations with its employees, stress the importance of team play and coop- eration for the company’s benefit, and recommend socially responsible courses of action. However, a company using egoism would be more likely to think first of promoting the company’s profit and striving for growth at all costs, as illustrated by the following example:
A Brazilian meat company, JBS, lost many of its customers and business partners amid a bribery scandal in 2017. The company admitted to bribing almost 2,000 politicians in exchange for subsidies that helped make JBS the largest meat- packer in the world. Restaurants and supermarkets in Brazil, including Domino’s Pizza Brasil and Subway, stopped buying JBS meats because of the corrupt behavior. The backlash against JBS even reached the United States, as Walmart publicly stated that they would not tolerate unethical behavior by their suppliers and would monitor the situation at JBS closely. Its shortsighted, self-focused actions had very high reputational costs to the company.5
Researchers have found that multiple ethical climates, or subclimates, may exist within one organization. For example, one company might include managers who often interact with the public and government regulators, using a principle-based approach, compared to
4 “National Business Ethics Survey 2013,” Ethics and Compliance Initiative, 2013, www.ethics.org. 5 “Business Partners Back Away from JBS amid Bribery Scandal,” The Wall Street Journal, June 8, 2017. www.wsj.com.
Ethical Criteria Focus of Individual Person Organization Society
Egoism (self-centered approach)
Self-interest Company interest Economic efficiency
Benevolence (concern- for-others approach)
Friendship Team interest Social responsibility
Principle (integrity approach)
Personal morality Company rules and procedures
Laws and professional codes
FIGURE 6.1 The Components of Ethical Climates
Source: Adapted from Bart Victor and John B. Cullen, “The Organizational Bases of Ethical Work Climates,” Administrative Science Quarterly 33 (1988), p. 104.
Final PDF to printer
118 Part Two Business and Ethics
law43665_ch06_115-136.indd 118 11/14/18 01:42 PM
another group of managers, whose work is geared toward routine process tasks and whose focus is mainly egoistic—higher personal pay or company profits.6
Corporate ethical climates can also signal to employees that ethical transgressions are acceptable. By signaling what is considered to be right and wrong, corporate cultures and ethical climates can pressure people to channel their actions in certain directions desired by the company. This kind of pressure can work both for and against good ethical practices.
Business Ethics across Organizational Functions
Not all ethics issues in business are the same. Because business operations are highly spe- cialized, ethics issues can appear in any of the major functional areas of a business firm. Accounting, finance, marketing, information technology, supply chain, and other areas of business all have their own particular brands of ethical dilemmas. In many cases, profes- sional associations in these functional areas have attempted to define a common set of ethical standards, as discussed next.
Accounting Ethics The accounting function is a critically important component of every business firm. By law, the financial records of publicly held companies are required to be audited by a cer- tified professional accounting firm. Company managers, external investors, government regulators, tax collectors, and labor unions rely on such public audits to make key deci- sions. Honesty, integrity, transparency, and accuracy are absolute requirements of the accounting function, and the impact can be devastating for organizations when these val- ues are absent.
In 2016, the United Kingdom established a new regulatory body, the Financial Reporting Council (FRC), to monitor auditing firms and investigate questionable financial statements. This action was in response to a $5.5 billion lawsuit against PricewaterhouseCoopers LLC for the auditing firm’s failure to uncover a mortgage lender fraud scheme. This action was part of a Europe-wide initiative to place audi- tors under greater scrutiny and to ensure they delivered fair and accurate accounting statements to organizational stakeholders.7
Accountants often are faced with conflicts of interest, introduced in Chapter 5, where loyalty or obligation to the company (the client) may be divided or in conflict with self-interest (of the accounting firm) and the interests of others (shareholders and the public). For example, while conducting an audit of a company, should the auditor look for opportunities to recommend to the client consulting services that the auditor’s firm can provide? Sometimes, accounting firms may be tempted to soften their audit of a company’s financial statements if the accounting firm wants to attract the company’s nonaudit busi- ness. For this reason, the Sarbanes-Oxley Act severely limits the offering of nonaudit con- sulting services by the auditing firm.
Examples of the U.S. accounting profession’s efforts promoting ethics are shown in Exhibit 6.A. Spurred by a threat of liability suits filed against accounting firms and a desire
6 James Weber, “Influences upon Organizational Ethical Subclimates: A Multi-departmental Analysis of a Single Firm,” Organization Science 6 (1995), pp. 509–23. For a summary of ethical climate research, see Aditya Simha and John B. Cullen, “Ethical Climates and Their Effects on Organizational Outcomes: Implications from the Past and Prophesies for the Future,” Academy of Management Perspectives, 2012, pp. 20–34. 7 “The Morning Risk Report: Auditors under Increased Scrutiny,” The Wall Street Journal, August 16, 2016, blogs.wsj.com.
Final PDF to printer
119
law43665_ch06_115-136.indd 119 11/14/18 01:42 PM
to reaffirm professional integrity, these standards go far toward ensuring a high level of honest and ethical accounting behavior.8
In addition, a new international Code of Ethics for professional accountants was unveiled in 2018. According to Kim Gibson, member of the International Ethics Standards Board for Accountants (IESBA), “the new standards are designed to be easier to use, nav- igate, and enforce; be more relevant for professional accountants in business, [and] distin- guish more clearly between requirements and application material.”9
Financial Ethics Within companies, the finance department and its officers are typically responsible for man- aging the firm’s assets and raising capital—for example, by issuing stocks and bonds. Finan- cial institutions, such as commercial banks, securities firms, and so forth, assist in raising capital and managing assets for both individuals and institutions. Whether working directly for a business or in a firm that provides financial services, finance professionals face a par- ticular set of ethical issues. Consider the following ethical lapses in corporate finance:
∙ Barclays PLC and four of their former top executives were charged with fraud by con- vincing Qatari to make payments to inflate the bank’s financial condition during the financial crisis. The United Kingdom’s Fraud Office filed the criminal suit against
8 For several excellent examples of ethical dilemmas in accounting, see Leonard J. Brooks and Paul Dunn, Business & Profes- sional Ethics for Directors, Executives and Accountants, 8th ed. (Stamford, CT: Cengage Learning, 2017); and Steven M. Mintz and Roselyn E. Morris, Ethical Obligations and Decision-Making in Accounting: Text and Cases, 4th ed. (New York: McGraw-Hill, 2016). 9 “5 Things You Need to Know about the New International Ethics Code,” Journal of Accountancy, May 8, 2018, www.journalofaccountancy.com.
Excerpts of the Professional Codes of Conduct in Accounting and Finance
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA)
Code of Professional Conduct These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethi- cal and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. The Principles include: professional responsibilities, serving the public interest, maintaining integrity, maintaining objectivity and independence, exhibiting due care, and adhering to the Principles when providing services.*
CHARTERED FINANCIAL ANALYST (CFA)®
CFA Institute Code of Ethics and Standards of Professional Conduct Members of CFA Institute (including Chartered Financial Analyst® (CFA®) charterholders) and candidates for the CFA designation (“Members and Candidates”) must act with integrity, competence, diligence, respect, and in an ethical manner, place the integrity of the investment profession and the interests of clients above their own personal interests, exercise independent professional judgment when making decisions, practice in a professional and ethical manner, promote the integrity for the ultimate benefit of society, and maintain their professional competence.†
*Source: AICPA Code of Professional Conduct. American Institute of CPAs. For a full text of the professional code, see www.aicpa.org. †Source: CFA Institute. For full text see www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n6.1.
Exhibit 6.A
Final PDF to printer
120 Part Two Business and Ethics
law43665_ch06_115-136.indd 120 11/14/18 01:42 PM
Barclays for conspiracy to commit fraud. Two separate financial capital investments by Qatari financiers raised nearly $15 billion to save the bank from collapse in the 2008 recession. This latest suit came on top of another investigation of Barclays over failures of disclosure linked to Qatar capital investments.10
∙ In 2018, the Royal Bank of Scotland agreed to pay $4.9 billion to settle with the U.S. Justice Department over the sale of toxic mortgage-backed securities during the lead-up to the global financial crisis. This settlement cleared the path for the bank’s privat- ization, ending the long-running probe into the bank’s actions. This settlement was in addition to the bank’s earlier payments involving these securities—$5.5 billion to the Federal Housing Finance Agency, $500 million settlement with the State of New York, and $125 million agreed to be paid to two large California pension funds.11
These and other lapses in ethical conduct occurred despite efforts by the finance profes- sions to foster an ethical environment. As shown in Exhibit 6.A, the highly regarded Char- tered Financial Analyst Institute, which oversees financial executives performing many different types of jobs in the financial discipline, emphasizes self-regulation as the best path for ethical compliance.12
Marketing Ethics Marketing refers to advertising, distributing, and selling products or services. Within firms, the marketing department is the functional area that typically interacts most directly with customers. Outside the firm, advertising agencies and other firms provide marketing services to businesses. The complex set of activities involved in marketing generates its own distinctive ethical issues.
One issue in marketing ethics emphasizes honesty and transparency in advertising and data about advertising.
In 2017, a tech start-up, Outcome Health, which installed and ran video monitors in physicians’ offices to show pharmaceutical advertising to patients, misled their corporate customers. Outcome Health inappropriately charged pharmaceutical com- panies for the placement of their ads on video screens that were never installed. The company even inflated data about how well the ads were performing and manipulated reports of third-party analyses of the success of the marketing strategy. The deceit also impacted the company’s investors, as Outcome Health overestimated its revenue by including the false data. These allegations were still being investigated in 2018.13
In addition to the general ethical questions that surround the marketing or advertising of products to consumers, consumer health and safety are another key ethics issue in mar- keting. Chapter 14 discusses several other issues in marketing ethics, including deceptive advertising, firm liability for consumer injury, and a firm’s responsibility for the unethical use of products by buyers.
To improve the ethics of the marketing profession, the American Marketing Association (AMA) has adopted a code of ethics for its members, as shown in Exhibit 6.B. The AMA
10 “Barclays, Four Former Top Executives Charged with Fraud over Fundraising with Qatari Investors,” Wall Street Journal, June 20, 2017, www.wsj.com. 11 “RBS in $4.9 Billion U.S. Settlement Over Mortgage-Backed Securities,” The Wall Street Journal, May 10, 2018, www.wsj.com. 12 For a good example of other financial ethics issues, see John B. Boatright, Ethics in Finance, 3rd ed. (Malden, MA: Wiley-Blackwell, 2014). 13 “Outcome, A Hot Tech Startup, Misled Advertisers with Manipulated Information, Sources Say,” The Wall Street Journal, October 13, 2017, www.wsj.com.
Final PDF to printer
121
law43665_ch06_115-136.indd 121 11/14/18 01:42 PM
Excerpts of the Professional Codes of Conduct in Marketing and Information Technology
AMERICAN MARKETING ASSOCIATION (AMA)
Statement of Ethics The American Marketing Association commits itself to promoting the highest standard of professional ethical norms and values for its members (practitioners, academics, and students). As Marketers, we must do no harm, avoiding harmful actions or omissions by embodying high ethical standards and adhering to all applica- ble laws and regulations; foster trust in the marketing system, striving for good faith and fair dealing as well as avoiding deception in product design, pricing, communication, and delivery of distribution; and, embrace ethical values, building relationships and enhancing consumer confidence by affirming these core values: honesty, responsibility, fairness, respect, transparency, and citizenship. We expect AMA members to be courageous and proactive in leading and/or aiding their organizations in the fulfillment of the explicit and implicit promises made to those stakeholders.*
ASSOCIATION OF INFORMATION TECHNOLOGY PROFESSIONALS (AITP)
Code of Ethics and Standards of Conduct This code begins with a commitment by each association’s member to promote the understanding of informa- tion processing methods and procedures, an obligation to fellow members to uphold the ideals of AITP and cooperate with my fellow members and treat them with honesty and respect at all times, an obligation to society to the dissemination of knowledge pertaining to the general development and understanding of infor- mation processing, an obligation to employers to discharge this obligation to the best of my ability, to guard my employer’s interests and to advise him wisely and honestly, an obligation to my country to uphold my nation and shall honor the chosen way of life of my fellow citizens, and to accept these obligations as a per- sonal responsibility and as a member of this Association.**
*Source: American Marketing Association’s Statement of Ethics, 2017, as it appears in www.marketing.com.
**Source: Association of Information Technology Professionals, 2011–16. A full text of the AITP code of ethics can be found at www.aitp.org.
Exhibit 6.B
code advocates professional conduct guided by ethics, adherence to applicable laws, and honesty and fairness in all marketing activities. The code seeks to help marketing profes- sionals translate general ethical principles into specific working rules.14
Information Technology Ethics One of the most complex and fast-changing areas of business ethics is in the field of informa- tion technology. Ethical challenges in this field involve invasions of privacy; the collection and storage of, and access to, personal and business information, especially through e-commerce transactions; confidentiality of electronic mail communication; copyright protection regard- ing software, music, and intellectual property; cyberbullying; and numerous others.
VTech, an electronics toymaker, agreed to pay a $650,000 penalty in 2018 for col- lecting personal information from hundreds of thousands of U.S. children without obtaining consent from their parents in violation of child privacy law. The Federal Trade Commission also required the Hong Kong-based company and its U.S. sub- sidiary to strengthen its data security measures and conduct external security audits of its operations as a part of the settlement. VTech’s actions were exposed after a
14 “Statement of Ethics,” American Marketing Association, n.d., www.ama.org.
Final PDF to printer
122
law43665_ch06_115-136.indd 122 11/14/18 01:42 PM
cyberattack incident in 2015, which revealed more than 6 million children’s per- sonal information, including name, gender, and birth date. Additionally, nearly 5 million parents’ personal information was breached.15
As discussed in later chapters of this book, the explosion of information technology has raised serious questions of trust between individuals and businesses. In response to calls by businesspeople and academics for an increase in ethical responsibility in the information technology field, professional organizations have developed or revised professional codes of ethics, as shown in Exhibit 6.B.16
Supply Chain Ethics Production and operations functions are part of an organizations’ supply chain and have also been at the center of some ethics storms.
Kobe Steel Limited, a Japanese metals manufacturer, admitted to misleading 500 companies about the quality of the copper the firm shipped to its customers for over 10 years. Japan’s Quality Assurance Organization is responsible for certifying that the quality of products meets Japanese and international standards. This agency investigated Kobe’s alleged manipulation of quality reports in 2017. The company admitted to falsifying quality documents on tens of thousands of metal orders involving copper piping and later to covering up evidence. Breaches in the failure to report accurate information expanded to include other manufacturing facilities owned by Kobe, violating laws, regulatory standards, and customers’ trust.17
Similar to other professional associations, supply chain managers also are guided by a professional code of ethics, shown in Exhibit 6.C.
Efforts by professional associations to guide their members toward effective resolution of ethical challenges make one point crystal clear: All areas of business, all people in busi- ness, and all levels of authority in business encounter ethics dilemmas from time to time. Ethics issues are a common thread running through the business world. Specific steps that businesses can take to make ethics work are discussed next.
15 “Electronic Toymaker VTech Reaches $650K FTC Settlement Over Child Privacy Rule Violations,” USA Today, January 8, 2018, www.usatoday.com. 16 For further discussion of ethics in information technology, see Sara Baase, A Gift of Fire: Social, Legal, and Ethical Issues for Computing and the Internet, 5th ed. (Upper Saddle River, NJ: Pearson, 2017); and Richard A. Spinello, Cyberethics: Morality and Law in Cyberspace, 6th ed. (Burlington, MA: Jones & Bartlett Learning, 2016). 17 “Kobe Steel Admits 500 Companies Misled in Scandal,” The Wall Street Journal, October 13, 2017, www.wsj.com; “Kobe Steel Finds More Products Shipped with Quality Issues,” The Wall Street Journal, October 20, 2017, www.wsj.com.
Professional Code of Conduct in Supply Chain Management
Similar to the other professional associations, whose codes of ethical conduct are presented in Exhibits 6.A and 6.B, the Institute for Supply Management (ISM) developed its Principles and Standards of Ethical Supply Chain Management Conduct with Guidelines that emphasize integrity, value, and loyalty across 10 main prin- ciples. The specific principles are avoid impropriety, conflict of interest, and negative influences; be responsi- ble to your employer, suppliers and customers, and social responsibility and sustainability practices; protect confidentiality; avoid reciprocity; follow applicable laws, regulations, and trade agreements; and exhibit pro- fessional competence.
Source: Institute for Supply Management’s Principles and Standards of Ethical Supply Management Conduct with Guidelines from www.instituteforsupplymanagement.org.
Exhibit 6.C
Final PDF to printer
Chapter 6 Organizational Ethics 123
law43665_ch06_115-136.indd 123 11/14/18 01:42 PM
Making Ethics Work in Corporations
Any business firm can improve the quality of its ethical performance. Doing so requires a company to build ethical safeguards into its everyday routines. This is sometimes called institutionalizing ethics. The percentage of the world’s largest firms (the Fortune 500 or 1000 as reported in Fortune magazine each year) that have adopted these safeguards since the 1980s is shown in Figure 6.2.
A 2015 Ethics Research Center study found that employees in large organizations with an effective ethics and compliance program were less likely to feel pressure to compromise their ethical standards (3 percent), compared to those without effective programs (23 percent). They were also less likely to observe misconduct (33 percent versus 62 percent) and less likely to experience retaliation (4 percent versus 59 percent). Employees at organizations with an effective ethics program were nearly three times more likely to report observed misconduct at work (87 percent versus 32 percent).18
Building Ethical Safeguards into the Company Managers and employees need guidance on how to handle day-to-day ethical situations; their own personal ethical compass may be working well, but they need to receive direc- tional signals from the company. Several organizational steps can be taken to provide this kind of ethical awareness and direction.
Lynn Sharp Paine, a Harvard Business School professor, has described two distinct approaches to ethics programs: a compliance-based approach and an integrity-based approach. A compliance-based program seeks to avoid legal sanctions. This
18 “The State of Ethics in Large Companies,” Ethics Research Center, 2015, www.ethics.org.
FIGURE 6.2 Percentage of Firms Reporting They Have the Ethical Safeguard
Sources: Center for Business Ethics, “Are Corporations Institutionalizing Ethics?” Journal of Business Ethics 5 (1986), pp. 85–91; Center for Business Ethics, “Instilling Ethical Values in Large Corporations,” Journal of Business Ethics 11 (1992), pp. 863–67; Ethics Resources Center, Ethics in American Business: Policies, Programs and Perceptions (Washington, DC, Ethics Resource Center, 1994); Ethics Resource Center, National Business Ethics Survey: How Employees View Ethics in Their Organizations 1994–2005, (Washington, DC, Ethics Resource Center, 2005); and James Weber and David Wasieleski, “Corporate Ethics and Compliance Programs: A Report, Analysis and Critique,” Journal of Business Ethics 112 (2013), pp. 609–26.
Developed code of ethics
O�ered ethics training
Created ethics o�ce/o�cer
Established ethics hotline
0%
20%
40%
60%
80%
100%
Center for Business Ethics, 1986
Center for Business Ethics, 1992
Ethics Resource Center, 1994
Ethics Resource Center, 2005
Weber and Wasieleski, 2013
Final PDF to printer
124 Part Two Business and Ethics
law43665_ch06_115-136.indd 124 11/14/18 01:42 PM
approach emphasizes the threat of detection and punishment in order to channel employee behavior in a lawful direction. Paine also described an integrity-based approach to ethics programs. Integrity-based ethics programs combine a con- cern for the law with an emphasis on employee responsibility for ethical conduct. Employees are told to act with integrity and conduct their business dealings in an environment of honesty and fairness. From these values a company will nurture and maintain business relationships and will be profitable.19
Researchers found that both approaches lessened unethical conduct, although in some- what different ways. Compliance-based ethics programs increased employees’ willingness to seek ethical advice and sharpened their awareness of ethical issues at work. Integrity-based programs, for their part, increased employees’ sense of integrity, commitment to the orga- nization, willingness to deliver bad news to supervisors, and their perception that better decisions were made.20
Top Management Commitment and Involvement
Research has consistently shown that the “tone at the top”—the example set by top executives— is critical to fostering ethical behavior. As Dan Amos, CEO and Chairperson for Aflac states, “Ethics is a mindset, not an option.”21 When senior-level managers and directors signal employees, through their own behavior, that they believe ethics should receive high priority in all business decisions, they have taken a giant step toward improving ethical performance throughout the company.
Whether the issue is sexual harassment, honest dealing with suppliers, or the reporting of expenses, the commitments (or lack thereof) by senior management and the employees’ immediate supervisor and their involvement in ethics as a daily influence on employee behavior are the most essential safeguards for creating an ethical workplace.
Ethics Policies or Codes
As shown in Figure 6.2, many U.S. businesses, especially large firms, have ethics policies or codes. An example of a corporate ethics code is shown in Exhibit 6.D. The purpose of such policies and codes is to provide guidance to managers and employees when they encounter an ethical dilemma. Research has shown significant differences among coun- tries. In the United States and Latin America, ethics policies were found to be primarily instrumental—that is, they provided rules and procedures for employees to follow in order to adhere to company policies or societal laws. In Japan, most policies were a mixture of legal compliance and statements of the company’s values and mission. Values and mission policies were also popular with European and Canadian companies.22 Despite some differ- ences in orientation, codes of ethics are clearly becoming more common.
Typically, ethics policies cover issues such as developing guidelines for accepting or refusing gifts from suppliers, avoiding conflicts of interest, maintaining the security of proprietary information, and avoiding discriminatory personnel practices. Yet, researchers have found that a written ethics policy, while an important contributor, is insufficient by itself to bring about ethical conduct. Companies must circulate ethics policies frequently and widely among employees and external stakeholder groups (for example, customers,
19 Lynn Sharp Paine, “Managing for Organizational Integrity,” Harvard Business Review, March–April 1994, pp. 106–17. 20 Gary R. Weaver and Linda Klebe Trevino, “Compliance and Values Oriented Ethics Programs: Influences on Employees’ Attitudes and Behavior,” Business Ethics Quarterly 9 (1999), pp. 315–35. 21 “Top CEOs Place High Value on Corporate Ethics and Social Responsibility to Drive Business,” Forbes, September 11, 2017, www.forbes.com. 22 Ronald C. Berenbeim, Global Corporate Ethics Practices: A Developing Consensus (New York: Conference Board, 1999).
Final PDF to printer
125
law43665_ch06_115-136.indd 125 11/14/18 01:42 PM
3M’s Code of Conduct
Named one of the world’s most ethical companies in 2018 for the fifth straight year by Ethisphere Institute, 3M maintains its reputation for its personal integrity, shared values, and ethical business practices around the world. Their code of conduct emphasizes six main principles:
1. Be Good. Obey the law and 3M’s Code of Conduct. 2. Be Honest. Act with uncompromising honesty and integrity. 3. Be Fair. Play by the rules, whether working with government, customers, or suppliers. 4. Be Loyal. Protect 3M’s interests, assets, and information. 5. Be Accurate. Keep complete and accurate business records. 6. Be Respectful. Respect one another and our social and physical environment around the world.23
Source: www.3m.com
23 “3M Recognized by Ethisphere Institute as a World’s Most Ethical Company for 5th Consecutive Year,” 3M News Center, Press Release, February 12, 2018, news.3m.com; and 3Msource.mmm.com/businessconduct. 24 “The 2014 Ethics and Compliance Program Effectiveness Report,” LRN, 2014, pp. 30–31. 25 “Getting Ahead of the Watchdogs: Real-Time Compliance Management, 2018 State of Compliance,” PricewaterhouseCoopers, 2018, www.pwc.com/us/stateofcompliance.
Exhibit 6.D
suppliers, or competitors). Many companies use posters, quick reference guides, and bro- chures to raise awareness and importance of their code.24
Ethics and Compliance Officers
Ethical lapses in large corporations throughout the 1980s prompted many firms to create a new position: the ethics and compliance officer (ECO), or sometimes called the chief compli- ance officer (CCO) or the chief integrity officer (CIO). A second surge of attention to ethics and the creation of ethics offices came in response to the 1991 U.S. Corporate Sentencing Guidelines, discussed in Chapter 5. The wave of corporate ethics scandals in the early 2000s and the passage of the Sarbanes-Oxley Act once again turned businesses’ attention toward entrusting ethical compliance and the development and implementation of ethics programs to an ethics or compliance officer. From 2000 to 2004, the number of members in the Ethics Officer Association doubled from 632 to more than 1,200 members and continued to grow to approximately 1,300 members representing over 400 organizations in over 50 countries by 2015. In 2015, the Ethics and Compliance Officer Association (ECOA), having renamed itself to reflect the growing number of managers charged with both compliance and ethics issues, and the Ethics Resource Center, America’s oldest non-profit organization advancing high ethical standards and practices in public and private institutions, merged into the Ethics and Compliance Alliance. One member of the ECOA is profiled in Exhibit 6.E.
A PricewaterhouseCoopers 2018 global compliance survey reported that 30 percent of the company’s ethics and compliance officers annually review the company’s code of con- duct and 49 percent update their firm’s compliance training and communication programs. Technology also plays a larger role for ethics officers. Half of the ethics and compliance officers surveyed reported they used technology to monitor employees’ compliance with ethics and compliance-related policies and procedures. “To prevent blind spots and flag exceptions as they occur, we must look to automation and technology to conduct real-time data mining and analytics,” explained Karen Griffin, executive vice present and chief com- pliance officer at Mastercard.25
Final PDF to printer
126
law43665_ch06_115-136.indd 126 11/14/18 01:42 PM
Meet Brad Smith, Microsoft’s Chief Compliance Officer
Brad Smith serves as Microsoft’s chief compliance officer, as well as its president and chief legal officer. He is responsible for the company’s corporate, external, and legal affairs, leading a team of more than 1,400 busi- ness, legal, and corporate affairs professionals working in 55 countries. These teams are responsible for the company’s legal work, its intellectual property portfolio, patent licensing business, corporate philanthropy, government affairs, public policy, corporate governance, and social responsibility work. Smith plays a key role in representing the company externally and in leading the company’s work on a number of critical issues including privacy, security, accessibility, environmental sustainability, and digital inclusion. Smith joined Microsoft in 1993 before becoming general counsel in 2002. Previously, he spent three years leading the legal and corporate affairs team in Europe and five years serving as the deputy general counsel responsible for legal and corporate affairs outside of the United States.
Sources: From the Leadership page in the Microsoft website, news.microsoft.com.
Exhibit 6.E
Ethics Reporting Mechanisms
In most companies, when employees are troubled about some ethical issue they seek out their immediate supervisor or someone else in senior management. But what if the employee is reluctant, for whatever reason, to raise the issue with their immediate supervi- sor? In that case, they can turn to their company’s ethics reporting mechanisms and call a “helpline” or send an e-mail expressing their concerns, anonymously if they wish. Ethics reporting systems typically have three uses: (1) to provide interpretations of proper ethical behavior involving conflicts of interest and the appropriateness of gift giving, (2) to create an avenue to make known to the proper authorities allegations of unethical conduct, and (3) to give employees and other corporate stakeholders a way to discover general informa- tion about a wide range of work-related topics.
A 2014 study found that 87 percent of firms made at least substantial progress on pro- viding employees with a secure and anonymous channel for reporting concerns. Another study found that more than one-third of the firms surveyed reported that the volume of calls to the organization’s reporting mechanism increased somewhat or a great deal in the last two years and only 12 percent of firms reported a decline in calls.26
While more and more employees are willing to use their companies’ ethical reporting mechanisms, a number of challenges remain. Executives tend to use the helpline more often than those farther down the organizational chart. The Ethics Resource Center study found that middle managers were “an area of vulnerability within companies” since they were less likely to use the helpline. The report also discovered that rates of helpline usage were lower in foreign-owned companies than in their U.S. counterparts. Yet, many busi- nesses described greater success when employees use the company’s helpline/hotline and were better able to avoid more serious ethical violations. Technology seemed to be the key.
A recent trend in corporate governance involves the use of ethics ambassadors, or liaisons, whose role is to promote and spread compliance and ethics messages throughout an organization. Most liaison programs focus on risk assessment and encouraging employees to communicate ethical infractions when they take place. New liaison programs go beyond this approach and try to design ways to better com- municate the ethics message to employees despite various competing sub-cultures within a given organization.27
26 “2014 LRN Study,” Ibid., p. 30; and “Helpline Calls and Incident Reports,” Society of Corporate Compliance, 2014. 27 “A Different Approach to Ethics Liaison Programs,” Ethikos, May/June 2016, pp. 1–4.
Final PDF to printer
Chapter 6 Organizational Ethics 127
law43665_ch06_115-136.indd 127 11/14/18 01:42 PM
But no matter how advanced the technology used in an ethics and compliance program, the ethics and compliance officer never really knows what to expect when monitoring calls to the helpline, as the following example showed:
“Oh, boy, this is one of those days,” thought the ethics officer at a midsized manu- facturing firm when she received a call on the ethics helpline that a toilet in the com- pany’s administration building was overflowing. She called maintenance and they found that someone had clogged up the toilet drain. When the same call was received a week later, the ethics officer knew she had to investigate. Through interviews with personnel who worked on that floor, she discovered that the supervisor had refused to allow workers to take bathroom breaks when needed, and an employee had boasted that “he was going to get even with his supervisor and plug up the toilet” to attract attention to unsafe working conditions. The call about the overflowing toilet and sub- sequent investigation allowed the ethics officer to address the real issue, counsel the supervisor, and repair the deteriorating working conditions at her company.28
Ethics Training Programs
Another step companies can take to build in ethical safeguards is to offer employee ethics training. This is generally the most expensive and time-consuming element of an ethics pro- gram. Studies have shown that only 20 to 40 percent of small businesses formally offer ethics training to their employees, often using less formal ways to communicate ethical values and procedures. Larger businesses, by contrast, usually conduct regular ethics training. As shown in Figure 6.3, businesses have several motivations for developing employee ethics training programs. In general, larger and more mature organizations are more inclined to believe that a culture of ethics encourages employees to speak up; whereas, small- and medium-size organizations are more likely to define training as an alignment with regulatory guidelines.29
As shown in Figure 6.3, most ethics and compliance training programs focus on making sure employees know what the law requires and the company expects. Some firms have gone further, exploring how individuals can contribute to strengthening the firm’s ethical culture.
An ethics training seminar sponsored by the Italian Cultural Institute in Copenhagen focused on the importance of individual creativity in making company cultures more ethical. Speakers at this cross-country congress of corporate governance professionals championed the great capacity of human ingenuity to facilitate ethical behavior in orga- nizations. For example, sessions at this conference included “The Responsibility of Indi- viduals and Organizations for Community Development and Progress” and “Innovative Approaches to Sustainable Development: From the Education of New Generations to the Processes for the Integration of Social Responsibility into Business Models.”30
One approach to ethics training in organizations that has become increasingly popular is known as “giving voice to values.” This approach is described in Exhibit 6.F.
The effectiveness of the ethics and compliance program is important to executives. Companies used to conduct formal ethics audits to ensure the quality of these programs, but today most firms have turned to a company-wide risk assessment audit to determine
28 Based on an interview with an ethics and compliance officer who requested that her firm and her identity remain anonymous. 29 See “Is Your Ethics and Compliance Training Really Preparing Your Employees?” Compliance and Ethics Professional, March–April 2012, www.corporatecompliance.org; and “2017 Ethics & Compliance Training Benchmark Report,” NAVEXGlobal (Lake Oswego, OR: NAVEXGlobal, 2017). 30 “Culture and Creativity as Key to Development Danish and Italian Applications: Ideas that Change the World,” conference sponsored by the Italian Cultural Institute in Copenhagen, www.fiveonlus.eu.
Final PDF to printer
128
law43665_ch06_115-136.indd 128 11/14/18 01:42 PM
Giving Voice to Values
Giving Voice to Values (GVV) was created Mary Gentile as an innovative approach to values-driven leadership development in business education and the workplace. As Gentile explained, “Rather than a focus on ethical analysis, the Giving Voice to Values curriculum focuses on ethical implementation and asks the questions: “What if I were going to act on my values? What would I say or do? How could I be most effective?” By 2018, this program was piloted in over 1,000 schools, companies, and other organizations on every continent. The GVV curriculum offers practical exercises, cases, modules, scripts, and teaching plans for handling a wide range of ethical conflicts in the workplace. The challenge for many moral managers is acting effectively on their beliefs in the day-to-day life of their organizations. Educator Mary Gentile tries to empower business leaders and managers by enabling them to give voice to—and to act on—their values at work. Gentile’s Giving Voice to Values program believes that the key is knowing how to act on your values despite opposing pressure. “GVV starts from the premise that most of us already want to act on our values, but that we also want to feel that we have a reasonable chance of doing so effectively and successfully. This pedagogy and curriculum are about raising those odds,” said Gentile.
Source: From www.darden.virginia.edu/ibis/initiatives/giving-voice-to-values.
Exhibit 6.F
FIGURE 6.3 Objectives and Motivations for Employee Ethics Training Programs
Source: “2017 Ethics & Compliance Training Benchmark Report,” NAVEXGlobal, 2017, Lake Oswego, OR: NAVEXGlobal).
0 10 20 30 40 50 60 70
Create a culture of ethics and respect
Improve employee understanding of compliance priorities and obligations
Prevent future issues or misconduct
Meet audit or certification requirements
Keep information secure and protected
Improve the skills of senior leaders and managers
Reinforce tone at the top
Improve training e�ectiveness by deploying courses that are higher quality
Establish strong legal defenses
Comply with laws and regulations 59%
57%
47%
39%
21%
20%
14%
14%
13%
8%
the effectiveness of the ethics program along with other risks. Experts believe that inte- grating various ethics safeguards into a comprehensive program is critically important and minimizes the firm’s risk. When all five components discussed in this chapter—top management commitment, ethical policies or codes, compliance officers, reporting mech- anisms, and training programs—are used together, they reinforce each other and become more effective.
As seen in Chapter 5, Ethisphere’s “The World’s Most Ethical Companies” financially outperformed the S&P 500 and FTSE 1000 every year since 2005. Figure 6.4 shows the 13 companies that have made the World’s Most Ethical Companies list each year from 2007–2017.
Final PDF to printer
Chapter 6 Organizational Ethics 129
law43665_ch06_115-136.indd 129 11/14/18 01:42 PM
Ethics in a Global Economy
Doing business in a global context raises a host of complex ethical challenges. One exam- ple of unethical activity is bribery, a questionable or unjust payment often to a government official to ensure or facilitate a business transaction. The act of bribery introduces an eco- nomic force that is not based on the product or service’s quality or other sales characteris- tics, therefore the element of bribery corrupts the economic exchange.
Bribery is found in nearly every sector of the global marketplace, but is more common in some countries than others.
A Berlin-based watchdog agency, Transparency International, annually publishes a sur- vey that ranks countries by their level of corruption, as perceived by executives and the public. In the 2017 survey, countries where having to pay a bribe was least likely included New Zealand, Denmark, Finland, Norway, and Switzerland. At the other end of the index, Syria, South Sudan, and Somalia were considered the world’s most corrupt countries, along with Afghanistan, Yemen, Sudan, Libya, and North Korea. The United States was tied for 16th on the list of 180 countries, with Canada 8th, Singapore and Sweden tied for 6th, the United Kingdom tied for 8th with the Netherlands, India tied for 81st with Ghana, China tied for 77th with Serbia and Suriname, and Russia tied for 135th.31
In some settings, corruption is so common as to be almost unavoidable. Transparency International interviewed over 160,000 adults from 119 countries around the globe from March 2014 to January 2017, to discover regional differences in corruption. This study found that one in four people claim to have paid a bribe when accessing public services in the 12 months prior to the survey. On average, the European Union had the lowest reported bribery rate at 9 percent compared to an average rate of 30 percent in the Middle East, North Africa, and the Commonwealth of Independent States in Eurasia. Latin American
31 For a complete list of all countries according to their perceived level of corruption, see https://www.transparency.org/ news/feature/corruption_perceptions_index_2017.
These firms were ranked among the highest ethical firms each year from 2007 through 2017.
AFLAC (insurance)
Deere and Company (industrial manufacturing)
Ecolab (chemicals)
Fluor Corporation (engineering)
General Electric (diversified)
International Paper (paper products)
Kao Corporation (consumer products)
Milliken & Company (industrial manufacturing)
PepsiCo (food & beverage)
Starbucks Coffee Company (restaurants)
Texas Instruments (computers)
UPS (transportation)
Xerox (computers)
FIGURE 6.4 The World’s Most Ethical Companies and Their Industries, According to Forbes Magazine
Source: “The World’s Most Ethical Companies, Forbes, March 14, 2017, www.forbes .com.
Final PDF to printer
130 Part Two Business and Ethics
law43665_ch06_115-136.indd 130 11/14/18 01:42 PM
and Asia Pacific regions were close behind with average bribery rates up to 29 percent. A survey in Nigeria found that Nigerians paid about $4.6 billion in bribes each year. Accord- ing to a 2017 study by the Prosecutor General’s Office in Russia, 25 percent of Russians admitted to having paid a bribe in the prior year.32
Bribery has significant economic, as well as ethical, consequences. Mythili Raman, a former senior executive at the Department of Justice explained,
“Our fight against foreign corruption is critical for so many reasons. The corrosive effects of transnational corruption are felt not just overseas, but also here in the United States. Although we may not experience as acutely, or as personally, some of the consequences of foreign bribery, such as hospitals or roads that go unbuilt because infrastructure funds are siphoned off by a corrupt official, American com- panies are harmed. They are denied the ability to compete in a fair and transparent marketplace. Instead of being rewarded for their efficiency, innovation and honest business practices, U.S. companies suffer at the hands of corrupt governments and lose out to corrupt competitors.”33
The following examples further demonstrate the harmful effects of bribery.
∙ Brazilian state-run oil company Petroleo Brasileiro SA announced that their corrup- tion scandal contributed to their stock shares dropping 6.2 billion reais ($2.1 billion) in value and led to a revised accounting charge of 44.6 billion reais ($14.8 billion) for 2014 after determining that assets were overvalued on its balance sheet.
∙ Alstom, a French conglomerate, plead guilty and paid $772 million to the United States for bribing Indonesian government officials with more than $4 billion to win power contracts from 2000 to 2011. Since Alstom has U.S. affiliate companies that are head- quartered in Connecticut, it is governed by United States laws, specifically the Foreign Corrupt Practices Act (the FCPA is introduced later in the chapter).
∙ Rolls-Royce, the luxury automobile, jet and marine engine manufacturer, settled a long- term corruption investigation by agreeing to pay U.S. and British government authori- ties more than $800 million in penalties. The company admitted in 2017 to engaging in corrupt business dealings overseas years earlier.34
Efforts to Curtail Unethical Practices Despite the prevalence of bribery, both companies and countries have taken a strong stand against it.
Huguette Labelle, the chair of Transparency International, stated, “People believe they have the power to stop corruption, and the number of those willing to combat the abuse of power, secret dealings, and bribery is significant.” Seventy-one percent of respondents to a
32 “People and Corruption: Citizens’ Voices from Around the World,” Transparency International, 2017, www.transparency .org; “Corruption Currents: Study Says Nigerians Pay $4.6 Billion in Bribes Per Year,” The Wall Street Journal, August 17, 2017, www.wsj.com; and “A Quarter of Russians Pay Bribes, Anonymous Survey Says,” Moscow Times, December 11, 2017, www.moscowtimes.com. 33 “Acting Assistant Attorney General Mythili Raman Speaks at the Global Anti-Corruption Compliance Congress,” Ethikos, May/June 2014, pp. 1–2. 34 “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges,” The Wall Street Journal, April 22, 2015, www.wsj.com; “Alstom to Pay U.S. Record $772 Million in Fine in Bribery Scheme,” The New York Times, December 22, 2014, www.nytimes.com; and, “Rolls-Royce to Pay More than $800 Million to Settle Corruption Probe,” The Wall Street Journal, January 14, 2017, www.wsj.com.
Final PDF to printer
Chapter 6 Organizational Ethics 131
law43665_ch06_115-136.indd 131 11/14/18 01:42 PM
Dow Jones Anti-Corruption survey said their companies had delayed or stopped activities with business partners over concerns about breaking anti-corruption regulations.
In 2017, Samsung Electronics’ vice-chairman, Lee Jae-yong, was convicted of brib- ery and sentenced to a five-year jail sentence. Lee was found guilty of bribing South Korea’s president and of involvement in a corruption scandal that had com- promised the previous government regime in his country. Allegedly, Lee had attempted to bribe President Park Geun-hye to get her to support business deals important to Samsung. The company admitted that it was complicit in the agree- ment to pay a close friend of Park $38 million. Prosecutors claimed that some of the payments made by Samsung were to guarantee that certain business deals were made for Samsung’s benefit. Park was later removed from political office and was tried and convicted of bribery and coercion. This bribery scandal spanned both cor- porate and political boundaries.35
Numerous efforts are under way to curb unethical business practices throughout the world. The most common method is government intervention and regulation.
Since 1977, the U.S. Foreign Corrupt Practices Act (FCPA) has prohibited executives of U.S.-based companies or businesses operating in the U.S. from paying bribes to govern- ment officials, political parties, or political candidates. To achieve this goal, the FCPA requires U.S. companies with foreign operations to adopt accounting practices that ensure full disclosure of the company’s transactions. In 2014, companies paid $1.56 billion to resolve FCPA cases. In 2015, companies paid $133 million; in 2016, $2.48 billion; and, in 2017, $1.92 billion.36
The United Kingdom’s Bribery Act was passed in 2010. Some believed it was even more stringent than the U.S.’s FCPA. The U.K. Bribery Act differs from the FCPA in that it
∙ prohibits the bribery of another person and receiving or accepting a bribe, whereas the FCPA only prohibits bribery of government officials. Bribery of a private business executive would be illegal under British, but not U.S., anticorruption law.
∙ does not require that the improper offer, promise, or payment be made “corruptly,” as the FCPA does require evidence of the intent to corrupt.
∙ does not provide exemptions for “facilitating payments” or the defense that there are reasonable and bona fide contractual or promotional expenses, as the FCPA does.
∙ contains a strict liability offense for failure to prevent bribery by commercial organiza- tions; the FCPA does not.37
Other governments have drafted and passed new legislation to combat corruption and bribery. In 2013, Brazil, one of the world’s top 10 largest economies, approved an anti- bribery law that imposed civil and criminal penalties on firms for acts committed against local and foreign government officials. Fines can be as high as 20 percent of the compa- ny’s annual gross revenues. India joined Brazil in 2014 by passing its own anticorruption legislation.
The Mexican government approved a major anticorruption reform bill in 2016 that revised 14 constitutional articles, creating two new laws and changing five others. Backed by civil society groups, this reform represented the largest and broadest attempt to address
35 “Samsung Heir Lee Jae-yong Convicted of Bribery, Gets Five Years in Jail,” The Wall Street Journal, August 25, 2017, www.wsj.com. 36 “2017 FCPA Enforcement Index,” The FCPA Blog, January 2, 2018, www.fcpzblog.com. 37 Bribery Act 2010, 2010, www.legislation.gov.uk/ukpga/2010/23/contents.
Final PDF to printer
132 Part Two Business and Ethics
law43665_ch06_115-136.indd 132 11/14/18 01:42 PM
rampant corruption in the country. Among the areas addressed by the new measures, dec- laration of assets by public contractors is now mandatory.38
While enforcement is often spotty, some countries have enforced their bribery laws aggressively. China imposed a $487 million fine on British pharmaceutical GlaxoSmith- Kline (GSK) for bribery, after Glaxo reportedly used payoffs to persuade hospitals and doctors to administer or sell Glaxo pharmaceuticals to their patients.39
While governmental efforts continue to emerge, a business scholar argued that “a legalistic approach, by itself, is unlikely to be effective in curbing bribery,” since culture has such a strong influence. Most effective in combating bribery may be an integrative approach of economic development, social investment in education, and business-friendly policies, in addition to anticorruption laws and punishments to combat bribery.40
Businesses of all sizes and from many diverse industries around the world have attempted to respond to the increasing pressure to create an ethical environment at work. As discussed, the organization’s culture and ethical work climate play a central role in pro- moting ethics at work and encouraging employees to act ethically. Businesses have imple- mented many ethical safeguards to create effective ethics programs. Challenges remain as organizations expand their operations globally and encounter a complex network of different customs and regulations.
38 “Mexico Wins: Anti-Corruption Reform Approved,” Forbes, July 18, 2016, www.forbes.com. 39 “Finally, Companies in Brazil Can Be Prosecuted for Corruption,” Transparency International, July 8, 2013, blog. transparency.org; “Indian: New Anti-Corruption Law,” The Law Library of Congress, January 8, 2014, www.loc.gov; and “China Fines GlaxoSmithKline Nearly $500 Million in Bribery Case,” The New York Times, September 19, 2014, www.nytimes.com. 40 Rajib Sanyal, “Determinants of Bribery in International Business: The Cultural and Economic Factors,” Journal of Business Ethics 59 (2005), pp. 139–45.
∙ A company’s culture and ethical climate tend to shape the attitudes and actions of all who work there, sometimes resulting in high levels of ethical behavior and at other times contributing to less desirable ethical performance.
∙ Not all ethical issues in business are the same, but ethical challenges occur in all major functional areas of business. Professional associations for each functional area often attempt to provide a standard of conduct to guide practice.
∙ Companies can improve their ethical performance by creating a values-based ethics program that relies on top management leadership and organizational safeguards, such as ethics policies or codes, ethics and compliance offices and officers, ethics reporting mechanisms, and ethics training programs.
∙ Companies that have a comprehensive, or multifaceted, ethics program often are better able to promote ethical behavior at work and avoid unethical action by employees.
∙ Ethical issues, such as bribery, are evident throughout the world, and many international agencies and national governments are actively attempting to minimize such unethical behavior through economic sanctions and international codes.
Summary
Final PDF to printer
law43665_ch06_115-136.indd 133 11/14/18 01:42 PM
Key Terms ethics reporting mechanisms, 126 U.S. Foreign Corrupt Practices Act, 131
bribery, 129 corporate culture, 116 employee ethics training, 127 ethical climate, 117
ethics and compliance officer, 125 ethics policies or codes, 124
Internet Resources
thecro.com CR: Corporate Responsibility Magazine www.dii.org Defense Industry Initiative on Business Ethics and Conduct ecoaconnects.theecoa.org Ethics and Compliance Initiative Connects (Ethics and
Compliance Officer Association) www.ethicaledge.com Ethics and Policy Integration Centre ethisphere.com Ethisphere Institute www.ethics.org Ethics and Compliance Initiative Connects (Ethics Resource
Center) www.globalethics.org Institute for Global Ethics www.saiglobal.com SAI Global www.business-ethics.org International Business Ethics Institute www.corporatecompliance.org Society of Corporate Compliance and Ethics www.transparency.org Transparency International
Discussion Case: Equifax’s Data Breach The credit reporting company Equifax was at the center of a massive data breach affecting over 145 million customers. In 2017, hackers took advantage of a vulnerability in Equi- fax’s website software and stole the personal information, including names, addresses, and Social Security numbers, of as many as 145 million Americans. A separate but related incident at Equifax involved 15 million British citizens who had their records violated from 2011 to 2016. The failure of Equifax’s internal reporting and control measures led to a widespread violation of peoples’ rights to the privacy of their personal information and became a huge public relations crisis for the company.
Equifax’s top lawyer, John Kelley, was investigated by the board of directors for his pos- sible involvement in a cover-up of the hack and his mishandling of the situation. Kelley was responsible for approving the sales of company stock by executives after the breach was dis- covered, but before it had been revealed to the public. Upon the disclosure of the breach, company stock price fell 14 percent. Investors sold approximately $4.5 billion (25 percent) of the company’s market value after the hack was made public.
More than 10 million Americans had their driver’s license data exposed during the hack. Many people who had provided their driver’s license information to the company were simply verifying their information in order to receive credit reports and ratings from Equifax. Some had entered their information on the company’s web page in an effort to settle credit report disputes. The credit report dispute web page had been particularly vul- nerable to security breaches. Equifax CEO Richard Smith admitted during congressional
Chapter 6 Organizational Ethics 133
Final PDF to printer
134 Part Two Business and Ethics
law43665_ch06_115-136.indd 134 11/14/18 01:42 PM
hearings that he and other executives had been aware of the security weaknesses, but that a single employee at the firm had not properly heeded security warnings and did not ensure the implementation of software fixes. Smith added that there was a failure in their software systems designed to scan for the absence of “patches” necessary to protect pri- vate information.
Other internal control mechanisms at Equifax appeared to have been either ignored or dysfunctional. Frederick Lemieux, director of Georgetown University’s graduate pro- gram in Applied Intelligence, blamed the breach on what he called “passive complicity” in the firm’s culture. (Complicity means being involved in wrongdoing; passive complicity implies that executives were guilty of wrongdoing by not actively preventing it.) That top executives seemed to worry more about their own stock portfolios than the security of their customers’ personal information was troubling to many ethics experts. Observers also crit- icized the company for its delay in going public about the breach. Finally, it appeared that knowledge of the potential for hacking was isolated to only one employee. A more robust system where multiple individuals were responsible for preventing a problem might have avoided the hack.
Unlike banks, credit reporting agencies are relatively lightly regulated, and they typi- cally rely on internal systems to maintain security. Lemieux stated, “there is no incentive to comply with the best industry practices and no incentives to spend [funds on these pro- grams] because you’re not accountable for it.” He noted that credit reporting agencies did not face the same financial or legal consequences that banks or other businesses, like Tar- get or Home Depot, encountered when hacked. Pamela Pressman, president of the Center for Responsible Enterprise and Trade, said that the breach should remind Equifax and other firms to train their employees and raise awareness about proper “cyber hygiene . . . ensur- ing that your employees, your contractors, your vendors—those people that have access to your network and your data—understand their role in protecting the network and protect- ing the data.”
The cyberattack on Equifax was potentially more dangerous than other hacks in recent history because credit-reporting agencies played a significant role in determining who received financing and ultimately, how much credit they received. The data collected by these agencies was needed for applying for credit cards, loans, and background checks. The attack was conducted in one major maneuver, which facilitated the hackers’ ability to use the data for their own purposes.
This breach could lead to problems for small financial institutions, like community banks and credit unions, which typically relied on information collected by the credit-reporting firms to determine their loan decisions. Larger financial institutions were more likely to collect additional information from applicants, which made them less vulnerable.
Days after the company discovered the breach, CFO John Gamble and two other top Equifax executives reportedly sold a combined $1.8 million worth of shares of the com- pany, but all three denied knowing of the hack when they made the transactions, despite evidence to the contrary. CEO Smith stepped down from his post following these events. Smith had been in charge since 2005. The Federal Bureau of Investigation investigated Equifax’s handling of the situation as well as the actions of the top executives. When testi- fying before Congress, Smith downplayed the severity of the situation and the factors that facilitated the breach. He repeatedly blamed an IT worker who did not implement software remedies after Equifax executives had been warned of possible holes in Equifax’s website security by the U.S. Department of Homeland Security.
Equifax hired FireEye’s Mandiant group to investigate the breach. The Mandiant report determined that approximately 2.5 million additional U.S. consumers were potentially
Final PDF to printer
Chapter 6 Organizational Ethics 135
law43665_ch06_115-136.indd 135 11/14/18 01:42 PM
impacted, for a total of 145.5 million. Mandiant did not identify any evidence of additional or new attacker activity or any access to new databases or tables. Instead, this additional population of consumers was confirmed during Mandiant’s completion of the remaining investigative tasks and quality assurance procedures built into the investigative process. The review also has concluded that there is no evidence the attackers accessed databases located outside of the United States.
Equifax claimed they learned of hacking activity in May 2017, but the Mandiant report said the hack started two months earlier. Company executives did not formally disclose the breach until September 2017, however. They admitted that the hack was conducted from May through July 2017. The identity of the hackers was never disclosed.
Sources: “The Morning Risk Report: Equifax Breach Could Spur New Round of Training,” The Wall Street Journal, September 11, 2017, www.wsj.com; “How to Explain the Equifax Breach? Start with the Culture,” Georgetown University, September 15, 2017, ses.georgetown.edu; “Equifax CEO Richard Smith to Exit Following Massive Data Breach,” The Wall Street Journal, September 26, 2017, www.wsj.com; “At the Center of the Equifax Mess: Its Top Lawyer,” The Wall Street Journal, October 1, 2017, www.wsj.com; “2.5 Million More People Potentially Exposed in Equifax Breach,” The New York Times, October 2, 2017, www.nytimes.com; “Equifax Announces Cybersecurity Firm Has Concluded Forensic Investigation Of Cybersecurity Incident,” Equifax website, October 2, 2017, investor.equifax.com; and “Equifax Breach Caused by Lone Employee’s Error, Former CEO Says,” The New York Times, October 4, 2017, www.nytimes.com.
Discussion Questions
1. Do you think the company reacted appropriately upon learning about the breach? 2. What could Equifax have done differently to prevent the cyberattack? 3. What type(s) of ethical climate existed at Equifax, and did this contribute to the hacking
issues there? 4. What changes should managers and the board of directors make now to reduce to likeli-
hood of an incident like this from occurring in the future? 5. What types of ethics training would you recommend for Equifax employees in the future
to prevent such corrupt behavior?
Final PDF to printer
law43665_ch06_115-136.indd 136 11/14/18 01:42 PM
Final PDF to printer
P A R T T H R E E
law43665_ch07_137-160.indd 137 11/20/18 10:59 AM
Business and Public Policy
Final PDF to printer
138
law43665_ch07_137-160.indd 138 11/20/18 10:59 AM
C H A P T E R S E V E N
Business–Government Relations Governments seek to protect and promote the public good and in these roles establish rules under which business operates in society. Therefore, a government’s influence on business through pub- lic policy and regulation is a vital concern for managers. Government’s relationship with business can be either cooperative or adversarial. Various economic or social assistance policies significantly affect society, in which businesses must operate. Many government regulations also impact business directly. Managers must understand the objectives and effects of government policy and regulation, both at home and abroad, in order to conduct business in an ethical and legal manner.
This Chapter Focuses on These Key Learning Objectives:
LO 7-1 Understanding why sometimes governments and business collaborate and other times work in opposition to each other.
LO 7-2 Defining public policy and the elements of the public policy process.
LO 7-3 Explaining the reasons for regulation.
LO 7-4 Knowing the major types of government regulation of business.
LO 7-5 Identifying the purpose of antitrust laws and the remedies that may be imposed.
LO 7-6 Comparing the costs and benefits of regulation for business and society.
LO 7-7 Examining the conditions that affect the regulation of business in a global context.
Final PDF to printer
Chapter 7 Business–Government Relations 139
law43665_ch07_137-160.indd 139 11/20/18 10:59 AM
Uber Technologies, a U.S.–based international transportation network company founded in 2009, developed a mobile app that allowed consumers to submit a trip request, which was then routed to one of its drivers. By 2018, the service was available in 84 countries and nearly 800 cities worldwide. Yet, Uber encountered serious opposition when it attempted to expand into the European Union. The Employment Appeal Tribunal ruled in 2017 that the 50,000 Uber drivers in the United Kingdom must be considered employees, not indepen- dent contractors, as Uber had argued. This ruling meant that the drivers qualified for vari- ous employee rights such as paid vacations. Experts stated that this decision could serve as a bellwether for other employment lawsuits against Uber in the United States, Canada, and other countries, potentially jeopardizing the company’s business model globally.1
In 2016, the U.S. Food and Drug Administration (FDA) created tough regulatory standards for the e-cigarette industry, including banning all sales to anyone under 18 years of age, requir- ing package-warning labels, and making all products—even those currently on the market— subject to government approval. This was seen as a devastating blow to the fast-growing $3.5 billion e-cigarette industry, which was largely unregulated and dominated by small man- ufacturers and vape shops. Most experts predicted that this was only the first step and that the FDA would soon move to regulate the e-cigarette industry further, targeting advertising and e-cigarette flavors, such as cotton candy and watermelon, which may appeal to youth.2
What prompted or compelled governments to become more involved in the status of employees or the sale of a consumer product? How do these governments’ actions affect businesses and what they are permitted to do? How did these actions affect competition or society and the public’s health? Did governments’ involvement promote or harm compa- nies or allow other firms to maintain their competitive advantage? Were these efforts by the governments necessary and effective, or can this only be answered in time?
Governments create the conditions that make it possible for businesses to compete in the modern economy. As shown in the opening examples, governments can act in dramatic ways to provide or limit opportunities for businesses and control business activities to better ensure the public’s health. In good times and bad, government’s role is to create and enforce the laws that balance the relationship between business and society. Governments also hold the power to grant or refuse permission for many types of business activity. Even the largest multinational companies, which operate in dozens of countries, must obey the laws and public policies of national governments.
This chapter considers the ways in which government actions impact business through the powerful twin mechanisms of public policy and regulation. The next chapter addresses the related question of actions business may take to influence the political process.
How Business and Government Relate
The relationship between business and government is dynamic and complex. Understand- ing the government’s authority and its relationship with business is essential for managers in developing their strategies and achieving their organization’s goals.
Seeking a Collaborative Partnership In some situations, government may work closely with business to build a collaborative partnership and seek mutually beneficial goals. They see each other as key partners in the relationship and work openly to achieve common objectives.
1 “Uber Suffers Setback as U.K. Court Rules Its Drivers Should Have Workers’ Rights,” The Wall Street Journal, November 10, 2017, www.wsj.com. 2 “FDA to Regulate E-Cigarettes, Ban Sales to Minors,” The Wall Street Journal, May 5, 2016, www.wsj.com.
Final PDF to printer
140 Part Three Business and Public Policy
law43665_ch07_137-160.indd 140 11/20/18 10:59 AM
The basis for this cooperation may be at the core of the nation’s societal values and customs. In some Asian countries, society is viewed as a collective family that includes both government and business. Thus, working together as a family leads these two powers to seek results that benefit both society and business. In Europe, the relationship between government and business often has been collaborative. European culture includes a sense of teamwork and mutual aid. Unions, for example, are often included on administrative boards with managers to lead the organization toward mutual goals through interactive strategies. One example of government–business collaboration is shown next.
While many businesses were requesting and supporting While House directives to eliminate or decrease regulatory control, quite the contrary drone makers and opera- tors were clamoring for more federal rules. They envisioned an increase in the regula- tory climate as an opportunity to open up the skies for unmanned aircraft. These businesses pledged to cooperate with regulators to make that happen. In response to these pressures, the Federal Aviation Administration gave approval for small, remotely piloted aircraft weighing up to 55 pounds to operate during daylight hours, up to an altitude of 400 feet and within sight of operators on the ground. Drone maker and operators took this opportunity to expand their operations. Unlike some other businesses that did not welcome government oversight, “we want and need rules and regulations to understand how we can fly drones commercially for expanded opera- tions,” said Gretchen West, a senior legal advisor to the drone industry.3
In this instance, both the Federal Aviation Administration and drone makers agreed on the need for regulation, leading to collaboration between the government and business.
Working in Opposition to Government In other situations, government’s and business’s objectives are at odds, and these conflicts result in an adversarial relationship where business and government tend to work in oppo- sition to each other.4
On three difference occasions, Tesla released relevant information to the National Transportation Safety Board (NTSB) to assist the government agency in its investi- gation of the cause of a crash of its semiautonomous driving Tesla Model S vehicle. But a few weeks later, the company withdrew from its formal agreement to cooper- ate with the NTSB after the preliminary investigation appeared to target the driver in the car, who died from injuries sustained in the accident. “Today, Tesla withdrew from the party agreement with the NTSB because it requires that we not release information about Autopilot to the public, a requirement which we believe funda- mentally affects public safety negatively,” explained a Tesla company press release. Tesla seemed upset that it could be a year or longer before the government investi- gators reached their conclusions, and meanwhile the company would be subject to negative publicity without an opportunity to respond with their side of the story.5
In this instance, a business concluded that cooperation with the government was not in its best interest.
3 “Unlike Most Industries, Drone Makers and Operators Clamor for Federal Regulation,” The Wall Street Journal, September 17, 2017, www.wsj.com. 4 The “collaborative partnership” and “in opposition” models for business–government relations is discussed in “Managing Regulation in a New Era,” McKinsey Quarterly, December 2008, www.mckinseyquarterly.com. 5 “Tesla Withdraws Formal Cooperation with Probe of Fatal Crash, Will Still Assist Investigators,” The Wall Street Journal, April 12, 2018, www.wsj.com.
Final PDF to printer
Chapter 7 Business–Government Relations 141
law43665_ch07_137-160.indd 141 11/20/18 10:59 AM
Why do businesses sometimes welcome government regulation and involvement in the private sector, and other times oppose it? Companies often prefer to operate without gov- ernment constraints, which can be costly or restrict innovation. But regulations can also help business, by setting minimum standards that all firms must meet, building public con- fidence in the safety of a product, creating a fair playing field for competition, or creating barriers to entry to maintain a business’s competitive advantage. How a specific company reacts to a specific government policy often depends on their assessment of whether they would be helped or hurt by that rule.
In short, the relationship between government and business can range from one of coop- eration to one of conflict, with various stages in between. Moreover, this relationship is constantly changing. A cooperative relationship on one issue does not guarantee coopera- tion on another issue. The stability of a particular form of government in some countries may be quite shaky, while in other countries the form of government is static but those in power can change unexpectedly or government leaders can change on a regular basis. The business–government relationship is one that requires managers to keep a careful eye trained toward significant forces that might alter this relationship or to promote forces that may encourage a positive business–government relationship.6
Legitimacy Issues When dealing with a global economy, business may encounter governments whose author- ity or right to be in power is questioned. Political leaders may illegally assume lawmaking or legislative power, which can become economic power over business. Elections can be rigged, or military force can be used to acquire governmental control.
Business managers may be faced with the dilemma of whether to do business in such a country, where their involvement would indirectly support this illegitimate power. Some- times, they may choose to become politically active, or refuse to do business in this coun- try until a legitimate government is installed.
Businesses can also influence the ability of a government leader or group of leaders to maintain political power. For example, companies can decide to withdraw operations from a country, as many U.S. firms did from South Africa in the 1970s to protest the practice of apartheid (institutionalized racial segregation). Some believe that the economic isolation of South Africa contributed to the eventual collapse of the apartheid regime. Governments may also order companies not to conduct business in another country because of a war, human rights violations, or lack of a legitimate government. These orders are called eco- nomic sanctions. As of 2018, the United States had imposed economic sanctions on the Balkans, Belarus, Myanmar, Cote D’Ivoire (Ivory Coast), Cuba, Democratic Republic of Congo, Iran, Iraq, Liberia, North Korea, Sudan, Syria, and Zimbabwe.7
Government’s Public Policy Role
Government performs a vital and important role in modern society. Although vigorous debates occur about the proper size of programs government should undertake, most peo- ple agree that a society cannot function properly without some government activities. Cit- izens look to government to meet important basic needs. Foremost among these are safety and protection provided by the military, homeland security, police, and fire departments.
6 See George Lodge, Comparative Business–Government Relations (Englewood Cliffs, NJ: Prentice Hall, 1990) and Tom Leh- man, “Six Arguments against Government Regulations,” www.capitalism.com. 7 See the Treasury Department’s Office of Foreign Asset Control, www.treasury.gov.
Final PDF to printer
142 Part Three Business and Public Policy
law43665_ch07_137-160.indd 142 11/20/18 10:59 AM
These are collective or public goods, which are most efficiently provided by government for everyone in a community. In today’s world, governments are also expected to provide economic security and essential social services, and to deal with the most pressing social problems that require collective action, or public policy.
Public policy is a plan of action undertaken by government officials to achieve some broad purpose affecting a substantial segment of a nation’s citizens. Public policy, while differing in each nation, is the basic set of goals, plans, and actions that each national government follows in achieving its purposes. Governments generally do not choose to act unless a substantial segment of the public is affected and some public purpose is to be achieved. This is the essence of the concept of governments acting in the public interest.
The basic power to make public policy comes from a nation’s political system. In dem- ocratic societies, citizens elect political leaders who can appoint others to fulfill defined public functions ranging from municipal services (e.g., water supplies, fire protection) to national services, such as public education or homeland security. Democratic nations typi- cally spell out the powers of government in the country’s constitution.
Another source of authority is common law, or past decisions of the courts, the original basis of the U.S. legal system. In nondemocratic societies, the power of government may derive from a monarchy (e.g., Saudi Arabia), a military dictatorship (e.g., Eritrea), or reli- gious authority (e.g., the mullahs in Iran). These sources of power may interact, creating a mixture of civilian and military authority. The political systems in Russia, Libya, Tuni- sia, and other nations have undergone profound changes in recent times. And democratic nations can also face the pressures of regions that seek to become independent nations exercising the powers of a sovereign state, as has Canada with the province of Quebec.
Elements of Public Policy The actions of government in any nation can be understood in terms of several basic ele- ments of public policy. These are inputs, goals, tools, and effects. They will be illustrated using the example of distracted driving.
Public policy inputs are external pressures that shape a government’s policy decisions and strategies to address problems. Economic and foreign policy concerns, domestic politi- cal pressure from constituents and interest groups, technical information, and media atten- tion all play a role in shaping national political decisions. For example, a growing recognition of the dangers of distracted driving has pressured many state and local governments to ban or regulate the use of various electronic devices by drivers. Distracted driving may occur when a driver’s attention is diverted by personal grooming tasks, adjusting music or naviga- tion settings, eating, reading, and assorted other activities. It has become an even greater threat to driver and passenger safety as technologies have advanced. More and more drivers are now able to make or receive calls, send text messages, and even browse the Internet—all while driving a car at high speeds, in heavy traffic, or during bad weather conditions.8
According to an annual National Safety Council study, for the first time since 2007 more than 40,000 people died in motor vehicle crashes in a single year. Experts point to numerous causes for this record-breaking data, but typically focus on one important potential contributor: distracted driving. According to a national Consumer Reports survey of 622 licensed drivers, 52 percent admitted to engaging in distracting activities while driving, even though they knew it was wrong. Of those drivers surveyed, 41 percent admitted using their hands to send a text, 37 percent to playing music on a smartphone, and 8 percent to watching videos on
8 “Windshield Devices Bring Distracted Driving Debate to Eye Level,” The New York Times, May 29, 2015, www.nytimes.com.
Final PDF to printer
Chapter 7 Business–Government Relations 143
law43665_ch07_137-160.indd 143 11/20/18 10:59 AM
their phone while driving. Teens were particularly vulnerable. According to data from the Insurance Institute for Highway Safety, 60 percent of teen drivers involved in fatal crashes were distracted immediately before the accident. In a survey con- ducted by Zendrive Research of 3 million drivers globally, they found that drivers used their phones during 88 percent of their trips. An Erie Insurance study found that 15 percent of drivers admitted they had engaged in “romantic encounters” while behind the wheel and 9 percent said they had changed clothes while driving.9
In response to this growing epidemic, government bodies—legislatures, town councils, regulatory agencies—need to consider all relevant inputs in deciding whether or not to act, and if so, how.
Public policy goals can be broad (e.g., full employment) and high-minded (equal oppor- tunity for all) or narrow and self-serving. National values, such as freedom, democracy, and a fair chance for all citizens to share in economic prosperity, have led to the adoption of civil rights laws and economic assistance programs for those in need. Narrow goals that serve special interests are more apparent when nations decide how legislation will allocate the burden of taxes among various interests and income groups, or when public resources, such as oil exploration rights or timber cutting privileges, are given to one group or another. Whether the goals are broad or narrow, for the benefit of some or the benefit of all, most governments should ask, “What public goals are being served by this action?” For example, the rationale for a government policy to regulate distracted driving has to be based on some definition of public interest, such as preventing harm to others, including innocent drivers, passengers, and pedestrians.
The goal of distracted driving regulation is to prevent deaths and serious injuries resulting from drivers being distracted while driving. The factual data appears to be overwhelming. However, some members of the public have insisted on their right to use their phones for texting and other activities in their vehicles. Traveling sales- persons, for example, depend on their phones as an important tool of the job. Some regulations have addressed this by permitting drivers to use hands-free devices that permit them to keep their hands on the wheel. But some government safety experts have disagreed, saying, “When you are on a call, even if both hands are on the wheel, your head is in the call, and not your driving.”
The issue of banning the use of cell phones, hand-held or hands-free, for the sake of making our roads a little safer for all, remains at the forefront, but new technology has created even greater distractions. Devices can project information and data streamed from a smartphone onto the car’s windshield. Maps, speed, incoming texts, caller identification, and even social media notifications can be projected just above the dashboard of a car for the driver to read. The game Pokémon Go prompts drivers to search for virtual creatures on the highways or country roads. So, the goals of saving lives, reducing injuries, and eliminating health care costs are increasingly more urgent and the demand for regulation even more critical.
Governments use different public policy tools to achieve policy goals. The tools of pub- lic policy involve combinations of incentives and penalties that government uses to prompt
9 “Rise in U.S. Traffic Deaths Reported for a Second Year,” The New York Times, February 15, 2017, www.nytimes.com; “Consumer Reports Tackles Distracted Driving and Calls Traffic Deaths a Public Health Epidemic,” Forbes, November 19, 2017, www.forbes.com; “Zendrive Research: Largest Distracted Driving Behavior Study,” The Fiscal Times, April 18, 2017, www.thefiscaltimes.com; and “Study Asks Just How Distracted Are Motorists?” Pittsburgh Post-Gazette, March 30, 2015, www.post-gazette.com. For updated information on distracted driving, see www.distraction.gov and the Insurance Institute for Highway Safety’s website at www.iihs.org.
Final PDF to printer
144 Part Three Business and Public Policy
law43665_ch07_137-160.indd 144 11/20/18 10:59 AM
citizens, including businesses, to act in ways that achieve policy goals. Governmental reg- ulatory powers are broad and constitute one of the most formidable instruments for accom- plishing public purposes.
Federal action limiting cell phone use in the United States stalled, so state and local governments stepped in to ban the use of cell phones by drivers while operating their vehicles. By 2018, 16 states had completely banned the use of cell phones while driving unless using a hands-free device, 38 had banned cell phone use by novice drivers, and 47 had banned text messaging for all drivers. And this was not just a public policy issue for Americans. More than 45 nations, including Australia, China, France, Germany, India, Israel, Japan, Russia, Spain, Taiwan, and the United Kingdom, have banned calling while driving.10
Public policy effects are the outcomes arising from government regulation. Some are intended; others are unintended. Because public policies affect many people, organiza- tions, and other interests, it is almost inevitable that such actions will please some and displease others. Regulations may cause businesses to improve the way toxic substances are used in the workplace, thus reducing health risks to employees. Yet other goals may be obstructed as an unintended effect of compliance with such regulations. For example, when health risks to pregnant women were associated with exposure to lead in the work- place, some companies removed women from those jobs. This action was seen as a form of discrimination against women that conflicted with the goal of equal employment oppor- tunity. The unintended effect (discrimination) of one policy action (protecting employees) conflicted head-on with the public policy goal of equal opportunity.
Different groups disagreed over the possible effects of distracted driving laws. Proponents obviously argued that the ban on cell phone use reduced accidents and saved lives. In fact, from 2012 to 2013, the number of deaths attributed to distracted driving nationwide declined nearly 7 percent, possibly due to the bans enacted by many states. Yet, these gains were short-lived as estimated deaths attributed to dis- tracted driving rose 14 percent in 2014 and another 6 percent in 2016. Opponents pointed to numerous other distractions that were not banned, such as drivers read- ing the newspaper, eating, putting on makeup, or shaving. “People have been driv- ing distracted since cars were invented. Focusing on mobile phones isn’t the same as focusing on distracted driving. Distraction is what has always caused car crashes and mobile phones don’t appear to be adding to that,” said a spokesperson for the Insurance Institute for Highway Safety.11
As the distracted driving examples illustrate, managers must try to be aware of the pub- lic policy inputs, goals, tools, and effects relevant to regulation affecting their business. As public issues emerge with significant negative consequences, such as death and injuries due to distracted driving, businesses should look for solutions. The automobile industry has increasingly done so, by introducing technologies that enable drivers to converse by phone or receive GPS directions and other notifications without removing their hands from the steering wheel or taking their eyes off the road.
10 For a complete listing of states that have regulated cell phone use while driving see the National Conference of State Legislators at www.ncsl.org. 11 Statistical information from “U.S. Motor Vehicle Deaths Surged 6% in 2016, NSC Says,” The Wall Street Journal, February 15, 2017, www.wsj.com; and “Study: No Evidence Cell Phone Bans Reduce Crashes,” Fox News, July 7, 2011, www.foxnews.com.
Final PDF to printer
Chapter 7 Business–Government Relations 145
law43665_ch07_137-160.indd 145 11/20/18 10:59 AM
Types of Public Policy Public policies created by governments are of two major types: economic and social. Sometimes these types of regulation are distinct from each another and at other times they are intertwined.
Economic Policies
One important kind of public policy directly concerns the economy. The term fiscal policy refers to patterns of government collecting and spending funds that are intended to stim- ulate or support the economy. Governments spend money on many different activities. Local governments employ teachers, trash collectors, police, and firefighters. State gov- ernments typically spend large amounts of money on roads, social services, and parkland. National governments spend large sums on military defense, international relationships, and hundreds of public works projects such as road building. During the Great Depression of the 1930s, public works projects employed large numbers of people, put money in their hands, and stimulated consumption of goods and services. Today, fiscal policy remains a basic tool to achieve prosperity, as the following example illustrates.
In 2015, Chinese government leaders and economists were surprised by the coun- try’s sharp economic decline and were increasingly worried about the potential risk of job losses throughout the country. The world’s second largest economy grew at 7 percent in the first quarter of 2015, the lowest rate since the global financial crisis in 2008–9. The leaders turned to fiscal stimulus to revive the growth of the country. The National Development and Reform Commission, China’s top planning agency, infused large amounts of funding in an attempt to speed up investment projects in several key sectors, including water conservation, environmental protection, power grids, and health care. In explaining this government spending, the chairman of China’s National Development and Reform Commission said, “China was on track to achieve its economic growth, employment, inflation, fiscal revenue as well as imports and exports targets, but the country was falling behind in its goals for investment and wooing foreign investors.”12
Another important kind of economic policy is trade policy, the rules that govern imports from and exports to foreign countries. Governments sometimes favor free-trade policies, allowing the relatively unrestricted flow of goods and services across national borders, and at other times erect various barriers to this flow, such as tariffs and duties. In early 2018, President Trump reported that he was considering imposing widespread tariffs on imports of various goods in an effort to help protect ailing U.S. industries. While many U.S. manufacturers hailed these actions as necessary, other business groups in the U.S. were opposed. Forty-five trade associations, representing a wide range of the U.S. economy, petitioned Trump’s administration to halt its plans to levy tariffs on China and to work instead with other nations to pressure China to end their trade restrictions. For the United States to impose heavy tariffs, said a letter written by the trade groups, “would trigger a chain reaction of negative consequences for the U.S. economy, provoking retalia- tion; stifling U.S. agriculture, goods, and service exports; and raising costs for businesses and consumers.”13
12 “China Hints at More Government Spending to Shore Up Economic Growth,” South China Morning Post, August 30, 2017, www.scmp.com. 13 “Trade Associations to Petition Trump Administration to Halt China-Tariff Plans,” The Wall Street Journal, March 19, 2018, www.wsj.com.
Final PDF to printer
146 Part Three Business and Public Policy
law43665_ch07_137-160.indd 146 11/20/18 10:59 AM
By contrast, the term monetary policy refers to policies that affect the supply, demand, and value of a nation’s currency. The worth, or worthlessness, of a nation’s currency has serious effects on business and society. It affects the buying power of money, the stabil- ity and value of savings, and the confidence of citizens and investors about the nation’s future. This, in turn, affects the country’s ability to borrow money from other nations and to attract private capital. In the United States, the Federal Reserve Bank—known as the Fed—plays the role of other nations’ central banks. By raising and lowering the interest rates at which private banks borrow money from the government, the Fed influences the size of the nation’s money supply and the value of the dollar. During the Great Recession, the Fed’s action to lower interest rates nearly to zero—an example of a monetary policy— was intended to stimulate borrowing and help the economy get moving again.
Other forms of economic policy include taxation policy (raising or lowering taxes on business or individuals), industrial policy (directing economic resources toward the devel- opment of specific industries), and trade policy (encouraging or discouraging trade with other countries).
Spurred by the president of the United States, Congress passed a $1.5 trillion tax cut in 2017. The most sweeping U.S. tax bill since 1986 cut the corporate tax rate from 35 to 21 percent, with the intent of stimulating the economy. In the first quar- ter of 2018, 108 of the nation’s largest companies reported saving almost $13 bil- lion in taxes, with nearly a third of the savings going to financial firms. AT&T and Comcast applauded the tax relief and promised to share the windfall by paying $1,000 bonuses to their more than 300,000 workers. Wells Fargo and Fifth Third Bancorp said they would raise their employees’ minimum wage to $15 an hour. However, Michael Dell, CEO of Dell Technologies, discovered that the new tax bill would prevent his company from deducting nearly $2 million it pays annually in interest on the company’s debt.14
Some thought that the tax reform would stimulate the economy, create jobs, and raise wages, but others cautioned that it would increase the national deficit, and that companies would be more likely use their windfalls to increase executive pay and shareholder divi- dends than to create jobs or pay workers more. According to economist Paul Krugman, while it is quite early to tell if the tax cut has been successful, “most voters say they haven’t seen any boost to their paychecks. To deliver on [the tax cut] backers’ promises, the tax cut would have to produce a huge surge in business investment—not in the long run, not five or 10 years from now, but more or less right away. And there’s no sign that anything like that is happening.”15 Yet, both critics and supporters say it will take months or years to draw conclusions on the law’s effects.
Social Assistance Policies
The last century produced many advances in the well-being of people across the globe. The advanced industrial nations have developed elaborate systems of social services for their citizens. Developing economies have improved key areas of social assistance (such as health care and education) and will continue to do so as their economies grow. International
14 “Trump Cheers GOP Tax Overhaul, Slams Democrats Who Opposed It,” The Wall Street Journal, December 20, 2017, www. wsj.com; “Thankful for Massive Tax Cut, AT&T, Wells Fargo Promise to Share the Wealth,” The Wall Street Journal, Decem- ber 21, 2017, www.wsj.com; “For Heavily Indebted Firms Like Dell, Tax Bill Delivers a Downside,” The Wall Street Journal, December 21, 2017, www.wsj.com; and “Corporate America Is Saving Boatloads on Trump Tax-Cut Windfall,” Bloomberg, April 30, 2018, www.bloomberg.com. 15 “How’s That Tax Cut Working Out?” The New York Times, April 30, 2018, www.nytimes.com.
Final PDF to printer
Chapter 7 Business–Government Relations 147
law43665_ch07_137-160.indd 147 11/20/18 10:59 AM
standards and best practices have supported these trends. Many of the social assistance pol- icies that affect particular stakeholders are discussed in subsequent chapters of this book.
One area often addressed by social assistance policies is housing. Many govern- ments have programs that subsidize rent payments, guarantee home loans, or pro- vide housing directly for low-income citizens or military veterans. For example, Brazil’s Minha Casa, Minha Vida (“My House, My Life”) program has invested R$300 billion ($80.27 billion U.S.) in mortgages, provided by a government- affiliated bank, resulting in more than 4.2 million housing units authorized for construction and 2.6 million units delivered to low-income families since the pro- gram began in 2009. Many of the first units built by the program were intended to house families displaced by development for the World Cup and Olympic Games in Rio de Janeiro.16
One particularly important social assistance policy—health care—has been the focus for concern on the international front and for national and state lawmakers. As discussed later in this chapter, the United States government has wrestled with the need for better health care for its citizens and the challenge of how to pay for this care.
Government Regulation of Business
Societies rely on government to establish rules of conduct for citizens and organiza- tions called regulations. Regulation is a primary way of accomplishing public policy, as described in the previous section. Because government operates at so many levels (federal, state, local), modern businesses face complex webs of regulations. Companies often require lawyers, public affairs specialists, and experts to monitor and manage the interaction with government. Why do societies turn to more regulation as a way to solve problems? Why not just let the free market allocate resources, set prices, and constrain socially irresponsible behavior by companies? There are a variety of reasons.
Market Failure One reason is what economists call market failure, that is, the marketplace fails to adjust prices for the true costs of a firm’s behavior. For example, a company normally has no incentive to spend money on product safety or pollution control equipment if customers do not demand it. The market fails to incorporate the cost of product safety or environmental harm into the business’s economic equation, because the costs are borne by someone else. In this situation, government can use regulation to force all competitors in the industry to adopt a minimum safety or pollution standards. Companies that want to act responsibly often welcome carefully crafted regulations, because they force competitors to bear the same costs. This behavior is seen in the following example.
In 2008, the European Union set regulatory standards for certain contaminants in foods, including maximum levels for lead, cadmium, and mercury. The EU explained, “in order to protect public health, to keep contaminants at levels which do not cause health concerns, maximum levels for lead, cadmium and mercury must be safe and as low as reasonably achievable based upon good manufacturing and agricultural/fishery practices.” These new regulatory standards affected food com- panies around the world that have business with or in Europe. Nestlé Purina
16 “Minha Casa Minha Vida Housing Program to Expand in Brazil,” The Rio Times, February 6, 2017, riotimesonline.com.
Final PDF to printer
148 Part Three Business and Public Policy
law43665_ch07_137-160.indd 148 11/20/18 10:59 AM
Petcare, a pet food subsidiary of Nestlé, the Swiss-based and world’s largest food and beverage company, welcomed these new standards, believing it provided them with a competitive advantage. The company released the following statement: “We use science to make quality and safe pet foods … We test for well over 150 sub- stances, including arsenic, pesticides, lead, mercury and cadmium. … We do make an effort to source ingredients that contain lower levels of heavy metals. … We are committed to providing our consumers with accurate and transparent nutrition labelling based on sound science, regulation and law in a format that best helps them make informed, balanced and mindful product choice.”17
Negative Externalities Governments also may act to regulate business to prevent unintended adverse effects on others. Negative externalities, or spillover effects, result when the manufacture or distri- bution of a product gives rise to unplanned or unintended costs (economic, physical, or psychological) borne by workers, consumers, competitors, neighboring communities, or other business stakeholders. To control or reverse these costs, government may step in to regulate business action.
In 2014 U.S. government regulators announced new rules to fight an increase in black lung disease, caused by breathing coal dust. These new regulations were the first major efforts since the 1969 Coal Mine Health and Safety Act, which estab- lished modern health and safety requirements in mines nationwide. Government health officials attributed increasing rates of the disease to new machinery that gen- erated more dust, longer shifts for younger workers, and an increase in silica dust churned up when thinner coal seams were tapped after many years of mining at the same location.18
Natural Monopolies In some industries, natural monopolies occur. The electric utility industry provides an example. Once one company has built a system of poles and wires or laid miles of under- ground cable to supply local customers with electricity, it would be inefficient for a sec- ond company to build another system alongside the first. But once the first company has established its natural monopoly, it can then raise prices as much as it wishes because there is no competition. In such a situation, government often comes in and regulates prices and access. Other industries that sometimes develop natural monopolies include cable TV, broadband Internet service, software, and railroads.
Ethical Arguments There is often an ethical rationale for regulation as well. As discussed in Chapter 5, for example, there is a utilitarian ethical argument in support of safe working conditions: It is costly to train and educate employees only to lose their services because of prevent- able accidents. There are also fairness and justice arguments for government to set stan- dards and develop regulations to protect employees, consumers, and other stakeholders. In debates about regulation, advocates for and against regulatory proposals often use both
17 The European Commission legislation on heavy metals can be found at ec.europa.eu/jrc/en/eurl/heavy-metals/legislation and Nestlé Purina Petcare statement can be found at wjla.com, a report on company responses to the Washington, DC, ABC television station’s report on heavy metals in foodstuff. 18 “Black Lung Disease Spurs New Coal-Mine Rules,” The Wall Street Journal, April 23, 2014, online.wsj.com.
Final PDF to printer
Chapter 7 Business–Government Relations 149
law43665_ch07_137-160.indd 149 11/20/18 10:59 AM
economic and ethical arguments to support their views. Some issues have consequences that are so devastating that the government needs to step in and impose controls, as shown in the following example.
In 2015 the U.K. government passed the Modern Slavery Act, the first piece of U.K. legislation focusing on the prevention and prosecution of modern slavery and the protection of victims. According to the International Labour Organisation (ILO), 25 million people around the world were trapped in some form of forced labor, including trafficking, debt bondage, and child labor. In the United Kingdom, instances of slavery were found in nail salons, the fishing industry, two London medical professional offices, and cannabis farms. The new law made businesses accountable for slavery and labor abuses occurring along their supply chain of oper- ations. The goal was to ensure that there were no instances of slavery linked to any British products or services.19
Whether the actions are self-imposed by a company or forced on businesses by the gov- ernment, the protection of the public is often the motivation for regulatory action.
Types of Regulation Government regulations come in different forms. Some are directly imposed; others are more indirect. Some are aimed at a specific industry (e.g., banking); others, such as those dealing with job discrimination or pollution, apply to all industries. Some have been in existence for a long time—for example, the Food and Drug Act was passed in 1906— whereas others, such as the Wall Street Reform and Consumer Protection (or Dodd-Frank) Act of 2010, are of much more recent vintage. Just as public policy can be classified as either economic or social, so regulations can be classified in the same fashion.
Economic Regulations
The oldest form of regulation is primarily economic in nature. Economic regulations aim to modify the normal operation of the free market and the forces of supply and demand. Such modification may come about because the free market is distorted by the size or monopoly power of companies, or because the consequences of actions in the marketplace are thought to be undesirable. Economic regulations include those that control prices or wages, allocate public resources, establish service territories, set the number of partic- ipants, and ration resources. The decisions by the Federal Trade Commission (FTC) to prevent anticompetitive business practices illustrate one kind of economic regulation.
The U.S. Congress responded to the global recession, in part, by passing the Dodd- Frank Act in 2010. This legislation was heralded as the most comprehensive financial reg- ulatory reform measure since the Great Depression and intended to revolutionize many business activities. Among other things, the Dodd-Frank Act affected the oversight and supervision of financial institutions, created a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduced more stringent regu- latory capital requirements, and implemented changes to corporate governance and execu- tive compensation practices.20 In 2017, President Trump signed two executive actions that scaled back some provisions of the Dodd-Frank Act with the intention of making it easier for businesses to borrow money.
19 “The U.K.’s New Slavery Laws Explained: What Do They Mean for Business?” The Guardian, December 14, 2015, www.theguardian.com. 20 “The Dodd-Frank Act: A Cheat Sheet,” Morrison & Foerster, n.d., www.mofo.com.
Final PDF to printer
150 Part Three Business and Public Policy
law43665_ch07_137-160.indd 150 11/20/18 10:59 AM
Antitrust: A Special Kind of Economic Regulation
One important kind of economic regulation occurs when government acts to preserve com- petition in the marketplace, thereby protecting consumers. Antitrust laws prohibit unfair, anticompetitive practices by business. (The term antitrust law is used in the United States; most other countries use the term competition law.) For example, if a group of companies agreed among themselves to set prices at a particular level, this would generally be an antitrust violation. In addition, a firm may not engage in predatory pricing, the practice of selling below cost to drive rivals out of business. If a company uses its market dominance to restrain commerce, compete unfairly, or hurt consumers, then it may be found guilty of violating antitrust laws.
The two main antitrust enforcement agencies in the United States are the Antitrust Divi- sion of the U.S. Department of Justice and the Federal Trade Commission. Both agencies may bring suits against companies they believe to be guilty of violating antitrust laws. They also may investigate possible violations, issue guidelines and advisory opinions for firms planning mergers or acquisitions, identify specific practices considered to be illegal, and negotiate informal settlements out of court. Antitrust regulators have been active in prosecuting price fixing, blocking anticompetitive mergers, and dealing with foreign com- panies that have violated U.S. laws on fair competition. In Europe, the European Commis- sion investigates antitrust violations for the European Union who may act to enforce EU laws, as seen in the Qualcomm example that follows.
One example of the European Union's antitrust regulatory oversight was evident when they imposed a €997 million ($1.23 million) antitrust fine on the U.S.-technology giant Qualcomm. The EU antitrust regulators accused Qualcomm of paying Apple billions of dollars over a five-year span, from 2011 to 2016. These payments were made to restrict Apple from purchasing from Qualcomm's rivals, those firms that sold chips that connected smartphones and tablets to cellular networks. “These pay- ments were not just reductions in price—they were made on the condition that Apple would exclusively use Qualcomm's baseband chipsets in all its iPhones and iPads,” said Margrethe Vestager, EU antitrust chief.21
If a company is found guilty of antitrust violations, what are the penalties? The govern- ment may levy a fine—sometimes a large one, as the EU did against Qualcomm. In the case of private lawsuits, companies may also be required to pay damages to firms or indi- viduals they have harmed. Sysco and U.S. Foods Holdings, two of the largest U.S. food dis- tribution companies, joined retailer Winn-Dixie Stores, in filing lawsuits for undisclosed damages against the chicken industry, accusing Tyson Foods, Pilgrim’s Pride, Sanderson Farms, and other poultry suppliers of manipulating wholesale chicken prices.22 In addition, regulators may impose other, nonmonetary remedies. A structural remedy may require the breakup of a monopolistic firm; this occurred when (the old) AT&T was broken up by gov- ernment order in 1984. A conduct remedy, more commonly used, involves an agreement that the offending firm will change its conduct, often under government supervision. For example, a company might agree to stop certain anticompetitive practices. Finally, an intel- lectual property remedy is used in some kinds of high-technology businesses; it involves disclosure of information to competitors. All these are part of the regulator’s arsenal.
Antitrust regulations cut across industry lines and apply generally to all enterprises. Other economic regulations, such as those governing stock exchanges, may be confined to
21 “Qualcomm Is Slapped with $1.23 Billion EU Fine for Illegal Payments to Apple,” The Wall Street Journal, January 24, 2018, www.wsj.com. 22 “U.S. Food Distributors Allege Tyson Foods, Rivals Fixed Chicken Prices,” Reuters, January 31, 2018, www.reuters.com.
Final PDF to printer
151
law43665_ch07_137-160.indd 151 11/20/18 10:59 AM
specific industries and companies. One recent example of a conflict over the application of antitrust laws to a proposed merger is discussed in Exhibit 7.A.
Social Regulations
Social regulations are aimed at such important social goals as protecting consumers and the environment and providing workers with safe and healthy working conditions. Equal employment opportunity, protection of pension benefits, and health care for citizens are other important areas of social regulation. Unlike the economic regulations mentioned above, social regulations are not limited to one type of business or industry. Laws concerning pollu- tion, safety and health, health care, and job discrimination apply to all businesses; consumer protection laws apply to all relevant businesses producing and selling consumer goods.
The Chilean government declared war on obesity in 2018. “They killed Tony the Tiger. They did away with Cheetos’ Chester Cheetah. They banned Kinder Surprise, the chocolate eggs with a hidden toy,” accounts The New York Times article. The Chilean government imposed multiple marketing restrictions, mandatory packaging redesigns, and labeling rules on the nation’s food producers and retailers aimed at transforming the eating habits of 18 million Chilean residents. Nutrition experts said this was the world’s most ambitious attempt to remake a country’s food culture and could be a model for how to turn the tide on a global obesity epidemic that researchers say contributed to 4 million premature deaths a year.23
23 “In Sweeping War on Obesity, Chile Slays Tony the Tiger,” The New York Times, February 7, 2018, www.nytimes.com.
The AT&T–Time Warner Merger of 2018
In 2018, a federal judge handed down what many economists believed to be a sweeping victory against governmental antitrust regulation by approving AT&T’s $85 billion acquisition of Time Warner. Judge Richard Leon ruled that the government—which had tried to block the merger—had failed to prove that the telecom company’s acquisition of Time Warner would violate antitrust law by leading to fewer choices for consum- ers and higher prices for television and internet services. With this final roadblock removed, the merger was expected to create a media and telecommunications powerhouse, reshaping the landscape of those industries. The combined company would join Time Warner’s library, including HBO’s hit “Game of Thrones” and channels like CNN, with AT&T’s vast distribution reach through wireless and satellite television services across the country. Media executives supported the AT&T–Time Warner merger deal, arguing that content creation and distri- bution had to be combined to compete successfully against technology companies like Amazon and Netflix. Although those companies had just started producing their own shows during the past several years, they were now spending billions of dollars a year on original programming. Their users could stream the video on apps in homes and on mobile devices, putting pressure on traditional media businesses. Yet, Makan Delrahim, the top antitrust official at the Justice Department said, “We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner.” Antitrust experts predicted that the court ruling would lead to a flood of new merger proposals. Just days after the AT&T–Time Warner decision, Comcast bid to acquire 21st Century Fox, challenging Disney, which pre- viously had bid for 21st Century Fox’s assets. In response, Disney increased their offer to acquire 21st Century Fox. Both Comcast and 21st Century Fox made bids on acquiring Sky, a European media company.
Sources: “AT&T Wins Approval for $85.4 Billion Time Warner Deal in Defeat for Justice Department,” The New York Times, June 12, 2018, www.nytimes.com; and “Judge Approves $85 Billion AT&T–Time Warner Deal,” CNNMoney, June 13, 2018, money.cnn.com.
Exhibit 7.A
Final PDF to printer
152
law43665_ch07_137-160.indd 152 11/20/18 10:59 AM
The most significant social regulation in the United States since the 1960s was the comprehensive reform of health care coverage passed by Congress in 2009. It is described in Exhibit 7.B.
Who regulates? Normally, for both economic and social regulation, specific rules are set by agencies of government and by the executive branch, and may be further interpreted by the courts. Many kinds of business behavior are also regulated at the state level. Gov- ernment regulators and the courts have the challenging job of applying the broad mandates of public policy.
Figure 7.1 depicts these two types of regulation—economic and social—along with the major regulatory agencies responsible for enforcing the rules at the federal level in the United States. Only the most prominent federal agencies are included in the chart. Individ- ual states, some cities, and other national governments have their own array of agencies to implement regulatory policy.
There is a legitimate need for government regulation in modern economies, but regu- lation also has problems. Businesses feel these problems firsthand, often because the reg- ulations directly affect the cost of products and the freedom of managers to design their
The Affordable Care Act: Health Care Coverage Mandated for Americans
In 2010, led by President Obama, Congress passed the Affordable Care Act, often referred to as “Obamacare.” The basic purpose of the law was to hold insurance companies accountable for their costs and services to their customers, lower the rising health care costs, provide Americans with greater freedom and control over their health care choices, and ultimately improve the quality of health care in America. Its provisions would be rolled out over 10 years. In 2010, the government began giving subsidies to small businesses that offered health coverage to employees, insurance companies were barred from denying coverage to children with preexisting illnesses, and children were permitted to stay on their parents’ insurance policies until age 26. The health care reform law aroused strong passions on both sides. Proponents of the law argued that the more than 5.1 million people on Medicare would save over $3 billion in prescription drugs costs, 105 million Americans would no longer have lifetime dollar limits on their health care coverage, and approximately 54 million Americans would receive greater preventative medical coverage. Health care fraud would decline by $4.1 billion annually due to new fraud detection measures, and 2.5 million young adults would retain health care coverage under their parents’ plan. Most importantly, most Americans would now have health insurance coverage. But, opponents challenged the new law as filled with myths, untruths, and harmful consequences. Some believed that the act would do nothing to bring down the cost of health care. Business leaders worried that the burden of providing their employees with health care insurance would result in bankruptcy or cause employers to reduce the level of health care coverage for their employees. Many worried that the mandate infringed on individual rights—including the right to go without health insurance if they chose. Several states sued, saying the law violated the constitution. In 2017, repeated attempts by Congress to repeal all or part of the Affordable Care Act failed. By 2018, 11.8 million Americans had selected marketplace plans or been automatically enrolled under the act. Under the act, millions more Americans received preventive services, such as vaccines, cancer screenings, and annual wellness visits at no out-of-pocket cost, than ever before. In addition, Americans could no longer be denied or dropped from coverage because of preexisting conditions or because they hit an annual or lifetime cap in benefits. Josh Peck, co-founder of the pro-ACA group Get America Covered, said, “While enrollment remained steady because of high consumer satisfaction and more affordable premiums for those who qualify for tax credits, enrollment would have outpaced previous years’ if the administration had focused on signing people up instead of derailing open-enrollment efforts.”
Sources: “What’s in the Bill,” The Wall Street Journal, March 22, 2010, online.wsj.com; “Get the Facts Straight on Health Reform—A More Secure Future,” The White House, n.d., www.whitehouse.gov; and “The Affordable Care Act Is Working,” Department of Health and Human Services, www.hhs.gov. The quote by Josh Peck is from “Nearly 12 Million People Enrolled in 2018 Health Coverage under the ACA,” The Washington Post, April 3, 2018, www.washingtonpost.com.
Exhibit 7.B
Final PDF to printer
Chapter 7 Business–Government Relations 153
law43665_ch07_137-160.indd 153 11/20/18 10:59 AM
FIGURE 7.1 Types of Regulation and Regulatory Agencies
Economic regulatory agencies NRC FAA FCC FERC FRB CFTC FREDDIE MAC DOT USDA DOJ DOL FLRA
Nuclear Regulatory Commission Federal Aviation Administration Federal Communications Commission Federal Energy Regulatory Commission Federal Reserve Board Commodity Futures Trading Commission Federal Home Loan Mortgage Corporation Department of Transportation Department of Agriculture Department of Justice Department of Labor Federal Labor Relations Authority
Social regulatory agencies EEOC OSHA MSHA FTC HHS
Equal Employment Opportunity Commission Occupational Safety and Health Administration Mine Safety and Health Administration Federal Trade Commission Department of Health and Human Services
CPSC FDA EPA NHTSA CFPB
Consumer Product Safety Commission Food and Drug Administration Environmental Protection Agency National Highway Tra�c Safety Administration Consumer Financial Protection Bureau
FCC
Radi o, TV
,
phon es,
cabl e
FA A,
DO T,
NT SB
Tr an
sp or
ta tio
n
N R
C
N uc
le ar
in d
us tr
y
E E
O C
, D O
L
D iscrim
- in
a tio
n
O S
H A
,
M S
H A
,
H H
S
S afe
ty
and he
alth
FTC, CPSC,
FDA, CFPB
Consum er
protection
EPA
Environ-mental protection
NHTSA
Vehicle safety and economy
S ec
ur iti
es an
d in
ve st
m en
t
IRS, B ATF
Taxa tion
NL RB
, D OL
, F LR
A
La bo
r
pr ac
tic es
S E
C , C
FT C
F T
C , D
O J
A n
tit ru
st
U SD
AAgribusiness
FRB,
TREASURY DEPT.,
FDIC, FREDDIE MACBanks
FERC, DOE
Energy
Economic regulation
FTC SEC NLRB IRS BATF
FDIC DOE NTSB
Federal Trade Commission Securities and Exchange Commission National Labor Relations Board Internal Revenue Service Bureau of Alcohol, Tobacco, Firearms and Explosives Federal Deposit Insurance Corporation Department of Energy National Transportation Safety Board
S ocial regulation
Final PDF to printer
154 Part Three Business and Public Policy
law43665_ch07_137-160.indd 154 11/20/18 10:59 AM
business operations. In the modern economy, the costs and effectiveness of regulation, as well as its unintended consequences, are serious issues that cannot be overlooked. Each is discussed below.
The Effects of Regulation Regulation affects many societal stakeholders, including business. Sometimes the conse- quences are known and intended, but at other times unintended or accidental consequences emerge from regulatory actions. In general, government hopes that the benefits arising from regulation outweigh the costs.
The Costs and Benefits of Regulation
The call for regulation may seem irresistible to government leaders and officials given the benefits they seek, but there are always costs to regulation. An old economic adage says, “There is no free lunch.” Eventually, someone has to pay for the benefits created.
An industrial society such as the United States can afford almost anything, including social regulations, if it is willing to pay the price. Sometimes the benefits are worth the costs; sometimes the costs exceed the benefits. The test of cost–benefit analysis helps the public understand what is at stake when new regulation is sought.
Figure 7.2 illustrates the increase in costs of federal regulation in the United States since 1960. Economic regulation has existed for many decades, and its cost has grown more slowly than that of social regulation. Social regulation spending reflects growth in such areas as environmental health, occupational safety, and consumer protection. A rapid growth of social regulation spending occurred in the 1960s and again in the 2000s, but has slowed somewhat recently. The cost of regulation has its critics, especially when the costs to small businesses or manufacturing firms are considered.
In addition to paying for regulatory programs, it takes people to administer, monitor, and enforce these regulations. Although the numbers have gone up and down, depending on the approach of various administrations, the overall trend has been toward growth of the regulatory apparatus of government. In 1960, fewer than 60,000 federal employees moni- tored and enforced government regulations; by 2015, this number had grown to more than 277,000 employees. John J. DiIulio Jr., of the University of Pennsylvania and the
FIGURE 7.2 Budgetary Costs of Federal Regulation, 1960–2018
Source: Susan Dudley and Melinda Warren, “Regulators’ Budget Increases Consistent with Growth in Fiscal Budget,” Regulatory Studies Center, The George Washington University and Weidenbaum Center, Washington University in Saint Louis, May 2015, regulatorystudies.columbian. gwu.edu; and regulatorystudies. columbian.gwu.edu.
Years
C o
n st
a n
t (R
e a
l) 2
0 0
9 D
o lla
rs
0
10000
20000
30000
40000
50000
60000
1960 1970 1980 1990 2000 2010 2015 2018
Social
Economic
Final PDF to printer
155
law43665_ch07_137-160.indd 155 11/20/18 10:59 AM
Brookings Institution, criticized the size of government regulation when he said, “Today’s government is indeed big—3.5 times bigger than five and a half decades ago, but dispersed to disguise its size.”24
Continuous Regulatory Reform
The amount of regulatory activity often is cyclical—historically rising during some peri- ods and declining during others. Businesses in the United States experienced a lessening of regulation in the early 2000s—deregulation, then experienced a return of regulatory activ- ity in the late 2000s and early 2010s—reregulation. The cycle continued as the pendulum swung back to deregulation in the late 2010s under the Trump administration.
Deregulation is the removal or scaling down of regulatory authority and regulatory activities of government. Deregulation is often a politically popular idea. President Ronald Reagan strongly advocated deregulation in the early 1980s, when he campaigned on the promise to “get government off the back of the people.” Major deregulatory laws were enacted off and on in the United States from the 1980s to today, mostly dependent upon whether there was a Republican administration in power. Recently efforts to promote deregulation in the United States are described in Exhibit 7.C.
Proponents of deregulation often challenge the public’s desire to see government solve problems. This generates situations in which government is trying to deregulate in some areas while at the same time creating new regulation in others. Reregulation is the increase or expansion of government regulation, especially in areas where the regulatory activities had previously been reduced. The scandals that rocked corporate America in
24 ‘Big Government’ Is Ever Growing, On the Sly,” National Review, February 25, 2017, www.nationalreview.com.
Deregulation in the United States, Starting in 2017
In 2017, the Trump Administration began a policy toward deregulation across many industries.
• The Office of Management and Budget suspended a rule that required wage reporting broken down by ethnicity and gender, claiming it was too costly to companies.
• The lessening of the Volcker Rules that restricted banking activities. This change permitted banks to con- duct fewer audits of individual securities and derivative transactions, and generally to have more freedom to buy and sell securities.
• The Dodd-Frank Act of 2010, which attempted to guard against another financial crisis, had its restrictions seriously minimized when about two-dozen regional banks were released from strict rules requiring them to maintain large capital reserves.
• Under the leadership of the White House, the Republican-led Congress reversed a rule that made it easier for consumers to bring class action lawsuits against banks by requiring that consumers use arbitration to resolve disputes.
• President Trump froze the implementation of a rule that said contract poultry and livestock farmers would be able to sue dealers without having to prove that a practice harmed the entire industry, just showing harm to their specific business.
• The Transportation Department withdrew a rule proposed by the Obama Administration that would require airlines to disclose baggage fees to consumers along with fare and schedule information.
• The Labor Department froze a rule that would tighten standards for workplace exposure to beryllium, a light- weight metal used in manufacturing that is dangerous if inhaled via dust or fumes or if it is exposed to the skin.
Source: “How Donald Trump Has Remade the Rules for Business,” The Wall Street Journal, January 17, 2018, www.wsj.com.
Exhibit 7.C
Final PDF to printer
156 Part Three Business and Public Policy
law43665_ch07_137-160.indd 156 11/20/18 10:59 AM
the 2000s—and the failure or near-failure of a number of big commercial and investment banks in the late 2000s—brought cries from many stakeholder groups for reregulation of the securities and financial services industries.
Regulation in a Global Context
International commerce unites people and businesses in new and complicated ways, as described in Chapter 4. U.S. consumers routinely buy food, automobiles, and clothing from companies located in Europe, Canada, Latin America, Australia, Africa, and Asia. Citizens of other nations do the same. As these patterns of international commerce grow more complicated, governments recognize the need to establish rules that protect the inter- ests of their own citizens. No nation wants to accept dangerous products manufactured elsewhere that will injure its citizens, and no government wants to see its economy dam- aged by unfair competition from foreign competitors. These concerns provide the rationale for international regulatory agreements and cooperation. At times, the issues themselves cut across national borders, so international regulation is needed.
In 2016, the International Civil Aviation Organization, representing more than 190 countries, adopted The Aviation Plan, designed to reduce the climate impact of international jet travel, which accounted for about 2 percent of the world’s emis- sions of greenhouse gases. The measure would require air carriers to take major steps to improve fuel economy in their routes and fleets, very likely accelerating the purchase of newer, more efficient planes. The plan was scheduled to take effect in 2021. “This measure addresses a growing source of global emissions, demonstrates the international community’s strong and growing support for climate action in all areas and helps avoid a patchwork of potentially costly and overlapping regional and national measures,” said John Kerry, then the U.S. Secretary of State.25
At other times, political conflicts spill over into economic regulatory actions, as described next.
In 2017, Iran, a long-time adversary of the United States, sanctioned 15 American companies in retaliation for restrictions imposed by the Trump administration on companies and people allegedly connected with Iran’s ballistic-missile program. Iran’s sanctions targeted American defense companies, including defense contractor Raytheon, and two firearms manufacturers, Magnum Research and Lewis Machine and Tool, for allegedly helping Israel and contributing to regional instability, according to the Islamic Republic News Agency. Future business dealings with these companies were prohibited by the Iranian government and their assets in the Islamic Republic were frozen, a common tactic used by the United States against companies from doing business with Iran.26
Whether at the local, state, federal, or international levels, governments exert their control seeking to protect society through regulation. The significant challenge involves balancing the costs of this form of governance against the benefits received or the prevention of the harms that might occur if the regulation is not in place and enforced. Businesses have long under- stood that managing and, if possible, cooperating with the government regarding regulation generally leads to a more productive economic environment and financial health of the firm.
25 “EU Halts Carbon Emission Fees for Airlines,” The Hill, November 12, 2012, www.thehill.com; and “Over 190 Countries Adopt Plan to Offset Air Travel Emissions,” The New York Times, October 6, 2016, www.nytimes.com. 26 “Iran Slaps Sanctions on 15 U.S. Companies as Animosity Grows,” The Wall Street Journal, March 26, 2017, www.wsj.com.
Final PDF to printer
Chapter 7 Business–Government Relations 157
law43665_ch07_137-160.indd 157 11/20/18 10:59 AM
∙ Government’s relationship with business ranges from collaborative to working at arm’s length. This relationship often is tenuous, and managers must be vigilant to anticipate any change that may affect business and its operations.
∙ A public policy is an action undertaken by government to achieve a broad public purpose. The public policy process involves inputs, goals, tools or instruments, and effects.
∙ Regulation is needed to correct for market failure, overcome natural monopoly, and protect stakeholders who might otherwise be hurt by the unrestricted actions of business.
∙ Regulation can take the form of laws affecting an organization’s economic operations (e.g., trade and labor practices, allocation of scarce resources, price controls) or focus on social good (e.g., consumer protection, employee health and safety, environmental protection).
∙ Antitrust laws seek to preserve competition in the marketplace, thereby protecting con- sumers. Remedies may involve imposing a fine, breaking up a firm, changing the firm’s conduct, or requiring the disclosure of information to competitors.
∙ Although regulations are often very costly, many believe that these costs are worth the benefits they bring. The ongoing debate over the need for and effectiveness of regula- tion leads to alternating periods of deregulation and reregulation.
∙ The global regulation of business often occurs when commerce crosses national borders or the consequences of unregulated business activity by a national government are so large that global regulation is necessary.
Summary
Key Terms regulation, 147 reregulation, 155 social assistance policies, 147 social regulation, 151 trade policy, 145
antitrust laws, 150 cost–benefit analysis, 154 deregulation, 155 Dodd-Frank Act, 149 economic regulation, 149 fiscal policy, 145
market failure, 147 monetary policy, 146 natural monopoly, 148 negative externalities, 148 predatory pricing, 150 public policy, 142
Internet Resources
www.cato.org Cato Institute www.consumerfinance.gov U.S. Consumer Financial Protection Bureau www.economywatch.com Economy Watch www.federalreserve.gov Board of Governors of the Federal Reserve System www.ftc.gov U.S. Federal Trade Commission www.mercatus.org Mercatus Center, George Mason University www.reginfo.gov U.S. Office of Information and Regulatory Affairs www.regulations.gov Regulations.gov www.un.org/en/law International Law, United Nations www.usa.gov Online Guide to Government Information and Services
Final PDF to printer
158 Part Three Business and Public Policy
law43665_ch07_137-160.indd 158 11/20/18 10:59 AM
Discussion Case: Should Facebook Be Regulated? In 2018, Facebook, the social media behemoth, faced public outrage over breaches of its users’ privacy. A British political consulting firm hired by the Trump campaign, Cambridge Analytica, was accused of accessing the private data of 87 million Facebook users in an attempt to influence the 2016 presidential election. The consultants had partnered with a psychology professor at Cambridge University, who developed a Face- book app that offered a personality survey. When people responded, the app harvested private information from their profiles and those of their friends. The professor then shared this information with Cambridge Analytica, which used it to target political ads to Facebook users.
In the wake of these revelations, the U.S. Congress and European Parliament both held hearings on how to better protect the personal information of social media users. These hearings raised the question: Should Facebook, and other social media platforms, be more strictly regulated by the government to prevent future breaches of this kind?
While it was not publicly known how much revenue online political advertisements generated for Facebook in 2018, the firm made it clear that Facebook was spending so much money hiring moderators to review political ads that it would cancel out the revenue those ads were expected to generate in the 2018 election cycle. CEO Mark Zuckerberg explained, “We’re essentially going to be losing money on running political ads, because the company is hiring ‘thousands’ in advance of the 2018 elections. … That cost is going to be greater than the money that we make.”
Zuckerberg responded to the growing social outcry by making himself publicly avail- able to legislators in both the United States and Europe. Zuckerberg was questioned for almost 10 hours by U.S. senators of the commerce and judiciary committees over the com- pany’s privacy and data mining policies. Zuckerberg explained,
“I believe it’s important to tell people exactly how the information that they share on Facebook is going to be used. … Every single time, there’s a control right there about who you’re going to be sharing it with. … It was my mistake, and I’m sorry. I started Facebook, I run it, and I’m responsible for what happens here. It’s clear now that we didn’t do enough to prevent these tools from being used for harm.”
Two weeks later Zuckerberg appeared before the European Parliament, pledging to be more diligent in protecting his users’ individual information. He explained, “Europeans make up a large and incredibly important part of our global community. Many of the val- ues Europeans care most deeply about are values we share: from the importance of human rights and the need for community to a love of technology, with all the potential it brings.” As in his congressional testimony, Zuckerberg admitted to making mistakes that needed to be corrected, but again argued against government regulation of the industry, claiming that companies could effectively address any problems themselves. “I believe deeply in what we’re doing. And when we address these challenges, I know we’ll look back and view helping people connect and giving more people a voice as a positive force here in Europe and around the world,” stated Zuckerberg.
In response to the Cambridge Analytica incident, Facebook introduced a centralized system that enabled its users to control their privacy and security settings. The system, available globally, provided users with a single location where they could change their settings, rather than the old system, which was spread out across 20 separate locations on
Final PDF to printer
Chapter 7 Business–Government Relations 159
law43665_ch07_137-160.indd 159 11/20/18 10:59 AM
the social media platform. Facebook’s chief privacy officer said, “We’ve heard loud and clear that privacy settings and other important tools are hard to find, and that we must do more to keep people informed.” Facebook also announced that it would curb information that it exchanged with companies that collected and sold consumer data for advertisers. It ended an ad-targeting option called Partner Categories that allowed data brokers to target specific groups of Facebook users—people who had bought a certain product, for example—on behalf of their ad clients. Graham Mudd, product marketing director at Facebook, posted that shutting that system down would “help improve people’s privacy on Facebook.”
Many thought Zuckerberg’s pledge to do better was not enough and legislation was required. This was not the first time in recent years that the public turned to the govern- ment to protect their privacy. In 2010, the Do Not Track Bill, intended to give American consumers more control over what personal details companies collected from them and how the data was used, was introduced in Congress. In addition, in 2012 then-President Obama unveiled a comprehensive Consumer Privacy Bill of Rights, which would empower consumers to know what personal information was collected, stored, and possibly sold to other businesses. Neither of these efforts generated sufficient political support to become law.
In 2018, the European Union passed the General Data Protection Regulation. This regu- lation defined personal data as proprietary—that is, owned by the individual—and required that any use of that data by other parties had to be authorized by permission. A consumer would have to affirmatively “opt in” (rather than “opt out”), after receiving a request writ- ten in clear language, not legalese, from a business seeking to use their information.
In response to the Facebook-Cambridge Analytica incident, calls for new legislation in the United States appeared. Some of the potential legislative and regulatory strategies considered included
∙ Legislation could be passed to protect the data of individuals. These laws would focus on how companies collect, share, and use user data, like the European Union’s 2018 General Data Protection Regulation.
∙ New regulation could restrict how consumer data was used, including the sale of this information to other businesses. It could require social media sites, like Facebook, to provide the government, or its users, with additional information on who purchased users’ information. These steps would increase the transparency regarding the sale of consumers’ information.
∙ New regulation might also target how the consumers’ information in used for online political advertising. Facebook said it would support legislation to require large digital platforms to keep a public library of paid political ads that had appeared on their sites. Proposals suggested that tech companies be required to confirm the identities and loca- tions of the sponsors of political advertisements on their sites.
∙ Facebook, Google, and other technology firms could be held responsible for the unethi- cal or illegal behavior of those who used their platforms. This effort targeted the actions by organizations like Cambridge Analytica—or even foreign governments—that might try to influence political elections through advertisements on social media.
∙ Governmental investigations, likely by the nation’s chief privacy regulator, the Federal Trade Commission (FTC), could be conducted, with the FTC given sweeping access and enforcement powers.
Final PDF to printer
160 Part Three Business and Public Policy
law43665_ch07_137-160.indd 160 11/20/18 10:59 AM
How did the public feel about these proposals? In a 2018 survey, only 37 percent of Americans said that Facebook, Twitter, and other social platforms were not regulated enough, and 14 percent of those polled said they were already regulated too much. While many were worried that a Cambridge Analytica-type incident might occur again, and that personal information was not well protected, they were uncertain if governmental regula- tion was the right answer.
Sources: “How Calls for Privacy May Upend Business for Facebook and Google,” The New York Times, March 24, 2018, www.nytimes.com; “Facebook Introduces Central Page for Privacy and Security Settings,” The New York Times, March 28, 2018, www.nytimes.com; “Facebook Limiting Information Shared with Data Brokers,” The Wall Street Journal, March 28, 2018, www.wsj.com; “As Mark Zuckerberg Prepares to Testify, Here’s How Washington Could Regulate Silicon Valley,” The Wall Street Journal, April 9, 2018, www.wsj.com; “The Key Moments from Mark Zuckerberg’s Testimony to Congress,” The Guardian, April 11, 2018, www.theguardian.com; “No Overwhelming Support for More Online Regulation, Poll Finds,” The Wall Street Journal, April 16, 2018, www.wsj.com; “Facebook Gears Up to Lose Money on Political Ads,” Ad Age, May 2, 2018, adage.com; “Read Mark Zuckerberg’s Prepared Remarks for his Meeting with EU Lawmakers,” CNBC, May 22, 2018, www.cnbc.com; and “Facebook and Cambridge Analytica: What You Need to Know as Fallout Widens,” The New York Times, March 19, 2018.
Discussion Questions
1. Do you believe the government (in the United States and other countries) should regu- late Facebook to protect its users’ privacy? Why or why not?
2. Do you believe that Facebook’s actions so far exemplify working in collaboration with, or in opposition to, government? Why?
3. What elements of the public policy process are seen in this case: public policy inputs, goals, tools, and effects?
4. Of the reasons described in this chapter to justify government regulation: market fail- ure, negative externalities, natural monopolies, and ethical arguments, which reasons are relevant in this case?
5. Since Facebook and other social media platforms are global in nature, is there a need for international regulation to protect consumers’ privacy worldwide? If so, what organiza- tion could provide this global regulatory protection?
6. What level of responsibility do individuals who use Facebook and other social media sites have to protect their own personal information?
Final PDF to printer
161
law43665_ch08_161-186.indd 161 11/21/18 08:00 AM
C H A P T E R E I G H T
Influencing the Political Environment Businesses face complicated issues in managing their relationships with politicians and government regulators. Managers must understand the political environment and be active and effective par- ticipants in the public policy process. They need to ensure that their company is seen as a rele- vant stakeholder when government officials make public policy decisions and must be familiar with the many ways that business can influence these decisions. The opportunities afforded businesses to participate in the public policy process differ from nation to nation. Sound business strategies depend on an understanding of these differences, enabling businesses to manage worldwide business–government relations effectively.
This Chapter Focuses on These Key Learning Objectives:
LO 8-1 Understanding the arguments for and against business participation in the political process.
LO 8-2 Knowing the types of corporate political strategies and the influences on an organization’s devel- opment of a particular strategy.
LO 8-3 Assessing the tactics businesses can use to be involved in the political process.
LO 8-4 Examining the role of the public affairs department and its staff.
LO 8-5 Recognizing the challenges business faces in managing business–government relations in different countries.
Final PDF to printer
162 Part Three Business and Public Policy
law43665_ch08_161-186.indd 162 11/21/18 08:00 AM
In 2018, a group of U.S. senators proposed the Honest Ads Act. The proposal quickly gained bipartisan traction, and corporate executives, including as Mark Zuckerberg, also voiced support for this new proposed law. The goal of the Honest Ads Act was to provide more transparency for online political advertisements. This concern was sparked by revelations that Russian nationals had purchased political ads on social media networks, including Facebook, to attempt to influence voters in the 2016 presi- dential election.
The Honest Ads Act would require digital platforms with more than 50 million unique monthly visitors to maintain a complete record of advertisers who had spent more than $500 on ads during the previous year. These records would be available to the public and include a digital copy of the ads, as well as a description of the target audience—for exam- ple, women over 25 who were likely to vote Republican. The report would also include the ad rate, the name of the candidate or office that the ad was supporting, and the contact information of the ad’s purchaser. Facebook and other digital platforms would make a rea- sonable effort to ensure that foreign nationals did not buy ads that attempted to influence elections. This last condition was something that Zuckerberg said in Congressional testi- mony that Facebook was already doing.1
The National Cannabis Industry Association (NCIA), a trade group for legal marijuana businesses, hired two Washington lobbying firms, Heather Podesta + Partners, a firm with ties to the Democratic Party, and Jochum Shore & Trossevin, a firm with strong rela- tionships with Republican lawmakers, to push for legislation to allow its members better access to banks. “We’ve gone from simply seeking to have our industry’s issues taken seri- ously to bipartisan legislation introduced in both chambers,” said Aaron Smith, the NCIA’s executive director. By 2018, 29 states and the District of Columbia had legalized marijuana for medical use and nine states had passed laws permitting personal, recreational use. Yet, marijuana-related businesses were often forced to deal in cash-only business transactions because most banks refused to deal with them out of fear of federal prosecution, since mar- ijuana possession was still illegal under federal law.2
As the first example above demonstrates, government and business must carefully mon- itor online political advertisements to ensure that the public is protected from deception, and information is transparently available. In the other opening example, businesses or an industry sometimes solicit lobbying firms to argue their case for a change in practices due to conflicting state and federal laws. In general, business recognizes the necessity of monitoring the political environment and addressing political issues as they arise. This is a constant challenge for businesses entrusted with managing the political environment, because new issues emerge and warrant intervention.
This chapter focuses on managing business–government relations and political issues. Businesses do not have an absolute right to exist and pursue profits. The right to conduct commerce depends on compliance with appropriate laws and public policy. As discussed in Chapter 7, public policies and government regulations are shaped by many actors, includ- ing business, special interest groups, and government officials. The emergence of public issues often encourages companies to monitor public concerns, respond to government proposals, and participate in the political process. This chapter discusses how managers can ethically and practically meet the challenge of managing the business–government relationship.
1 “Facebook: What Is the Honest Ads Act?” CBS News, April 11, 2018, www.cbsnews.com. 2 “Marijuana Industry Hires Lobbyists to Ease Bank Access,” The Wall Street Journal, July 28, 2015, www.wsj.com.
Final PDF to printer
Chapter 8 Influencing the Political Environment 163
law43665_ch08_161-186.indd 163 11/21/18 08:00 AM
Participants in the Political Environment
In many countries the political environment features numerous participants. These partici- pants may have differing objectives and goals, varying access to political tools, and dispa- rate levels of power or influence. The outcomes sought by businesses may be consistent, or at odds, with the results desired by interest groups. Participants may argue that their needs are greater than the needs of other political actors, or that one group or another group does not have the right to be involved in the public policy process. To better understand the dynamic nature of the political environment, it is important to explore who participates in the political process and their claims of legitimacy.
Business as a Political Participant There is a serious debate between those who favor and those who oppose business involve- ment in governmental affairs. This debate involves the question of whether, and to what extent, business should legitimately participate in the political process. As shown in Figure 8.1, some people believe business should stay out of politics, while others argue that business has a right to be involved.
Proponents of business involvement in the political process often argue that since other affected groups (such as special interest groups) are permitted to be involved, it is only fair that business should be, too. This justice and fairness argument becomes even stronger when one considers the significant financial consequences that government actions may have on business.
An Irishman walks into a bar. This may sound like the opening line of a joke, but it actually is the beginning of a television advertisement about responsible drinking, developed by British beverage maker Diageo. The company-sponsored ads promot- ing moderation in drinking, the first of their kind in the United Kingdom, were aired during prime time to maximize their impact. A Diageo spokesperson admitted that while the company wanted to discourage binge drinking by young people, a growing concern, it also hoped its campaign would help Diageo avoid possible governmental regulation of their product and its advertisements.3
Businesses see themselves as countervailing forces in the political arena and believe that their progress, and possibly survival, depends on influencing government policy and regulations. But sometimes efforts to do so can become controversial.
In early 2017, several dozen CEOs joined two advisory councils established as part of the White House’s “Open Door” policy for the country’s top business leaders.
3 “Promoting Moderation,” Ethical Performance Best Practices, Winter 2007/2008, p. 8.
Why Business Should Be Involved Why Business Should Not Be Involved
A pluralistic system invites many participants. Managers are not qualified to engage in political debate.
Economic stakes are high for firms. Business is too big, too powerful—an elephant dancing among chickens.
Business counterbalances other social interests.
Business is too selfish to care about the common good.
Business is a vital stakeholder of government. Business risks its credibility by engaging in partisan politics.
FIGURE 8.1 The Arguments for and against Political Involvement by Business
Final PDF to printer
164 Part Three Business and Public Policy
law43665_ch08_161-186.indd 164 11/21/18 08:00 AM
They were the Manufacturing Jobs Initiative and the Strategic Policy Forum, both established to advise President Trump on economic growth and job creation. But the two advisory councils were short-lived. Trump’s comments regarding a violent conflict between white supremacist groups and counterprotesters in Charlottesville, Virginia—in which he said there were “some very fine people on both sides”— offended some of the executives. Under pressure from many of the companies’ stakeholders, top executives at J.P. Morgan Chase, IBM, PepsiCo, Walt Disney, Uber, Merck, Tesla, 3M, and others resigned from the two councils. Douglas McMillon, Walmart’s CEO, expressed many of their concerns when he said, “As we watched the events and the response from President Trump over the weekend, we too felt that he missed a critical opportunity to help bring our country together by unequivocally rejecting the appalling actions of white supremacists.” A few minutes later Trump posted on Twitter that he had dissolved the councils: “Rather than put- ting pressure on the businesspeople of the Manufacturing Council & Strategy & Policy Forum, I am ending both. Thank you all!”4
Although the debate continues over whether businesses should be involved in politics, and if so how, the facts are that in many countries businesses are permitted to engage in political discussions, influence political races, and introduce or contribute to the drafting of laws and regulations, as discussed later in this chapter. (Some of these organizations are mentioned later in Figure 8.4.)5
Influencing the Business–Government Relationship
Most scholars and businesspeople agree: Business must participate in politics. Why? Quite simply, the stakes are too high for business not to be involved. Government must and will act upon many issues, and these issues affect the basic operations of business and its pursuit of eco- nomic stability and growth. Therefore, businesses must develop a corporate political strategy.6
Corporate Political Strategy A corporate political strategy involves the “activities taken by organizations to acquire, develop, and use power to obtain an advantage.”7 These strategies might be used to further a firm’s economic survival or growth. Alternatively, a corporate political strategy might target limiting a competitor’s progress or ability to compete. Strategies also may be devel- oped simply to exercise the business’s right to a voice in government affairs, as intended by participation in the presidential advisory councils discussed earlier. Organizations differ in how actively they are involved in politics on an ongoing basis. Some companies essentially wait for a public policy issue to emerge before building a strategy to address that issue. This is likely when they believe the threat posed by unexpected public issues is relatively small.
4 “Trump’s Business Councils Disband after CEOs Defect,” The Wall Street Journal, August 16, 2017, www.wsj.com; and “Morning Agenda: Trump Bites Back against C.E.O.s Who Rebuked Him,” The New York Times, August 16, 2017, www.nytimes.com. 5 All data from OpenSecrets.org. 6 For a contrarian view, see Miguel Alzola, “Corporate Dystopia: The Ethics of Corporate Political Spending,” Business & Soci- ety, 52 (2013), pp. 388–426. 7 The quotation is from John F. Mahon and Richard McGowan, Industry as a Player in the Political and Social Arena (Westport, CT: Quorum Press, 1996), p. 29. Also see Jean-Philippe Bonardi, Amy J. Hillman, and Gerald D. Keim, “The Attractiveness of Political Markets: Implications for Firm Strategy” Academy of Management Review 30 (2005), pp. 397–413, for a thorough discussion of this concept.
Final PDF to printer
Chapter 8 Influencing the Political Environment 165
law43665_ch08_161-186.indd 165 11/21/18 08:00 AM
On the other hand, other companies develop an ongoing political strategy, so that they are ready when various public issues arise. Firms are most likely to have a long-term polit- ical strategy if they believe the risks of harm from unexpected public issues are great, or when the firm is a frequent target of public attention. For example, firms in the technology industry realized that online political advertising created a new challenge and might require them to support passage of the Honest Ads Act, as discussed at the beginning of this chapter.
Political actions by businesses often take the form of one of the following three strategic types, also shown in Figure 8.2:
∙ Information strategy (where businesses seek to provide government policymakers with information to influence their actions, such as lobbying).
∙ Financial-incentives strategy (where businesses provide incentives to influence govern- ment policymakers to act in a certain way, such as supporting a political action commit- tee that contributes to a policymaker’s campaign).
∙ Constituency-building strategy (where businesses seek to gain support from other affected organizations to better influence government policymakers to act in a way that helps them).
The various tactics used by businesses when adopting each of these political strategies are discussed next in this chapter.
Political Action Tactics
The tactics or tools used by business to influence the public policy process are often sim- ilar to those available to other political participants. Sometimes business may have an advantage since it might have greater financial resources, but often it is how tactics are used—not the amount of money spent—that determines their effectiveness. This section
FIGURE 8.2 Business Strategies for Influencing Government
Source: Adapted from Amy J. Hillman and Michael A. Hitt, “Corporate Political Strategy Formulation: A Model of Approach, Participation, and Strategy Decisions” Academy of Management Review 24 (1999), Table 1, p. 835.
G o
ve rn
m e
n t
Constituency-building Strategy
• Stakeholder coalitions • Advocacy advertising • Public relations • Legal challenges
Information Strategy
• Lobbying • Direct communication • Expert witness testimony
Financial-incentives Strategy
• Political contributions • Economic leverage • Political consulting aid • O�ce personnel
B u
si n
e ss
Final PDF to printer
166
law43665_ch08_161-186.indd 166 11/21/18 08:00 AM
will discuss tactics used by business in the three strategic areas of information, financial incentives, and constituency building.
Promoting an Information Strategy As shown in Figure 8.2, some firms pursue a political strategy that tries to provide govern- ment policymakers with information to influence their actions. Lobbying is the political action tool most often used by businesses when pursuing this type of political strategy, but some firms also use various forms of direct communication with policymakers. These various information-strategy approaches are discussed next.
Lobbying
An important tool of business involvement in politics is lobbying. Many companies hire full-time representatives in Washington, DC, state capitals, or local cities (or the national capital in other countries where they operate) to keep abreast of developments that may affect the company and, when necessary, to communicate with government officials. These individuals are called lobbyists. Their job is to represent the business before the people and agencies involved in determining legislative and regulatory outcomes. Lobbying involves direct contact with a government official to influence the thinking or actions of that person on an issue or public policy. Lobbyists communicate with and try to persuade others to support an organization’s interest or stake as they consider a particular law, policy, or reg- ulation. Google and Alphabet, created when Google was restructured, spent more than $18 million on lobbying activities and hired more than 110 lobbyists in 2018.8 One example of businesses engaging a lobbyist is discussed in Exhibit 8.A.
8 “Growing Persuasion,” The Wall Street Journal, June 21, 2018, www.wsj.com; data from Center for Responsive Politics.
Lobbyist for Hire: Access to the President
In 2017, as President Trump was sworn into office, Trump’s personal attorney Michael Cohen saw an opportu- nity. Cohen pitched his close association with Trump to potential corporate clients. He showed photos of himself with Trump, mentioned how frequently they spoke, and inferred that he was the president’s “fixer.” Through his personal business, Essential Consultants, Cohen was seeking to sell his services to companies eager to gain insights in how to navigate the new Trump administration. A rapid flow of millions of dollars to Cohen’s consult- ing firm suggested that some corporations no longer wished to rely on traditional lobbying tactics when dealing with the new “outsider” president, and rather sought an “inside” tack through Trump’s personal attorney. A Korean defense company, competing for a U.S. government contract, paid Cohen $150,000 to advise it on accounting practices. Novartis AG, a global pharmaceutical company, paid Cohen $1.2 million to provide insights into health care policy. Later the firm realized that it had “made a mistake,” according to its CEO, since Cohen “had little to offer the firm,” but allowed Cohen to retain the consulting fee. AT&T’s CEO Randall Ste- phenson also recognized that “the company made a mistake” after hiring Cohen to provide advice on federal policy, including how the administration might view the telecommunication giant’s deal to buy Time Warner. Eventually Cohen’s business activities came under investigation by special counsel Robert Mueller and the U.S. attorney for the Southern District of New York, resulting in raids on Cohen’s office, home, hotel room and safe-deposit box. Cohen would not comment on the investigation, but his friends said that he had so many potential clients after Trump’s election that he had to turn many down. “An entrepreneur always under- stands their opportunities. And Michael has always been an entrepreneur,” explained a friend who spoke to The Washington Post under the condition of anonymity.
Source: “I’m Crushing It: How Michael Cohen, Touting His Access to President Trump, Convinced Companies to Pay Millions,” The Washington Post, May 9, 2018, www.washingtonpost.com; “Novartis CEO Calls Hiring of Trump Lawyer Michael Cohen a ‘Mistake’,” The Wall Street Journal, May 10, 2018, www.wsj.com; and “AT&T Chief Says It Made a ‘Big Mistake’ Hiring Michael Cohen,” The New York Times, May 11, 2018, www.nytimes.com.
Exhibit 8.A
Final PDF to printer
Chapter 8 Influencing the Political Environment 167
law43665_ch08_161-186.indd 167 11/21/18 08:00 AM
Businesses, trade associations, and other groups spend a great deal on lobbying. Figure 8.3 shows the total number of lobbyists and the amount spent on lobbying activ- ity from 1998 to 2017. As illustrated, the number of lobbyists peaked in 2010 and has held relatively constant since then. Similarly, the amount spent on lobbying rose to more than $3 billion annually by 2008 and has declined slightly since that time. The organi- zations spending the most on lobbying in 2018 were the U.S. Chamber of Commerce ($23,095,000), the National Association of Realtors ($13,085,136), and the Pharmaceu- tical Research and Manufacturers of America ($10,073,750). Corporations also spent money on lobbying, as indicated by the following information from the 2018 election cycle: Alphabet ($5,100,000), Pfizer ($4,650,000), DowDuPont ($4,496,570), Northrop Grumman ($4,400,000), Comcast ($4,242,000), and AT&T ($4,140,000).9
Under U.S. law and EU directive (and in other nations as well), lobbying activities are severely limited and must be disclosed publicly.10 Lobbying firms and organizations employing in-house lobbyists must register with the government. They must also file regu- lar reports on their earnings (lobbyists) or expenses (organizations), and indicate the issues and legislation that were the focus of their efforts. These rules are supposed to guarantee that politicians are free from undue influence and represent the public interest. However, they are not always effective, as the following report indicates.
The Transparency International’s report entitled “Lobbying in Europe: Hidden Influence, Privileged Access” reported that in most European countries, the
9 For a complete listing of lobbyists and their expenses by organization and by industry, see www.opensecrets.org/lobby. 10 For a detailed account of lobbying regulations in the United States, see Lobbying Disclosure Act Guidance at lobbyingdisclosure.house.gov, and for a description of rules governing the EU, see “Regulation of Lobbying across the EU,” European Parliament, December 2016, www.europarl.europa.eu.
FIGURE 8.3 Total Federal Lobbying Spending and Number of Lobbyists, 1998–2017, by U.S. Business
Source: Center for Responsive Politics at www.opensecrets.org.
Total Lobbying Spending ($ in billions) Number of Lobbyists
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$1.44
$1.44
$1.56
$1.64
$1.81
$2.04 $2.18
$2.42
$2.61
$2.85 $3.30
10,684
12,936
12,535
11,838
12,125
12,920
13,167
14,066
14,514
14,840
14,154
2009$3.50 13,672
2010$3.54 12,931
2011$3.32 12,655
2012$3.31 12,185
2013$3.24 12,109
2014 2015
2016
2017
$3.24
$3.22
$3.15
$3.37
11,800 11,544
11,175
11,529
Final PDF to printer
168 Part Three Business and Public Policy
law43665_ch08_161-186.indd 168 11/21/18 08:00 AM
influence of lobbyists was shrouded in secrecy and lacked the overall transparency founds in other countries. This European practice led to a major cause for concern among its citizens. When political lobbying activities are undertaken with integrity and transparency, lobbying was viewed by the citizenry as a legitimate avenue for special interest groups to be involved in the deliberative process of lawmaking. Yet, when lobbying was not transparent and unregulated, concerns rose over the poten- tial for political corruption. The lobbying activities conducted by businesses, in par- ticular, raised serious concerns among Europeans. They were fearful of the vast sums at their disposal of large companies and how these resources could be used to develop close relationships with lawmakers, and thus gain undue political influ- ence. A Eurobarometer report revealed that 81 percent of Europeans agreed that overly close links between business and politics in their country had led to corrup- tion, and more than half believed that the only way to succeed in business in their country was through political connections.11
Businesses sometimes hire former government officials as lobbyists and political advi- sors. These individuals bring with them their personal connections and detailed knowledge of the public policy process. This circulation of individuals between business and gov- ernment is often referred to as the revolving door. Some examples of this revolving door phenomenon are shown in Exhibit 8.B.
While it is perfectly legal for government officials to seek employment in industry, and vice versa, the revolving door carries potential for abuse. Although it may be praised as an act of public service when a business executive leaves a corporate position to work for a regulatory agency, that executive may be inclined to act favorably toward his or her former employer. Such favoritism would not be fair to other firms also regulated by the agency. Businesses can also seek to influence public policy by offering jobs to regulators in exchange for favors, a practice that is considered highly unethical. “Is it any wonder that the public holds such a low esteem for Congress?” said Joel Hefley, who served as chairman of the House ethics committee before he retired from Congress. “You can dance around these rules in so many ways it really does not accomplish much of anything.”12
Despite the public’s strong concerns, lobbying—as well as hiring former government officials for positions in the corporate world—is normally legal, but great care must be exercised to act ethically.
Direct Communications
Businesses can also promote an information strategy through direct communication with policymakers, another kind of information strategy.
Democracy requires citizen access and communication with political leaders. Businesses often invite government officials to visit local plant facilities, give speeches to employees, attend awards ceremonies, and participate in activities that will improve the officials’ under- standing of management and employee concerns. These activities help to humanize the dis- tant relationship that can otherwise develop between government officials and the public.
One of the most effective organizations promoting direct communications between business and policymakers is The Business Roundtable. Founded in 1972, the Roundtable is an organization of chief executive officers (CEOs) of leading corporations representing $7.2 trillion in annual revenues and more than 16 million employees. The organization studies various public policy issues and advocates for laws that it believes “foster vigorous
11 “Lobbying in Europe: Hidden Influence, Privileged Access,” Transparency International, 2014, www.transparency.org. 12 “Law Doesn’t End Revolving Door on Capitol Hill,” The New York Times, February 1, 2014, dealbook.nytimes.com.
Final PDF to printer
169
law43665_ch08_161-186.indd 169 11/21/18 08:00 AM
economic growth and a dynamic global economy.” Some issues the Roundtable has taken a position on in recent years include corporate governance, job creation and training, sus- tainability, health care, international trade, immigration, and cybersecurity.13
Expert Witness Testimony
A common method of providing information to legislators is for CEOs and other execu- tives to give testimony in various public forums. Businesses may want to provide facts, anecdotes, or data to educate and influence government leaders. One way that government officials collect information in the United States is through public congressional hearings, where business leaders may be invited to speak. These hearings may influence whether legislation is introduced in Congress, or change the language or funding of a proposed piece of legislation, or shape how regulation is implemented. In some cases, the very future of the firm or industry may be at stake. An example of this political activity is pro- vided in the discussion case at the end of Chapter 7, which describes the 2018 testimony of Facebook CEO Mark Zuckerberg before the U.S. Congress and the European Parliament. Another example is provided next.
The top executives of five of the nation’s largest prescription drug distributors, McKesson, Cardinal Health, AmerisourceBergen, Miami-Luken, and H.D. Smith, all testified before a Congressional committee investigating the opioid crisis. The investigation targeted the massive amounts of opioid painkillers shipped to small- town pharmacies in southern West Virginia. Joseph Mastandrea, CEO of Miami- Luken, told the committee that his company played a role in the opioid crisis, but executives from the other four drug distributors downplayed their responsibility arguing that drug prescribers and pharmacists were to blame. Carinal Health CEO George Barrett apologized for not doing more to stop large shipments of prescrip- tion painkillers from flooding into rural communities in West Virginia. “I want to express my personal regret for our judgements that we’d make differently today, with regard to two pharmacies. With the benefit of hindsight I wish we would have
13 More information about the Business Roundtable is available at www.businessrountable.org.
The Revolving Door of Political Influence
What job opportunities are available for politicians after they decide to retire from Congress or lose a reelec- tion campaign? Lucrative positions await many of them just months after leaving Congress.
• Charlie Dent served seven years in the Pennsylvania House of Representatives and six years in the Penn- sylvania State Senate before moving on to the U.S. Congress for 14 years in the House of Representa- tives. Immediately after retiring from Congress, Dent was hired as a senior policy advisor by DLA Piper, a lobbying firm. DLA had over 40 clients; among its largest were Brookfield Asset Management, Booz Allen Hamilton, Discover Financial Services, Coca-Cola, and Comcast.
• Lawrence Linden was a White House staffer before serving in the U.S. House of Representatives for six years. After his political career, Linden was hired as the senior manager of federal government affairs by Walmart.
Of the 61 members of the 114th Congress who stepped down from their political offices in January 2017, 26 had found new employment within a year, most serving their new employer as a lobbyist on Capitol Hill. Of the 75 members of the 113th Congress who did not return, 41 found employment as lobbyists.
Source: See OpenSecrets.org/revolving.
Exhibit 8.B
Final PDF to printer
170
law43665_ch08_161-186.indd 170 11/21/18 08:00 AM
moved faster and answered a different set of questions. … today I am confident we would have reached different conclusions.”14
The role of drug distributors in the opioid crisis is further discussed in a case that appears at the end of this book.
Promoting a Financial-Incentive Strategy A major method businesses use to influence government policymakers is to provide finan- cial incentives. They can do this by contributing to a politician’s election campaign, in order to persuade him or her—once in office—to support certain policies or to vote in a manner favorable to the firms’ interests. In recent years, a series of Supreme Court and lower court decisions have dramatically expanded the ability of corporations to make campaign contributions. This section will describe the various mechanisms businesses can now use to influence the outcome of elections, including political action committees, Super PACs, tax-exempt organizations, and direct contributions by both corporations and their executives and employees. While most examples and data in this section are from the United States, Exhibit 8.C describes political campaign funding in Malaysia.
Political Action Committees
One of the oldest political action tools used by business is to form and support political action committees (PACs), independently incorporated organizations that can solicit con- tributions and then channel those funds to candidates seeking public office. Since the mid-1970s, companies have been permitted to spend company funds to organize and administer political action committees. (They cannot give directly to PACs, however.)
14 “Major Drug Distributors Downplay Contribution to Opioid Crisis in Testimony before Congress,” CBS News, May 8, 2018, www.cbsnews.com.
Campaign Finances in Malaysia
In 2015 Malaysian Prime Minister Najib was fighting for his political life. The media revealed that almost $700 million from an undisclosed source were in Najib’s personal bank accounts. While not initially proven to be illegal, this flood of money raised many ethical questions. Najib explained that the funds were not used for his personal enrichment. They were, instead, channeled to politicians or into spending on projects aimed at helping the country and the ruling party (of which he was a member) win elections. It was never revealed where the $700 million came from or where it went, even after a six-month Wall Street Journal investigation. The investigation concluded that the payments were not illegal but did represent a new chapter in Malaysia’s “freewheeling electoral system.” The prime minister justified the contributions since the money boosted Malaysia’s economy by attracting foreign capital necessary to offset the more than $11 billion in government debt. Najib reported he funneled at least $140 million to charity projects, such as schools and low-income housing. He also admitted to writing checks from his personal bank accounts to lawmakers, who used the money as they saw fit. Although investigations revealed nothing illegal, Najib did pledge to change the system, setting up a bipartisan panel to look at campaign financing and possible reforms. “There is an urgent need to regulate political financing to ensure accountability and transparency,” said Najib. But by the time the 2018 elections were held in Malaysia, no new campaign financing laws had been passed. Shortly after Najib’s surprising election defeat, Najib was arrested on anticorruption charges.
Sources: “1MDB and the Money Network of Malaysian Politics,” The Wall Street Journal, December 28, 2015, www.wsj.com; “Your Guide to Malaysia’s Upcoming General Election,” Bloomberg, May 7, 2018, www.bloomberg.com; and “Najib Razak, Malaysia’s Fallen Leader, Is Arrested in 1MDB Corruption Scandal,” The Wall Street Journal, July 3, 2018, www.wsj.com.
Exhibit 8.C
Final PDF to printer
Chapter 8 Influencing the Political Environment 171
law43665_ch08_161-186.indd 171 11/21/18 08:00 AM
PAC contributions to political campaigns are limited to certain amounts per candidate and per election. Multicandidate PACs could give up to $5,000 per candidate per election and $15,000 per national party per calendar year; for non-multicandidate PACs, these lim- its were $2,700 and $33,900, respectively. The amounts that could be donated to a PAC were also limited.
PACs are particularly active in industries that are highly regulated or are the target of proposed regulations, such as the telecommunications, financial services, and defense contractors industries. Figure 8.4 lists the top political action committees by contribution, comparing data from different time periods. It shows that the labor unions that dominated the top 10 PAC list in 2007–2008 (with four of the top ten spots) have been replaced by a growing number of business organizations and business trade groups in 2017–2018.
Business PACs have recently favored Republican candidates. For example, the follow- ing companies, through political action committee contributions, have generally supported Republican candidates over Democrat candidates: AT&T (62%–38%), Lockheed Martin (62%–37%), Northrup Grumman (57%–43%), Honeywell International (58%–42%), United Parcel Service (67%–33%), Boeing Company (64%–36%), Comcast (61%–38%), and Deloitte LLP (61%–39%).15
15 For a more comprehensive listing of business contributions by political party, see www.opensecrets.org/pacs.
PAC Name 2007–2008 PAC Name 2011–2012* PAC Name 2017–2018
1. AT&T Inc. $1,911,500 National Association of Realtors
$4,020,900 Honeywell International $1,768,562
2. National Beer Wholesalers Association
$1,911,000 International Brotherhood of Electrical Workers
$3,344,650 National Beer Wholesalers Association
$1,491,500
3. National Air Traffic Controllers Association
$1,804,000 AT&T, Inc. $3,108,200 AT&T Inc. $1,360,000
4. Lockheed Martin $1,783,500 American Bankers Association
$2,918,143 American Association for Justice
$1,298,500
5. Prosperity Action $1,740,000 National Beer Wholesalers Association
$2,869,000 International Brotherhood of Electrical Workers
$1,293,150
6. American Crystal Sugar $1,583,500 National Auto Dealers Association
$2,864,000 Lockheed Martin $1,271,500
7. Northrup Grumman $1,553,000 International Association of Fire Fighters
$2,734,900 American Bankers Association
$1,182,750
8. Operating Engineers Union
$1,483,925 Operating Engineers Union
$2,704,067 Credit Union National Association
$1,168,000
9. Honeywell International $1,466,127 American Association for Justice
$2,700,500 Every Republican Is Crucial PAC
$1,101,000
10. American Association for Justice
$1,433,500 Laborers Union $2,555,850 Boeing $1,069,000
FIGURE 8.4 Political Action Committee Activity
Sources: “Top PACs” for 2007–2008, 2011–2012, and 2017–2018, Center for Responsive Politics, www.opensecrets.org.
Final PDF to printer
172 Part Three Business and Public Policy
law43665_ch08_161-186.indd 172 11/21/18 08:00 AM
Although companies have continued to operate PACs, this mechanism has some dis- advantages, from a business perspective. Contributions to candidates are capped at fairly low levels, and companies cannot give money directly to their affiliated PACs. For these reasons, companies have turned increasingly to other mechanisms of political influence that have recently become available, as described next.
Super PACs
In 2010, a federal district court ruling in a lawsuit filed by SpeechNow.org opened the door for the creation of another mechanism of political influence. The court ruled that as long as PACs did not contribute directly to candidates, parties, or other PACs, they could accept unlimited contributions from individuals, unions, or corporations. This decision led the rise of super PACs, technically known as independent expenditure-only committees. Because contri- bution limits had been removed by the court, these organizations were able to raise and spend vast amounts of money, so long as they were not actually affiliated with any campaigns.
By 2018, nearly 2,400 groups had organized as super PACs. They reported total contri- butions of nearly $1.8 billion during the last president election cycle of 2015–2016 and over $420 million in the 2017–2018 election cycle. Super PACs spent more than $1 billion during the 2016 presidential election cycle and nearly $100 million during the 2017–2018 election cycle. Although super PACs were technically independent, they often worked to support par- ticular candidates or parties, such as the two largest super PACs, the Senate Majority PAC, with strong ties to the Democratic Party and spending nearly $16 million in 2017–2018, and the Congressional Leadership Fund, which generally supported conservative candidates and causes and contributed nearly $13 million in 2017–2018. But many super PACs repre- sented a group of potential voters or a political stance, such as the Club for Growth Action, a free-enterprise advocacy group, and Women Vote!, in support of electing female candidates.
While some individuals and companies were eager to take advantage of the new oppor- tunity to be involved in super PACs, others found that doing so could be risky.
With John Bolton set to officially become President Trump’s national security adviser (in March 2018), two government watchdog groups filed a criminal com- plaint demanding an investigation into whether Bolton’s Super PAC wittingly con- spired with the scandal-ridden British data firm, Cambridge Analytica, to commit “very serious” violations of U.S. election laws. The complaint calls for a Justice Department probe and argued that Bolton’s Super PAC violated federal laws pro- hibiting foreign nationals from “directly or indirectly” participating in the decision-making process of American political campaigns. “What’s worse than the fact that it apparently happened in this case is that the people involved apparently knew they were breaking the law and continued to do it anyway,” said Noah Book- binder, executive director at the Citizens for Ethics and Responsibility.16
Tax-Exempt Organizations
A third mechanism businesses can use to direct money to election campaigns is tax-exempt organizations, such as 527, 501(c)4, or 501(c)6 organizations, each named after the rele- vant section of the tax code. These organizations are political campaign groups officially unaffiliated with individual parties or candidates, and therefore not liable for campaign spending restrictions. 527 committees may raise unlimited money for general political
16 “Alleging ‘Very Serious’ Violations, Groups File Complaint against John Bolton Super PAC over Ties to Cambridge Analytica,” Common Dreams, March 30, 2018, www.commondreams.org.
Final PDF to printer
Chapter 8 Influencing the Political Environment 173
law43665_ch08_161-186.indd 173 11/21/18 08:00 AM
activities, such as voter mobilization efforts, but are prohibited from directly supporting or opposing a specific candidate. They gained prominence after the passage of the Bipartisan Campaign Reform Act (BCRA) of 2002, which prohibited soft money —unlimited contri- butions to the national political parties by individuals or organizations for party-building activities. As a way to get around these restrictions, some companies turned to tax-exempt organizations as vehicles for their political contributions. In the 2016 and 2018 election cycle, Act Blue was one of the most active 527 organizations.
Act Blue, headquartered in Massachusetts, is considered a liberal 527 organization. During the 2016 and 2018 election cycles, Act Blue raised more than $56 million and nearly $16 million, respectively, and spent $45 million and $14.5 million during these election cycles. Two of its largest contributors in 2016 were Bernie 2016, with nearly $48 million, and the Democratic Congressional Campaign Committee, with more than $3 million.17
The term dark money was used to describe contributions made to 527 organizations since the donors’ names and amount of their contributions were not reported to the Fed- eral Election Commission. Contributions to these organizations are often used for various advocacy tactics, such as telephone calls, television or radio announcements, and social media messages to bring attention to a political issue. These types of organizations have no contribution or spending limits.
Direct Contributions by Corporations
Until 2010 corporations were not permitted by law to make direct contributions to political candidates for national and most state offices. As noted above, companies could organize PACs and contribute to super PACs or tax-exempt organizations, but they could not simply write a check from their own corporate treasuries to support a candidate, say, for president. But that all changed with the 2010 Supreme Court ruling in Citizens United v. the Federal Election Commission. As further explained in Exhibit 8.D, this decision allowed compa- nies for the first time to contribute directly to political campaigns.
In 2012, the first full election cycle after the Citizens United decision, outside spend- ing for all political campaigns tripled from the previous four-year cycle to more than $1 billion. Super PACs accounted for more than $600 million of that spending. In 2014, the Supreme Court, in a separate case called McCutcheon v. Federal Election Commis- sion, abolished all limits on election spending by corporations, as well as other organi- zations such as unions. The amount of campaign contributions continued to rise, as seen in the 2016 presidential races. Hillary Clinton had raised more than $563 million from traditional sources—the Democratic Party, established PACs, and individual donors— and an additional $231 million from other sources, generally considered “dark money.” Donald Trump had raised $333 million from the Republican Party, established PACs, and donors, and an additional $75 million from dark money sources.18
Executive and Employee Personal Contributions
A final way that companies can influence elections is by encouraging their executives or employees to make personal contributions to the campaigns of candidates whose views they feel are aligned with their interests. The McCutcheon v. Federal Election Commission decision, mentioned earlier, also struck down the cap on the total amount any individual
17 See Opensecrets.org/527s and the Center for Responsive Politics. 18 See opensecrets.org/pres16 and the Center for Responsive Politics.
Final PDF to printer
174
law43665_ch08_161-186.indd 174 11/21/18 08:00 AM
The Citizens United Case
In a 5-to-4 decision in 2010 the U.S. Supreme Court upheld the argument made by Citizens United, a conser- vative nonprofit political organization, that its First Amendment right to free speech was violated by the Fed- eral Election Commission’s restrictions on campaign contributions. Justice Anthony Kennedy wrote for the majority opinion, “if the First Amendment has any force, it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.” Republican campaign consultant Ed Rollins stated that the decision added transparency to the election process and would make it more competitive. The Citizens United decision sent shock waves through the world of campaign financing since it allowed corporations, and also labor unions, for the first time in the history of the United States to directly contribute to candidates for public office. Critics said it would “corrupt democracy” by allowing corporate funds to flow directly into campaigns. At the time of the decision, 80 percent of Americans surveyed opposed the Citizens United ruling, and 65 percent strongly opposed it. Nearly three out of four Americans supported an effort by Congress to reinstate limits on corporate and union spending on election campaigns. In 2015, the End Citizens United PAC was established, funded by grassroots donors dedicated to coun- tering what they call the disastrous effects of Citizens United and reforming the American campaign finance system. The End Citizens United PAC’s mission was “To end Big Money in politics and fix our rigged political system by electing campaign finance reform champions, passing state ballot measures, and elevating this issue in the national conversation.” Those running the PAC were committed to working in partnership with others to overturn Citizens United and end undisclosed money in politics. They sought to do this by electing pro-reform candidates, raising the issue of money in politics as a national priority, working with ballot mea- sure campaigns to pass pro-reform laws in the states, and using grassroots membership to demonstrate political power on the issue of money in politics.
Sources: “Summary Citizens United v. Federal Election Commission (Docket No. 08-205),” Cornell University School of Law, n.d., topics.law.cornell.edu/supct/cert/08-205; “Money Grubbers: The Supreme Court Kills Campaign Finance Reform,” Slate, January 21, 2010, www.slate.com; “Justices, 5–4, Reject Corporate Spending Limit,” The New York Times, January 21, 2010, www.nytimes.com; “Citizens United v. Federal Election Commission,” IIT Chicago—Kent College of Law, June 1, 2012, www.oyez.org; and End Citizens United website, endcitizensunited.org. Also see David Silver, “Business Ethics after Citizens United: A Contractualist Analysis,” Journal of Business Ethics 127 (2015), pp. 385–97.
Exhibit 8.D
can contribute to federal candidates in a two-year election cycle. Given the multiple mech- anisms for campaign financing and the lack of caps on the amount contributed, individuals are able to significantly influence the political process if they have enough money. One example of the potential for political power through contributions is described next.
By June 2015, fewer than 400 families were responsible for almost half of the money raised for the 2016 presidential campaign, a concentration of political donors that was unprecedented in the modern era. The vast majority of the $388 million backing presidential candidates by these families was channeled to groups that could accept unlimited contributions in support of candidates from almost any source. The concentration of donors was greatest on the Republican side, according to a New York Times analysis of Federal Election Commission reports. Just 130 families and their businesses provided more than half of the money raised through June 2015 by Republican candidates and their super PACs to support their presidential campaigns bids. “In the donor world, it is primarily a love of economic freedom,” said Chart Westcott, a Dallas private equity investor. “That’s the biggest drive for most donors—more prosperity for the country as a whole, as well as for themselves.”19
19 “Small Pool of Rich Donors Dominates Election Giving,” The New York Times, August 1, 2015, www.nytimes.com.
Final PDF to printer
Chapter 8 Influencing the Political Environment 175
law43665_ch08_161-186.indd 175 11/21/18 08:00 AM
Generally, recent court decisions have expanded the mechanisms available to corpora- tions, as well as labor unions, other organizations, and individuals to use their resources to influence politics. To some, these developments represent a confirmation of individual or organizational free speech rights. To others, they represent a distortion of the political process in favor of organizations and individuals with money to spend.
Economic Leverage
Another political action tool often used by businesses when pursuing a financial incen- tive strategy is to use their economic leverage to influence public policymakers. Economic leverage occurs when a business uses its economic power to threaten to leave a city, state, or country unless a desired political action is taken. Economic leverage also can be used to persuade a government body to act in a certain way that would favor the business, as seen in the following story.
When the state of Pennsylvania was considering legalizing slot machines at race- tracks, the owners of a National Hockey League team located in the state, the Pitts- burgh Penguins, were lobbying for a new ice hockey arena to be built with public funds. Government leaders were hesitant to use public funds for a new arena unless substantial private funds were also available. Ted Arneault, owner of the Mountaineer Racetrack and Gaming Resort and part owner of the Pittsburgh Penguins, offered a deal. He said his company would contribute $60 million to build the new ice hockey arena if the state would approve the use of slot machines at Pennsylvania racetracks, including his proposed racetrack facility near Pittsburgh. Legislators agreed.20
In this example, the business owner successfully used economic leverage. By commit- ting his own private money to help support the construction of a new ice hockey arena, he was able to persuade politicians to vote in favor of legislation to approve the use of slot machines at racetracks in the state.
Promoting a Constituency-Building Strategy The final strategy used by business to influence the political environment is to seek sup- port from organizations or people who are also affected by the public policy or who are sympathetic to business’s political position. This approach is sometimes called a grass- roots strategy, because its objective is to shape policy by mobilizing the broad public in support of a business organization’s position, or a grasstops strategy, because its objective is to influence local opinion leaders. Firms use several methods to build support among constituents. These include advocacy advertising, public relations, and building coalitions with other affected stakeholders. Increasingly, firms have turned to social media as a grass- roots tool, as the following example shows.
During the 2016 presidential elections, politicians and their staffers used Twitter messages, Facebook posts, Instagram photos, and Snapchats that steadily flowed into voters’ inboxes and social media feeds in the digitized, pixelated, endlessly streaming election world. Yet, most avoided using text messages until Senator Ber- nie Sanders, a candidate in the Democratic presidential primary, directed his digital organizing director, Claire Sandberg, to ask each of his more than 100,000 follow- ers to send a quick text. Over a video hookup, Sandberg told Sanders’ supporters, “Everyone, please, take out your smartphones right now and text the word ‘work’.”
20 “Penguins, Arneault Make $107 Million Private Funding Proposal for New Arena Project,” Pittsburgh Post-Gazette, June 24, 2003, p. A1.
Final PDF to printer
176 Part Three Business and Public Policy
law43665_ch08_161-186.indd 176 11/21/18 08:00 AM
Within hours, the Sanders campaign received nearly 50,000 responses. Other presi- dential hopefuls quickly followed, asking voters to text them during speeches. Republican presidential candidate Rand Paul texted his supporters, encouraging them to sign petitions and support him online. “A text is almost a sacred thing,” said Vincent Harris, digital director for Paul’s campaign. “This space is reserved for your closest friends, your family, people who know you well enough to have your number and bypass a voice mail or email. I think it’s taken several years for the electorate to warm up to this.”21
Stakeholder Coalitions
Businesses may try to influence politics by mobilizing various organizational stakeholders— employees, stockholders, customers, and the local community—to support their political agenda. If a political issue can negatively affect a business, it is likely that it also will negatively affect that business’s stakeholders. If pending regulation will impose substantial costs on the business, these costs may result in employee layoffs, or a drop in the firm’s stock value, or higher prices for the firm’s customers. Businesses may use a variety of tac- tics to appeal to a wide range of stakeholder groups, as described next.
As the 2016 election primaries approached, Patagonia wanted to remind their custom- ers, employees, and the communities to exercise their right to vote on election day. Patagonia contributed $200,000 to nonprofit advocacy groups NextGen Climate and HeadCount, hosted a series of educational events in its apparel stores, and launched the “Vote Our Planet” online campaign to encourage everyone to vote and to educate potential voters on issues important to the company. “We are very concerned that the ugliness and the divisiveness of this election has left voters feeling disenfranchised with politics, and they might sit this one out,” said Patagonia’s vice president of envi- ronmental activism Lisa Pike Sheehy. “It’s imperative that this doesn’t happen.”22
Thus, businesses have an opportunity to build partnerships with various stakeholder groups, encourage them to vote, and hopefully support the causes important to the busi- nesses in elections.
Advocacy Advertising and Public Relations
A common method of influencing constituents is advocacy advertising. Advocacy ads focus not on a particular product or service, like most ads, but rather on an organiza- tion’s or company’s views on controversial political issues. Advocacy ads, also called issue advertisements, can appear in newspapers, on television, or in other media outlets. They have been legal in the United States since 1978, but greater involvement by businesses and other nonprofit (advocacy) organizations in the political process resulted in their use to dramatically increase after the Citizens United v. FEC U.S. Supreme Court decision, dis- cussed earlier. A media expert reported that since the Citizens United decision, television and radio stations revenue each year from issue advertisements has nearly tripled. (Exam- ples of advocacy advertisements are provided in Chapter 19.)
Another constituency-building tactic is the use of public relations firms to promote the company’s message to various stakeholders.
In 2016, the American Petroleum Institute (API), which represents more than 650 oil and gas companies accounting for 9.8 million jobs in the United States and
21 “Presidential Campaigns See Texting as a Clear Path to Voters,” The New York Times, August 18, 2015, www.nytimes.com. 22 “Big Corporate Ad Campaigns Promote Voting,” NPQ, September 27, 2016, nonprofitquarterly.org.
Final PDF to printer
Chapter 8 Influencing the Political Environment 177
law43665_ch08_161-186.indd 177 11/21/18 08:00 AM
8 percent of the U.S. economy, launched a multi-faceted Renewable Fuel Standard advocacy campaign program in anticipation of the 2016 elections. The program included television and online advertising focusing on how higher ethanol man- dates can hurt consumers and threaten to reverse America’s energy renaissance, where the United States had become the number one oil and gas producer in the world. A poll taken at the time of this advertising campaign showed that 77 percent of registered voters were concerned about government requiring increased amounts of ethanol in gasoline and 73 percent agreed that federal regulations could contrib- ute to increase costs at the gasoline pump. “These new ads will help further inform voters about the potential dangers of the broken ethanol mandate, and increase calls on Congress to fix the RFS [Renewable Fuel Standard],” said Frank Macchiarola, API executive.23
However, this political tactic can also be a high-risk strategy, as described next.
In 2017, marketing consultants warned business that diving into the political fray with their messaging was risker than ever, given widespread political upheaval or uncertainty in the United States and Europe. Many marketing experts provided a single, clear message: steer clear of politics altogether. While they acknowledged that it was tempting for companies to weigh in on political issues, they also pointed out that the Internet backlash against possible missteps was quicker and fiercer than ever. “The implications for corporations that get sucked into this are not good. You want to stay as far removed from politics as possible,” said Mark Penn, a market researcher.24
Trade Associations
Many businesses work through trade associations—coalitions of companies in the same or related industries—to coordinate their grassroots mobilization campaigns, such as the National Realtors Association (real estate brokers), National Federation of Independent Businesses (small businesses), the National Association of Manufacturers (manufacturers only), or the U.S. Chamber of Commerce (broad, diverse membership).25
The U.S. Chamber of Commerce represents more than 3 million businesses of all sizes, sectors, and regions. The chamber has a multimillion-dollar budget, publishes a widely circulated magazine, and operates a satellite television network to broad- cast its political messages. Its agenda includes advocating for pro-business policies that create jobs and grow our economy, and to support smart tax policy, regula- tory relief, legal reform, and trade promotion to the benefit of all U.S. businesses. The U.S. Chamber of Commerce organization has one overarching mission—to strengthen the competitiveness of the U.S. economy.26
Businesses focus on various trade associations for promoting their political activities. The Center for Public Integrity reported that trade associations spent more than $16 million on political campaigns in 2016, compared to only $5 million in 2014 and $3.2 million in
23 “API Launces New RFS Advocacy Campaign Focused on Consumers,” API, August 9, 2016, www.api.org. 24 “Marketing Experts to Advertisers: Steer Clear of Politics,” The Wall Street Journal, June 20, 2017, www.wsj.com. 25 The classic discussion of corporate political action can be found in Edwin Epstein, The Corporation in American Politics (Englewood Cliffs, NJ: Prentice Hall, 1969). A more recent handbook of current strategies in American political activity is in Kenneth A. Gross, Lawrence M. Noble, Ki P. Hong, and Patricia M. Zweibel, Corporate Political Activities Deskbook (New York: Practicing Law Institute, 2014). 26 See the U.S. Chamber of Commerce website, www.uschamber.com.
Final PDF to printer
178 Part Three Business and Public Policy
law43665_ch08_161-186.indd 178 11/21/18 08:00 AM
the previous presidential election cycle. This spending was decidedly biased, with 92 percent of the contributions supporting Republican candidates or conservative issues.27
Activities of trade associations may include letters, telephone calls, tweets, blogs, e-mails, and other Internet communications to register approval or disapproval of a gov- ernment official’s position on an important issue.
Legal Challenges
A political tactic available to businesses (and other political participants) is the use of legal challenges. In this approach, business seeks to overturn a law or portions of a law after it has been passed or threatens to challenge the legal legitimacy of the new regulation in the courts. Such an approach is shown in the following example.
A few years after Congress passed the Affordable Care Act, many organizations legally challenged the provision that required employers to provide employees with contraceptive coverage in their health plans. Many of those filing lawsuits were churches and religious-affiliated businesses, like Hobby Lobby and its owners David and Barbara Green. The Greens argued that the contraceptive requirement directly challenged their faith, which was the foundation of their business. Based on strong, traditional Christian values, Hobby Lobby stores were not open on Sunday, and the owners and employees supported various Christian charities with their time and financial contributions. Hobby Lobby’s owners also were strongly opposed to any form of birth control based on their religious convictions. According to CEO David Green, “Our family is now being forced to choose between following the laws of the land that we love or maintaining the religious beliefs that have made our business successful and have supported our family and thousands of our employees and their families.” In 2014, the U.S. Supreme Court ruled, in a 5 to 4 decision, in favor of Hobby Lobby, exempting the company from the Affordable Care Act requirements and citing the legal principle that one can maintain their religious beliefs even when acting as a business owner.28
Levels of Political Involvement
Business executives must decide on the appropriate level of political involvement for their company. As shown in Figure 8.5, there are multiple levels of involvement and many ways to participate. To be successful, a business must think strategically about objectives and how specific political issues and opportunities relate to those objectives.
Organizations often begin at the lowest level of political participation, limited organiza- tional involvement. Here managers of the organization are not ready or willing to become politically involved by giving their own time or getting their stakeholders involved, but they want to do something to influence the political environment. Organizations at this level may show their political interest, for example, by writing out a check to a trade association to support an industry-backed political action, such as hiring a lobbyist on a specific issue.
When the organization is ready for moderate political involvement, managers might directly employ a lobbyist to represent the company’s political strategy in Washington or the state capital to push the firm’s political agenda. This is a more active form of political involvement since the lobbyist is an employee of the organization. Getting the organization’s
27 For more information, see OpenSecrets.org or the Center for Public Integrity, www.publicintegrity.org. 28 “Businesses Sue Government over Birth Control Mandate,” National Public Radio, January 11, 2013, www.npr.org; and for a detailed timeline and analysis of the lawsuit see www.hobbylobbycase.com.
Final PDF to printer
Chapter 8 Influencing the Political Environment 179
law43665_ch08_161-186.indd 179 11/21/18 08:00 AM
stakeholders involved is another way a firm can increase its political involvement. Employ- ees can write letters or send e-mails or tweets to their congressperson or become involved in a political campaign. Senior executives might communicate with stockholders or customers on particular issues that might affect the firm and its stakeholders and encourage them to write letters, blog, or otherwise voice their concerns. Some firms have sent letters to their shareholders soliciting their political contributions for a particular candidate or group of candidates but have asked that the contributions be sent to the company. Then the company takes all of the contributions to the candidate or candidates, clearly indicating that the con- tributions are from the firm’s shareholders. This technique is called bundling.
The most direct and personal involvement in the political environment is achieved at the third level—aggressive organizational involvement—where managers become personally involved in developing public policy. Some executives are asked to sit on important task forces charged with writing legislation that will affect the firm or the firm’s industry. When state legislatures were writing laws limiting the opportunities for corporate raiders to acquire unwilling companies in their states, the legislators turned to corporate general counsels, the company attorneys, to help draft the laws. Another example of aggressive organizational involvement is provided by The Business Roundtable, described earlier in this chapter.
Managing the Political Environment
In many organizations, the task of managing political activity falls to the department of public affairs or government relations. The role of the public affairs department is to man- age the firm’s interactions with governments at all levels and to promote the firm’s inter- ests in the political process. (Public relations, discussed in Chapter 19, is a different business function.) The creation of public affairs units is a global trend, with many compa- nies in Canada, Australia, and Europe developing sophisticated public affairs operations.29 As shown in Exhibit 8.E, nearly all of the most frequently performed activities by public affairs officers or departments involve a political action tactic and the use of most of these tactics has remained relatively stable since 2005.
29 The global patterns of public affairs practice are documented in Journal of Public Affairs, published by Henry Stewart Pub- lishing beginning in 2001. For a practical guide to public affairs, see Public Affairs in Practice: A Practical Guide to Lobbying, Stuart Thomson and Steve John (London, U.K.: Kogan Page, 2007).
Level 3 Aggressive Organizational Involvement—direct and personal
• Executive participation
• Involvement with industry working groups and task forces
• Public policy development
Level 2 Moderate Organizational Involvement—indirect yet personal
• Organizational lobbyist
• Employee grassroots involvement
• Stockholders and customers encouraged to become involved
Level 1 Limited Organizational Involvement—indirect and impersonal
• Contribution to political action committee
• Support of a trade association or industry activities
FIGURE 8.5 Levels of Business Political Involvement
Final PDF to printer
180
law43665_ch08_161-186.indd 180 11/21/18 08:00 AM
Most companies have a senior manager or executive to lead the public affairs depart- ment. This manager is often a member of the company’s senior management committee, providing expertise about the company’s major strategy and policy decisions. The size of the department and the support staff varies widely among companies, but more than half have reported an increase in budget and staffing since 2011. Many companies assign employees from other parts of the business to work on public affairs issues and to help plan, coordinate, and execute public affairs activities. In this way, the formulation and implementation of the policies and programs developed by a company’s public affairs unit are closely linked to the primary business activities of the firm.
Over one-third of the heads of public affairs departments report directly to the CEO, chairperson, or president of the company, while others report to the firm’s general counsel. Most work out of company headquarters; most of the rest—particularly those whose work focuses on government relations—work in Washington, DC. Eighty-five percent of those leading the public affairs department are typically an executive vice president, senior vice president, or vice president. The typical public affairs executive spends most of the day direct lobbying with federal or state politicians, hosting visits by politicians to the company’s locations, attending funding raising activities, or participating in coalition building. Over 56 percent of the public affairs officers reported that funding for public affairs activities increased over the past three years, with 44 percent of the companies reporting an increase in funding for international public affairs.30
Business Political Action: A Global Challenge
Most of the discussion so far in the chapter has focused on business political activity in the United States. As more companies conduct business abroad, it is critical that managers
30 Foundation for Public Affairs, The State of Corporate Public Affairs, 2017–2018 (Washington, DC: Foundation for Public Affairs, 2017).
Corporate Public Affairs Activities
Source: Foundation for Public Affairs, The State of Corporate Public Affairs, 2017–2018 (2017), based on a survey of 105 companies.
Exhibit 8.E
Activities Conducted within the Public Affairs Department
Percent of Companies, 2005
Percent of Companies, 2017
Federal government relations 95% 93
State government relations 85 89
Issues management 82 94
Local government relations 79 81
Business/trade association oversight
75 96
Political action committee 83 74
Coalitions 71 92
Grassroots/grasstops 75 76
Final PDF to printer
Chapter 8 Influencing the Political Environment 181
law43665_ch08_161-186.indd 181 11/21/18 08:00 AM
be aware of the opportunities for and restrictions on business involvement in the political processes in other countries. Other societies and governments also struggle with issues of participation in the political environment, campaign financing, and maintaining a fair ethical climate throughout the public policy process. The following example focuses on lobbying and constituency-building tactics.
In 2015, Google was embroiled in an escalating EU antitrust case and the “right to be forgotten” controversy (the subject of a case study at the end of this book and also discussed in Chapter 12). The firm doubled its direct lobbying expenditures in Europe in 2013 to nearly €4 million (about $4.3 million). By comparison, Google spent $16.8 million lobbying in the United States. Other U.S. technology firms also increased their political activities in Europe. Microsoft belonged to 33 European trade associations. By comparison, Deutsche Telekom, a German telecommunica- tions company, maintained 13 trade association memberships, while Axel Springer, the leading digital publisher in Europe, belonged to only four.
StandWithUs, a pro-Israel American advocacy group closely tied to the Israeli govern- ment, opened up an office in China in 2015. Announcing that China was “a country in which we can make a difference,” StandWithUs set about correcting what it characterized as “misinformation in the Chinese media about Israel.” Their approach was focused on “utilizing social media, university programs, and networking events” to better connect with the next generation of Chinese political leadership and the Chinese media.31
In contrast to China, Japan has a more pluralistic public policy process. The major actors in the Japanese political environment are representatives of big business, agri- culture, and labor, which are quite powerful and influential. Some of the largest interest groups support hundreds of candidates in each important election and provide them with large financial contributions. The Kiedanren, or federation of economic organizations, is mostly concerned with big business, but other interest groups promote the concerns of small and medium-sized businesses, such as barbers, cosmeticians, dry cleaners, inn- keepers, and theater owners. Some political influence is in the hands of smaller groups, such as the teachers’ union (Nikkyoso), Japan Medical Association, employers association (Nikkeiren), and a labor union (Rengo).32
Although political alliances and favoritism appears around the world, in varying degrees, some have made efforts to promote fairness in the electoral process, control the rapid rise in the costs of campaigning, enhance the role of political parties in elections, and encourage grassroots participation by various societal groups.
Since 1999, the Global Electoral Organization (GEO) has brought together more than 300 of the world’s top election officials and democracy advocates to celebrate “transparency in the election process.” The GEO-7 meeting, held in 2016, focused on the use of data and technology to improve transparency and accountability in elections. GEO partners included the Association of European Election Officials, the International Foundation for Electoral System, the International Institute for Democracy and Electoral Assistance, the Electoral Institute for Sustainable Democ- racy in Africa, Mexico’s National Electoral Institute, the United Nations Electoral Assistance Division, and the United Nations Development Programme. One
31 “U.S. Tech Firms Increase EU Lobbying Efforts,” The Wall Street Journal, April 29, 2015, www.wsj.com; and “An Israeli Lobby in China?” The Diplomat, April 30, 2015, thediplomat.com. 32 Ryan Beaupre and Patricia Malone, “Interest Groups and Politics in Japan,” alpha.fdu.edu/~ woolley/JAPANpolitics/Beaupre.htm.
Final PDF to printer
182 Part Three Business and Public Policy
law43665_ch08_161-186.indd 182 11/21/18 08:00 AM
conference delegate explained, “I think standards are changing and politicians will have to recognize this—that as we are now in the 21st century, public opinion is applying different standards to politics, to politicians, to political parties. They’re not allowed to do things they were doing in the 19th and 20th centuries. People have high expectations, high demands, and they will keep politicians accountable.”33
Political action by business—whether to influence government policy or the outcome of an election—is natural in a democratic, pluralistic society. In the United States, business has a legitimate right to participate in the political process, just as consumers, labor unions, environmentalists, and others do. One danger arising from corporate political activity is that corporations may wield too much power. As businesses operate in different commu- nities and countries, it is important that ethical norms and standards guide managers as they deal with political issues. If corporate power tips the scales against other interests in society, both business and society may lose. Whether it is in the media-rich arena of elec- toral politics or the corridors of Congress where more traditional lobbying prevails, busi- ness leaders must address the issues of how to manage relationships with government and special interests in society in ethically sound ways. Ultimately, business has an important long-term stake in a healthy, honest political system.
33 See “The Seventh Global Elections Organization Conference (GEO-7)” at ifes.org/GEO. The quote is from “Credible Elec- tions for Democracy,” Institute for Democracy and Electoral Assistance, www.idea.int.
∙ Some believe that businesses should be involved in politics because their economic stake in government decisions is great and they have a right to participate, just as do other stakeholders in a pluralistic political system. But others believe that businesses are too big, powerful, and selfish, and that they wield too much influence in the political arena.
∙ There are three political strategies: information, financial incentives, and constituency- building. Some firms implement strategies as needed, on an issue-by-issue basis, while other firms have a long-term, ongoing political strategy approach.
∙ Some of the political action tactics available for business include lobbying, direct communications, expert witness testimony, political action committee contributions, economic leverage, advocacy advertising and public relations, trade association involvement, legal challenges, and encouraging the involvement of other stakehold- ers. Businesses are increasingly turning to social media to promote their political strategies.
∙ Businesses manage their government interactions through a public affairs department. Most public affairs officers report to the CEO, chairperson, or president of the com- pany, although how these departments are structured is widely varied.
∙ The differing national rules and practices governing political activity make business’s political involvement complex in the global environment. Many governments have debated whether to restrict lobbying or political contributions or to make the political process more transparent.
Summary
Final PDF to printer
law43665_ch08_161-186.indd 183 11/21/18 08:00 AM
Discussion Case: Political Action by the U.S. Steel Industry, 2015–2018
Often regarded as the backbone of American manufacturing, the steel industry is essential to the world’s water and food supply, energy generation, and national security. The U.S. military uses steel extensively, in applications including aircraft carriers, nuclear subma- rines, missiles, armor plate, and every major military aircraft. There are many reasons to be concerned with the health of the U.S. steel industry. However, in the 2010s, the American steel industry began to suffer from an unprecedented surge of foreign-produced steel flooding into the United States. In many cases, these imports were nearly 50 percent cheaper than U.S.–made steel, since the Chinese and some other governments subsidized their steel industries, and foreign steel companies used nonunion, low-wage workers.
Production at domestic steel mills dropped to as low as 60 percent of capacity, an unsus- tainable level for a capital-intensive steel producer. American steel companies began to close down major facilities or reduce production. More than 12,000 steel jobs were lost in 2014 and 2015, as foreign steel imports took a record 29 percent of the U.S. steel manu- facturing market.
Almost one in three tons of steel sold in the United States were produced by foreign companies. The Chinese government owned almost half of the world’s steelmaking capacity. Between 2000 and 2014, Chinese steel production increased an astonishing
Internet Resources
www.businessroundtable.org The Business Roundtable www.commoncause.org Common Cause lobbyingdisclosure.house.gov Lobbying Disclosure, U.S. House of Representatives www.endcitizensunited.org End Citizens United www.nfib.com National Federation of Independent Businesses www.opensecrets.org Opensecrets.org www.politico.com Politico www.politics.co.uk/ Politics.co.uk pac.org Public Affairs Council www.pdc.wa.gov Public Disclosure Commission www.fec.gov U.S. Federal Election Commission
Key Terms revolving door, 168 soft money, 173 super PACs, 172 The Business Roundtable, 168 trade associations, 177
advocacy advertising, 176 bundling, 179 Citizens United decision, 174 corporate political strategy, 164
dark money, 173 economic leverage, 175 lobbying, 166 political action committees (PACs), 170 public affairs departments, 179
Chapter 8 Influencing the Political Environment 183
Final PDF to printer
184 Part Three Business and Public Policy
law43665_ch08_161-186.indd 184 11/21/18 08:00 AM
540 percent, with additional surges in steel production in South Korea and Turkey. With the rising tide of cheap imports entering the U.S. market from these and other coun- tries, the U.S. steel industry knew it had to do something dramatic and quickly.
In 2015, the steel companies launched a multi-faceted and well-funded political strategy to seek governmental protection from the onslaught of cheap steel imports coming into the country. Their main objective was the imposition of import tariffs, or an additional fee or tax, to boost the price of foreign-made steel sold in the United States. Some political activities focused on articulating a clear message to Congress and the White House. Steel executives arranged for opportunities to testify before numerous congressional committees focusing on the economy, trade, and national security. Steel companies provided “white papers,” short briefs emphasizing key points, sent to congressional members and their staff, seeking to ensure that everyone with any political power knew of the steel industry’s policy views.
Other efforts targeted political candidates’ campaigns and funneled significant dollars to key politicians and political parties to gain influence. As shown in Figure 8.6, the American Iron and Steel Institute, the industry’s trade association, and the United States Steel Corpo- ration, a domestic integrated steel producer, increased their levels of political action com- mittee (PAC) campaign contributions, especially during the 2014 political election cycle.
Domestic steel producers sought economic relief by filing a complaint with the U.S. Commerce Department. The steel industry was aware that Congress gave the Commerce Department new tools in 2015 when it enacted legislation that changed the trade rem- edy laws, and steel executives argued that it was critical that the department aggressively use them. The U.S. Steel Corporation turned to the U.S. International Trade Commission (ITC), an independent federal agency with broad investigative responsibilities on matters of trade. The U.S. Steel Corporation filled a complaint with the ITC alleging that Chinese steel producers and distributors conspired to fix prices, stole trade secrets, and falsely label steel products on the market. “We have said that we will use every tool available to fight
FIGURE 8.6 PAC Contributions by the Steel Industry, 2012–2018
Source: OpenSecrets.org.
American Iron and Steel Institute PAC contributions – funds spent
U.S. Steel Corporation PAC contributions – funds spent
0
2012
2014
2016
2018
1,0 0,
00 0
2, 00
,0 00
3, 00
,0 00
4, 00
,0 00
5, 00
,0 00
6, 00
,0 00
7, 00
,0 00
$564,210 $94,000
$587,911 $154,225
$484,990 $82,000
$263,183 $40,000
Final PDF to printer
Chapter 8 Influencing the Political Environment 185
law43665_ch08_161-186.indd 185 11/21/18 08:00 AM
for fair trade. With today’s [ITC] filing, we continue the work we have pursued through countervailing and antidumping cases and pushing for increased enforcement of existing laws,” said U.S. Steel Corporation CEO Mario Longhi.
The steel industry also worked in coalition with others to promote their interests. It joined with other manufacturers from the aluminum, textile, fabric, fiber, and resin indus- tries to form the Manufacturers for Trade Enforcement coalition to raise awareness of their concerns about China’s market status. Company executives encouraged their employees to sign petitions calling on Congress to protect the steel industry by enacting tariffs, an additional fee imposed on all tonnage of steel coming into the country. Not all other manu- facturers agreed to join this effort, however. For example, Daniel Cosio of Ball Metal Food Container said that restricting Chinese steel imports would “lead to short supplies, higher prices and fewer alternatives for companies like ours. The products we buy from China are not available from U.S. producers in the quality and quantity provided by the Chinese. The level of service that Chinese producers provide is superior to the service provided by domestic steel producers.”
Some steel executives launched publicity campaigns to educate Americans about the industry’s economic crisis. Lakshmi Mittal, CEO of ArcelorMittal, the world’s leading integrated steel and mining company, said that he “was counting on tariff protection to help save his U.S. [steel] mills, heavily concentrated in northern Indiana. [This protection] will help prices.” ArcelorMittal announced that it would lay off 150 of the 207 workers at its Philadelphia plant early the following year. Kimberly Allen, a steelworker and single parent who had worked at the ArcelorMittal plant for more than 22 years, said, “I told my son, ‘Christmas is going to be kind of severe, because Mommy’s going to lose her job soon.’”
The steel industry’s multi-faceted political strategy seemed to pay off in 2017 when President Trump announced he would impose steep—25 percent—global tariffs on steel imports, making good on his campaign promise to aggressively pursue his “America First” trade policy. “You’re going to see a lot of good things happen. You’re going to see expansion of the [domestic steel] companies,” said Trump. However, countries impacted by these tariffs were expected to bring complaints before the World Trade Organization (WTO), discussed in Chapter 4, saying the tariffs violated WTO rules prohibiting protec- tive tariffs under most circumstances.
News of the tariffs caused a negative reaction on Wall Street, where investors fled stocks following Trump’s announcement. The Dow Jones Industrial Average declined 264 points, or 1.1 percent, the Standard and Poor’s 500 fell 0.5 percent, and the Nasdaq Composite dropped 0.4 percent. Analysts argued that the new tariffs on imports would boost steel prices in the United States, offering a lifeline to beleaguered American steel makers, but also raising costs for manufacturers of goods made from steel, ranging from oil pipes to factory equipment to automobiles. Steve Handschuh, head of the Motor Equip- ment Manufacturers Association, said, “Tariffs limit access to necessary specialty prod- ucts, raise the cost of motor vehicles to consumers, and impair the industry’s ability to compete in the global marketplace.”
Sources: “The Crisis Facing the U.S. Steel Industry,” CNN, March 23, 2016, www.cnn.com; “U.S. Steel Fires New Salvo in War against Chinese Imports,” Pittsburgh Business Times, April 26, 2016, www.bizjournals.com; “U.S. Steel Complaint Opposed by Steel Users,” Pittsburgh Post-Gazette, May 14, 2016, www.post-gazette.com; “U.S. Steel Tariffs Create a Double-Edged Sword,” The Wall Street Journal, May 31, 2016, www.wsj.com; “Trump Promised to Protect Steel, Layoffs Are Coming Instead,” The New York Times, December 22, 2017, www.nytimes.com; “Trump Will Approve Aluminum, Steel Tariffs Next Week,” The Wall Street Journal, March 1, 2018, www.wsj.com; and “U.S. Stocks Trade Sharply Lower,” The Wall Street Journal, March 2, 2018, www.wsj.com.
Final PDF to printer
186 Part Three Business and Public Policy
law43665_ch08_161-186.indd 186 11/21/18 08:00 AM
Discussion Questions
1. Did the steel industry act appropriately as a participant in the political environment when it sought economic protection from foreign steel imports?
2. What political strategies, as shown in Figure 8.2, did the steel industry use to gain tariff protections?
3. What other political strategies could the steel industry have used to promote their inter- ests and how?
4. What levels of corporate political involvement, as shown in Figure 8.5, are evident in the case?
5. Should Chinese and other country’s steel producers be permitted to engage as a political participant in the U.S. political environment to protect their economic interests?
Final PDF to printer
P A R T F O U R
law43665_ch09_187-210.indd 187 11/20/18 11:33 AM
Business and the Natural Environment
Final PDF to printer
188
law43665_ch09_187-210.indd 188 11/20/18 11:33 AM
C H A P T E R N I N E
Sustainable Development and Global Business The world community faces unprecedented ecological challenges in the 21st century, including cli- mate change, resource scarcity, and threats to biodiversity. Many political and business leaders have embraced the idea of sustainable development, calling for economic development without depleting the natural capital on which future generations depend. A critical task in coming decades for govern- ment policymakers, civil society organizations, corporate leaders, and entrepreneurial innovators will be to find ways to meet simultaneously both economic and environmental goals.
This Chapter Focuses on These Key Learning Objectives:
LO 9-1 Understanding how business and society interact within the natural environment.
LO 9-2 Defining sustainable development.
LO 9-3 Recognizing the ways in which population growth and economic development interact with the world’s ecological crisis.
LO 9-4 Examining common environmental issues, including climate change, that are shared by all nations and businesses.
LO 9-5 Analyzing the steps both large and small businesses can take globally to reduce ecological dam- age and promote sustainable development.
LO 9-6 Describing the leading global codes of environmental conduct.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 189
law43665_ch09_187-210.indd 189 11/20/18 11:33 AM
In 2015, representatives of 193 of the world’s nations gathered at the United Nations in New York City to adopt the Sustainable Development Goals, also known as Agenda 2030 because of the deadline for meeting them. The goals were broad and aspirational, covering many aspects of economic and social development. But all shared a vision of a sustainable future in which humanity could thrive without destroying the environmental basis for life on Earth. Agenda 2030 called, for example, for clean drinking water, renewable energy, responsible consumption and production, protecting the oceans, halting deforestation, and aggressive action on climate change. “We are determined,” said the United Nations state- ment, “to take the bold and transformative steps which are urgently needed to shift the world onto a sustainable and resilient path.”1
Meeting these ambitious goals will surely require the involvement of businesses, both large and small, from all over the globe, in the pursuit of sustainability. Companies of all types have embraced the challenges of operating within the limits of the Earth’s natu- ral systems. Many have recognized the cost savings associated with operating more effi- ciently, the opportunities to serve consumer markets in emerging economies, the benefits of reducing regulatory risk, and the competitive advantages of innovation in sustainable technology. Consider the following examples:
∙ In 2018, McDonald’s, the world’s largest restaurant chain, announced that by 2025 one hundred percent of customer packaging—at all locations across the globe—would come from renewable, recycled, or certified sources. It would also offer recycling receptacles for patrons to use at all locations to dispose of their waste. At the time of the announce- ment, about half of the company’s packaging met this standard, and only 10 percent of its locations offered recycling. Because of its enormous size—37,000 restaurants in more than 100 countries—McDonald’s commitment promised a huge impact. “We look forward to doing more and continuing to raise the bar,” said the company’s chief sus- tainability officer.2
∙ Taylor Guitars makes high-end acoustic and electric guitars, played by such well-known musicians as Taylor Swift, Jason Mraz, and Dave Matthews. To assure its supply of ebony, a hardwood that grows in tropical rain forests and is used to make fret boards, the company bought a saw mill in Cameroon, West Africa. Taylor Guitars quickly ended the wasteful practice of cutting down 10 ebony trees to find one with solid black wood, which had stressed the forest and endangered remaining supplies. Instead, they began using all the ebony they harvested, and educated their customers that the wood naturally came in many hues other than black. “Our vision was to transform the way that ebony is harvested, processed, and sold,” said Bob Taylor, the president of the company. “To accomplish this, we assumed the role of guardian of the forest, and we operate with the philosophy to use what the forest gives us.”3
∙ Airbus Group is a European multinational corporation that makes aircraft, including the world’s largest passenger jet. The company has endorsed Agenda 2030 and has pledged to support carbon-neutral growth in the aviation industry. In support of this goal, the company has partnered with farmers, energy companies, and researchers to develop new biofuels that can be “dropped in” to today’s aircraft as part of a fuel blend, cutting
1 “U.N. Adopts Ambitious Global Goals After Years of Negotiations,” The New York Times, September 25, 2015. The full text of the Agenda 2030 is available at https://sustainabledevelopment.un.org/post2015/transformingourworld. 2 “By 2025, All of McDonald’s Packaging to Come from Renewable, Recycled, or Certified Sources; Goal to Have Recycling Available in All Restaurants,” January 16, 2018, press release, at http://news.mcdonalds.com. 3 “The Crelicam Mill in Cameroon,” www.taylorguitars.com/about/sustainable-ebony; and Bob Taylor, “Remarks at the Remarks at the 15th Annual Awards for Corporate Excellence,” www.state.gov/secretary/remarks/2014/01/220756.htm.
Final PDF to printer
190 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 190 11/20/18 11:33 AM
carbon emissions. Since 2016, Airbus has offered its customers, such as Cathy Pacific Airlines, the option of having their new aircraft delivered from the factory using the sustainable fuel. “This is a major step for Airbus,” said the company’s head of new ener- gies. “It enables us to demonstrate that aviation biofuels are today a reality.”4
These examples suggest some of the great creativity that businesses were bringing to the ecological challenges of the 21st century. Can businesses, governments, and society, working together, put the global economy on a more sustainable course? This chapter will describe the major sustainability challenges facing society and both the risks and opportu- nities these challenges present to businesses globally. The following chapter will focus on specific areas of government regulation and the ways in which businesses, in the United States and other countries, have sought to manage for sustainability.
Business and Society in the Natural Environment
Business, society, and the environment are deeply interrelated. Business and society oper- ate within, and depend on, the natural environment. The extraordinary planet on which we live provides the abundant resources humans use to thrive, but it also imposes con- straints. We have only one Earth, and its resources are finite. Natural capital refers to the world’s stocks of natural assets, including its geology, soil, air, water, and all living things.5 The United Nations has estimated that the value of natural capital to society is as high as $72 trillion per year.6 These assets make human life possible. For human society to survive over time it must operate sustainably, in a way that does not destroy or deplete these nat- ural resources for future generations. This fundamental truth confers on business leaders both great challenges and great opportunities.
Chapter 1 introduced the idea of systems theory and explained how businesses cannot be understood in isolation, but only in relationship to the broader society in which they operate. This idea can be extended to the relationship between business and society, on one hand, and the natural environment, on the other. In this view, business and society can be most fully understood in relationship to the broader natural environment in which they are embedded and with which they interact. This relationship is illustrated in Figure 9.1.
The well-known image of the Earth as seen from space—a blue-and-green globe, gir- dled by white clouds, floating in blackness—dramatically shows us that we share a single, unified natural system, or ecosystem. Preserving our common ecosystem and assuring its continued use is an urgent imperative for governments, business, and society. As KPMG International stated in its report, Expect the Unexpected, “The central challenge of our age must be to decouple human progress from resource use and environmental deterioration.”7
Sustainable Development The need for balance between economic progress and environmental protection is captured in the concept of sustainable development. This term refers to development that “meets the needs of the present without compromising the ability of future generations to meet their
4 KPMG (in partnership with the U.N. Global Compact), “Sustainable Development Goals Industry Matrix,” at www.kpmg.com; and “Airbus Demonstrates Regular Customer Delivery Flights with Sustainable Jet Fuel,” June 1, 2017, at www.airbus.com/ newsroom. 5 “What is Natural Capital,” www.naturalcapitalforum.com. See also Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natu- ral Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999). 6 “The State of Green Business Report 2018,” at www.greenbiz.com. 7 “Expect the Unexpected: Building Business Value in a Changing World,” KPMG International, 2012.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 191
law43665_ch09_187-210.indd 191 11/20/18 11:33 AM
own needs” or, more simply, “ensuring a better quality of life for everyone, now and for generations to come.”8 At its core, sustainable development is about fairness—a central tenet of ethics, as explained in Chapter 5. Fairness requires that the benefits and burdens of an action be distributed equitably, according to an accepted rule. Sustainable development requires an equitable distribution of the benefits gained from the use of natural resources for both current generations (the developing world countries should receive its fair share along with the countries in the developed world) and across generations (the present gen- eration should not gain at the expense of future generations). This can only occur if govern- ments and business leaders work to promote economic development that does not further degrade the environment. The very nature of consumption itself will need to change as people come to emphasize the quality of their lives over the quantity of goods they own, and innovation in a dynamic market economy will need to find new ways to meet human aspirations in a more resource-efficient manner.
What would a sustainable society look like? Of course, there are many paths to sustain- ability, and there is no way to know for sure what the future will hold. But, some cities have set out to demonstrate what might be possible. One such city is Curitiba, Brazil, which is profiled in Exhibit 9.A.
Threats to the Earth’s Ecosystem Humanity has entered a new geological era, called the Anthropocene (the period in which human activity has been the dominant influence on climate and the environment). Since the Industrial Revolution, humans have become a powerful force, altering the face of the planet and rivaling the forces of nature herself—glaciers, volcanoes, asteroids, and earthquakes—in impact. Human beings have literally rerouted rivers, moved mountains, and burned vast forests. By the early part of the 21st century, human society had trans- formed about half of the Earth’s ice-free surface and made a major impact on most of the rest. In many areas, as much land was used by transportation systems as by agriculture.
8 World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1987), p. 8; “Sustainable Development: The UK Government’s Approach,” http://sd.defra.gov.uk.
FIGURE 9.1 Business, Society, and the Natural Environment: An Interactive System
Society Business
Natural Environment
Final PDF to printer
192
law43665_ch09_187-210.indd 192 11/20/18 11:33 AM
The climate itself had been profoundly altered by emissions of global warming gases. Although significant natural resources—fresh water, fertile land, and forest—remained, exploding populations and rapid economic development had reached the point where, by most measures, the demands of human society had already exceeded the carrying capacity of the Earth’s ecosystem.
These rapid changes pose severe threats to many businesses. They face limited supplies of critical resources, unpredictable weather changes, and increased political risk, among many other challenges. Yet the environmental problems faced by society also present busi- ness with great opportunities. Established firms and innovative entrepreneurs who can figure out, for example, how to build offices and houses that are more energy-efficient, produce energy without irreversibly altering the climate, or devise systems to recycle and reuse obsolete electronics, can both help society and enjoy great commercial success.
Forces of Change Pressure on the Earth’s resource base is becoming increasingly severe. Two critical factors have combined to accelerate the ecological crisis facing the world community and to make sustainable development more difficult: population growth and the rapid industrialization of many developing nations.
The Population Explosion
A major driver of environmental degradation is the exponential growth of the world’s pop- ulation. A population that doubled every 50 years, for example, would be said to be grow- ing exponentially. Many more people would be added during the second 50 years than during the first, even though the rate of growth would stay the same. Just 10,000 years ago, the Earth was home to no more than 10 million humans, scattered in small settlements. For many thousands of years, population growth was gradual. Around 1950, the world
Curitiba: Brazil’s Sustainable City
The world is becoming increasingly urbanized. By 2050, two-third’s of the world’s people are expected to be living in cities, as rural migrants pore into urban areas from the surrounding countryside. How cities grow will therefore have a great impact on society’s future sustainability. Curitiba, Brazil, has been called the “greenest city on earth.” The capital of the state of Paraná, this city of almost 2 million has long embraced innovation in urban planning. Eighty-five percent of the population uses public transit rather than cars, with speedy buses moving along dedicated express lanes, stopping at tube stations where people can get on and off without using stairs. The city boasts 150 square feet of green space per resident, four times the World Heath Organization standard, and has planted 1.5 million trees. Buildings are repurposed rather than torn down and rebuilt: the planning department, for example, is in an old furniture factory. Nine out of ten residents recycle their paper, metal, glass, and plastic; and many participate in a program in which they can exchange trash for tokens, good for bus tickets and vegetables. “Curitiba is not a paradise,” said the mayor. “But it is a model for many cities in the world.” According to Arcadis, a global design and engineering firm, the most sustainable cities in the world— ranked by their impact on the planet—now include Zurich, Wellington, and Singapore. The factors considered include the use of renewable energy, recycling, clean drinking water, and low air pollution and greenhouse gas emissions.
Sources: “Story of Cities #37: How Radical Ideas Turned Curitiba into Brazil’s ‘Green Capital,’” The Guardian, May 6, 2016; “The Five Greenest Cities in the World,” Huffington Post, August 30, 2016; World Economic Forum, “Inspiring Future Cities and Urban Services,” April, 2016; Bill McKibben, Hope, Human and Wild (Minneapolis, MN: Milkweed Editions, 2007); and Arcardis, Sustainable Cities Index 2016, www.arcadis.com.
Exhibit 9.A
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 193
law43665_ch09_187-210.indd 193 11/20/18 11:33 AM
population reached 2.5 billion. World population crossed the 6 billion mark in 1999 and the 7 billion mark in late 2011. The United Nations estimates that the population will reach slightly more than 11 billion by 2100. To gain some perspective on these figures, consider that a baby born in 2015 who lives to be 85 years old will see the world’s population increase by more than 3 billion people.
Population growth in the coming decades will not be distributed equally. In the indus- trialized countries, especially in Europe, population growth has already slowed. Almost all the world’s population growth over the next century is predicted to be in less developed countries, especially in Africa, as shown in Figure 9.2.
The world’s burgeoning population will put increasing strain on the Earth’s resources. Each additional person uses raw materials and adds pollutants to the land, air, and water. The world’s total industrial production would have to quintuple over the next 40 years just to maintain the same standard of living that people have now, if technology remains unchanged.
Economic Development
A second source of pressure on the Earth’s resource base is the rapid industrialization of many countries. Many parts of Africa, Asia, and Latin America are developing at a rapid pace. This is positive because it is reducing poverty and slowing population growth. But economic development has also contributed to the growing ecological crisis. Industry requires energy, much of which comes from burning fossil fuels, releasing pollutants, and disrupting the climate. The agricultural “green” revolution, although greatly increasing crop yields in many parts of the world, has caused contamination by pesticides, herbicides, and chemical fertilizers. Development is often accompanied by rising incomes, bringing higher rates of both consumption and waste. In many instances, environmental regulations have lagged the pace of development.
China dramatically illustrates the tight connection between rapid economic develop- ment and environmental risk. China is one of the fastest-growing economies in the world, expanding at a rate approaching 10 percent annually on average over the past 30 years (although its economy has recently slowed somewhat). The evidence of industrialization is everywhere, from skyscrapers under construction, to cars crowding
FIGURE 9.2 Population of the World and Major Areas, 1950–2100
Source: United Nations Population Division, “World Population Prospects: The 2017 Revision: Key Findings and Advance Tables,” 2017. The projections represent the medium-range scenario. Other estimates are higher and lower. All estimates are available at www.un.org/development/desa.
0
2
4
6
8
10
12
W o
rl d
P o
p u
la tio
n (i
n b
ill io
n s) Oceania
Asia
World
North America
Europe
Africa
Latin America
1950 1980 2017 2050 2100
Final PDF to printer
194 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 194 11/20/18 11:33 AM
the streets, to factories operating 24/7 to produce goods for export. Yet a major conse- quence has been increased pollution. By the mid-2010s, 90 percent of China’s cities failed to meet air quality standards, and residents routinely wore face masks and stayed indoors to protect themselves from choking smog. In 2013, the government finally changed course, adopting a five-year plan to drastically limit coal burning, car emis- sions, and construction dust. By 2018, most of the plan’s goals had been met, although at the cost of many factory and mine closures. Said the Chinese president Xi Jinping, “Clear waters and green mountains are as good as mountains of gold and silver.”9
China and other fast-growing developing nations challenge business and society to “leapfrog” stages and move directly to cleaner technologies and methods of production.
The Earth’s Carrying Capacity The Earth’s rapid population growth, together with economic development of many of the world’s poorer nations and people’s rising expectations, are on a collision course with a fixed barrier: the limited carrying capacity of the Earth’s ecosystem. The world’s resource base, the air, water, soil, minerals, and so forth, is essentially finite, or bounded. We have only one Earth; the ecosystem itself is not growing. If human societies use up resources faster than they can be replenished, and create waste faster than it can be dispersed, envi- ronmental devastation will be the inevitable result.10 Human society is already overshooting the carrying capacity of the Earth’s ecosystem. Just as it is possible to eat or drink too much before your body sends you a signal to stop, so too are people and businesses using up resources and emitting pollution at an unsustainable rate. But because of delays in feedback, society may not understand the consequences of its actions until the damage has been done.
One method of measuring the Earth’s carrying capacity, and how far human society has overshot it, is called the ecological footprint. This term refers to the amount of land and water a human population needs to produce the resources it consumes and to absorb its wastes, given prevailing technology. According to the Global Footprint Network, which maintains a public data set that is updated as new information becomes available, for each living human being, the Earth contains 4.2 acres of biologically productive area—farmland, forest, fresh water, and so forth. At the same time, each person has, on average, an ecolog- ical footprint of 7.1 acres. What that means is that human society is using resources and producing waste at a rate greater than one and a half times above what the Earth’s ecosys- tem can sustainably support. (Overshooting the Earth’s carrying capacity is possible in the short run because people can consume resources without allowing them to regenerate, and generate waste at a rate higher than can be absorbed or recycled.) Historical data show that human society first exceeded world ecological capacity in the 1970s, and the gap between the two has been widening steadily since then.
Not surprisingly, some nations and individuals have bigger ecological footprints than oth- ers. For example, in the United States the average citizen has an ecological footprint of about five times his or her share of the world’s resources. By contrast, citizens of Bangladesh use less than half of their share; citizens of Honduras use exactly their share.11 These differences
9 “Why China’s Good Environmental Policies Have Gone Wrong,” The New York Times, January 14, 2018; “China’s Pollution Curbs Hit Growth as Policy Priorities Shift,” Financial Times, December 13, 2017; and “Hundreds of Chinese Cities Not Meet- ing Air Quality Standards,” The New York Times, April 21, 2015. 10 James Gustave Speth, The Bridge at the Edge of the World (New Haven: Yale University Press, 2008); and Herman E. Daly, Beyond Growth: The Economics of Sustainable Development (Boston: Beacon Press, 1996). 11 The most recent data are available from the Global Footprint Network, www.footprintnetwork.org. Individuals can estimate their own ecological footprint by taking a quiz available at the “personal footprint” link at this website.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 195
law43665_ch09_187-210.indd 195 11/20/18 11:33 AM
reflect the higher levels of consumption and less efficient use of resources in some coun- tries, relative to others.
Acting together, how can human society bring the Earth’s carrying capacity—and the demands placed on it—back into balance? This is without a doubt one of the great chal- lenges now facing the world’s people. Any solution will require change on many fronts.
∙ Technological innovation. One approach is to develop new technologies to produce energy, food, and other necessities of human life more efficiently and with less waste. Vast solar arrays in the desert, offshore wind turbines, or state-of-the-art utilities could power homes and businesses. For example, an innovative Swiss company called Clime- works partnered with a publicly-owned power plant in Iceland to capture carbon diox- ide and inject it underground, where it was absorbed by rock—trapping emissions for thousands of years.12 Genetic engineering could create more nutritious and productive crops. (Some concerns about genetic engineering are explored in Chapter 11.) Energy-efficient homes and commercial buildings could allow people to go about their lives while using fewer of the Earth’s resources. Technological innovation in support of sustainability is further discussed later in this chapter and in Chapter 10.
∙ Changing patterns of consumption. Individuals and organizations concerned about environmental impact could decide to consume less or choose less harmful products and services, or to buy from companies committed to sustainability in their own opera- tions. Mobile applications, such as those developed by goodguide.com, now allow indi- viduals to scan a product’s barcode in a store with their smartphones and receive instant information on its environmental impact. They can modify their purchasing decisions, based on this knowledge. Light Bulb Finder, named one of the best “green apps” by the U.S. Environmental Protection Agency, enabled users to compare bulbs by energy usage, cost, style, and light quality; create shopping lists; and buy online—making it easy than ever to make an environmentally-informed choice.13 In a consumer society, when many people decide to reduce their personal footprints by shopping thoughtfully for products like light bulbs, society’s overall footprint becomes smaller. Homes, work- places, and places of entertainment could be built closer to each other and to public transit, so people could get where they needed to go with less wasted energy.
∙ “Getting the prices right.” Some economists have called for public policies that impose taxes on environmentally harmful products or activities. For example, when an indi- vidual bought gasoline—or a utility burned coal to make electricity—they would be charged an added carbon tax. Because prices would reflect true environmental costs, individuals and firms would have an incentive to make less harmful choices. For exam- ple, in 2017 the province of Alberta, Canada, levied a tax of $20 a ton on carbon diox- ide emissions from fossil fuels used for heating and transportation. The government returned most of the money raised to households and small businesses in the form of rebates and tax cuts. The objective was to encourage individuals and companies to switch to more efficient vehicles and heating fuels.14
Some contemporary thinkers have gone even further and suggested that what is needed is nothing less than a completely new set of values about what is truly important. In this view, society needs a new narrative in which, as scholar Sandra Waddock has put it, “the
12 “The World’s First ‘Negative Emissions’ Plant Has Begun Operation—Turning Carbon Dioxide into Stone,” October 12, 2017, Quartz, at https://qz.com. 13 “The Top Eco-Friendly Smartphone Apps,” The Spruce, June 13, 2017. 14 “Here’s How Alberta’s Carbon Tax Increase Will Affect You in 2018,” December 28, 2017, at www.cbc.ca.
Final PDF to printer
196 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 196 11/20/18 11:33 AM
goals shift from wealth creation toward well-being and dignity in an economy that works for all, that is, creating more equity rather than less and fostering sustainability for all liv- ing beings and ecosystems, rather than simply exploiting nature for human gain.”15 Such a narrative would view the quality of life—not the quantity of things—as the worthiest goal of human aspiration.
Technological innovation, smart consumption, and accurate accounting all hold the promise of helping human society realize this vision of the future.
Global Environmental Issues
A commons is a shared resource, such as land, air, or water that a group of people use col- lectively. The paradox of the commons is that if all individuals attempt to maximize their own private advantage in the short term, the commons may be destroyed, and all users, present and future, lose. The only solution is restraint, either voluntary or by mutual agree- ment.16 The tragedy of the commons—that freedom in a commons brings ruin to all—is illustrated by the following parable.
There was once a village on the shore of a great ocean. Its people made a good living from the rich fishing grounds that lay offshore, the bounty of which seemed inexhaustible. Some of the cleverest fishermen began to experiment with new ways to catch more fish, borrowing money to buy bigger and better equipped boats. Since it was hard to argue with success, others copied their new techniques. Soon fish began to be harder to find, and their average size began to decline. Eventually, the fishery collapsed, bringing economic calamity to the village. A wise elder commented, “You see, the fish were not free after all. It was our folly to act as if they were.”17
In a sense, we live today in a global commons, in which many natural resources, like the fishing grounds in this parable, are used collectively. Some environmental problems are inherently global in scope and require international cooperation. Typically, these are issues pertaining to the global commons, that is, resources shared by all nations. Five global prob- lems that will have major consequences for business and society are climate change, ozone depletion, resource scarcity, decline of biodiversity, and threats to the world’s oceans.
Climate Change A critically important challenge facing the world community is climate change. This term refers to changes in the Earth’s climate caused by increasing concentrations of carbon dioxide and other pollutants produced by human activity. These have caused the average surface temperature of the Earth to rise over time, a phenomenon known as global warming. But because these gases also have a variety of other complex effects on the climate, scien- tists often prefer the more general term climate change.
The Earth’s atmosphere contains carbon dioxide and other trace gases that, like the glass panels in a greenhouse, prevent some of the heat reflected from the Earth’s surface from escaping into space, as illustrated in Figure 9.3. Without this so-called greenhouse
15 Sandra Waddock, “Beyond CSR to System Change,” in James Weber and David M. Wasieleski (eds.), Stakeholder Manage- ment, Business and Society 360: Volume 2, pages 394–95 (Bingley, United Kingdom: Emerald Publishing Ltd., 2018). 16 Garrett Hardin, “Tragedy of the Commons,” Science 162 (December 1968), pp. 1243–48. 17 Source: Abridgment of “The Story of a Fishing Village,” from 1994 Information Please Environmental Almanac.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 197
law43665_ch09_187-210.indd 197 11/20/18 11:33 AM
effect, the Earth would be too cold to support life. Since the Industrial Revolution, the concentration of carbon dioxide in the atmosphere has increased by more than 40 percent, largely due to the burning of fossil fuels such as oil, natural gas, and coal. According to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), a group of the world’s leading atmospheric scientists, since 1880 the Earth has warmed by between 0.7 and 1.1 degrees Celsius. (One degree Celsius equals 1.8 degrees Fahrenheit, the unit commonly used in the United States.) Each of the past three decades has been the warmest of any in the last century and a half. The IPCC found that climatic warming was “unequivocal” and “extremely likely” due to human-generated greenhouse gases, which were at their highest atmospheric levels in at least 800,000 years.18
The possible causes of global warming are numerous. The burning of fossil fuels, which releases carbon dioxide, is the leading contributor. Increased emissions of nitrous oxides, resulting in part from the manufacture and use of synthetic fertilizers, also contributes. But consider the following additional causes.
∙ Black carbon. Recent scientific research has shown that black carbon—the sooty smoke that is created by the incomplete combustion of diesel engines, wildfires, and cookstoves fueled by dung, wood, and charcoal—is the second largest contributor to climate change, responsible for as much as 18 percent of global warming. Black carbon, which can travel thousands of miles in the atmosphere, absorbs heat and settles on glaciers, speeding up melting. A global alliance to reduce black carbon and simultaneously reduce global warming and advance economic development by promoting the use of clean cookstoves in developing nations is described in the discussion case at the end of this chapter.
18 Intergovernmental Panel on Climate Change, “Climate Change 2014: Synthesis Report—Summary for Policymakers,” 2014. A complete set of materials may be found at IPCC’s website, www.ipcc.ch. The next IPCC assessment report is scheduled for release in 2022.
FIGURE 9.3 Global Warming
INFRARED ENERGY
Infrared energy from the sun reflects o� the Earth’s surface and is trapped in the atmosphere by greenhouse gases, warming the surface.
ATMOSPHERE
SUN
Greenhouse gases include carbon dioxide, methane, nitrous oxides, and chlorofluorocarbons (CFCs).
EARTH
Final PDF to printer
198 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 198 11/20/18 11:33 AM
∙ Deforestation. Trees and other plants absorb carbon dioxide, removing it from the atmosphere. Deforestation—cutting down and not replacing trees—thus contributes to higher levels of carbon dioxide. Scientists have estimated that about half of all original forests have already been cut. Burning forests to clear land for grazing or agriculture also releases carbon directly into the atmosphere as a component of smoke. And when trees are removed, their leaves do not shade the ground, leading to still more warming. Large-scale deforestation thus contributes in several ways to climate change.
∙ Beef production. Cattle ranching contributes to global warming in several ways. Meth- ane, a potent greenhouse gas, is produced as a by-product of the digestion of ruminants, and feed production and manure processing have additional climate impacts. According to the Food and Agriculture Organization of the United Nations, livestock are responsi- ble for 15 percent of greenhouse gas emissions, measured in carbon equivalents; beef and dairy production account for three-fifths of this amount. As the world’s economies develop, people tend to eat more meat; the world’s beef consumption is projected to nearly double by 2050.19
If global warming continues, the world may experience extreme heat waves, air pollution crises, violent storms, and damaging wildfires in the 21st century. The polar ice caps may partially melt, raising sea levels and causing flooding in low-lying coastal areas such as Florida, Bangladesh, and the Netherlands. It may become as difficult to grow wheat in Iowa as it is now in arid Utah. Such climate change could harm peoples’ health, leading to breath- ing problems, epidemics of tropical diseases, and injuries from extreme weather events. It could devastate many of the world’s economies and destroy the habitats of many species.20
The most important international treaty on global warming is the Convention on Climate Change, first negotiated in 1992. The United Nations hosts an annual Conference of the Parties (COP), where representatives of virtually all the world’s nations meet to hammer out agreements to cut the fossil fuel emissions that cause global warming. The first major breakthrough occurred in 1997, when the Kytoto Protocol (named after the city in Japan where representatives met) set limits aimed at stabilizing the concentration of greenhouse gases in the atmosphere. In 2015, the COP negotiated a second major breakthrough, known as the Paris Agreement, which aimed to limit the rise in the average global temperature to well below 2 degrees Celsius above preindustrial levels. Individual nations would vol- untarily determine their own contributions to this goal. By late 2017, all of the world’s nations had signed the agreement, although the Trump Administration had announced its intention to withdraw the United States as soon as legally possible.21
Many companies—whether or not required by treaty to do so—have acted to reduce their impact on climate change.
CSX, a railroad, has worked aggressively to reduce its carbon emissions, investing more than $1.5 billion to lower its use of fuel. The company has adopted new tech- nology to provide auxiliary power to its locomotives, allowing their diesel engines to shut down while idling. It has also trained its engineers to use the most fuel- efficient throttle settings and lubricated its rails to reduce friction. These steps, among others, now allow CSX to move a ton of freight 500 miles on just one gallon of diesel fuel. Commented the Carbon Disclosure Project’s CEO, “Business must
19 Tackling Climate Change Through Livestock: A Global Assessment of Emissions and Mitigation Opportunities (Rome: United Nations Food and Agriculture Organization, 2013); and Creating a Sustainable Food Future (World Resources Institute, 2013). 20 Photographs of observable evidence of global warming may be found on the website of National Geographic, http://environment.nationalgeographic.com/environment/global-warming. 21 “Syria Joins Paris Climate Accord, Leaving Only U.S. Opposed,” The New York Times, November 7, 2017.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 199
law43665_ch09_187-210.indd 199 11/20/18 11:33 AM
continue to forge ahead, innovate and seek out opportunities by doing more with less. The decisions that perpetuate a legitimate, low carbon and high growth econ- omy will bring considerable value to those that have the foresight to make them.”22
Ozone Depletion Another global environmental challenge is ozone depletion. Ozone is a bluish gas, com- posed of three bonded oxygen atoms, that floats in a thin layer in the stratosphere between 9 and 28 miles above the planet. Although poisonous to humans in the lower atmosphere, ozone in the stratosphere is critical to life on Earth by absorbing dangerous ultraviolet light from the sun. Too much ultraviolet light can cause skin cancer and damage the eyes and immune systems of humans and other species.
Since the 1970s, scientists have understood that chlorofluorocarbons (CFCs), manu- factured chemicals formerly widely used as refrigerants, insulation, solvents, and propel- lants in spray cans, could react with and destroy ozone in the upper atmosphere. This has caused a thin spot, or hole, in the Earth’s ozone layer, particularly over Antarctica and in the northern latitudes over Europe and North America during the summer, when the sun’s ultraviolet rays are the strongest and pose the greatest danger. In addition to destroying the ozone, CFCs are also greenhouse gases.
In 1987, world leaders negotiated the Montreal Protocol, agreeing to cut CFC pro- duction; the agreement was later amended to ban CFCs, along with several other ozone-depleting chemicals. Participating countries will have until 2030 to phase out chlo- rofluorohydrocarbons (HCFCs), related chemicals also damaging to the ozone layer. As of 2018, 197 countries, all but a tiny handful, had signed the protocol. Scientists believe that if the agreement is honored, the ozone layer will recover by 2050.23
An ongoing problem is that HCFCs, often used as substitutes for CFCs, are themselves powerful greenhouse gases. (In fact, one pound of some HCFCs released into the atmosphere has more than 2,000 times the warming impact as the same amount of carbon dioxide.)
The Coca-Cola Company, PepsiCo, and Red Bull, normally fierce competitors, col- laborated to find a substitute for fluorinated gases, including HCFCs, in refrigeration units such as vending machines and convenience-store coolers. Working in a part- nership called Refrigerants Naturally!, these firms and others experimented with a variety of natural refrigerants, energy-efficient fans, intelligent controllers, and insu- lated glass. By 2016, they had replaced 5.5 million older units with ones using natu- ral refrigerants. “Competitors working together to help address environmental issues is definitely a strong message to the industry,” said a representative of Coca-Cola.24
Resource Scarcity: Water and Land The Earth also faces serious challenges of resource scarcity involving both fresh water and arable land.
Fresh Water Resources
Only 2.5 percent of the water on the Earth is fresh, and most of this is underground or locked up in ice and snow. Only about one-tenth of 1 percent of the Earth’s water is in
22 Carbon Disclosure Project, CDP Global 500 Report 2011: Accelerating Low Carbon Growth, available online at www.cdproject.net. CSX’s most recent report on its environmental initiatives is at www.csx.com/index.cfm/responsibility. 23 The text of the Montreal Protocol and its various amendments and a list of signatories may be found at http://ozone.unep.org. 24 The website of the coalition is www.refrigerantsnaturally.org.
Final PDF to printer
200 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 200 11/20/18 11:33 AM
lakes, rivers, and accessible underground supplies, and thus available for human use. Water is, of course, renewable: Moisture evaporates from the oceans and returns to Earth as freshwater precipitation, replenishing used stocks. But in many areas, humans are using up or polluting water faster than it can be replaced or naturally purified, threatening people and businesses that depend on it. In 2018, for example, officials of Cape Town, South Africa, announced they would turn off the water taps on what they called “Day Zero,” leaving its 4 million residents without access. Facing a severe drought, Cape Town—which drew its supplies from local reservoirs fed by rain—had run dangerously low. At the last moment, officials cancelled Day Zero, saying that recent rains had eased the shortage somewhat, but warned that the city could still run out of water if residents did not continue strict conservation practices.25
One step businesses can take to address water scarcity is to institute recycling in their offices and factories. In 2018, Salesforce opened a 61-story office tower in San Francisco, which boasted the largest water recycling system in a commercial high-rise building in the United States. The system was designed to collect “black- water” from the roof, cooling equipment, dishwashers, showers, sinks, and toilets and treat it on-site for reuse as “gray water” in toilets and irrigation, reducing over- all water use by 76 percent and saving enough to supply 16,000 households annually—a welcome move in a chronically drought-stricken area. “Offices can be an expression of our values,” said the director of sustainability for Salesforce.26
All four of the world’s leading irrigators—China, India, Pakistan, and the United States—are using groundwater faster than it is being replenished on crop-producing land.27 By one estimate, if society were able to eliminate all pollution, capture all available fresh water, and distribute it equitably—all of which are unlikely—demand would exceed the supply within a hundred years. By the 2010s, water shortages had already caused the decline of local economies and in some cases had contributed to regional conflicts. In Africa, for example, water disputes had flared among Egypt, Ethiopia, and Sudan, the three coun- tries traversed by the world’s longest river, the Nile. In the Middle East, disagreement over access to water from the River Jordan had exacerbated conflict between Israel and Palestine. By 2030, an estimated 3.9 billion people will be living under conditions of water scarcity.28
Arable Land
Arable (fertile) land is necessary to grow crops to feed the world’s people. Land, if prop- erly cared for, is a renewable resource. Although the productivity of land increased through much of the 20th century, by the 2010s much of the world’s arable land was threatened with decline from soil erosion, loss of nutrients, and water scarcity. Worldwide, one-fifth of irrigated land required reclamation because of salinization (excess salt) or poor drain- age.29 In many areas, overly intensive farming practices and climate change have caused previously arable land to turn into desert (this process is called desertification). The United
25 “On Day Zero, Cape Town Will Run Out of Water,” The Washington Post, February 5, 2018; and “Cape Town Confident of Beating Water Crisis Next Year,” Financial Times, June 28, 2018. 26 “Inside Salesforce Tower’s Water Recycling System,” MIT Sloan School of Management, February 12, 2018; and “Sales- force Dives Headfirst into Water Recycling with New HQ,” www.greenbiz.com. 27 Sandra Postel, “Sustaining Freshwater and its Dependents,” in WorldWatch Institute, State of the World, 2013: Is Sustainability Still Possible. 28 “Increasing Water Stress,” in World Economic Forum, Outlook on the Global Agenda 2015. 29 The most recent statistics may be found at the website of the United Nations Environmental Program, www.unep.org.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 201
law43665_ch09_187-210.indd 201 11/20/18 11:33 AM
Nations has estimated that 12 million hectares of arable land are lost every year to deserti- fication (one hectare equals about two and a half acres).30 This will prompt migration and the potential for civil unrest.
Syngenta, a Swiss company that sells seeds and agricultural chemicals, committed to support the sustainable development goals of Agenda 2030 and set specific tar- gets to rescue farmland from degradation and improve soil fertility. The firm part- nered with the United Nations to launch the Soil Leadership Academy. Together with local nongovernment organizations (NGOs), it trained growers of soybeans in Brazil, wine grapes in Hungary, and maize in Vietnam, among others, to reduce soil erosion by planting cover crops and limiting tillage. In 2016, the company reported in its annual review that its efforts had had a positive impact on 5 million hectares of land, preventing and reversing degradation. “I think sustainability, over time, will be the driving force for everybody’s business,” said Syngenta’s CEO.31
Decline of Biodiversity Biodiversity refers to the number and variety of species and the range of their genetic makeup. To date, approximately 1.7 million species of plants and animals have been named and described. Many scientists believe these are but a fraction of the total. According to recent research, the total number may be closer to 9 million, but no one knows for sure. Scientists estimate that species extinction is now occurring at 100 to 1,000 times the nor- mal, background rate, mainly because of pollution and the destruction of habitat by human society. A 2016 study by the World Wildlife Fund found that populations of vertebrate species (mammals, birds, reptiles, amphibians, and fish) were more than half of what they were in 1970.32 Biological diversity is now at its lowest level since the disappearance of the dinosaurs some 65 million years ago. Genetic diversity is vital to each species’ ability to adapt and survive and has many benefits for human society as well. By destroying this biological diversity, we are undermining our survivability as a species.
A major reason for the decline in the Earth’s biodiversity is the destruction of rain for- ests, particularly in the tropics. They are the planet’s richest areas in terms of biological diversity. Rain forests cover only about 7 percent of the Earth’s surface but account for somewhere between 40 and 75 percent of the Earth’s species. At the rate that the original tropical rain forests are currently being cut, all will be gone or severely depleted within 30 years. The reasons for destruction of rain forests include commercial logging, cattle ranching, and conversion of forest to plantations to produce cash crops such as palm oil and soybeans for export. Overpopulation also plays a part, as landless people clear forest to grow crops, raise livestock, and cut trees for firewood.
The destruction is ironic because rain forests may have more economic value standing than cut. Rain forests are the source of many valuable products, including foods, medi- cines, and fibers. The pharmaceutical industry, for example, each year develops new med- icines based on newly discovered plants from tropical areas. Moreover, rain forests absorb carbon dioxide from the atmosphere, so their destruction worsens climate change.
Some businesses have taken important steps to conserve tropical rain forests. Members of the Consumer Products Forum, an alliance of 400 leading companies
30 The most recent statistics may be found at the website of the United Nations Convention to Combat Desertification, www.unccd.int/en. 31 “The Good Growth Plan,” in Annual Review 2016, at www.syngenta.com. 32 World Wildlife Fund, Living Planet Report: Risk and Resilience in a New Era (2016).
Final PDF to printer
202 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 202 11/20/18 11:33 AM
including Coca-Cola, Unilever, and Walmart, have adopted a goal of “zero net deforestation” by 2020 and agreed not to buy any raw materials—such as beef, soy- beans, palm oil, timber, and paper—whose production requires the destruction of forest. In another initiative, Archer Daniels Midland (ADM), a major trader of agri- cultural commodities, partnered with the Forest Trust to assure it purchased no soy- beans from threatened ecosystems. This was important because much of the world’s soybean crop came from Brazil, where Amazonian rain forests were being cleared for farming. “We’re at a critical juncture now to break the link between agriculture, especially for soy production, and deforestation in Latin America,” said a represen- tative of the activist group Forest Heroes. “ADM’s announcement is a major step forward for the soy industry.”33
The Convention on Biological Diversity, an international treaty first negotiated in 1992, addresses many of these issues. By 2018 all U.N. member countries except for the United States had ratified it. The treaty commits these countries to draw up national strategies for conservation, to protect ecosystems and individual species, and to take steps to restore degraded areas. It also allows countries to share in the profits from sales of products derived from their biological resources.
Threats to Marine Ecosystems A final issue of concern is threats to the world’s marine ecosystems. This term refers broadly to oceans and the salt marshes, lagoons, and tidal zones that border them, as well as the diverse communities of life that they support. Salt water covers 70 percent of the Earth’s surface and is home to a great variety of species, from tiny plankton to the giant blue whale, from kelp beds to mangrove forests. Marine ecosystems are important to human society in many ways. Fish, marine mammals, and sea plants provide food and other useful products such as fertilizer, animal feed, cooking and heating oil, medicines, clothing, and jewelry. Healthy coastal zones protect coastlines from erosion and filter run- off from the land. Many communities have survived for centuries off the bounty of the sea.
Today, the health of these ecosystems is increasingly threatened. Some of the key issues include the following:
Fish populations. Oceans provide 90 percent of the world’s fish catch. The United Nations has estimated that of the world’s marine fisheries, 90 percent are fully exploited or overexploited, and some fisheries—such as those for cod off the Grand Banks (east- ern United States and Canada) and for anchovies off Peru—have probably been per- manently destroyed by overfishing.34 Active management, such as limiting the number of fishing boats, establishing fish quotas, or banning fishing for periods of time, has allowed fish to regenerate in some areas. Coral reefs. Coral reefs are limestone structures that develop from the skeletons of aquatic life and are host to great biological diversity. Today, however, they are in decline from pollution, oceanic warming, damage from ships, and cyanide and dynamite fish- ing. The Nature Conservancy estimates that at their current rate of decline, 70 percent of coral reefs will be gone by 2050. Coastal development. Much of the world’s population growth is now concentrated in coastal areas, often in ecologically fragile areas. In the United States, for example,
33 “Agribusiness Giant Adopts Historic No-Deforestation Policy,” Climate Progress, April 1, 2015. The commitments of the Consumer Goods Forum are reported at www.theconsumergoodsforum.com. 34 “The State of World Fisheries and Aquaculture, 2016,” www.fao.org.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 203
law43665_ch09_187-210.indd 203 11/20/18 11:33 AM
50 percent of the population lives in counties bordering the ocean—which comprise just 17 percent of the land. Inappropriate development can put pressure on ecologically fragile areas.35
Ocean acidity. One effect of increased concentrations of greenhouse gases in the atmo- sphere has been gradual acidification of the oceans, as seawater has absorbed excess carbon dioxide (which becomes carbonic acid). The result has been the destruction of aquatic life, which is often highly sensitive to acidity.36
A young entrepreneur in Denmark, Boyan Slat, has launched a company called The Ocean Cleanup to remove some of the 8 million tons of plastic waste that enters the oceans every year. Plastics are chemical pollutants; they despoil coastlines and also kill marine life when inadvertently ingested. Slat’s idea was to float solid curved barriers, 60 or more miles long, near enormous accumulations of floating trash such as the Great Pacific Garbage Patch. Boats would then pick up the gathered detritus and ferry it back to land where it could be properly recycled, generating funds to continue the process. By 2018, the Ocean Cleanup had hired more than 70 staff members, raised more than $40 million, and conducted its first rounds of testing in preparation for deploying its barriers and boats in the open ocean.37
Response of the International Business Community
Since so many ecological challenges cross national boundaries, the international business community has a critical role to play in addressing them. This section describes some of the important voluntary initiatives undertaken by companies around the world to put the principle of sustainable development into practice. Other actions by business to address environmental challenges will be explored in Chapter 10.
Life-cycle analysis (LCA), also called life-cycle assessment, involves collecting infor- mation on the lifelong environmental impact of a product, all the way from extraction of raw material to design, manufacturing, distribution, use, and ultimate disposal. The aim of life-cycle analysis is to minimize the adverse impact of a product at all stages, from cradle to grave. Having this information can permit companies to make informed choices about how to reduce a product’s footprint. For example, a Procter & Gamble life-cycle analy- sis of its Tide detergent brand found that its greatest environmental impact occurred in the home—when customers washed their clothes in hot water. The company subsequently introduced Tide Coldwater as a more environmentally friendly alternative. Walmart, Dell, Alcoa, and other companies work through the Sustainability Consortium to advance LCA for thousands of products.38
Industrial ecology refers to designing factories and distribution systems as if they were self-contained ecosystems. For example, businesses can save materials through closed- loop recycling, use wastes from one process as raw material for others, and make use of energy generated as a by-product of production.
An example of industrial ecology may be found in the town of Kalundborg, Denmark, where several companies have formed a cooperative relationship that
35 Pew Charitable Trusts, “Coastal Sprawl: The Effects of Urban Development on Aquatic Ecosystems in the United States,” www.pewtrusts.org. 36 “How Will Ocean Acidification Impact Marine Life?” Science Daily, February 3, 2015. 37 “It’s Important at Least to Try: Can This 23-Year-Old Clear the Oceans of Plastic Waste?” The Telegraph (U.K.), August 4, 2017. The website of the organization is at www.theoceancleanup.com. 38 For more information on the Sustainability Consortium, see www.sustainabilityconsortium.org.
Final PDF to printer
204 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 204 11/20/18 11:33 AM
produces both economic and environmental benefits. The local utility company sells excess process steam, which had previously been released into a local fjord (waterway), to a local pharmaceutical plant and oil refinery. Excess fly ash (fine particles produced when coal is burned) is sold to nearby businesses for use in cement making and road building. Meanwhile, the oil refinery removes sulfur in the natural gas it produces to make it cleaner burning and sells the sulfur to a sulfuric acid plant. Calcium sulfate, produced as a residue of a process to cut smoke emis- sions, is sold to a gypsum manufacturer for making wallboard. The entire cycle both saves money and reduces pollution.39
Extended product responsibility refers to the idea that companies have a continuing responsibility for the environmental impact of their products or services, even after they are sold. This implies, for example, that firms pay close attention to the energy efficiency of their products when used by the consumer. It also implies that companies design prod- ucts for disassembly, that is, so that at the end of their useful life they can be disassembled and recycled. At Renault, the French carmaker, engineers design cars for eventual reuse. At a plant near Paris, the company remanufactures used engines, transmissions, and injection pumps for resale. Other components, such as steel body parts and upholstery fabric, are separated and recycled.40 This is sometimes called cradle to cradle, because materials that are used to create one product are later reused to create another. The efforts of one com- pany, HP, to reduce its carbon impact through extended product responsibility is profiled in Exhibit 9.B.
Recently, the ideas of life-cycle analysis, industrial ecology, and extended product responsibility have been captured by a new concept: the circular economy. The term refers to a production system that is regenerative by design, that is, it restores rather than wastes its inputs. In contrast, with a linear model, where a production system proceeds from raw materials, to product, to use, to disposal, the circular economy uses a circular model, where a production system proceeds after use to recycling and reuse.41
Carbon neutrality is when an organization or individual produces net zero emissions of greenhouse gases. Since virtually all activity produces some atmospheric warming, this is usually accomplished by a combination of energy efficiencies (to reduce their own emis- sions) and carbon offsets (to reduce others’ emissions). Carbon offsets (sometimes called carbon credits) are investments in projects that remove carbon dioxide (or its equivalent in other climate-warming pollutants, such as black carbon) from the atmosphere. This can be done, for example, by paying others to plant trees, produce clean energy, or sequester (bury underground) earth-warming gases. Some organizations now broker carbon offsets to businesses and individuals wishing to reduce their climate impact.
In 2017, the British retailer Marks & Spencer launched the second phase of its ambitious sustainability initiative, Plan A 2025 (so-called because, as their chief executive explained, “there is no Plan B”). The company had already met a prior commitment to become carbon neutral. To achieve this ambitious goal, the com- pany had built an experimental “learning store” in the United Kingdom as well as an “eco-factory” in partnership with a supplier in Sri Lanka, to try out new approaches that could be diffused through its system. It had installed solar panels
39 Information about Kalunborg’s industrial ecology initiative is available at www.symbiosis.dk/en. 40 Renault’s environmental report is available at https://group.renault.com. 41 “Remaking the Industrial Economy,” McKinsey Quarterly, February 2014. Additional articles on the circular economy may be found at www.ellenmacarthurfoundation.org.
Final PDF to printer
205
law43665_ch09_187-210.indd 205 11/20/18 11:33 AM
and radically cut energy use at its stores and warehouses, improved the fuel effi- ciency of its delivery fleet, and reduced the number of business flights taken by employees. It also introduced new products, such as the “first ever carbon neutral bra,” part of its Autumn Leaves lingerie collection. Marks & Spencer offset the remainder of its carbon emission by investing in carbon reduction projects. (Mark’s & Spencer’s partnership to promote less polluting cook stoves— mitigating their climate impacts—is described in the discussion case at the end of this chapter.)42
Other companies that have achieved—or pledged to achieve—carbon neutrality include Salesforce, Nike, News Corporation, Timberland, and Van City.43
Sustainable development will also require technology cooperation through long-term partnerships between companies in developed and developing countries to transfer tech- nology, as shown in the following example.
In 2017, Microsoft invested $50 million in a 5-year program called AI for Earth. The goal was the share the company’s expertise in artificial intelligence with other businesses, governments, and researchers across the world to address a wide variety of environmental problems. These included pollution modeling, crop yield optimi- zation, and animal migration tracking. Microsoft provided support, for example, to the Jane Goodall Institute for its work in chimpanzee conservation and to the Inter- national Centre for Tropical Agriculture in its efforts to predict climate changes
42 “Marks & Spencer Launches Plan A 2025,” press release, June 1, 2017; and Marks & Spencer, Plan A Report 2017, http://planareport.marksandspencer.com. 43 A list of companies that have pledged or achieved carbon neutrality may be found in “Who’s Going ‘Carbon Neutral,’” at www.bsr.org.
From Moonshot to The Machine: Reducing Carbon Impact through Extended Product Responsibility
In an analysis of its carbon impact, Hewlett Packard (HP) learned that more than three-fifths of the company’s greenhouse gas emissions were caused by its product portfolio—that is, by its products in use once they were in the customers’ hands. Reducing the climate impacts of its own operations, manufacturing, and trans- portation could only fix part of the problem, the company reasoned. So, in 2014, HP announced a new goal of reducing the emissions intensity in use of all of its high-volume products, including printers, computers, and mobile devices, by 40 percent overall by 2020, compared with 10 years earlier. A major part of this effort was the creation of a new generation of energy-efficient servers—the powerful computers that store, share, and route data on behalf of customers in enormous data centers. Astonishingly, humans today produce more data in 12 hours than they did in all of history up to 2003. Handling and storing this volume of data requires more energy than the entire nations of Germany and Japan combined. HP’s first answer was the Moonshot, a high-volume server that used up to 90 percent less energy. Hewlett Packard Enterprise (which took over HP’s server business after the company split in 2015) followed up in 2017 with another energy-saving innovation: The Machine, a high-efficiency computer capable of using just 1 percent of the energy required per calculation compared with others then available. “We must take swift and bold action to address the root causes of climate change,” said the company’s CEO, Meg Whitman. “This means disrupting the status quo.”
Sources: CDP, Global Climate Change Report 2015, www.cpd.net; “HPE Unveils Computer Built for the Era of Big Data,” HPE press release, May 16, 2017; and “HP Announces Goal to Reduce Greenhouse Gas Emissions of Product Portfolio,” HP press release, September 24, 2014.
Exhibit 9.B
Final PDF to printer
206 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 206 11/20/18 11:33 AM
that could impact food crops in developing countries. “AI is not a panacea for envi- ronmental problems,” said Microsoft’s chief environmental scientist. “But history will judge the success of the Information Age by our ability to deploy its resulting technology in service of the planet.”44
The idea of sustainable development is not only widely accepted in the business com- munity; many firms are increasingly viewing it as a core business issue. A 2017 global survey of almost 3,000 business leaders, for example, reported that six in ten were more engaged with sustainability than they had been two years earlier, and the top reason for doing so was “to align sustainability with [their] goals, mission, or values.” The following chapter explores in more detail the steps companies are taking to do so.45
Codes of Environmental Conduct Earlier chapters of this text have discussed the emergence of standards and codes of con- duct in the areas of ethics and global corporate citizenship. Similarly, several national and international organizations have developed standards and codes of environmental con- duct. Some are designed to be universally applicable, while others are tailored to specific industries. All, however, share the characteristic that they are private and voluntary: cor- porations choose to comply with these codes to show customers, investors, regulators, and others that they have met certain environmental standards in their operations.
Some of the leading universal codes and standards include the following:
∙ The International Chamber of Commerce has developed the Business Charter for Sus- tainable Development, eight guiding principles that identify key elements of environ- mental leadership and call on companies to recognize sustainable development as among their highest corporate priorities.46
∙ The CERES Roadmap, developed by the Coalition for Environmentally Responsible Economies (CERES), contains 20 expectations for corporate sustainability leadership, divided into four areas of activity—governance, stakeholder engagement, disclosure, and performance.47
∙ ISO 14000 is a series of voluntary standards developed by the ISO, an international group based in Geneva, Switzerland, that permit companies to be certified as meeting global environmental performance standards.48
∙ The Greenhouse Gas Protocol is a tool developed by the World Resources Institute and the World Business Council for Sustainable Development to help businesses measure and manage their greenhouse gas emissions.49
Codes of environmental conduct have also been developed by and for specific industries.
A prominent example is the Equator Principles, a set of environmental standards for the financial services industry. Their focus is specific to banking: they commit sig- natories to determine, assess, and manage environmental risk in project financing. In other words, when a bank considers whether to lend money, for example, for the
44 “The Case for Technology Investments in the Planet,” December 19, 2017, www.nature.com. 45 “Sustainability’s Deepening Impact,” December 2017, www.mckinsey.com. 46 “Inspire and Grow Your Business in the 21st Century: Business Chapter for Sustainable Development, at https://cdn.iccwbo. org/content/uploads/sites/3/2015/01/ICC-Business-Charter-for-Sustainable-Development.pdf. 47 “The CERES Roadmap for Sustainability,” www.ceres.org/roadmap. 48 www.iso.org. 49 www.ghgprotocol.org.
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 207
law43665_ch09_187-210.indd 207 11/20/18 11:33 AM
construction of an oil pipeline, it must examine the environmental impact of the project and whether its sponsors have systems in place to mitigate adverse impacts. If borrowers are unable to comply, the bank will not loan them money. The Equator Principles, launched in 2003 and most recently reviewed in 2013, have spread widely in the financial industry. By 2018, 92 financial institutions around the world had signed on, ranging from huge institutions such as Citigroup to regional banks such as Egypt’s Arab African International Bank, China’s Industrial Bank Com- pany, and Uruguay’s Banco de la Republica Oriental.50
Other industry-specific standards include the Forest Stewardship Council Principles in the forest products industry, the Marine Stewardship Council in the fishing industry, and the Leadership in Energy and Environmental Design (LEED) standards in the commercial and residential construction industry.
Protecting the environment and the well-being of future generations is not only a neces- sity, but also an opportunity for business. Companies operate in a resource-constrained world, where climate change and scarcity of fresh water, arable land, and healthy forests pose pressing challenges. Environmental regulations are getting tougher, consumers want cleaner products, and employees want to work for environmentally responsible companies. Finding ways to reduce or recycle waste saves money. Many executives are championing the idea that corporations have moral obligations to future generations. The most success- ful global businesses in coming years may be those, like the ones profiled in this chapter, that recognize the imperative for sustainable development as an opportunity both for com- petitive advantage and ethical action.
50 The website of the Equator Principles is www.equator-principles.com.
∙ Business and society operate within a finite natural environment. This reality confers constraints but also provides opportunities.
∙ Many world leaders have supported the idea of sustainable development, that is, devel- opment that meets the needs of the present without hurting the ability of future genera- tions to meet their own needs. Governments, businesses, and civil sector organizations are engaged in a range of innovations in an effort to reach this goal.
∙ Population growth and rapid economic development in many parts of the world have contributed to these ecological problems. Human society is now using resources and producing waste at a rate well above what the Earth’s ecosystem can sustainably support.
∙ Five environmental issues—climate change, ozone depletion, resource scarcity, declin- ing biodiversity, and threats to the marine ecosystem—are shared by all nations. Inter- national treaties, including the Paris Agreement, are addressing some of these issues, although more remains to be done.
∙ Global businesses have begun to put the principles of sustainable development into action through such innovative actions as life-cycle analysis, extended product respon- sibility, carbon neutrality, and technology cooperation.
∙ Nationally and internationally, businesses and nongovernmental organizations have worked together to develop voluntary codes of environmental conduct to promote sustainability.
Summary
Final PDF to printer
law43665_ch09_187-210.indd 208 11/20/18 11:33 AM
Discussion Case: Clean Cooking In a small village in rural Kenya, a woman bent over an open fire pit in the center of her hut cooking the evening meal. That morning, she had spent two hours collecting wood, animal dung, and scrap paper to use as fuel. Now, as she stirred the pot, the cook fire gave off a steady stream of sooty, acrid smoke, which filled the room despite a ventilation hole in the roof. The woman’s young son played dangerously close to the open flame, while her daughter, coughing from the smoke, tried to read by the weak light of the fire.
In 2018, a similar scene was repeated in households with around 3 billion people every day across the developing world, with devastating effects on human health, the environ- ment, and economic development.
Indoor air pollution from open cookstoves is a killer. The World Health Organization has estimated that soot, particles, and smoke from cooking is one of the worst risk factors for health in developing countries, causing 4.3 million premature deaths a year, mostly from lung and heart disease. Open cookstoves also lead to disfiguring burns, asthma, eye damage, and pregnancy complications. The effects are greatest on women and young chil- dren, who spend the most time near the hearth.
Women and girls also suffer from head and back injuries, animal attacks, and sexual violence while searching for and carrying heavy loads of fuel, often far from home. Time spent collecting fuel is time not spent attending school, working at a paid job, or running a small business.
Key Terms natural capital, 190 ozone, 199 Paris Agreement, 198 sustainable development, 190 technology cooperation, 205
biodiversity, 201 carrying capacity, 194 carbon neutrality, 204 carbon offsets, 204 circular economy, 204 climate change, 196 commons, 196 Convention on Climate Change, 198
ecological footprint, 194 ecosystem, 190 extended product responsibility, 204 global warming, 196 industrial ecology, 203 life-cycle analysis, 203 marine ecosystems, 202
Internet Resources
www.ipcc.ch Intergovernmental Panel on Climate Change www.unep.org United Nations Environmental Program newsroom.unfccc.int United Nations Framework Convention on Climate Change www.wbcsd.org World Business Council on Sustainable Development www.iclei.org Local Governments for Sustainability www.triplepundit.com New media company that covers sustainable business practices www.worldwatch.org The Worldwatch Institute www.wri.org World Resources Institute
208 Part Four Business and the Natural Environment
Final PDF to printer
Chapter 9 Sustainable Development and Global Business 209
law43665_ch09_187-210.indd 209 11/20/18 11:33 AM
Primitive cooking methods also harm the environment. Cutting trees to produce wood or charcoal leads to deforestation, loss of biodiversity, and watershed degradation. More- over, the combustion of biomass in cooking produces more than a quarter of the world’s black carbon, or soot. Scientists now believe that soot is second only to carbon dioxide in its overall contribution to global warming. Policymakers have been intrigued by the fact that while carbon dioxide stays in the atmosphere for decades, black carbon washes out within days or weeks. Reducing soot in the atmosphere would thus have a much more immediate effect on global warming than cutting carbon emissions.
In 2010, the United Nations Foundation, in collaboration with several governments (includ- ing the United States), launched the Global Alliance for Clean Cookstoves, with the ambitious goal of “100 by 20”—that 100 million households worldwide adopt clean and efficient cook- stoves and fuels by 2020. The alliance recognized that reaching this goal would require more than money; it would require technical innovation in fuels and stove design, new mechanisms of financing, and on-the-ground campaigns to engage users from a wide range of cultures and cooking traditions. It would also require the support of businesses—large and small.
Many companies saw an opportunity in the Global Alliance for Clean Cookstoves. CEMEX, a global building products company based in Mexico, developed and con- tributed $2 million worth of clean-burning concrete cookstoves. Marks & Spencer, the British retailer, joined the Alliance and committed to helping employees of its suppliers of products such as coffee and textiles to cook more efficiently; and it had already part- nered with UNICEF (the United Nations Children’s Fund) to install 40,000 clean cook- stoves in Bangladesh. Dow Corning, a Midland, Michigan–based maker of silicon-based materials, donated both money and expertise in manufacturing and material science to the Alliance.
At the same time, motivated by greater attention to the issue, social entrepreneurs across the globe began generating innovative ideas about how to design, manufacture, and finance more efficient and cleaner cookstoves—potentially a “win–win” for the environment and human health and well-being.
For example, in the west African country of Ghana, Suraj Wahab founded a small busi- ness, Toyola Energy Ltd., to produce a cookstove he invented called the gyapa (“good fire”). His company constructed the stove from locally sourced materials—scrap metal from construction sites and fired clay liners. Because it was designed to burn charcoal, a fuel used by 30 percent of Ghanaian households, twice as efficiently as in an open fire, each stove over the course of its life would prevent the release of global-warming emis- sions equivalent to the amount generated by a Honda Civic driven for one year.
Wahab had difficulty obtaining needed capital until he partnered with E+Co, a clean energy nonprofit that invested $270,000. E+Co helped Toyola calculate the carbon offset value of its cookstoves, which was then monetized and sold to the investment banking firm Goldman Sachs. Within a short period, Toyola employed 150 people and had sold more than 150,000 cookstoves to eager Ghanaians, who welcomed the cost savings and health benefits they provided. More than a quarter of the company’s revenue came from the sale of carbon offsets, helping keep the price to consumers as low as $7.
Similar stories of creative partnerships were occurring around the globe. The nonprofit Trees, Water, & People, based in Fort Collins, Colorado, teamed with
local partners to build and distribute 75,000 cookstoves in Guatemala, El Salvador, Hondu- ras, and Nicaragua. Their stove was an insulated combustion chamber topped by a remov- able steel griddle adapted to cooking tortillas and a chimney pipe to vent smoke through a roof hole, reducing indoor air pollution by more than 80 percent. Other organizations, such
Final PDF to printer
210 Part Four Business and the Natural Environment
law43665_ch09_187-210.indd 210 11/20/18 11:33 AM
as Solar Cookers International, experimented with ways to harness the power of the sun—a completely renewable, clean, and free source of energy—to boil water and cook food.
By 2017, 80 million cookstoves had been distributed, and the Alliance was closing in on its ambitious goal. “As we build a cookstoves market to the scale necessary to combat and defeat this silent killer,” said its executive director, “the strong support and unique expertise of our partners and champions will be invaluable.”
Sources: Global Alliance for Clean Cookstoves, 2017 Progress Report: Driving Demand, Delivering Impact, at www.cleancookstoves.org; “Putting Clean Cooking on the Front Burner,” December 21, 2017, www.worldbank.org; World Health Organization, “Household Air Pollution and Health,” February 2016, www.who.it; “How Marks & Spencer is Cooking Its Way to a Cleaner Future,” March 30, 2015, www.greenbiz.com; “Forest Saving Stoves Program,” www.treeswaterpeople. org; “Case Study: Toyola Energy Limited, Ghana,” www.cleancookstoves.org; and “Clean Cookstoves: Dow Corning’s Path to Public-Private Partnership,” http://dowcorningcitizenservicecorps.wordpress.com, February 28, 2012; and personal correspondence with staff of Trees, Water, & People.
Discussion Questions
1. In what ways would the widespread adoption of clean cookstoves address the global environmental issues discussed in this chapter?
2. In what ways would the widespread adoption of clean cookstoves address the issues of economic development and poverty discussed in this chapter?
3. Which sectors (e.g., government, business, civil society) would need to be involved in a successful campaign to promote clean cookstoves in the developing world, and what would be the contributions of each?
4. What would be the benefit to multinational corporations, such as CEMEX, Marks and Spencer, and Dow Corning, of participating in this effort? What distinctive contribu- tions can social entrepreneurs make to promoting clean cookstoves?
Final PDF to printer
211
law43665_ch10_211-236.indd 211 01/28/19 03:25 PM
C H A P T E R T E N
Managing for Sustainability
Growing public concern about sustainability has prompted political, corporate, and civil society leaders to become increasingly responsive to environmental issues. In the United States and other nations, government policymakers have moved toward greater reliance on economic incentives, rather than command and control regulations, to achieve environmental goals. At the same time, many businesses have become increasingly proactive and have pioneered new approaches to effective sustainability management, sometimes in partnership with advocacy organizations. These actions have often given firms a competitive advantage by cutting costs, gaining public support, and spurring innovation.
This Chapter Focuses on These Key Learning Objectives:
LO 10-1 Knowing the main features of environmental laws in the United States and other nations.
LO 10-2 Understanding the advantages and disadvantages of different regulatory approaches.
LO 10-3 Assessing the costs and benefits of environmental regulation.
LO 10-4 Defining an ecologically sustainable organization and the stages through which firms progress as they become more sustainable.
LO 10-5 Understanding how businesses can best manage for sustainability.
LO 10-6 Analyzing how effective sustainability management makes firms more competitive and improves their financial performance.
Final PDF to printer
212 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 212 01/28/19 03:25 PM
Levi Strauss & Company was widely recognized as a sustainability leader in the apparel industry. The maker of the iconic Levi’s jeans had worked with cotton farmers to reduce their use of water and pesticides, integrated recycled plastic from soda bottles into their fabric, and worked with the World Bank to provide low-cost loans to suppliers that met sustainability goals. The company encouraged its customers to wash their jeans less often and to keep them longer and provided grants to early career designers to help them adopt eco-friendly practices. The company aimed for a day when all Levi’s apparel would be recycled in a closed loop, worn for many years and then returned to be made into new gar- ments. “What would happen if we could change culture in such a way that consumers imagined the end of life of the product they bought?” asked the company’s head of global product innovation.1
Even as the Trump administration in 2017 announced its intention to pull the United States out of the international climate change agreement negotiated in Paris, several Cana- dian provinces and U.S. states were joining forces in their efforts to reduce carbon emis- sions. The Western Climate Initiative (WCI) was a nonprofit corporation that managed a common cap-and-trade market for Quebec, Ontario, British Columbia, and California. These subnational governments had established limits on greenhouse gas emissions and set up a system that allowed companies that had cut their emissions to sell permits to others that had exceeded their quota. This provided these companies with a financial incentive to reduce pollution below their quota. “Having a larger number of emitters, power plants, factories, [and] fuel increases the diversity of opportunities to reduce emissions at a lower cost than [a single province or state] would be able to do on [its] own,” explained a former WCI board member.2
The Environmental Defense Fund (EDF), a leading environmental advocacy organi- zation, has formed partnerships with several companies, including McDonald’s, DuPont, Starbucks, and FedEx, to improve environmental performance and gather information. In its most recent effort, EDF partnered with Google Earth Outreach to find, measure, and map natural gas leaks in selected cities across the United States. Specially equipped Street View cars, which Google uses to photograph streetscapes for its map application, gathered data on even small gas leaks. Escaping gas—mostly from aging pipes—was a problem because it cost customers money, heightened the risks of explosion, and worsened climate change. This information enabled utilities, such as PSE&G of New Jersey and New York, to prioritize the replacement of leaking gas mains, focusing on the worst offenders. The partnership later expanded its scope to create detailed maps of health-damaging pol- lutants such as nitrous oxides and particulates. “Seeing pollution mapped this way makes us better advocates for cleaner air and smart development choices,” said a representative of EDF.3
In the early years of the 21st century, many businesses, governments, and environ- mental advocacy organizations became increasingly concerned that old strategies for promoting environmental protection were failing and new approaches were necessary. Government policymakers moved toward greater reliance on economic incentives to
1 “Levi’s Is Radically Redefining Sustainability,” Fast Company, February 9, 2017. The company’s sustainability initiatives are described at www.levistrauss.com/sustainability. www.levistrauss.com/unzipped-blog. 2 “Will Other States Join California’s International Climate Pact?” The Atlantic, August 10, 2017. The website of the Western Climate Initiative is at www.wci-inc.org. 3 “Methane to Its Madness,” Fast Company, October 27, 2017. “Google Uses Street View Cars to Collect Pollution Data,” June 5, 2017, at www.money.cnn.com, and “Mapping Pollution with Mobile Sensors.” Google’s efforts are described at www.google.com/earth. The methane maps are available at http://edf.org/methanemaps. More information about EDF’s corporate partnerships is available at www.edf.org/approach/partnerships/corporate.
Final PDF to printer
Chapter 10 Managing for Sustainability 213
law43665_ch10_211-236.indd 213 01/28/19 03:25 PM
achieve environmental goals. Environmentalists engaged in greater dialogue and cooper- ation with industry leaders. Many businesses pioneered new approaches to sustainability, such as developing products with fewer adverse environmental impacts.
The challenge facing government, industry, and environmental advocates alike, as they tried out new approaches and improved on old ones, was how to promote ecologically sound business practices in an increasingly integrated world economy.
Role of Government
In many nations, government is actively involved in regulating business activities to pro- tect the environment. Business firms have few incentives to minimize pollution if their competitors do not. A single firm acting on its own to reduce discharges into a river, for example, would incur extra costs. If its competitors did not do the same, the firm might not be able to compete effectively and could go out of business. Government, by setting a common standard for all firms, can take the cost of pollution control out of competition. It can also provide economic incentives to encourage businesses, communities, and regions to reduce pollution, and offer legal and administrative systems for resolving disputes. Gov- ernment cannot accomplish environmental goals by itself; its role, rather, is to make a critical contribution to a collective effort, together with business and civil society, to move toward sustainability.
In the United States, government has been involved in environmental regulation since the late 19th century, when the first federal laws were passed protecting navigable water- ways. The government’s role began to increase dramatically, however, in 1970, when Congress passed the National Environmental Policy Act (NEPA). The Environmental Protection Agency (EPA), the nation’s main environmental regulatory agency, was created shortly afterwards. Figure 10.1 summarizes the major federal environmental laws enacted by the U.S. Congress since then. It is organized into four categories: air; water; solid and hazardous waste; and cross-media (referring to the regulation of forms of pollution that have multiple impacts on air, water, and land). Various regional, state, and local agencies also have jurisdiction over some environmental issues in their respective areas, as one of the opening examples shows.
Major Areas of Environmental Regulation In the United States, the federal government regulates in three major areas of environmen- tal protection: air pollution, water pollution, and solid and hazardous waste (land pollu- tion). This section will review the major environmental issues and the U.S. laws pertaining to each, with comparative references to similar initiatives in other nations and examples of how businesses have responded.
Air Pollution
Air pollution occurs when more pollutants are emitted into the atmosphere than can be safely absorbed and diluted by natural processes. Some pollution occurs naturally, such as smoke and ash from volcanoes and forest fires. But most air pollution today results from human activity, especially industrial processes and motor vehicle emissions. Air pollution degrades buildings, reduces crop yields, mars the beauty of natural landscapes, and harms people’s health. The American Lung Association (ALA) estimated in 2017 that 125 million Americans, nearly four in ten people, were breathing unsafe air for at least part of each year. Fully 70 percent of the cancer risk from air pollution is due to diesel exhaust from trucks, farm and construction equipment, marine vessels, and electric generators. People
Final PDF to printer
214 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 214 01/28/19 03:25 PM
living near busy highways and workers in occupations that use diesel equipment are partic- ularly at risk.4
One approach to reducing diesel pollution is a service called IdleAir, operated by Convoy Solutions of Knoxville, Tennessee. IdleAir provides an alternative for long- haul truck drivers who idle their engines at truck stops in order to provide power to the cab during rest breaks. An inexpensive window-mounted adapter allows drivers to hook up to a service module, so they can continue to enjoy heating, cooling, cable TV, and Internet access with their engines off. The solution is less expensive
4 American Lung Association, “State of the Air: 2017,” www.lung.org; and “Health Effects of Diesel Exhaust,” http://oehha.ca.gov.
FIGURE 10.1 Leading U.S. Environmental Protection Laws • CLEAN AIR ACT (1970) Established national air quality standards and timetables.
• CLEAN AIR ACT AMENDMENTS (1977) Revised air standards.
• CLEAN AIR ACT AMENDMENTS (1990) Required cuts in urban smog, acid rain, and greenhouse gas emissions; promoted alternative fuels.
• WATER POLLUTION CONTROL ACT (1972) Established national goals and timetables for clean waterways.
• SAFE DRINKING WATER ACT (1974 and 1996) Authorized national standards for drinking water.
• CLEAN WATER ACT AMENDMENTS (1987) Authorized funds for sewage treatment plants and waterways cleanup.
• HAZARDOUS MATERIALS TRANSPORT ACT (1974) Regulated shipment of hazardous materials.
• RESOURCE CONSERVATION AND RECOVERY ACT (1976) Regulated hazardous materials from production to disposal.
• TOXIC SUBSTANCES CONTROL ACT (1976) Established national policy to regulate, restrict, and, if necessary, ban toxic chemicals.
• COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT (SUPERFUND) (1980) Established Superfund and procedures to clean up hazardous waste sites.
• SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT (SARA) (1986) Established toxics release inventory.
• PESTICIDE CONTROL ACT (1972) Required registration of and restrictions on pesticide use.
• POLLUTION PREVENTION ACT (1990) Provided guidelines, training, and incentives to prevent or reduce pollution at the source.
• OIL POLLUTION ACT (1990) Strengthened EPA’s ability to prevent and respond to catastrophic oil spills.
• CHEMICAL SAFETY INFORMATION, SITE SECURITY, AND FUELS REGULATORY RELIEF ACT (1999) Set standards for the storage of flammable chemicals and fuels.
AIR
WATER
SOLID AND HAZARDOUS WASTE
CROSS-MEDIA POLLUTION
Final PDF to printer
Chapter 10 Managing for Sustainability 215
law43665_ch10_211-236.indd 215 01/28/19 03:25 PM
for truckers because it uses one-tenth the energy of idling, and reduces pollution by completely eliminating diesel emissions during rest breaks.5
The major law governing air pollution is the Clean Air Act, passed in 1970 and amended in 1990. The 1990 amendments toughened standards in several areas, including stricter restrictions on emissions of acid rain–causing chemicals.
The EPA has identified six criteria pollutants, relatively common harmful substances that serve as indicators of overall levels of air pollution. These are lead, carbon monoxide, particulate matter, sulfur dioxide, nitrogen dioxide, and ozone. (Ozone at ground level is a particularly unhealthy component of smog.) In addition, the agency also has identified a list of toxic air pollutants that are considered hazardous even in relatively small concen- trations. These include asbestos, benzene (found in gasoline), dioxin, perchloroethylene (used in some dry-cleaning processes), methylene chloride (used in some paint strippers), and radioactive materials. Emissions of toxic pollutants are strictly controlled. In 2014, the Supreme Court ruled that the EPA could regulate emissions of carbon dioxide (one of the main contributors to climate change) at facilities it already regulated for other pollutants.6
In 2017, Volkswagen, the German carmaker, pleaded guilty to charges of violat- ing the Clean Air Act and agreed to pay $4.3 billion in fines. The company had programmed its diesel cars to switch on emissions controls when the vehicle was undergoing smog testing and then switch them off when the vehicle was on the road, to boost performance and gas mileage. The result was that the cars emitted up to 40 times the allowed levels of nitrogen oxides, a toxic mixture including nitrogen dioxide, which causes health problems and contributes to smog.7 (This situation is further discussed in the discussion case at the end of Chapter 14.)
A special problem of air pollution is acid rain. Acid rain is formed when emissions of sulfur dioxide and nitrogen oxides, by-products of the burning of fossil fuels by utilities, manufac- turers, and motor vehicles, combine with natural water vapor in the air and fall to earth as rain or snow that is more acidic than normal. Acid rain can damage the ecosystems of lakes and rivers, reduce crop yields, and degrade forests. Structures, such as buildings and monuments, are also harmed. Within North America, acid rain is most prevalent in New England and eastern Canada, regions that are downwind of coal-burning utilities in the Midwestern states.8
Water Pollution
Water pollution, like air pollution, occurs when more wastes are dumped into waterways, lakes, or oceans than can be naturally diluted and carried away. Water can be polluted by organic wastes (untreated sewage or manure), by chemicals from industrial processes, and by the disposal of nonbiodegradable products (which do not naturally decay). Heavy metals and toxic chemicals, including some used as pesticides and herbicides, can be par- ticularly persistent. Like poor air, poor water quality can harm ecosystems, decrease crop yields, threaten human health, and degrade the quality of life. Failure to comply with clean water laws can be very expensive for business, as the following example shows.
In 2010, a wellhead blowout at a deepwater drilling platform operated on behalf of BP (formerly British Petroleum) in the Gulf of Mexico caused the largest marine
5 The company’s website is www.idleair.com. 6 PBS Newshour, “Supreme Court Limits EPS’s Authority to Regulate Carbon Dioxide Emissions,” June 23, 2014, www.pbs. org/newshour. 7 “Volkswagen Set to Plead Guilty and to Pay U.S. $4.3 Billion in Deal,” The New York Times, January 10, 2017. 8 More information about acid rain may be found at www.epa.gov/acidrain.
Final PDF to printer
216 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 216 01/28/19 03:25 PM
oil discharge in U.S. history. For three months, as crews struggled to cap the well, more than three 3 million barrels of oil gushed into the waters of the Gulf of Mexico, causing extensive damage to marine life and devastating the coastal economies of adjacent states. Subsequent government investigations found that BP’s relentless cost cutting and inadequate safety systems had contributed to the disaster. In 2015, BP agreed to pay more than $20 billion to settle claims by federal, state, and local governments arising from the spill, the largest environmental settlement in U.S. his- tory. BP estimated that the total cost of the spill—including the actual cleanup, pay- ments to individuals and shareholders, criminal fines, and other costs not included in the settlement—would be more than $66 billion.
The impacts of the BP disaster on business, society, and the environment are profiled in a case at the end of this book.
In the United States, regulations address both the pollution of rivers, lakes, and other surface bodies of water and the quality of the drinking water. The main U.S. law governing water pollution is the Water Pollution Control Act, also known as the Clean Water Act. This law aims to restore or maintain the integrity of all surface water in the United States. It requires permits for most point sources of pollution, such as industrial emissions, and mandates that local and state governments develop plans for nonpoint sources, such as agricultural runoff or urban storm water. The Pesticide Control Act specifically restricts the use of dangerous pesticides, which can pollute groundwater. The quality of drinking water is regulated by another law, the Safe Drinking Water Act of 1974, amended in 1996. This law sets minimum standards for various contaminants in both public water systems and aquifers that supply drinking water wells.
The impacts of hydraulic fracturing, a method for extracting natural gas from under- ground shale formations, on the quality of drinking water—and how these impacts should be regulated—is explored in the discussion case at the end of this chapter.
Solid and Hazardous Waste
The third major focus of environmental regulation is the contamination of land by both solid and hazardous waste. The United States produces an astonishing amount of solid waste, adding up to more than four pounds per person per day. Of this, 47 percent is recy- cled, composted, or incinerated, and the rest ends up in municipal landfills.9 Many busi- nesses and communities have tried to reduce the solid waste stream by establishing recycling programs.
Sweden is one of the world’s leaders in reducing solid waste. Astonishingly, less than 1 percent of the country’s household waste ends up in landfills. Swedes sort their trash, separating paper, plastics, metal, glass, food waste, light bulbs, and bat- teries. All residential areas have convenient recycling stations, and special trucks pick up electronics and other hazardous waste. About half of these materials are recycled and reused in some way, and the other half are burned to generate energy. Sweden’s waste incineration plants have become so efficient that the country routinely imports waste from its neighbors. Swedish companies have joined the effort, too; the retailer H&M, for example, accepts used clothing from customers in exchange for coupons. “Zero waste, that’s our slogan,” said the CEO of the Swedish Waste Management and Recycling Association.10
9 Environmental Protection Agency, “Advancing Sustainable Materials Management: 2014 Fact Sheet,” www.epa.gov. 10 “The Swedish Recycling Revolution,” March 29, 2017, https://sweden.se/nature/the-swedish-recycling-revolution/.
Final PDF to printer
Chapter 10 Managing for Sustainability 217
law43665_ch10_211-236.indd 217 01/28/19 03:25 PM
The safe disposal of hazardous waste is a special concern. Several U.S. laws address the problem of land contamination by hazardous waste. The Resource Conservation and Recovery Act of 1976 (amended in 1984) regulates hazardous materials from “cradle to grave.” The Toxic Substances Control Act (TSCA) of 1976 (amended in 2016) requires the EPA to inventory the thousands of chemicals in commercial use, identify which are most dangerous, and, if necessary, ban them or restrict their use.
In 2014, an aging and rusty storage tank holding toxic chemicals used to wash coal leaked, spilling 7,500 gallons into the nearby Elk River near Charleston, West Vir- ginia. Three hundred thousand people who relied on the river for their water supply were told not to drink or bathe with it for several weeks afterwards. (The owner of the tank, Freedom Industries, shortly afterwards declared bankruptcy and shut down.) This frightening incident led Congress to strengthen the almost 40-year-old TSCA, and several states, including West Virginia, passed new laws requiring the inspection of chemical storage tanks.11
As this example illustrates, states can pass regulations that are stricter than federal rules. (They can also regulate industries that do not engage in interstate commerce.)
Some studies have suggested that hazardous waste sites are most often located near eco- nomically disadvantaged African American, Hispanic, and Native American communities. Since 1994, the EPA has investigated whether state permits for hazardous waste sites vio- late civil rights laws and has blocked permits that appear to discriminate against minori- ties. The effort to prevent inequitable exposure to risk, such as from hazardous waste, is sometimes referred to as the movement for environmental justice.12 For example, Native American tribes in Utah, Nevada, and New Mexico have organized to block the construc- tion of nuclear waste disposal facilities on their land, saying the facilities would threaten their health, culture, and economic viability.13
The major U.S. law governing the cleanup of existing hazardous waste sites is the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, popularly known as Superfund, passed in 1980. This law established a fund, supported primarily by a tax on petroleum and chemical companies that were presumed to have cre- ated a disproportionate share of toxic wastes. The EPA was charged with establishing a National Priority List of the most dangerous toxic sites; around 1,700 sites were eventually designated as Superfund sites. Where the original polluters could be identified, they would be required to pay for the cleanup; where they could not be identified or had gone out of business, the federal government would pay. One of the largest hazardous waste sites on the Superfund list was an almost 200-mile long stretch of the Hudson River, which GE factories had contaminated with cancer-causing chemicals called PCBs. In 2018, GE said it had completed its cleanup of the site, at a total cost of around $2 billion, but was still awaiting final EPA approval.
The Houston metropolitan area has one of the largest concentrations of Superfund sites in the nation. When Hurricane Harvey devastated the city in 2017, many of these sites flooded, and some were damaged. At the San Jacinto River Waste Pits, for example, toxic waste from a long-since closed paper mill was released when
11 “Obama Set to Sign Bipartisan Update of 1976 Toxic Substance Law,” The New York Times, June 22, 2016; and “A Year after West Virginia Chemical Spill, Some Signs of Safer Water,” National Geographic, January 10, 2015. 12 Robert D. Bullard, “Environmental Justice in the 21st Century,” Environmental Justice Resource Center, available at www.ejrc.cau.edu/ejinthe21century.htm; and Christopher H. Foreman, Jr., The Promise and Perils of Environmental Justice (Washington, DC: Brookings Institution, 2000). 13 Nuclear Information and Resource Service, “Environmental Racism, Tribal Sovereignty, and Nuclear Waste,” at www.nirs.org.
Final PDF to printer
218
law43665_ch10_211-236.indd 218 01/28/19 03:25 PM
floodwaters damaged a concrete cap that had covered the pits. An EPA dive team that visited the site soon afterwards found dioxin, a dangerous carcinogen, in high concentrations, and the agency fast-tracked a $115 million cleanup. But some criticized the agency for its past inaction. “Superfund sites are known to be the most dangerous places in the country,” and they should have been protected against flooding,” said one environmental activist.14
Remarkably, nearly one in six U.S. residents now lives within three miles of a Super- fund site. As of 2016, cleanup had been completed at around 380 of them.15
Since 2000, most changes in federal regulatory oversight have come through agency rulemaking and executive action rather than legislation. In the first year of the Trump administration, the EPA changed or proposed changes to dozens of rules, with the cumu- lative effect of weakening environmental regulations. Some of these changes are described in Exhibit 10.A.
Alternative Policy Approaches Governments can use a variety of policy approaches to control air, water, and land pollu- tion. The most widely used method of regulation historically has been to impose environ- mental standards. Increasingly, however, government policymakers have relied more on market-based and voluntary approaches, rather than command and control regulations, to achieve environmental goals. These different approaches are discussed next.
14 “Toxic Waste Sites Flooded in Houston Area,” September 3, 2017, at https://apnews.com; and “EPA Oks Plan to Rid Toxics from Waste Pits,” Houston Chronicle, October 11, 2017. 15 “Polluted Sites Linger Under U.S. Cleanup Program,” Chemical and Engineering News, April 3, 2017.
Rule-Making to Weaken Environmental Protections
During the year and a half of the Trump administration, regulators overturned or announced their intention to overturn more than 70 environmental rules. (Some rules were reversed, but then put back in effect after legal challenges.) Among other actions, regulators
• Proposed to open more than 90 percent of offshore areas to oil and gas drilling, giving energy companies access to lease areas off the coasts of California, the Arctic, and the Eastern Seaboard.
• Suspended clean water rules that required farmers, ranchers, and developers to limit pollution in streams running across land they owned that fed larger bodies of water. These bodies of water, such as the Ches- apeake Bay and Puget Sound, provided drinking water for one in three Americans.
• Revoked a rule that prevented coal companies from dumping mining waste into local streams. This rule had made a big impact in Central Appalachia, where debris from mountaintop surface mining often ended up in valleys, where it polluted running water.
• Reversed a ban on the use of lead ammunition and fishing tackle on public lands (lead is toxic to wildlife and humans).
• Proposed changes that would weaken fuel-efficiency standards for cars and trucks made between 2021 and 2025.
• Ended a requirement that oil and gas companies report their emissions of methane (a potent greenhouse gas).
Some welcomed these rollbacks as releasing businesses and individuals from burdensome regulations, but others thought they represented dangerous attacks on protections of the nation’s air, water, and land.
Sources: “Environmental Rules on the Way Out Under Trump,” The New York Times, July 6, 2018; “Trump Moves to Open Nearly All Offshore Waters to Drilling,” The New York Times, January 4, 2018; and “EPA Blocks Obama-Era Clean Water Rule,” The New York Times, January 31, 2018.
Exhibit 10.A
Final PDF to printer
Chapter 10 Managing for Sustainability 219
law43665_ch10_211-236.indd 219 01/28/19 03:25 PM
Command and Control Regulation
The traditional method of pollution control is through environmental standards. Standard allowable levels of various pollutants are established by legislation or regulatory action and applied by administrative agencies and courts. This approach is called command and control regulation, because the government commands business firms to comply with cer- tain standards and often directly controls their choice of technology.
One type of command-and-control regulation is an environmental-quality standard. In this approach a given geographical area is allowed to have no more than a certain amount or proportion of a pollutant in the air. Polluters, such as utilities and factories, are required to control their emissions to maintain the area’s standard of air quality. For example, in 2014, the EPA issued new, more stringent standards for air concentrations of ground-level ozone, which the agency called the “most pervasive and widespread pollutant in the coun- try.”16 A second type is an emission standard. For example, the law might specify that manufacturers could release into the air no more than 1 percent of the ash (a pollutant) they generated. Sometimes, the EPA mandates that companies use the best available technology, meaning a specific process that the agency determines is the best economically achievable way to reduce negative impacts on the environment.
Market-Based Mechanisms
In recent years, regulators have begun to move away from command and control regula- tion, favoring increased use of market-based mechanisms. This approach is based on the idea that the market is a better control than extensive standards that specify precisely what companies must do.
One approach that has become more widely used is to allow businesses to buy and sell the right to pollute, in a process known as cap-and-trade. California’s tradable permit program for carbon emissions, described in one of the opening examples of this chapter, illustrates this approach. The U.S. Clean Air Act of 1990 also incorporated the concept of tradable permits. The law established emission levels (called “caps”) and permitted companies with emissions below the cap to sell (“trade”) their rights to the remaining permissible amount to firms that faced penalties because their emissions were above the cap. Over time, the government would reduce the cap, thus gradually reducing overall emissions, even though individual companies might continue to pollute above the cap. Companies could choose whether to reduce their emissions—for example, by installing pollution abatement equipment—or to buy allowances from others. One study showed that the tradable permit program for acid rain may have saved companies as much as $3 billion per year, by allowing them the flexibility to choose the most cost-effective methods of complying with the law.17
Another market-based type of pollution control is establishment of emissions charges or fees. Each business is charged for the undesirable waste that it emits, with the fee varying according to the amount of waste released. The result is, “The more you pollute, the more you pay.” In this approach, polluting is not illegal, but it is expensive, creating an incentive for companies to clean up. In recent years, governments have experimented with a variety of so-called green taxes or eco-taxes that levy a fee on various kinds of environmentally destructive behavior. In addition to taxing bad behavior, governments may also offer var- ious types of positive incentives to firms that improve their environmental performance. For example, it may decide to purchase only from those firms that meet a certain pollution
16 “E.P.A. Ozone Rules Divide Industry and Government,” The New York Times, November 26, 2014. 17 For more on the tradable permit system for acid rain, see www.epa.gov/acidrain.
Final PDF to printer
220 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 220 01/28/19 03:25 PM
standard or offer aid to those that install pollution control equipment. Tax incentives, such as faster depreciation for pollution control equipment, also may be used. Governments may also levy eco-taxes on individuals.
Norway has declared that to meet its obligations under the 2015 Paris climate accord, it will reduce its carbon emissions by 40 percent. One way it has done so is by offering both positive and negative incentives. The government imposes high taxes on new car purchases, except for nonpolluting electric cars. Operators in Norway’s North Sea oil fields are required to capture carbon dioxide discharged during drilling and pump it back underground or pay a stiff fee per ton. Companies have responded by developing technology to do so.18
In short, the trend has been for governments to use more flexible, market-oriented approaches—tradable allowances, pollution fees and taxes, and incentives—to achieve environmental objectives where possible.
Information Disclosure
Another approach to reducing pollution is popularly known as regulation by publicity, or regulation by embarrassment. The government encourages companies to pollute less by publishing information about the amount of pollutants individual companies emit each year. In many cases, companies voluntarily reduce their emissions to avoid public embarrassment.
The major experiment in regulation by publicity has occurred in the area of toxic emis- sions to the air and water. The 1986 amendments to the Superfund law, called SARA, included a provision called the Community Right-to-Know Law, which required manufac- turing firms to report, for a list of specified toxic chemicals, the amount on site, the number of pounds released, and how (if at all) these chemicals were treated or disposed of. The EPA makes this information available to the public in the Toxics Release Inventory, or TRI, pub- lished annually. Evidence shows that at least initially, reporting manufacturers in the United States cut their releases and disposal of these chemicals to the air, water, and land, apparently fearing negative publicity. Recently, however, the TRI numbers have been quite stable.19
The advantages and disadvantages of alternative policy approaches to reducing pollu- tion are summarized in Figure 10.2.
Civil and Criminal Enforcement
Companies that violate environmental laws are subject to stiff civil penalties and fines, and their managers can face prison if they knowingly or negligently endanger people or the environment. Proponents of this approach argue that the threat of fines and even impris- onment can be an effective deterrent to corporate outlaws who would otherwise degrade the air, water, or land. In 2017, the EPA brought criminal charges against 137 defendants. Companies can also be charged, as the following example shows.
Anadarko Petroleum, an oil and gas exploration company, paid more than $5 billion to settle charges of widespread environmental contamination and to pay for cleanup. Anadarko had purchased Kerr-McGee, a company responsible for dumping radioac- tive uranium, rocket fuel, wood creosote, and other contaminants at 2,000 sites in
18 “Sucking Up Carbon, Combatting Climate Change,” The Economist, November 18, 2017; and “Both Climate Leader and Oil Giant? A Norwegian Paradox,” The New York Times, June 17, 2017. 19 TRI data are available at www2.epa.gov/toxics-release-inventory-tri-program. Maps showing the geographical distribution of chemical releases reported under TRI are available at http://toxmap.nlm.nih.gov.
Final PDF to printer
Chapter 10 Managing for Sustainability 221
law43665_ch10_211-236.indd 221 01/28/19 03:25 PM
FIGURE 10.2 Advantages and Disadvantages of Alternative Policy Approaches to Reducing Pollution
Policy Approach Advantages Disadvantages
Command-and- control regulation
Market-based mechanisms
Information disclosure
Civil and criminal enforcement
Cap-and-trade systems
• Enforceable in the courts • Compliance mandatory
• Gives businesses more flexibility • Achieves goals at lower overall cost • Saves jobs by allowing some less-e�cient plants to stay open • Permits the government and private organizations to buy allowances to take them o� the market • Encourages continued improvement
• Taxes bad behavior (pollution) rather than good behavior (profits)
• Rewards environmentally responsible behavior • Encourages companies to exceed minimum standards
• Government spends little on enforcement • Companies able to reduce pollution in the most cost- e�ective way
• May deter wrongdoing by firms and individuals
• Across-the-board standards not equally relevant to all businesses • Requires large regulatory apparatus • Older, less-e�cient plants may be forced to close • Can retard innovation • Fines may be cheaper than compliance • Does not improve compliance once compliance is achieved
• Gives business a license to pollute • Permit levels are hard to set • May cause regional imbalances in pollution levels • Enforcement is di�cult.
• Fees are hard to set • Taxes may be too low to curb pollution
• Incentives may not be strong enough to curb pollution
• Does not motivate all companies
• May not deter wrongdoing if penalties and enforcement e�orts are perceived as weak
Emissions fees and taxes
Government incentives
11 states over an 85-year period. Kerr-McGee had tried to spin off its environmental liabilities before selling its remaining assets to Anadarko, but the court had rejected that argument. “Today’s settlement is a just resolution of an historic injustice to the American people and our environment,” said one of the prosecutors.20
European regulators and prosecutors have also actively pursued corporate environmen- tal lawbreakers. For example, the EU standardized its laws against marine pollution and
20 “United States Announces $5.15 Billion Settlement of Litigation Against Subsidiaries of Anadarko Petroleum Corp.,” press release, U.S. Department of Justice, April 3, 2014.
Final PDF to printer
222 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 222 01/28/19 03:25 PM
raised maximum penalties after a series of oil tanker wrecks fouled the coasts of France, Spain, and Portugal. Europe is the world’s largest importer of oil, and 90 percent is trans- ported to the continent by seagoing ships.21
The U.S. Sentencing Commission, a government agency responsible for setting uniform penalties for violations of federal law, has established guidelines for sentencing environ- mental wrongdoers. (These guidelines are also discussed in Chapter 5.) Under these rules, penalties would reflect not only the severity of the offense but also a company’s demon- strated environmental commitment. Businesses that have an active compliance program, cooperate with government investigators, and promptly assist any victims would receive lighter sentences than others with no environmental programs or that knowingly violate the law. These guidelines provide an incentive for businesses to develop active compliance programs to protect themselves and their officers from high fines or even prison if a viola- tion should occur.
Costs and Benefits of Environmental Regulation
One central issue of environmental protection is how costs are balanced by benefits. In the four decades or so since the modern environmental era began, the nation has spent a great deal to clean up the environment and keep it clean. Some have questioned the value choices underlying these expenditures, suggesting that the costs—lost jobs, reduced capital investment, and lowered productivity—exceeded the benefits. Others, in contrast, point to significant gains in the quality of life and to the economic payoff of a cleaner environment.
Businesses in the United States have invested heavily in environmental protection. Man- ufacturers have spent billions of dollars on both capital expenditures (e.g., installing pol- lution controls) and operating costs (e.g., paying for wages and supplies) to comply with environmental regulations. Business spending to comply with environmental regulation has diverted funds that might otherwise have been invested in new plants and equipment or in research and development, and strict rules have sometimes led to plant shutdowns and loss of jobs. Some regions and industries have especially been hard hit by environmental regulation, especially those with high abatement costs, such as paper and wood products, chemicals, petroleum and coal, and primary metals. Inevitably, many of these costs are passed on to customers. On the other hand, emissions of nearly all pollutants have dropped significantly since the beginning of the modern environmental era. These improvements have benefited human health and the environment.
For any specific regulation, weighing the costs and benefits—called a regulatory impact analysis—is mandated by law. For example, the EPA estimated that its recent regulations on ozone, mentioned earlier in this chapter, would cost busi- nesses $15 billion in 2025, when the rule would be fully implemented (based on the middle of three possible scenarios). However, the estimated benefits were even big- ger: $19 to $38 billion, the valuation the EPA calculated for fewer premature deaths, heart attacks, asthma attacks, and other adverse impacts on human health. Not surprisingly, reactions differed among stakeholders. “We’re facing a series of regulations, and the cumulative cost of compliance . . . is significant,” said the pres- ident of the American Chemistry Council, which had vigorously opposed the new rules. But the American Lung Association praised them, saying, “The science is
21 “The Community Framework for Cooperation in the Field of Accidental or Deliberate Marine Pollution,” at http://ec.europa. eu/echo/civil_protection/civil/marin/mp01_en_introduction.htm.
Final PDF to printer
Chapter 10 Managing for Sustainability 223
law43665_ch10_211-236.indd 223 01/28/19 03:25 PM
clear. A more protective standard is needed to protect the health of millions of Americans breathing polluted air every day.”22
As this example illustrates, whether a specific regulation is worthwhile depends on the stakeholder’s point of view, since its costs and benefits often accrue to different parties.
More broadly, environmental regulations stimulate some sectors of the economy. While jobs are lost in industries such as forest products and high-sulfur coal mining, others are created in areas like recycling, environmental consulting, wind turbine and solar panel production and installation, waste management equipment, and air pollution control. For example, operators of coal-fired power plants predicted that big required cuts in mercury emissions, adopted in 2012, would cost thousands of jobs. But trade groups said that the regulations could add 300,000 jobs a year through 2017 in companies that make equipment to reduce emissions.23 Jobs are saved or created in industries such as fishing and tour- ism when natural areas are protected or restored. Moreover, environmental regulations can stimulate the economy by compelling businesses to become more efficient by conserving energy, and less money is spent on treating health problems caused by pollution.
Sectors of the economy that produce goods and services with an environmental benefit are known as the clean economy. A 2018 study by the International Labor Organization esti- mated that the clean economy would be a major source of job growth in the future. Although the transition to a more sustainable society would lead to job loss in carbon-intensive indus- tries, these would be more than offset by jobs created in clean sectors such as alternative energy, electric vehicles, and energy-efficient construction. The report concluded that if the long-term goals of the Paris Agreement were reached, the net impact would be the creation of 18 million jobs.24
Because of the complexity of these issues, economists differ on the net costs and bene- fits of environmental regulation. In some respects, government controls hurt the economy, and in other ways they help, as summarized in Figure 10.3. What is clear is that choices in environmental regulation reflect underlying values, expressed in a democratic society
22 EPA, “Regulatory Impact Analysis of the Proposed Revisions to the National Ambient Air Quality Standards for Ground-Level Ozone,” November 2014, www.epa.gov; “Health Professionals across the Nation Urge EPA to Finalize Most Protective Ozone Air Quality Standard,” March 17, 2015, www.lung.org; and “EPA Ozone Rules Divide Industry and Environmentalists,” The New York Times, November 26, 2014. 23 “Regulations Create Jobs, Too,” Bloomberg Businessweek, February 9, 2012. 24 World Employment Social Outlook 2018: Greening with Jobs (Geneva: International Labour Organization, 2018).
FIGURE 10.3 Costs and Benefits of Environmental Regulations
Costs Benefits
• Manufacturers, mining companies, and utilities spend billions of dollars annually to comply with environmental regulations.
• Some jobs are lost in particularly polluting industries.
• Competitiveness of some capital-intensive, “dirty” industries is impaired.
• Consumers pay more when companies pass along increased costs of regulations.
• Emissions of pollutants drop.
• Air and water quality improves; toxic-waste sites are cleaned up; and natural beauty is preserved or enhanced.
• People live longer and healthier lives in less polluted environments.
• Jobs are created in the clean economy sector, such as environmental products and services, alternative energy, and tourism.
Final PDF to printer
224 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 224 01/28/19 03:25 PM
through an open political process. Just how much a society is prepared to pay and how “clean” it wants to be are political choices, reflecting the give and take of diverse interests in a pluralistic society.
Managing for Sustainability
Environmental regulations, such as the laws governing clean air, water, and land described in this chapter, establish minimum legal standards that businesses must meet. Most compa- nies try to comply with these regulations, if only to avoid litigation, fines, and, in the most extreme cases, criminal penalties. But many firms are now voluntarily moving beyond compliance to improve environmental performance in all areas of their operations and to manage proactively for sustainability. This section describes the stages of corporate envi- ronmental responsibility and discusses the organizational approaches companies have used to manage environmental issues effectively. The following section explains why managing for sustainability can improve a company’s strategic competitiveness.
Stages of Corporate Environmental Responsibility Although environmental issues are forcing all businesses to manage in new ways, not all companies are equally proactive in their response. One widely used model identifies three main stages of corporate environmental responsibility.
According to this model, companies pass through three distinct stages in sustainability management.25 The first stage is pollution prevention, which focuses on “minimizing or elim- inating waste before it is created.” The second stage is product stewardship. In this stage, managers focus on “all environmental impacts associated with the full life cycle of a product,” from the design of a product to its eventual use and disposal. HP, for example, has designed its laser printer ink cartridges so they can be refurbished and reused, and provides a mailing label for customers to return them free of charge. Finally, the third and most advanced stage is clean technology, in which businesses develop innovative new technologies that support sustainability—that provide actual environmental benefits, rather than simply prevent harm.
General Electric, a company long associated with pollution, from building coal-fired power plants to dumping toxic chemicals in the Hudson River, took a dramatic turn in 2005 when it announced a new strategy dubbed “ecomagination.” GE pledged to double its investment in developing renewable energy, fuel cells, efficient lighting, water filtration systems, and cleaner jet engines, which it viewed as a huge commer- cial opportunity. In 2017, a dozen years into the initiative, GE reported that it had invested $20 billion in clean tech research and development and had earned $270 billion in revenues from its ecomagination portfolio of products and services.26
Evidence suggests that many companies are now moving quickly toward the final stage in this model. Surveys of senior executives by McKinsey & Company document a notable shift from 2012, when the main reason cited for addressing sustainability was to “improve operational efficiency and cut costs,” to 2017, when the main reason cited was to “align with [the] company’s business goals, mission, or values.”27
25 Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review, January–February 1997. All quotes in this paragraph are taken from this article. An alternative stage model may be found in Dexter Dunphy, Suzanne Benn, and Andrew Griffiths, Organisational Change for Corporate Sustainability (New York: Routledge, 2003). 26 “Ecomagination Progress,” www.gesustainability.com. 27 McKinsey & Company, “Sustainability’s Deepening Impact,” December 2017.
Final PDF to printer
Chapter 10 Managing for Sustainability 225
law43665_ch10_211-236.indd 225 01/28/19 03:25 PM
The Ecologically Sustainable Organization
An ecologically sustainable organization (ESO) is a business that operates in a way that is consistent with the principle of sustainable development, as presented in Chapter 9. In other words, an ESO could continue its activities indefinitely, without altering the carrying capacity of the Earth’s ecosystem. Such businesses would not use up natural resources any faster than they could be replenished, or substitutes found. They would make and transport products efficiently, with minimal use of energy. They would design products that would last a long time and that, when worn out, could be disassembled and recycled. They would not produce waste any faster than natural systems could absorb and disperse it. They would work with other businesses, governments, and organizations to meet these goals.28
Of course, no existing business completely fits the definition of an ecologically sustain- able organization. The concept is what social scientists call an ideal type; that is, a kind of absolute standard against which real organizations can be measured. A few visionary businesses, however, have embraced the concept and begun to try to live up to this ideal.
One such business is Interface, a $1 billion company based in Atlanta, Georgia, the world’s largest maker of commercial carpet tiles. In 1994, CEO Ray C. Anderson announced, to many people’s surprise, that Interface would seek to become “the first sustainable corporation in the world.” Anderson and his managers undertook hundreds of initiatives. For example, the company started a program by which customers could lease, rather than purchase, carpet tile. When tile wore out in high-traffic areas, Interface technicians would replace just the worn units, reduc- ing waste. Old tiles would be recycled, creating a closed loop. The company later adopted a goal of “Mission Zero”—no negative impact on the environment—by 2020. Another initiative was to tag all products with a special label called an envi- ronmental product declaration (EPD). Like a nutrition label on packaged food, the third-party verified EPD listed the raw materials, energy use, emissions, and waste generation associated with each product, allowing Interface customers to make environmentally informed decisions. In 2017, Interface was selected by a panel of experts as one of world’s most sustainable companies, the only company to do so for each of the 20 years the survey had been taken.29
No companies, including Interface, have yet become truly sustainable businesses, and it will probably be impossible for any single firm to become an ESO in the absence of supportive government policies and a widespread movement among many businesses and other social institutions. However, many companies are demonstrating leadership in responding to environmental challenges. The next section will describe actions leading companies are taking now to operate their businesses as sustainably as possible.
Sustainability Management in Practice Companies that have begun to move toward sustainability have learned that new structures, processes, and incentives are often needed.
An emerging role at many leading firms is the chief sustainability officer (CSO). In 2004, DuPont was the first company to appoint a chief sustainability officer; a 2014 survey found
28 Mark Starik and Gordon P. Rands, “Weaving an Integrated Web: Multilevel and Multisystem Perspectives of Ecologically Sustainable Organizations,” Academy of Management Review, October 1995. 29 GlobeScan/SustainAbility, “The 2017 Sustainability Leaders: Celebrating 20 Years of Leadership,” 2017. Interface’s sustain- ability initiatives are described at www.interfaceglobal.com/sustainability. Ray Anderson’s story is told in Ray C. Anderson with Robin White, Business Lessons from a Radical Industrialist (New York: St. Martin’s Press, 2011).
Final PDF to printer
226 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 226 01/28/19 03:25 PM
36 CSOs at large U.S. firms. Most of these CSOs reported directly to the CEO or to an individual who did. They often supervised staffs of specialists and coordinated the work of managers across many functional areas, including research and development, marketing, facilities, and supply chain management, whose work was related to the firm’s sustainabil- ity mission.30
An example is Justin Whitmore, appointed chief sustainability officer at Tyson Foods, the world’s second-largest processor and marketer of chicken, beef, and pork, in 2017. The newly created position reported directly to the CEO. Whitmore quickly set out to establish science-based targets for Tyson in the areas of green- house gas emissions, water conservation, animal welfare, and food transparency. He also worked on ways to reduce meat waste during processing and on the devel- opment of vegetarian meat alternatives. Whitmore described the challenges facing Tyson: “There are more people in the world, and more of them are rising them- selves out of poverty, so that’s driving protein consumption. You have to set targets for companies that will continue to grow.”31
Sustainability managers reported that when they first took the job, they thought that the most important determinant of success would be their subject-matter expertise—how much they knew about pollutants, energy efficiency, regulations, and the like. But after serving in the position, these managers changed their minds, saying that interpersonal skills—being able to work effectively with people across the organization—were the most critical. “[CSOs] must typically work across the organization to implement their change initiatives,” explained the chief sustainability officer for the clothing maker Reformation. “That means they must be very effective at influencing others.”32
Chief sustainability officers may be based in departments with a variety of names, such as sustainability, citizenship, and corporate affairs. But wherever they are located, recent research shows that effective sustainability management shares several common characteristics:33
Top management commitment. The most environmentally proactive companies almost all have CEOs and other top leaders with a strong espoused commitment to sustainabil- ity. Paul Polman, the CEO of Unilever, a firm that was judged the world’s most sustain- able in 2017, told an interviewer that a different executive team could come into the company, shut down all sustainability initiatives, wring out costs, and drive the share price up—at least in the short term. But he favored the long-term view. “I would like to be remembered for leaving the place a little bit better than I found it,” he said. Boards of directors have also become involved, overseeing the implementation of environmental policies and assessing environment-related risks. For example, Prudential Financial, a financial services company that sells insurance as well as other products, now requires candidates for the board to have sustainability expertise.34 Thirty-one percent of firms integrate sustainability into board committee charters.
30 CSO Back Story II: The Evolution of the Chief Sustainability Officer (Weinreb Group, 2014). 31 Meat Industry Must Grow Sustainably, Tyson Executive Says,” February 8, 2018, www.bloomberg.com; and “The Science Behind Tyson’s Meaty New Sustainability Agenda,” February 26, 2018. 32 “Who’s in Charge of Sustainability at Your Favorite Brand?” November 23, 2016, www.racked.com. 33 Data in this section are drawn from “Turning Point: Corporate Progress on the CERES Roadmap for Sustainability,” February 2018, www.ceres.org, unless otherwise noted. The CERES study was based on a survey of executives of 600 companies, representing 80 percent of the total market capitalization of all publicly traded companies in the United States. 34 CERES, “Lead from the Top: Building Sustainability Competence on Corporate Boards,” 2017.
Final PDF to printer
Chapter 10 Managing for Sustainability 227
law43665_ch10_211-236.indd 227 01/28/19 03:25 PM
Clear goals and metrics. Another characteristic of leading companies is that they set measurable, science-based sustainability goals and regularly assess and report their per- formance. A 2017 report by Pivot Goals found that 94 percent of the world’s 200 largest firms had measurable sustainability goals, and 33 percent had adopted science-based goals.35 By setting specific goals, these firms hold themselves accountable (and allow their stakeholders to do so). A particularly dramatic example is the German sportswear firm Puma, one of the first firms to release an environmental profit-and-loss statement, covering all significant environmental impacts from the production of raw materials to the final sale. After the company learned that most adverse impacts occurred during the production of raw materials, it introduced new products made from recycled content or that could themselves be recycled.36
Employee engagement. Sustainability leaders have found they are most effective when they involve line managers and employees from across the organization in the process of change. Thirty-eight percent of large firms engage their employees on sustainability issues. In 2016, for example, Cisco Systems launched an internal engagement platform called GreenHouse, on which employees could learn about ways to reduce their envi- ronmental footprint and inspire others. In its first six months, 1,750 employees had par- ticipated. One group started a “bring your own cup” campaign and gave out Starbucks cards to others who registered their reusable cup. They calculated that this action had diverted 2,900 pounds of waste in one year.37
Alignment of rewards and incentives. Businesspeople are most likely to consider the environmental impacts of their actions when their organizations acknowledge and reward this behavior. The most sustainable organizations tie the compensation of their managers, including line managers, to environmental achievement and take steps to recognize these achievements publicly. In 2018, 24 percent of U.S. companies linked executive compen- sation to sustainability metrics, but only 8 percent of companies linked pay to meeting goals that went beyond legal and regulatory requirements. For example, at Xcel Energy, a utility that is a leading supplier of wind power, a portion of the CEO’s bonus was linked to meeting specific sustainability goals set annually by the board, including reductions in energy use by customers. A study of U.S., Canadian, and German firms found those com- panies that did link pay to sustainability metrics boosted their performance in this area.38
Environmental Auditing and Reporting As noted earlier, leading companies not only organize themselves to achieve sustainability goals; they also closely track their progress toward meeting them. Chapter 3 introduced the concept of corporate social reporting and presented evidence on what proportion of compa- nies report results to their stakeholders. In the 1990s, in a parallel development, many com- panies began to audit their environmental performance. More recently, many firms have moved to integrate their social and environmental reporting into a single sustainability report. In 2017, as reported in Chapter 3, 93 percent of the world’s largest companies issued a corporate responsibility report; most of these covered both social and environmental issues. A significant trend is toward the inclusion of corporate responsibility data in the
35 “The Rise of Corporate Sustainability Goals: Some Hard Data,” December 1, 2017, www.sustainblebrands.com. The data- set is available at www.pivotgoals.com. 36 For information about Puma’s Environmental Profit & Loss Account and other sustainability initiatives, see www.puma.com. 37 “A Look Back at Cisco’s Recent Sustainability Accomplishments,” February 13, 2017, at https://blogs.cisco.com; and “Changing the Way We Waste, One Cup at a Time,” September 7, 2016, at http://weare.cisco.com. 38 “It’s Time to Tie Executive Compensation to Sustainability,” Harvard Business Review, August 17, 2017.
Final PDF to printer
228 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 228 01/28/19 03:25 PM
annual financial report; this rose from 44 percent of these companies in 2011 to 78 percent in 2017. This is called integrated reporting (also discussed and defined in Chapter 3).39
An example of a company that was an early leader in integrated reporting is Novo- zymes, a Danish biotechnology firm. The company produced its first environmental report in 1993 and its first combined social and environmental report six years later. Since 2002, it has produced a single report to stakeholders that integrates its finan- cial, social, and environmental results. The company acknowledges the challenge of preparing a single report “in accordance with more than one set of rules and guide- lines,” but says that the process improves transparency and accurately reflects its commitment to sustainability.40
As discussed earlier in Chapter 3, the movement to audit and report on social and environ- mental performance—and to integrate these efforts with financial auditing and reporting— has gained momentum in recent years in many regions of the world.
Environmental Partnerships Many businesses that are seeking to become more sustainable have formed voluntary, col- laborative partnerships with environmental organizations and regulators to achieve spe- cific objectives, as illustrated by the Google Earth Outreach example at the beginning of this chapter. These collaborations, called environmental partnerships, draw on the unique strengths of the different partners to improve environmental quality or conserve resources.
Starbucks Corporation is the largest coffeehouse company in the world, with more than 27,000 stores in 75 countries. For more than 15 years, the company has part- nered with Conservation International (CI) to promote coffee farming methods that protect biodiversity, mitigate climate change, and reduce harm from pesticides and fertilizers. For example, in Chiapas, Mexico, and Sumatra, Indonesia, the partners have worked with local farmers to develop coffee varieties that thrive in the shade of native trees, conserving habitat and sequestering carbon. The company has also worked with CI to develop a set of purchasing guidelines based on sustainability and has committed to paying a premium price to suppliers who meet the standards. The two organizations also joined the Sustainable Coffee Challenge, an industrywide ini- tiative to make coffee the world’s first completely sustainable agricultural product. Conservation International noted that it viewed Starbucks “as a natural partner to our work because of shared geographies: most of the world’s key coffee-growing regions are the same areas where biological diversity is richest and most threatened.”41
Sustainability Management as a Competitive Advantage
Some researchers believe that by moving toward sustainability, business firms gain a com- petitive advantage. That is, relative to other firms in the same industry, companies that proactively manage environmental issues will tend to be more successful than those that do
39 The Road Ahead: The KPMG Survey of Corporate Social Responsibility Reporting 2017, at www.kpmg.com. The figures reported here are for the G250 companies. 40 Novozymes’ website and integrated reports are at http://novozymes.com/en. For a full discussion of the movement toward triple bottom line reporting, see Robert G. Eccles and Michael P. Krzus, The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality (Hoboken, NJ: John Wiley & Sons, 2014). 41 The partnership’s progress can be followed at www.conservation.org/partners/Pages/starbucks and www.starbucks.com/ responsibility/sourcing/coffee.
Final PDF to printer
Chapter 10 Managing for Sustainability 229
law43665_ch10_211-236.indd 229 01/28/19 03:25 PM
not. Effective sustainability management confers a competitive advantage in five different ways, as follows. 42
Cost Savings Companies that reduce pollution and hazardous waste, reuse or recycle materials, and operate with greater efficiency can reap significant cost savings. An example is Subaru’s automobile assembly plant in Lafayette, Indiana, which has gone to great lengths to reduce waste, saving a great deal of money in the process.
Subaru’s 3.5 million square foot Indiana factory has achieved its goal of “zero waste”: it sends no waste at all to landfills. The company returns packaging materials— including the Styrofoam used to protect engines in transit—to suppliers, to be used again. Cafeteria scraps go to a nearby waste-to-energy power plant. The company processes and reuses solvent and oil. Dried paint sludge is shipped to other com- panies that use it to make railroad ties, parking lot bumpers, and bicycle helmets. Used lightbulbs are used to make reflective road striping. Leftover metal slag goes to a company that extracts the copper it contains. These initiatives not only reduce the plant’s environmental impact, they also save the company more than $2 million a year.43
Many companies have found they are able to obtain significant cost savings by more efficiently managing their real estate portfolios. How some companies have managed the built environment to save money and improve their environmental performance is described in Exhibit 10.B. One company that has benefited from this trend is Autodesk, a maker of software for architects and other designers. The company has developed special- ized software that enables architects to calculate the energy and water usage of proposed designs, and to make the most efficient use of daylight and shadows. “Autodesk is commit- ted to helping designers and engineers create a future where we all live well and within the limits of our planet,” said the company on its website.44
Brand Differentiation Companies that develop a reputation for environmental excellence distinguish their brand and attract like-minded customers. Sustainable products and services can attract environmen- tally aware customers. For example, shoppers might select cell phones with power-saving features, such as “unplug charger” reminders, or cleaning products formulated with ingre- dients that are not environmentally harmful. Services can also be marketed based on their environmental attributes, as the following example illustrates.
One company that has benefited from its reputation for sustainability is Intrepid Travel. Founded in Australia in 1989, the tour operator now offers itineraries for adventurous travelers on seven continents. Early on, Intrepid Travel embraced the principle of sustainable development and committed to reducing its environmental footprint, so its travel destinations could be enjoyed for many generations to come.
42 Daniel C. Esty and Andrew S. Winston, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (New Haven, CT: Yale University Press, 2006); and Sanjay Sharma and J. Alberto Aragon-Correa, eds., Corporate Environmental Strategy and Competitive Advantage (Northampton, MA: Edgar Elgar Academic Publishing, 2005). 43 “The Zero-Waste Factory,” Scientific American, July 13, 2017. The website of Subaru Industries of America is at www. subaru-sia.com. 44 The Autodesk website is at www.autodesk.com.
Final PDF to printer
230
law43665_ch10_211-236.indd 230 01/28/19 03:25 PM
The company employed local guides, used public transit, offset the carbon emis- sions of its air travel, and gave back to local communities through its foundation. In the past 10 years, the company has grown at an annual compound rate of 25 percent. Said one of the company’s founders: “We became known as a responsible company, and responsible travel became a selling feature for Intrepid.”45
In general, promoting specific products or services based on their environmental attributes, a practice sometimes known as green marketing, has not been particularly effective. Evidence shows that most consumers select products and services based on price, convenience, and quality—not “greenness.” However, what consumers do respond to is a company’s overall rep- utation for environmental responsibility and the credibility of its communications with stake- holders. A study of 30,000 consumers in 60 countries found that almost half were more likely to purchase a product or services from a company known as being environmentally friendly. This was especially true of young people. Only ten percent, however, had purchased products specifically labeled as eco-friendly.46 Joel Makower, an expert on environmental marketing, concluded that “It’s at the company or brand level that this [environmental marketing] makes sense: Why offer a few good, eco-labeled products if the organization behind them is headed in the wrong direction?” In his view, consumers generally do not seek out “green” products, but they do buy from companies they perceive as responsible.47
Technological Innovation Environmentally proactive companies are often technological leaders, as they seek imagi- native new methods for reducing pollution and increasing efficiency. In many cases, they
45 Geoff Manchester, “Why We Must Act Now on Sustainability,” May 1, 2014 [blog post], at www.travelweekly.com.au. For Intrepid Travel’s reports on its progress on sustainability, see www.intrepidtravel.com/rb-our-progress-sustainability-policy. 46 “The Sustainability Imperative: New Insights on Consumer Expectations,” Nielsen, October 2015. 47 Joel Makower, “Five Reasons Green Marketing is Going Nowhere,” March 12, 2013, www.linkedin.com.
Greening the Built Environment
For most companies, their buildings—the offices, factories, stores, and warehouses where their employees work—account for a huge share of their overall environmental impact. The U.S. Energy Information Admin- istration has estimated that commercial buildings and industrial facilities together account for slightly more than half of the nation’s energy consumption (most of the rest comes from transportation and residential use). Many companies have realized that improving operating efficiencies in their real estate holdings can yield tremendous savings, as well as reduce their environmental footprint. One approach is to design buildings from the ground up to conserve resources both in their construction and use. The U.S. Green Building Council has developed a certification process called LEED (Leadership in Energy and Environmental Design) for both new and retrofitted buildings. Adopting these standards has brought com- panies many benefits. For example, Adobe, the maker of digital authoring tools, has obtained 25 LEED certifi- cations, including for corporate headquarters in San Jose, California, which was completely retrofitted. Adobe introduced scores of improvements—from motion sensors that turned off lights when people left their offices to landscape irrigation linked to weather satellites, so sprinklers did not operate when it was raining. The improve- ments cost a total of $1.4 million but saved Adobe $1.2 million per year. “I was one of the naysayers saying, no, green costs money, it doesn’t save money. [But] once I started seeing the cost savings, [I jumped] right up on that bandwagon . . . because it works,” said the company’s director of global facilities services.
Sources: Rocky Mountain Institute, “Adobe Systems Corporate Headquarters” [case study], and “Green Building for a Profitable Future.” The website of the U.S. Green Building Council is at www.usgbc.org. Adobe’s sustainable building initiatives are described at www.adobe.com/corporate-responsibility/sustainability/green-building.
Exhibit 10.B
Final PDF to printer
Chapter 10 Managing for Sustainability 231
law43665_ch10_211-236.indd 231 01/28/19 03:25 PM
produce innovations that can win new customers, penetrate new markets, or even be mar- keted to other firms as new regulations spur their adoption.
IBM’s semiconductor chip-making plant in Burlington, Vermont, uses vast quanti- ties of ultrapure water to clean its products. The water bill for this single facility has been as high as $10,000 a day. To reduce costs, IBM managers devised an elaborate system of electronic sensors to track the movement of water at every point and used the data to drive greater efficiencies—nearly doubling the “water productivity” of the plant over 10 years. “We did fifty different things,” reported the plant’s opera- tion manager. “Angles of usage, treatment, energy capture, using less pump capac- ity, capturing internal pressure that comes with the water in the line—fifty different things.” In the process, IBM had the startling revelation that it had done more than save money on water; it had created an entirely new business of consulting with other organizations on how to do the same thing. IBM later created a robust busi- ness called “Intelligent Water,” which helped governments, utilities, and businesses use advanced data analytics to conserve water and save money.48
Reduction of Regulatory and Liability Risk Another benefit for companies that are proactive with respect to their environmental impacts is that they are often better positioned than their competitors to respond to new government mandates. For example, when new rules went into effect in Europe that banned all electronics products that included six toxic substances, including lead, cadmium, and mercury, companies that had learned how to make their products free of these substances prior to the ban suddenly had a big advantage in winning European accounts. When the United Kingdom announced that all large British companies would be required to report annually on their greenhouse gas emissions, the companies that had taken earlier steps to measure and report on carbon voluntarily were better prepared for compliance. Similarly, proactively managing for sustainability can avoid expensive fines and lawsuits, such as those experienced by Anadarko, in the example mentioned earlier in this chapter.
Strategic Planning Companies that cultivate a vision of sustainability must adopt sophisticated strategic plan- ning techniques to allow their top managers to assess the full range of the firm’s effects on the environment. The complex auditing and forecasting techniques used by these firms help them anticipate a wide range of external influences on the firm, not just ecologi- cal influences. Wide-angle planning helps these companies foresee trends—new markets, materials, technologies, and products. For example, Toyota, well known for its ability to anticipate market trends, was among the first to produce a commercially successful hybrid vehicle, the Prius. As U.S. car makers struggled—and some went into bankruptcy—in the deep recession of the late 2000s, Toyota fared relatively well. The same sophisticated planning that enabled Toyota to weather the recession had also contributed to its abil- ity to meet the public’s increased interest in less polluting, more efficient transportation.49 McKinsey & Company found in the survey mentioned earlier in this chapter that 44 percent of companies have formally integrated sustainability into their strategic planning process.50
48 “IBM Intelligent Water,” at www-935.ibm.com/services/multimedia/Intelligent_Water.pdf; and Charles Fishman, The Big Thirst: The Secret Life and Turbulent Future of Water (New York: Free Press, 2011), Chapter 5, “Money in the Pipes.” 49 Information on Toyota’s sustainability initiatives is at www.toyota.co.jp/en/environment. 50 McKinsey & Company, “Sustainability’s Deepening Impact,” December 2017.
Final PDF to printer
232 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 232 01/28/19 03:25 PM
Figure 10.4 lists the companies viewed by a panel of experts as the world’s leaders in integrating sustainability into their business strategy.
If managing for sustainability confers a competitive advantage, it follows that it should have a measurable impact on financial performance. Scholars have begun to study this relationship. A comprehensive examination of almost two decades of data on U.S. companies by Robert Eccles and colleagues at the Harvard Business School concluded that “high-sustainability firms” significantly outperformed others, as measured by both financial and stock market returns.51 The most recent work on this topic has focused on material sustainability issues. To explain, the term material in financial reporting refers to issues that are relevant to eval- uating a firm’s financial condition; the law requires that firms report to investors and the public not all information, but material information. In the same way, material sustainabil- ity issues refer to those that are particularly relevant to an evaluation of a specific company or industry’s sustainability management. For example, greenhouse gas emissions are highly material in the transportation industry, but of lower materiality in the financial ser- vices industry. Building on this concept, recent research shows that firms with good per- formance on material sustainability issues significantly outperform firms with poor performance on these issues. A 2018 study of large U.S. firms found that 32 percent had conducted a materiality assessment.52
51 Robert G. Eccles, Ioannis Ioannou, and George Serafeim, “The Impact of a Corporate Sustainability on Organizational Pro- cesses and Performance,” Management Science 60(11), 2014. 52 Mozaffar Khan, George Serafeim, and Aaron Yoon, “Corporate Sustainability: First Evidence on Materiality,” November 9, 2016, The Accounting Review, Vol. 91, No. 6; and CERES (2018), op. cit.
FIGURE 10.4 Corporate Leaders in Integrating Sustainability into Their Business Strategy Question: What specific companies do you think are leaders in integrating sustainability into their business strategy?
Source: Globe Scan/SustainAbility, The 2017 Sustainability Leaders, p. 13. Based on a survey of more than 1,000 qualified sustainability experts from government, NGOs, academia, corporations, and the media from 79 countries. Respondents were asked to list a maximum of three companies. The numbers shown are the percentage of respondents who named that specific company.
0 5 10 15 20 25 30 35 40 45 50
GE
BASF
Nike
Nestle
Tesla
Natura
IKEA
Marks & Spenser
Interface
Patagonia
Unilever
Final PDF to printer
Chapter 10 Managing for Sustainability 233
law43665_ch10_211-236.indd 233 01/28/19 03:25 PM
A theme of this chapter is that achieving a sustainable economy and society will require a collaborative effort among government, business, and civil society. The U.S. government, like that of many other countries, has adopted many environmental laws and regulations constraining business behavior. These are critically important, as they assure that mini- mum standards are met by all. But many proactive companies are moving beyond com- pliance, recognizing that operating sustainably will help them become more competitive in the global marketplace by cutting costs, attracting environmentally aware customers, spurring innovation, reducing regulatory and liability risk, and encouraging long-range strategic planning. Recent research shows that managing for sustainability pays off for companies in the long run.
∙ Government environmental laws and regulations focus on protecting the ecological health of the air, water, and land, and limiting the amount of pollution that companies may emit.
∙ Environmental laws have traditionally been of the command and control type, specify- ing standards and results. New laws, in both the United States and Europe, have added market incentives to induce environmentally sound behavior.
∙ Environmental laws have brought many benefits. Air, water, and land pollution levels are in many cases lower than in 1970. A continuing challenge is to find ways to promote a clean environment and sustainable business practices without impairing the competi- tiveness of the U.S. economy.
∙ Companies pass through three distinct stages in the development of green management practices. Many businesses are now moving from lower to higher stages. An ecologi- cally sustainable organization is one that operates in a way that is consistent with the principle of sustainable development.
∙ Effective environmental management requires an integrated approach that involves all parts of the business organization, including top leadership, sustainability managers, and employees in many functional areas, as well as strong partnerships with stakehold- ers and effective auditing.
∙ Many companies have found that proactive environmental management can confer a competitive advantage by saving money, attracting customers, promoting innovation, reducing regulatory risk, and developing skills in strategic planning. Emerging evi- dence shows a positive relationship between sustainability practices and stock market and financial performance.
Summary
Key Terms market-based mechanisms, 219 material sustainability issues, 232 Superfund (CERCLA), 217 sustainability report, 227
acid rain, 215 cap-and-trade, 219 chief sustainability officer (CSO), 225 clean economy, 223 command and control regulation, 219
ecologically sustainable organization (ESO), 225 environmental justice, 217 environmental partnerships, 228 Environmental Protection Agency (EPA), 213
Final PDF to printer
234 Part Four Business and the Natural Environment
law43665_ch10_211-236.indd 234 01/28/19 03:25 PM
Discussion Case: Hydraulic Fracturing—Can the Environmental Impacts Be Reduced?
Hydraulic fracturing—or fracking, as it is sometimes known—has been called the gold rush of the 21st century because so many companies and people are rushing to make their fortunes by extracting oil and natural gas from underground shale formations. What are the environmental impacts of fracking, and what can business, government, and society do to reduce them?
In recent years, technology has evolved to make possible the economic extraction of crude oil and natural gas from vast underground shale formations. In hydraulic fracturing, a vertical well is drilled as deep as 7,000 feet before turning horizontally into the oil- or gas-bearing layer. Operators then pump in vast quantities of water, sand, and chemicals under high pressure to break up the shale and release hydrocarbons, which are then brought back up the drill hole. By rotating the horizontal turns in successive passes, a single well can reach a large area underground.
Hydraulic fracturing grew rapidly in the United States in the first two decades of the century. In 2016, more than 1 million oil and gas wells were operating in 31 states. The biggest fracking booms were underway in several shale formations: the Baaken (North Dakota), Marcellus (Pennsylvania, West Virginia, New York, Ohio, and Maryland), Barnett (Texas), and Permian (western Texas and eastern New Mexico).
Hydraulic fracturing has several benefits. In 2012, the United States became the leading natural gas producer in the world, overtaking Russia, and in 2013, became the leading oil producer, overtaking Saudi Arabia. At current rates of growth, the United States will be energy self-sufficient by 2030. The fracking boom has created jobs, tax revenue, and royal- ties to property owners who lease their mineral rights. Natural gas burns cleaner than either coal or oil, providing a possible bridge to a future economy based on renewable energy.
But fracking also carries serious environmental risks. Trucks and heavy equipment cause noise and air pollution in and around drilling sites. The process uses vast quantities of water—at least 239 billion gallons since 2005, according to some estimates—depleting supplies available for drinking and irrigation. Chemicals injected underground include a host of toxins. Fluid that returns to the surface—called flowback—is often further con- taminated by radioactive substances, heavy metals, and volatile organic compounds from deep in the Earth. Improper disposal of this wastewater can contaminate land, wells, and rivers—and even cause earthquakes in such normally quiescent places as Oklahoma and
Internet Resources
www.epa.gov Environmental Protection Agency www.envirolink.org Environmental organizations and news www.GreenBiz.com Green Business Network www.sustainablebusiness.com Network of sustainable small businesses www.environmentalleader.com Briefing for executives www.sustainability.com SustainAbility (consultancy) www.sustainablog.org Blogs on green and sustainable businesses www.theguardian.com/us/sustainable-business The Guardian [newspaper] coverage of
sustainable business
Final PDF to printer
Chapter 10 Managing for Sustainability 235
law43665_ch10_211-236.indd 235 01/28/19 03:25 PM
Kansas. Methane can be released at multiple stages in the fracking process, powerfully contributing to climate change. Wildlife habitat is destroyed as forests and fields give way to industrial drilling sites.
In 2017, the Trump administration cancelled federal regulations, issued two years ear- lier, governing hydraulic fracturing on public and tribal lands. These regulations would have required companies to disclose the chemicals they used and set stricter rules for the storage and disposal of wastewater. States, which had jurisdiction over fracking on pri- vate and state-owned land, had taken a wide range of approaches. At one extreme, three states—Vermont, New York, and Maryland—had banned fracking outright; some cities had as well. In announcing the decision, the health commissioner of New York said, “The potential risks are too great. In fact, they are not even known.” At the other extreme, gov- ernment oversight in North Dakota—site of a huge oil boom—was considered highly per- missive; in fact, the state’s top environmental regulator described himself on a radio show as “not a regulations guy.” Some states had charted a middle course; California, for exam- ple, implemented regulations in 2015 that allowed fracking but required strict monitoring of groundwater and air quality near wells. Most states taxed fracking operations.
As the practice of hydraulic fracturing spread, some companies experimented with new technologies to extract oil and gas with less environmental damage. Halliburton devel- oped solar-powered storage silos and natural gas fueled pumps, reducing on-site emissions. Southwestern Energy installed infrared cameras to detect fugitive methane emissions, so leaks could be plugged. General Electric tested a system that enabled water to be treated and reused on site, and GasFrac, a Canadian company, introduced a fracking method that used no water at all.
Said a professor who studied these trends, “[It is] the same as with any industry—if you come out with a game-changing technology, you can get in the market first and ride that.”
Sources: “The World’s Top Oil Producers of 2017,” Investopedia, February 19, 2018; “To Round Out a Year of Rollbacks, the Trump Administration Just Repealed Key Regulations on Fracking,” The Washington Post, December 29, 2017; “Fracking by the Numbers: The Damage to Our Water, Land, and Climate from a Decade of Dirty Drilling,” Environment America, April 2016; “New Federal Rules are Set for Fracking,” The New York Times, March 20, 2015; “Citing Health Risks, Cuomo Bans Fracking in New York State,” The New York Times, December 17, 2014; “The Downside of the Boom,” [series of articles], The New York Times, various dates starting November 22, 2014; “Green Fracking? 5 Technologies for Cleaner Shale Energy,” National Geographic, March 21, 2014. Maps showing the distribution of fracking wells in the United States are available online at www.fractracker.org/map.
Discussion Questions
1. What is hydraulic fracturing, or fracking, and what are its costs and benefits? 2. Using the classification system presented in this chapter, what type(s) of pollution is
(are) generated by fracking? 3. Using the classification system presented in this chapter, what type(s) of government
regulation has (have) been used to address the concerns you identified in question 1, and which do you think would be most effective?
4. What are the benefits to companies of moving beyond compliance and developing more sustainable methods of fracking?
5. What factors might influence a company to use more or less environmentally responsi- ble methods of fracking?
Final PDF to printer
law43665_ch10_211-236.indd 236 01/28/19 03:25 PM
Final PDF to printer
P A R T F I V E
law43665_ch11_237-260.indd 237 11/21/18 12:26 PM
Business and Technology
Final PDF to printer
238
law43665_ch11_237-260.indd 238 11/21/18 12:26 PM
C H A P T E R E L E V E N
The Role of Technology
Technology is an unmistakable economic and social force in both business and the world where we live. Global and local communications, business exchanges, the science that affects the quality of our lives, and the simple tasks that make up our daily lives are all significantly influenced by technology. Whether we are at home, in school, or in the workplace, emerging technological innovations have dramatically changed how we live, play, learn, work, and interact with others, raising important social and ethical questions for business.
This Chapter Focuses on These Key Learning Objectives:
LO 11-1 Defining technology and its characteristics.
LO 11-2 Recognizing how technology has evolved throughout history.
LO 11-3 Analyzing and assessing how technology impacts individuals in society.
LO 11-4 Understanding the potential for unwanted threats arising from individuals’ use of the Internet and other social media platforms.
LO 11-5 Examining inequalities in public access to technology.
LO 11-6 Assessing the ethical challenges posed by new technologies.
LO 11-7 Identifying how some governments act to control or censor the use of technology by its citizens.
LO 11-8 Evaluating the benefits and risks of recent breakthroughs in science and medicine.
Final PDF to printer
Chapter 11 The Role of Technology 239
law43665_ch11_237-260.indd 239 11/21/18 12:26 PM
Three Russian companies and 25 Russian citizens were indicted on charges of engaging in a widespread effort to interfere in the 2016 U.S. presidential election. The indictment alleged that Russians planted social-media messages, invented fake personas, and staged rallies with the “strategic goal to sow discord in the U.S. political system.” Facebook estimated that 87 million of its users had been targeted to view political ads based on their race, political preference, religion, and personal interests, such as gun ownership. Facebook estimated that 470 Russian-backed accounts connected to a single pro-Kremlin firm, the Internet Research Agency, churned out 80,000 Facebook posts over a 30-month period before the election.1
Imagine taking a pill and information is communicated to your physician. In 2017 the U.S. Food and Drug Administration approved the world’s first digital drug, an anti- psychotic pill that signals smartphones once it reaches the stomach, so doctors can track whether patients are taking their medication. Japan’s Otsuka Pharmaceutical implanted a tiny chip containing minerals, such as silicon, magnesium, and copper, inside tablets of Abilify, used to treat schizophrenia, bipolar disorder, and other mental illnesses. Once swallowed, the chip mixes with stomach acids and sends a heartbeat-like signal to an adhe- sive patch worn on the patient’s torso. The patch records the dosage and time of ingestion and relays this information to a smartphone app for patients to monitor and share with doctors and caretakers. The chip ultimately passes through the digestive tract normally.2
Just a decade earlier, interference by a foreign government in the U.S. elections was considered unlikely. But the use of social media had spread rapidly across the United States, connecting people as never before. Likewise, innovative medical procedures, like a pill communicating with a physician, only imagined until now, have become real. In recent decades, the rate of technology change has been extraordinary, encompassing the wireless revolution, the ability to process enormous amounts of data, and the application of artificial intelligence (discussed in the next chapter) to both manufacturing and service delivery. Today, processing power and data storage are virtually free in the cloud, and a simple handheld iPhone has the same computing power as the room-sized IBM mainframe computer of the 1970s.
Technology is a major factor in our lives, helping us communicate with others around the world and across town, providing new opportunities for business to promote its activi- ties, and improving the quality of our lives. But what are the consequences of the extraordi- narily rapid pace of technological change? Has technology replaced human contact and, if so, what are the consequences of this change in how we relate to others? Who decides what technology should emerge and dramatically affect our lives? Should businesses be allowed to use technology freely or should there be some constraints on its use by business? Who should determine what these constraints are?
Technology Defined
Technology is a broad term referring to the practical applications of science and knowledge to commercial and organizational activities. The dominant feature of technology is change and then more change. As discussed at the beginning of this chapter, new technological breakthroughs are again changing our lives. Sometimes the pace of change is so fast and furious that it approaches the limits of human tolerance, and people lose their ability to cope with it successfully. Although technology is not the only cause of change in society, it
1 “Russians Charged With Interfering in U.S. Election,” The Wall Street Journal, February 16, 2018, www.wsj.com; and “12 Russian Agents Indicted in Mueller Investigation,” The New York Times, July 14, 2018, www.nytimes.com. 2 “Digital Pills That Talk to Your Doctor Are Here,” The Wall Street Journal, November 13, 2017, www.wsj.com.
Final PDF to printer
240 Part Five Business and Technology
law43665_ch11_237-260.indd 240 11/21/18 12:26 PM
is a primary cause. It is either directly or indirectly involved in most changes that occur in society, as noted in an article in Foreign Affairs:
“Technology has sped globalization forward, dramatically lowering communication and transaction costs and moving the world much closer to a single, large global market for labor, capital, and other inputs to production. Even though labor is not fully mobile, the other factors increasingly are. As a result, the various components of global supply chains can move to labor’s location with little friction or cost.”3
Another feature of technology is that its effects are widespread, reaching far beyond the immediate point of technological impact in unpredictable ways. Technology ripples through society until every community is affected by it.
A final feature of technology is that it is self-reinforcing. As stated by Alvin Toffler, “Technology feeds on itself. Technology makes more technology possible.”4 This self- reinforcing feature means that technology acts as a multiplier to encourage its own faster development. It acts with other parts of society so that an invention in one place leads to a sequence of inventions in other places. Thus, invention of the microprocessor led rather quickly to successful generations of the modern computer, which led to new banking meth- ods, electronic mail, bar-code systems, global tracking systems, and so on.
Phases of Technology in Society Seven broad phases of technology have developed, as shown in Figure 11.1. Societies have tended to move sequentially through each phase, beginning with the lowest technology and moving higher with each step, so the seven phases roughly represent the progress of civilization throughout history. The first phase was the nomadic-agrarian, in which people hunted wild animals for meat and gathered wild plants for food. The second was the agrar- ian, corresponding with the domestication of animals and plants. The first two used manual labor exclusively. The third was the industrial, characterized by the development of pow- ered machinery, first in the textile industry and later in many other forms of manufacturing. The fourth was the service phase, marked by the rise of service industries and intellectual labor. The fifth was the information phase. This phase emphasized the use and transfer
3 Erik Brynjolfsson, Andrew McAfee, and Michael Spence, “New World Order: Labor, Capital, and Ideas in the Power Law Economy,” Foreign Affairs, July/August 2014, www.foreignaffairs.com. 4 Alvin Toffler, Future Shock (New York: Bantam, 1971), p. 26.
Technology Level
Phases in the Development of Technology
Approximate Period Activity Primary Skill Used
1 Nomadic-agrarian Until 1650 Harvesting Manual
2 Agrarian 1650–1900 Planting and harvesting Manual
3 Industrial 1900–1960 Building material goods Manual and machine
4 Service 1960–1975 Providing services Manual and intellectual
5 Information 1975–2000 Thinking and designing Intellectual and electronic
6 Semantic 2000–today Relevance and context Intellectual and networking
7 Biotechnology 2016–today Application of engineering and biological sciences
Networking and artificial creation
FIGURE 11.1 Phases in the Development of Technology
Final PDF to printer
Chapter 11 The Role of Technology 241
law43665_ch11_237-260.indd 241 11/21/18 12:26 PM
of knowledge and information rather than manual skill. Businesses of all sizes, including the smallest firms, explored the benefits of the information age through the availability of nanotechnology and similar inventions. These inventions catapulted societies into cyber- space, where information is stored, ideas are described, and communication takes place in and through an electronic network of linked systems. The technology developed in this age provided the mechanisms for more information to be produced in a decade than in the previous 1,000 years.
The semantic phase, which began around 2000, saw the development of processes and systems to enable organizations and people to navigate through the expanding amount of links and information available on the Internet. Search engines, such as Google, employed massive clusters of computers to analyze the metadata or descriptive information embedded within web pages, documents, and files. A Google search for a specific airline flight, for example, might return links to a flight-tracking website, an estimated time of departure or arrival for that day’s flight, weather forecasts, and airport maps. Social interaction is an important part of the semantic phase. Services such as Facebook, Twitter, and LinkedIn analyzed the transac- tions and metadata from each user’s activity to suggest new contacts, entertainment, and links.
Scientists suggest that society is now in the midst of a seventh, phase dominated by biotechnology. Biotechnology uses biological processes in the development or manufacture of a product or in the technological solution to a problem. While the term biotechnology first appeared in 1919, the principles of engineering and biological sciences have recently been applied in such wide-ranging uses as food alterations, genetic research and cloning, human and animal health care, pharmaceuticals, and the natural environment.5
The Role of Technology in Our Daily Lives
Technology has been intertwined in our daily lives since the Industrial Revolution. The connection between the two became even stronger in the information, semantic, and bio- technology phases. Today, technology has the potential to influence every aspect of every individual’s global activity—driving innovation, affecting collaborative partnerships, and changing business–stakeholder relationships. It has created great opportunities for people— but also serious ethical and social challenges. This section will explore some ways in which major technologies have presented both opportunities and challenges for people in their daily lives.
The Presence of the Internet More people have more access to technology than ever before. Residents of developing countries increasingly enjoy energy-powered appliances, entertainment devices, and com- munications equipment. Individuals in developed countries in North America, Europe, portions of Asia, and the Middle East more than ever are dependent on electronic commu- nication devices for access to information and for interactions with others and businesses. In today’s environment, nearly every individual in a developed country has a desktop or laptop computer, tablet, mobile phone, and a host of other electronic devices to connect them with others in their family, neighborhood, country, or world and this is becoming true for more and more people in developing countries as well.
One of the most visible and widely used technological innovations over the past decade has been the Internet. Springing to life in 1994, this conduit of information revolutionized
5 For more information see The Industry Handbook: Biotechnology at www.investopedia.com; and Ashish Swarup Verma, Shishir Agrahari, Shruti Restogi, and Anchal Singh, “Biotechnology in the Realm of History,” Journal of Pharmacy and BioAllied Sciences, July–September 2013, pp. 321–3, www.ncbi.nlm.nih.gov/pmc/articles.
Final PDF to printer
242 Part Five Business and Technology
law43665_ch11_237-260.indd 242 11/21/18 12:26 PM
how business was conducted, students learned, and households operated. The Wall Street Journal reported that Generation Z, individuals born after 2000, access most of their video entertainment from Internet streaming services, such as YouTube (34 percent) and Netflix (27 percent), compared to traditional TV (27 percent).6
Any estimate of the number of Internet users is quickly out of date but some important trends have emerged. In 2008, China surpassed the United States with the most Internet users by country. By 2017, India surpassed the United States and Japan to become the country with the second largest number of Internet users. Indonesia, with 50.4 percent of its population using the Internet, moved up from eleventh place to fifth place based on number of Internet users by country by 2017. The top 10 countries by Internet usage in 2017 are shown in Figure 11.2.
This figure also shows the emerging markets for Internet usage: Africa (more than 8,000 percent growth since 2000), the Middle East (more than 4,000 percent growth), and Latin America/Caribbean (more than 2,000 percent growth). Developing countries, especially in the Southern Hemisphere, are catching up with developed countries in the integration of Internet usage into the lives of managers and citizens.
Thousands of new Internet users each day demonstrate the power of this technology as a force in our lives. The Internet is increasingly being used as a place for interpersonal communication, social networking, and shopping, as described later. Yet, technology experts are warning of the potentially negative impacts on our lives of dependence on technology.
Social psychologist Adam Alter warns that many children, teenagers, and adults are behaviorally addicted to modern digital products, indicated by the significant amount of time they are engaged in using their cellphones or other devices. Unlike a physical dependence on a habit-forming chemical substance such as heroin or nicotine, behavioral addiction refers to a compulsion to engage in rewarding behaviors, such as checking one’s Facebook feed, despite negative consequences. Alter says that some teenage boys spend weeks alone in their rooms paying video games, and Snapchat boasted that young users open their app more than 18 times a day.7
Technology manufactures are accused of contributing to the increasing behavioral addic- tion to technology. Some of the games available on an individual’s smartphone require that users pay money as they play. Obviously, the game producers want users to keep playing, and they often pretest different versions of a game before release to see which version is the hardest to resist or will keep users’ attention the longest. South Korea and China are considering legislative proposals, called Cinderella laws, to protect children from playing certain games after midnight. In China, there are camps where parents commit their chil- dren for months so that therapists can treat them for their technology addiction.8
When Facebook founder, Mark Zuckerberg, was challenged with the accusation that Facebook users were spending far too much time on the social network platform, he responded that he wanted his company and its product “to encourage meaningful social interactions.” He added, “time spent is not a goal by itself.”
Yet, a 2017 study conducted by the Royal Society for Public Health in the United Kingdom evaluated five of the most frequently used social networks, (Facebook, Twitter, Snapchat, Instagram, and YouTube), and concluded that all but one, You- Tube, had a negative effect on the user’s mental health. In another study, Tel Aviv
6 “How Gen Z Watches,” The Wall Street Journal, November 27, 2017, www.wsj.com. 7 “Why We Can’t Look Away from Our Screens,” The New York Times, March 6, 2017, www.nytimes.com. 8 “Why We Can’t Look Away from Our Screens,” The New York Times, March 6, 2017, www.nytimes.com.
Final PDF to printer
Chapter 11 The Role of Technology 243
law43665_ch11_237-260.indd 243 11/21/18 12:26 PM
University researchers found that people using Facebook can begin to feel that their own lives do not measure up to those of others, causing depression, especially among young people.9
Unwanted Technology Threats The presence of the Internet in our lives is a welcomed benefit, but it has also opened the door to various threats, such as spam and phishing. Spam refers to unsolicited commercial e-mails (also called junk e-mail) sent in bulk to valid e-mail and mobile accounts. These messages
9 “Zuckerberg’s Dilemma: When Facebook’s Success Is Bad for Society,” The Wall Street Journal, January 7, 2018, www.wsj.com.
FIGURE 11.2 Top 10 Internet Use by Country, 2017, and Growth in World Internet Usage by Region, 2000–2017
Sources: “Top 20 Internet Countries—2017” and “World Internet Usage and Population Statistics June 30, 2017—Update” Internet World Statistics, www.internetworldstats.com.
China
India
United States
Brazil
Indonesia
Japan
Russia
Nigeria
Mexico
Bangladesh
Top 10 Countries
Rest of the World
C o
u n
tr y
0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 900.0 1000.0
Internet Users, June 2017
Millions of users
2,237,370,522
1,648,197,097
0% 1,000% 2,000% 3,000% 4,000% 5,000% 6,000% 7,000% 8,000% 9,000%
North America
Oceania/Australia
Europe
Asia
Latin America/ Caribbean
Middle East
Africa
W o
rl d
R e
g io
n s
Millions of users
Internet Usage Growth, 2000–2017
Final PDF to printer
244 Part Five Business and Technology
law43665_ch11_237-260.indd 244 11/21/18 12:26 PM
can vary from harmless advertisements for commercial products to offensive material and finance scams. Spam has created problems for users as it has caused extra network traffic and wasted time sorting through the irrelevant or unwanted e-mails to access desired mes- sages. By the early 2010s, spam began to infiltrate e-mail accounts on mobile or cell phones.
As shown in Figure 11.3, the volume of spam messages around the world, as a percent- age of all e-mail traffic, began to fall somewhat, from nearly 70 percent in July 2014 to around 55 percent in 2017. The main reason was the overall heightened level of antispam protection, according to a spokesperson at Kaspersky Labs, the world’s largest antivirus and Internet security software company. Spam filters are now in place on just about every e-mail system, reducing the amount of spam reaching both personal and corporate user accounts. Also, aggressive action taken by governments, especially in the United Kingdom and United States, have created strong penalties for spammers caught sending out malicious e-mails.
Compounding the problem of spam or unsolicited commercial e-mail is phishing. This involved the practice of stealing consumers’ personal identity data and financial account credentials by using fake e-mails that appeared to be from legitimate businesses to trick users into divulging identifying personal data such as usernames and passwords, or to open attachments that installed viruses or malware (malicious software). A 2017 report from the Anti-Phishing Working Group (APWG), a U.S. industry association, reported a consistent stream of phishing activity, with several hundred companies targeted regularly. Phishing attacks occurred most frequently in the payment, financial, and webmail sectors. Of the nearly 8,000 attacks reported, many were spread via Facebook and half were hosted in the United States.10
Although Internet users were more aware of potential problems that might be encoun- tered when using their e-mail and smartphones and were taking precautions to prevent unwanted spam or phishing, new intrusions emerge, particularly through unwanted solici- tation calls to cell phones. These threats continue, and users need to remain vigilant.
10 “Phishing Activities Trends Report,” Anti-Phishing Working Group, published October 2017, www.antiphishing.org/reports.
FIGURE 11.3 Global Spam Volume as Percentage of Total E-Mail Traffic from January 2014 to July 2017
Source: “Global Spam Volume as Percentage of Total E-mail Traffic from January 2014 to July 2017,” The Statistics Portal, accessed February 1, 2017, www. statista.com/statistics/420391/ spam-email-traffic-share.
0
10
20
30
40
50
60
70
80
Ja nu
ar y
20 14
Ju ly
20 14
Ju ly
20 15
Ja nu
ar y
20 15
Ju ly
20 16
Ja nu
ar y
20 16
Ju ly
20 17
Ja nu
ar y
20 17
Final PDF to printer
Chapter 11 The Role of Technology 245
law43665_ch11_237-260.indd 245 11/21/18 12:26 PM
Public Access to and Use of Technology
Overall, the public has more access to and uses more technology than ever before. Yet, inequalities remain in individuals’ ability to access technology, whether within the United States or around the world. Certain technological devices, including mobile telephones, a new form of currency called bitcoin, and social media platforms, are more readily available to some than others. These issues are discussed in greater depth in this section.
The Digital Divide in the United States and Worldwide The gap between those who have access to the Internet through technology and those who do not is called the digital divide. Some people have Internet access through computers, cell phones, and other devices; others do not. People in developing countries often have less Internet access than people in developed countries; and within developed countries, persons of color and the less affluent often have less access. The presence of a digital divide is a problem because less advantaged individuals and societies may not enjoy the same benefits of technology as others.
In the United States, the government has acted to break down the digital divide. The U.S. government launched a $7 billion effort to expand access, chiefly thorough grants to build wired and wireless systems in the most technologically neglected areas of the coun- try. This government effort subsidized Internet upgrades for schools and libraries and pro- vided digital textbooks in poor and rural areas.11
By 2013, reports claimed that nearly 98 percent of American homes were able to access the Internet on some sort of high-speed broadband network, either at home or work. Yet, in 2017, the MIT Technology Review pointed out that “the U.S. has ‘a persistent, embarrass- ing digital divide’ that needs to be addressed at the highest levels.” Moreover, the report emphasized that, “mobile broadband access isn’t the same as at-home connectivity,” even though some people in the Federal Communication Commission and the executive branch of the federal government are making that case. Access to high-speed Internet services remains “uneven” for many Americans.12
Microsoft announced plans in 2017 to address the digital divide in the United States by harnessing the unused channels between television broadcasts, known as white spaces, to help get more of rural America online. The initiative targeted twelve states, including Arizona, Kansas, New York, and Virginia, to provide two million rural Americans with access to high-speed Internet by 2022. Microsoft’s president Brad Smith explained, “[white spaces are] the best solution for reaching over 80 percent of people in rural America who lack broadband today.” Microsoft also reached out to federal and state regulators to guarantee the use of unused television channels and investments in promoting the technology in these rural areas.13
The digital divide also persists globally. According to a United Nations report, by 2017, more than 52 percent of people on the planet still did not have Internet access, despite efforts by some technology companies. Many businesses saw providing Internet access at the bottom of the pyramid as a lucrative business opportunity.
11 “F.C.C. Chief Aims to Bolster Internet for Schools,” The New York Times, November 17, 2014, www.nytimes.com. 12 “The 2017 Digital Divide,” MIT Initiative on the Digital Economy, September 1, 2017, medium.com. 13 “To Close Digital Divide, Microsoft to Harness Unused Television Channels,” The New York Times, July 11, 2017, www.nytimes.com.
Final PDF to printer
246 Part Five Business and Technology
law43665_ch11_237-260.indd 246 11/21/18 12:26 PM
Smartphone maker BlackBerry unveiled a new model, the Aurora, exclusively targeting mobile phone users in Indonesia. Its low-cost touch-screen model retailed for 2.2 million rupiah, or about $190, and contained a number of special applica- tions for Indonesian users, including local banking and travel services and a direc- tory of halal food outlets, critical in the world’s largest Muslim-majority country. A few years later, BlackBerry shifted the manufacturing of the Aurora to Indonesia.14
Despite efforts undertaken by BlackBerry, as well as other programs launched to boost the digitally developing economies around the world, the United Nations reported “mas- sive disparities in connection speeds in different countries.” With average global Internet speeds at 7.7 megabits per second (Mbps), South Korea had an average broadband speed of 28.6 Mbps, but Nigeria had a slow 1.5 Mbps on average. Based on a 40-metric score, the average increase in broadband speed among developed countries was 4.7 points in the last 12 months [2016–2017], but only 2.4 points in developing countries.15
Mobile Telephones Mobile telephones, or cell phones, use radio technology to enable users to place calls from a mobile device, with transmission over a service area divided into small “cells,” each with its own low-power radio transmitter. The first generation of cell phones, introduced in the 1980s, were clumsy analog devices; today’s digital smartphones, by contrast, provide a range of applications, including e-mail and Internet access, voice communications, video recording, and many more.
Coca-Cola and Nokia first installed vending machines in Finland in 1997 that accepted payment via text message, or SMS as it was called then. In North America, mobile phones usage was initially mainly as a communications tool. But American cell phone users, and users in developing countries, have joined Europeans and Asians to embrace using their mobile phones for commerce. M-commerce, commerce conducted via mobile or cell phones, allows consumers to use their mobile phones as an electronic wallet. In a 2017 study conducted in nine countries, Mobile Ecosystem Forum found that 78 percent of the 6,000 individuals surveyed had made M-commerce purchases in the last six months. The report also showed what consumers were purchasing using mobile payments, where mobile payments were being used, and how consumers were using mobile payments, as shown in Figure 11.4.16
Mobile devices can be used for more than making calls or shopping. These devices can run apps and GPS systems, access the Internet, send text messages and photos, and stream music and videos. Use of mobile devices is the norm for the newest generation of consum- ers. Rytis Vitkauskas, founder and CEO of YPlan, said: “There’s an expectation that any transaction will take a minimum amount of effort. The Gen-Y person doesn’t really think about buying something as a transaction any more. It’s an act of consumption where pay- ment is an afterthought and must be seamless.”17 As Rimma Perelmuter, CEO of Mobile Ecosystem Forum, observed,
“The adoption of mobile money continues to advance. In developed markets, mobile payments and banking are driving a revolution in convenience. In growth
14 “BlackBerry Unveils Low-Cost Smartphone with Indonesia in Mind,” The New York Times, May 13, 2014, www.nytimes. com; and “BlackBerry Happy with Indonesian Market,” The Jakarta Post, October 25, 2017, www.thejakartapost.com. 15 “The UN Says the Global Digital Divide Could Become a Yawning Chasm,” MIT Technology Review, September 15, 2017, www.technologyreview.com. 16 “Mobile Commerce, Payments and Banking: 7 Key Facts,” Wirecard.com, April 27, 2017, blog.wirecard.com. 17 “One-click Checkouts and Pay-by-Selfie: The Rise of Mobile Commerce,” The Guardian, June 23, 2016, www.theguardian.com.
Final PDF to printer
Chapter 11 The Role of Technology 247
law43665_ch11_237-260.indd 247 11/21/18 12:26 PM
FIGURE 11.4 Use of Mobile Payments, by Country, 2017
Source: “Mobile Commerce, Payments and Banking: 7 Key Facts,” Wirecard.com, April 27, 2017, blog.wirecard.com.
(3) Mobile payments made by
0 5 10 15 20 25 30 35 40 45
Airtime transfer
Via mobile wallet+ (e.g., Apple Pay)
Via an app
Directly to mobile phone bill
Type credit or debit card information into
mobile website
(2) Mobile commerce usage in the last six months by country
0 20 40 60 80 100
France
Brazil
Germany
Global
United Kingdom
United States
India
South Africa
Nigeria
China
(1) Mobile payment usage by purchase
0 5 10 15 20 25 30 35 40
Service
Food/drink
Digital content
Mobile app
Physical product
markets, they are giving millions of people access to financial services for the first time. It’s important that the industry builds on this momentum. But overall, the news is good: mobile remains the key driver of online commerce.”18
18 “Mobile Commerce, Payments and Banking: 7 Key Facts,” Wirecard.com, April 27, 2017, blog.wirecard.com.
Final PDF to printer
248
law43665_ch11_237-260.indd 248 11/21/18 12:26 PM
The ability of a consumer to pay for products and services continues to be easier and easier, as discussed in Exhibit 11.A, as facial recognition and other technologies surfaced in the world of consumer purchasing.
But with the potential for greater mobile device activity worldwide, some stakeholder groups warned that increased usage would be accompanied by increased frustration. Crit- ics predicted more unwanted and unsolicited mobile text messages and incidents of mal- ware and spyware.
Another emerging technology that more and more people around the world are using in significant numbers is bitcoin. A bitcoin is a digital currency that operates independently of the banking system and uses encryption techniques to verify the transfer of funds. Some believe that the software that brought bitcoin into existence may also enable a fundamen- tally new way of transacting and maintaining records online—allowing people and banks to directly exchange money and assets like stocks and bonds without having to rely on expensive intermediaries. This innovation is discussed in detail in Exhibit 11.B.
Social Networking Social networking, a system using technology to enable people to connect, explore inter- ests, and share activities around the world, exploded onto the technology scene in the 2000s, altering many social and human interactions.
As with estimating the number of Internet users, any estimate on the number of people using social media is quickly outdated the moment the calculations are completed. What is undeniable is that the number of individuals using social media continues to rise, as shown in Figure 11.5. Facebook is the most frequently used social network, with more than 2.1 billion active users by 2018, with YouTube, WhatsUp, Facebook Messenger, and WeChat among the most popular social networks, all with around 1 billion users by 2018.19
19 “Most Popular Social Networks Worldwide as of January 2018, Ranked by Number of Active Users,” The Statistics Portal, accessed January 30, 2017, www.statista.com/statistics/272014.
Want to Pay at KFC? You Don’t Need Cash or a Credit Card
When customers walk into a Kentucky Fried Chicken store in Hangzhou, China, they encounter a modern, high-technology fast-food restaurant. An open design allows customers to look into the kitchen to see how their food is being prepared. Hanging plants create a friendly atmosphere. The expanded menu includes tuna-and-pesto paninis and quinoa-and-corn salads. When customers make their food selections, they have three options for payment: via smartphone, using QR codes printed on tables, or through a facial-recognition system that matches the consumer’s image to their Alipay digital wallets. Muktesh “Micky” Pant, CEO of Yum China, conceded he was skeptical of the emphasis on apps for pay- ment in the store, telling his team they were too complicated. His employees told him to “just hang on, and I’m glad I didn’t interfere. People have far more apps on their phone, and they are able to navigate them effectively.” Yum China collaborated with Alibaba Group Holding, the world’s largest retailer operating in over 200 countries. This partnership helped create a self-serve kiosk for customers to select their food items on a screen and then pay by looking into a camera, provided they have enabled their facial-recognition on their Alipay app. Customers can also use their smartphone to pay for their meal using a variety of apps, including Apple Pay, WeChat, Android Pay, Samsung Pay, and others. Mobile payments at Yum China’s 7,700 KFC and Pizza Hut restaurants represented 45 percent of sales by 2016.
Source: “Fast Food Gets a Reboot in China: Tuna-Pesto Paninis, Paid for by Facial Recognition,” The Wall Street Journal, November 6, 2017, www.wsj.com.
Exhibit 11.A
Final PDF to printer
249
law43665_ch11_237-260.indd 249 11/21/18 12:26 PM
Bitcoin: The Currency of the Future?
Initially many people thought a bitcoin was science fiction or something used by drug dealers and shadowy hackers looking to evade authorities. Starting in 2017, bitcoins emerged as a legitimate digital currency and quickly became the darling of Wall Street investors. In less than two days in December 2017, the price of one unit of the digital currency jumped to $16,000, briefly hitting $19,000 on some exchanges. Then, a week later, the value of the bitcoin plummeted 25 percent. By February 2018, bitcoin had plunged below $8,000, and four months later the value of a bitcoin was around $6,500. Peoples’ confidence in the security of bitcoin was shaken when it was reported that nearly $70 million worth of the currency had been stolen from a cryptocurrency-mining service called NiceHash following a security breach. Two weeks later, Korean-based Youbit went out of business after experiencing a second hack where digital thieves stole one-fifth of its clients’ bitcoin holdings. Yet, despite these risks, bitcoins continue to hold considerable potential as a new form of currency. Because bitcoin functions on a technology called blockchain, a relatively secure, non–record-based ledger form of accounting using cryptography, it offers a quicker and cheaper option for processing financial trans- actions. Bitcoin is considered desirable since the blockchain technique protects against things like identity theft and payment fraud more thoroughly than a credit-card transaction ever could. Others argue that bitcoin is riddled with problems, including the potential for tax evasion or to support illegal or unethical transactions. Perhaps the biggest issue with bitcoin is the general lack of understand- ing surrounding the cryptocurrency. Several studies have shown that people, including bitcoin users, do not really understand how bitcoin works and whether or not it is secure, as the incidents of cyberhacking attest.
Sources: “Bitcoin’s Wildest Ride: Up 40% in 40 Hours,” The Wall Street Journal, December 7, 2017, www.wsj.com; “Hackers Steal $70 Million in Bitcoin,” The Wall Street Journal, December 7, 2017, www.wsj.com; “Bitcoin Exchange Goes Bust After Hack,” CNN, December 20, 2017, money.cnn.com; “Bitcoin Is Falling Fast, Losing More Than Half Its Value in Six Weeks,” The Wall Street Journal, February 2, 2018, www.wsj.com; and “The Pros and Cons of Bitcoin,” Investor Place, May 7, 2018, www.investorplace.com.
Exhibit 11.B
FIGURE 11.5 Americans with a Social Profile, 2008–2017
Source: Extracted from “Percentage of U.S. Population with a Social Media Profile from 2008 to 2017,” The Statistics Portal, accessed January 30, 2017, www.statista. com/statistics/273476.
0
10
20
30
40
50
60
70
80
90
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
P e
rc e
n ta
g e
o f
U .S
. p o
p u
la tio
n
Year
Clearly the dramatic rise in social networking has taken the world by storm and has become a central aspect of individuals’ lives. With these new ways to interact with others comes additional responsibilities to ensure that the interactions are ethical and socially beneficial as individuals and businesses began to realize.
Recently individuals discovered that their social media sites were accessed by various companies, especially when seeking employment. Carnegie Mellon University researchers
Final PDF to printer
250 Part Five Business and Technology
law43665_ch11_237-260.indd 250 11/21/18 12:26 PM
examined Google’s ad-targeting system and found that male web users were six times more likely than female users to be shown ads for high-paying jobs. Veterans learned that they were automatically disqualified for civilian jobs because human resources software used by employers did not recognize the skills they had acquired in the military. Researchers believed that programmers had embedded biases into the software without realizing it.20
As social networking sites become more and more embedded in the lives, businesses and users need to ensure that the social network sites enhance our lives, not lead to serious mental or physical problems.
Ethical Challenges Involving Technology
With each new technological innovation comes the important ethical question: Should we develop and offer the new technological application? At present, many inventors, computer programmers, and business managers appear only to be asking: Can we develop and offer the new technological application? Both questions are paramount as technology continues to influence individuals, businesses, and society interactions in the world in which we live. Some of the most profound ethical issues involve privacy and free speech.
The Loss of Privacy The right to privacy, as introduced in Chapter 5 and also discussed in Chapters 14 and 15, refers to a person’s entitlement to protection from invasion of his or her private life by the government, business, or other persons. In many respects, the rise of the Internet and the Information Age have led to a loss of privacy. According to Richard Clarke, former senior White House cybersecurity adviser:
“Over time there will be few people who recall pre-Information Age privacy, more people who will have grown up with few expectations of privacy. While a backlash against the erosion of privacy is possible, it is more likely that people acting on their fear of big government and big corporate data will be a minority.”21
Individuals are indeed under a technology microscope with vast amounts of data col- lected each minute and available to be analyzed in great detail, sometimes by people with the individuals’ interests in mind, such as marketers, job recruiters, and loan grantors, but also by others who have criminal motives. Facebook announced in 2018 a data partnership with four Chinese electronics firms, bringing the number to 60 different data sharing part- nerships since 2007.22
This dramatic increase in data sharing has led to some users to ask: Can what I post online or store on my electronic devices be used against me if accessed by government enforcement agencies? Recently, this issue arose when the FBI sought to compel Apple to unlock the phone of a man involved in a terrorist attack, the focus of the discussion case at the end of this chapter. But online activity can be used as evidence in everyday legal proceedings, too.
According to an online transparency report, Facebook received 14,274 requests involving 21,731 accounts from U.S. law enforcement agencies in just six months. That is far more than companies like Twitter, which received just 1,622 requests
20 “How Social Bias Creeps Into Web Technology,” The Wall Street Journal, August 21, 2015, www.wsj.com. 21 “Will Privacy Be a Thing of the Past?” The Wall Street Journal, July 8, 2014, blogs.wsj.com. 22 “Facebook Confirms Data-Sharing Deals with Chinese Tech Firms,” The Wall Street Journal, June 5, 2018, www.wsj.com.
Final PDF to printer
Chapter 11 The Role of Technology 251
law43665_ch11_237-260.indd 251 11/21/18 12:26 PM
during the same period. Facebook provided information for nearly 80 percent of those requests. Nevertheless, the practice remains controversial, especially when law enforcement casts a wide net.23
Invasions of individual privacy come from many different directions. Automobiles are becoming smarter, with global positioning systems, Internet connections, data recorders, and high-definition cameras. While automakers say they are only responding to consumer demands, these new technologies increase the number of people with access to individu- als’ data. In 2014 a law was introduced in the United States that would enable car owners to control the data collected on the in-car device called the event data recorder, commonly known as a black box. The legislation was spurred by the clash over the use of personal data by law enforcement agencies and insurance companies, seeking to use the information against the car owners.
Ethical challenges on how this information is collected and analyzed, and by whom, are becoming increasingly salient.
Free Speech Issues Another important ethical issue posed by advances in technology involves free speech. As discussed in Chapter 5, individuals have certain ethical rights, including the right to free speech. However, this right is not absolute and must be weighed against its consequences for the community. For example, an individual is not permitted to yell “fire” in a crowded movie theater, even though some might see this as an expression of free speech, since the potential harms caused by panicked moviegoers outweighs the right of free expression. The issue of free speech was at the core of Elonis v. United States in 2015.
Anthony Elonis was accused of threatening his estranged wife based on a series of Facebook posts. Elonis likened the posts to Eminem’s Grammy-winning songs “Kim” and “Kill You,” which included threats of violence. He argued that he was only venting frustration after a run of personal setbacks, including the collapse of his marriage and loss of his job. He thought, like the artist Eminem, that he was just expressing his thoughts to a crowd, those accessing his Facebook page, as the singer had to his concert audience. The Justice Department argued that Elonis’s posts indi- cated a “clearly sinister meaning of a threat” and were meant as expressions of his intent to harm his wife. The Supreme Court overturned Elonis’ earlier conviction arguing that criminal threats cannot be based solely on whether a reasonable person would regard communications posted on social media or elsewhere as threatening.24
Other controversial issues involving free speech have appeared recently, such as when Facebook shutdown a popular anonymous discussion board used by Facebook employees in 2016. FB Anon was a discussion forum that featured conservative political views that some claimed generated into racist or sexist comments. Facebook defended their actions by saying, “A cornerstone of our culture is being open. The FB Anon internal Facebook group violated our terms of service, which require people who use Facebook, including our employees, to use an authentic identity on our platform.” Facebook reminded their employees that there were other forums where they could discuss confidential matters, but not anonymously. Some employees disagreed with Facebook’s actions, saying that free
23 “Surveillance Society: Throw the (Face)book at ‘em,” Pittsburgh Post-Gazette, July 20, 2015, www.post-gazette.com. 24 “In Social-Media Era, When Is Free Speech Illegal?” The Wall Street Journal, November 23, 2014, online.wsj.com; and “Supreme Court Overturns Conviction for Threats on Facebook,” The Wall Street Journal, June 1, 2015, www.wsj.com. Also see Elonis v. United States at www.scotusblog.com/case-files/cases/elonis-v-united-states.
Final PDF to printer
252 Part Five Business and Technology
law43665_ch11_237-260.indd 252 11/21/18 12:26 PM
speech was paramount and this forum provided “lots of information that you would not have had otherwise.”25
Undoubtedly, the debate over free speech versus censorship will continue and likely inten- sify as the frequency of using public forums on Facebook and other social network mediums also increases. In many countries around the world, the government has stepped in to control the Internet or social media sites under the banner of national security. These actions directly pit government interests against individual rights. This conflict is discussed next.
Government Censorship of Free Speech
Governments play various and sometimes conflicting roles with respect to an individual’s free speech. In some countries, particularly in nondemocratic regimes, governments censor and restrict citizen’s free speech. In democratic countries, the role of government is more likely to look out for the public good and protect intellectual property; that is, the private own- ership of certain kinds of information and a citizens’ right to express themselves. What is the appropriate role of government in controlling use of the Internet and of citizens’ free speech? Does the government overstep its authority, for example, when imposing censorship on social media sites? These various government approaches to free speech are addressed next.
In some nondemocratic or authoritarian societies, governments have attempted to limit their citizens’ access to the Internet based on political, security, and religious grounds. These efforts have become increasingly more common and more sophisticated in recent years.
∙ China. In 2017, China announced it would impose new rules controlling its citizens’ use of instant-messaging apps, video streaming, and other content platforms. The gov- ernment argued that these platforms were being used to engage in illegal behavior and must be stopped. The Cyberspace Administration of China said, “the new technologies can be used by criminals to spread illegal information and undertake criminal activity, harming the lawful interests of citizens, legal persons, and other organizations.”26 These rules affected the 700 million Internet users in China.
∙ Pakistan. During the past decade, the Pakistani government, with the support of con- servative Islamic groups, broadened an existing ban on social networking sites. In 2016, the Pakistani legislature passed the Pakistan Electronic Crimes Act (PECA). PECA allows the government to issue social media takedown notices for any material deemed to be “in the interest of the glory of Islam or the integrity, security or defense of Pakistan . . . or public order, decency or morality.”27 Within a year after the law came into effect, at least 147 people had been arrested and 194 cases registered under the law for various offences, including online sexual harassment, according to the Pakistani interior ministry. Many of those accused were told their social media activities were being closely monitored, leading to their detention or arrest.
∙ Iran. Since 2009, after contentious presidential elections that pitted various religious groups against each other, the elected Iranian government banned Facebook, Twitter, YouTube, and later Instagram. Based on the ruling party’s religious-political stance and the country’s official philosophy: “the media should be used as a forum for healthy encounter of different ideas, but they must strictly refrain from diffusion and propaga- tion of destructive and anti-Islamic practices.” When protests broke out in December
25 “Facebook Shut Down Employee Chat Room Over Harassing Messages,” The Wall Street Journal, August 16, 2017, www.wsj.com. 26 “Chinese Internet Regulators Target Social Media Use,” The Wall Street Journal, October 30, 2017, www.wsj.com. 27 “Social Media Crackdown Stifles Dissent in Pakistan” Aljazeera, November 24, 2017, www.aljazeera.com.
Final PDF to printer
Chapter 11 The Role of Technology 253
law43665_ch11_237-260.indd 253 11/21/18 12:26 PM
2017 in opposition to the government’s economic policies, the regime renewed its ban of mobile Internet access and blocked apps including Telegram and Instagram.28
∙ North Korea. North Korea is one of the world’s most notorious censors of the Internet. In 2013 the Korean government adopted a policy that only foreigners could conduct Inter- net searches on mobile devices and laptops; its citizens could not. In 2016, the North Korean government went further, formally blocking all access by its citizens to Face- book, Twitter, YouTube, and other social media platforms. These actions made it more difficult for its citizens to post real-time information about conditions in North Korea.29
In each of these instances, governments intervened to restrict their citizens’ access to information and various Internet and social media sites, generally to suppress political dissent or to impose particular religious or ideological views. In most democratic, West- ern nations, such interventions would not be tolerated. Sometimes a government accesses information for the public good and limits individual rights; while at other times, govern- ments support individuals’ control over their personal information.
The Impact of Scientific Breakthroughs
Dramatic advances in the biological sciences have propelled the impact of technology on our lives. Recent unprecedented applications of biological science have made possible new, improved methods of agricultural food production as well as medical care, but they have also posed numerous ethical challenges regarding safety and the quality of life. Four of the most profound impacts on our lives come from the scientific breakthroughs in genetically modified (GM) or engineered foods; the sequencing of the human genome and the use of genetic information; the advent of biotechnology and the resulting stem cell research; and the development of radically new medical procedures, delivery, and record keeping. These topics are discussed in this section.
As Bill Joy of Sun Microsystems warns, speaking of biotechnology as well as other innovative applications of science, “21st century technologies . . . are so powerful that they can spawn whole new classes of accidents and abuses. Most dangerously, for the first time, these accidents and abuses are widely within the reach of indi- viduals or small groups. They will not require large facilities or rare raw materials. Knowledge alone will enable the use of them.”30
Genetically Engineered Foods The biotechnological revolution resulted in applications for use by the agricultural indus- try and brought promises of larger than ever crop production through advances in genetic engineering of food. Genetic engineering involves altering the natural makeup of a living organism and allows scientists to insert virtually any gene into a plant and create a new crop or a new species.
Genetically modified foods, or GM foods, are foods that are processed from genetically modified crops. The explosion of GM foods into our food chain in just a few decades was remarkable. In 1982 the first tomato plant was genetically engineered. Corn was geneti- cally modified to develop a resistance to insects, and soybeans were genetically modified to resist the weed-killer Roundup, enabling farmers to spray for weeds without harming 28 “Iran Moves to Block Social Media Apps, Mobile Networks as Protests Spread,” Gizmodo, December 31, 2017, gizmodo.com. 29 “North Korea Announces Blocks on Facebook, Twitter and YouTube,” The Guardian, April 1, 2016, www.theguardian.com. 30 Bill Joy, “Why the Future Doesn’t Need Us,” Wired, April 2000, www.wired.com.
Final PDF to printer
254 Part Five Business and Technology
law43665_ch11_237-260.indd 254 11/21/18 12:26 PM
the crop. At first, expectations were high that these changes would increase crop yields per acre. However, results have been disappointing.
A New York Times report, using United Nations data, reported that there has been no discernable advantage in crop yields in the United States and Canada—measured by food per acre—when measured against Western Europe crop production, where significant genetically modified food controls are in place. A study by the National Academy of Sciences confirmed this finding when it stated that there was little evi- dence that the introduction of genetically modified crops in the United States has led to yield gains beyond those seen in conventional crops.31
Some critics charged that consuming genetically modified crops would harm humans. Despite a lack of scientific evidence that GM foods are harmful to humans, social advo- cates in Europe led the charge against genetically modified foods, calling GM foods “Fran- kenstein foods.”
In the late 2000s, both France and Germany passed national bans on the use of various kinds of GM seeds. Despite French and German farmers’ protests that the ban would inflict great economic harm on them and their countries’ economies, the German agriculture minister said, “The decision is not a political decision, it’s a decision based on the facts.” He affirmed the government’s commitment to protect the safety of consumers and the environment. Austria and Hungary also passed their own national bans on growing GM crops. While Europe continued to allow each nation to decide whether to allow the planting or sale of GM foods, the Euro- pean Union passed a GM food labeling law so that all European consumers can also make their own decisions to purchase this type of food or not.32
By contrast with Europe, GM foods became quite common in grocery stores in the United States. Although most GM corn grown in the United States was made into animal feed or ethanol, it was also processed into food industry staples such as corn syrup or tortilla chips. GM food has its advocates. Over one hundred Nobel laureates, individuals honored for their contributions to science, the arts, or global social issues, drafted a letter in 2016 that touted the value of GM foods for a ballooning global population. This group took specific aim at a global non-profit organization: Greenpeace.
In the Nobel Laureates’ letter, they wrote: “Greenpeace has spearheaded opposition to Golden Rice, which has the potential to reduce or eliminate much of the death and disease caused by a vitamin A deficiency (VAD), which has the greatest impact on the poorest people in Africa and Southeast Asia.” Greenpeace countered by explaining: “Corporations are overhyping ‘Golden’ rice to pave the way for global approval of other more profitable genetically engineered crops.” Dr. Richard J. Rob- erts, a Nobel Prize winner in 1993 for physiology and medicine, replied, “There’s been a tremendous amount of misinformation being put out by Greenpeace.”33
The debate over the human nutritional value of GM foods versus the potential for busi- nesses to profit from their development and distribution of these foods rages on.
It appears that the tide against GMO food in the United States was gaining momentum by the 2010s. In 2013, Ben & Jerry’s Homemade initiated a plan to eliminate GM ingredi- ents from its ice cream. In 2015, Chipotle Mexican Grille became the first major restaurant
31 “Doubts about the Promised Bounty of Genetically Modified Crops,” The New York Times, October 29, 2016, www.nytimes.com. 32 “Europe to Allow Two Bans on Genetically Altered Crops,” The New York Times, March 3, 2009, www.nytimes.com. 33 “Stop Bashing G.M.O. Foods, More Than 100 Nobel Laureates Say,” The New York Times, June 30, 2016, www.nytimes.com.
Final PDF to printer
Chapter 11 The Role of Technology 255
law43665_ch11_237-260.indd 255 11/21/18 12:26 PM
chain to serve only food free of genetically engineered ingredients. Whole Foods stores were on track to be free of all GMO products by 2018, and Walmart vastly expanded its selection of organic foods, free from genetic alternation.34
In contrast, Campbell Soup, makers of Pepperidge Farms, Prego, Plum Organics, and V8, in addition to its well-known soup lines, announced in 2016 that it would become the first major food company to disclose GMO ingredients. Some felt that Campbell’s action would risk a backlash by alienating consumers who believed that GM foods had adverse health effects, while others saw the company bowing to pressure to comply with increasingly popular GM food labeling laws. In July 2016, Vermont required disclosure of genetically engineered ingredients, a measure opposed by most major food companies.35
Sequencing of the Human Genome When Celera Genomics Group announced that it had finished the first sequencing of a human genome, the achievement was hailed as the most significant scientific breakthrough since landing a man on the moon. Strands of human deoxyribonucleic acid, or DNA, are arrayed across 23 chromosomes in the nucleus of every human cell, forming a unique pattern for every human. These strands are composed of four chemical units, or letters, used over and over in varying sequences. These replicated letters total 3 billion and form the words, or genes—our unique human signature—that instruct cells to manufacture the proteins that carry out all of the functions of human life.36 The identification of human genes is critical to the early diagnosis of life-threatening diseases, the invention of new ways to prevent ill- nesses, and the development of drug therapies to treat a person’s unique genetic profile.
Over a decade later, the Human Genome Project had fueled the discovery of more than 1,800 disease genes and more than 2,000 genetic tests for human conditions were ongoing. These tests enabled a countless number of patients to learn their genetic risks for disease and also helped health care professionals to diagnose disease. One major step forward was taken in 2005 with the creation of the HapMap, which catalogs common genetic variation, or haplotypes, in the human genome. By 2010, the third phase of the HapMap project was published, with data from 11 global populations, the largest survey of human genetic variation performed to date.37
However, in addition to the remarkable advances in understanding DNA, touted as one of humanity’s greatest achievements, numerous ethical challenges emerged in private and public research focusing on genetics.
One family, afflicted by a rare genetic heart disease called Brugada syndrome, wondered how others might react if they learned of the family’s medical condition. Would employers want to hire someone who might die prematurely or require an expensive implantable defibrillator? Would they be eligible for individual health care coverage or be able to afford life insurance if their condition were known? The underlying fear for this family and others with genetic conditions was whether they would be treated fairly if their genetic fingerprints became public.
The debate over whether advances in human genome sequencing and genetic research outweigh the risks or harms will continue for years. What is clear is that our scientific
34 “The GMO Fight Ripples Down the Food Chain,” The Wall Street Journal, August 7, 2014, online.wsj.com; and “Chipotle to Stop Serving Genetically Altered Food,” The New York Times, April 26, 2015, www.nytimes.com. 35 “Campbell Labels Will Disclose G.M.O. Ingredients,” The New York Times, January 7, 2016, www.nytimes.com. 36 “Genetic Secrets of Malaria Bug Cracked at Last” The Wall Street Journal, January 18, 2002, pp. B1, B6. 37 Unfortunately, a computer security audit revealed flaws in its site that required it to be taken down.
Final PDF to printer
256 Part Five Business and Technology
law43665_ch11_237-260.indd 256 11/21/18 12:26 PM
understanding of the human body and its makeup has changed, and significant technolog- ical innovations are on the horizon. What is not clear is who, if anyone, can manage these changes to better ensure the improvement of the quality of our lives and society.
Biotechnology and Stem Cell Research Complementing the discovery of DNA sequencing were numerous medical breakthroughs in regenerative medicine. Tissue engineering, the growth of tissue in a laboratory dish for experimental research, and stem cell research, research on nonspecialized cells that have the capacity to self-renew and to differentiate into more mature cells, were two such breakthroughs. Both offered the promise that failing human organs and aging cells could be rejuvenated or replaced with healthy cells or tissues grown anew. While the promise of immortality may be overstated, regenerative medicine provided a revolutionary technolog- ical breakthrough for the field of medicine.
Supported by private and government funding, hundreds of biotechnology companies and university laboratories were actively pursuing new approaches to replace or regenerate failed body parts. New discoveries were occurring quickly. Some promising breakthroughs included the following: researchers were able to insert bone growth factors or stem cells into a porous material cut to a specific shape, creating new jaws or limbs; genetically engi- neered proteins were successfully used to regrow blood vessels that might repair or replace heart valves, arteries, and veins; and the process to regrow cartilage was used to grow a new chest for a boy, and a human ear was grown on a mouse. A truly remarkable advance- ment in stem cell research occurred in China in 2018.
Chinese scientists announced they had cloned two monkeys by transplanting donor cells into eggs, an achievement that scientists predicted could lead to genetically engineered primates for drug testing, gene editing, and brain research. The technique used to clone the monkeys was based on the somatic cell nuclear transfer technique pioneered 20 years ago by Scottish scientists to clone a sheep, named Dolly. Qiang Sun, director of the Nonhuman Primate Research Facility said, “For the cloning of a primate species, including humans, the technical barrier is now broken.38
Medical Breakthroughs As discussed in one of the chapter’s opening examples, breakthroughs in pharmaceutical care and medicine are occurring at a breathtaking pace. Innovations abound and seem lim- ited only by our imagination.
Anita Roy had an impaired blood flow to the left side of her brain. Dr. David Langer, chair of neurosurgery at Lennox Hill Hospital in New York, was about to perform bypass surgery on slender, delicate arteries to restore the circulation and prevent Anita from having a stroke. But, oddly, everyone in the operating room was wearing 3-D glasses and Langer was using a videomicroscope. The images of Anita’s brain were shown on a 55-inch monitor and the scissors and scalpel used by Langer seems extraor- dinarily large and popped out of the screen vividly. The equipment produced magnified, high-resolution, three-dimensional digital images of surgical sites. Dr. Charles Branch, of Wake Forest Baptist Medical Center, praised 3-D surgery: “It’s like being in the Imax [Theatre]. It lets not only the surgeon but everybody else in the room see what’s going on. Instead of having to lean up against the microscope and strain my neck or back, I can stand comfortably, look at the big screen in front of me and work with my hands.”39
38 “China Breaks a Cloning Barrier: Primates,” The Wall Street Journal, January 24, 2018, www.wsj.com. 39 “Brain Surgery in 3-D: Coming Soon to the Operating Theatre,” The New York Times, January 8, 2018, www.nytimes.com.
Final PDF to printer
Chapter 11 The Role of Technology 257
law43665_ch11_237-260.indd 257 11/21/18 12:26 PM
Medical revolutions are not only occurring in the operating room but in remote villages in Africa. Technology has entered the world of delivering medical supplies using drones, an innovation adopted by UPS, the world’s largest package delivery company employing more than 434, 000 people globally.
In 2016, UPS announced a partnership with drone startup Zipline and Gavi, the Vaccine Alliance, to deliver blood for transfusions by drones throughout Rwanda. While Amazon, Domino’s Pizza, and other businesses speculated about drone delivery systems, UPS was experimenting with drone delivery and took a decidedly humanitarian approach. Piloting a program with the American Red Cross in 2016, UPS discovered that it could provide disaster relief through drone delivery. The new partnership with Zipline and Gavi enabled UPS to deliver life-saving medical supplies in Rwanda. The initial plan was for UPS-Zipline to make 150 blood deliv- eries a day from its central base in western Rwanda to 21 transfusing facilities within a 37-mile radius resulting in a 30-minute delivery commitment. “This is an elegant solution to a difficult problem,” said Dr. Seth Berkley, CEO of Gavi. “This would have been great in the Ebola outbreak, when we actually had a boat deliver- ing vaccines because of the poor road infrastructure.”40
According to the World Health Organization, rural Africa’s two billion people lack adequate access to essential medical care due to challenging terrain and roads. Zipline announced that it had plans to expand its delivery systems into Tanzania and other African nations within the next few years.
Technological breakthroughs in medicine bring challenges as well as benefits. Many in the health care field were overjoyed with the advances in electronic medical records, or EMR. By implementing EMR, patient data can be tracked over an extended period by multiple health care providers. It can help identify patients who are due for preventive checkups and vaccinations, or flag those whose vital signs like blood pressure are out of the normal range. EMRs are designed to help organizations provide efficient and precise care. Perhaps the most significant difference is that EMR records are universal, meaning that instead of having different charts at different health care facilities, a patient will have one electronic chart that can be accessed from any healthcare facility using EMR software.
However, EMRs also offer attractive data appealing to hackers, putting health care systems at the top of the list for cybercriminals. While hacking is discussed in more detail in the next chapter, the hacking of medical records places important infor- mation into the hands of those seeking to make money from their thievery. Hackers often use legitimate-looking e-mail attachments as a common way to acquire a patient’s login name and password information. This enables hackers to acquire sensitive information, such as credit card information, Social Security number, or driver’s license number, leading to identity theft. It is estimated that the average cost of cybercrime in 2017 reached $12.5 million per health care organization, a 69 percent increase from hacking costs reported in 2016.41
The controversies that emerge over scientific breakthroughs from advancements in technology—GM food production, the sequencing of the human genome, stem cell research, and medicine—raise serious ethical and social issues. How to maximize the benefits to individ- uals and society yet minimize or eliminate the negative consequences regarding these techno- logical developments must continue to be addressed, as new innovations appear on the horizon.
40 “UPS Wants To Be a Player in Drone Delivery, Starting in Rwanda,” Marketwatch, May 9, 2016, www.marketwatch.com. 41 “Medical Records: The Holy Grail of Data for Cybercriminals,” Pittsburgh Post-Gazette, January 15, 2018, www.post-gazette.com.
Final PDF to printer
258 Part Five Business and Technology
law43665_ch11_237-260.indd 258 11/21/18 12:26 PM
∙ Technology is the practical application of science and knowledge that is rapidly chang- ing and spreading across societies.
∙ Societies have sequentially moved through distinct phases of technology, always incor- porating a greater reliance on technology.
∙ Technology has exponentially increased its potential to influence every aspect of our lives—driving innovation, affecting collaborative partnerships, and changing business– stakeholder relationships. It also has contributed to behavioral addiction among some technology users.
∙ The presence of the Internet is a welcomed benefit, but also has opened the door to various threats, such as spam and phishing.
∙ Gaps between those who have access to the Internet through technology and those who do not is called the digital divide. This is a problem as the less-advantaged individuals and societies do not enjoy the same benefits of technology as others.
∙ With significant advances in technology come numerous ethical challenges, such as the loss of privacy and free speech. Citizens and consumers look to governments and busi- nesses to protect these ethical rights.
∙ Governments play various and sometimes conflicting roles with respect to an individu- al’s free speech.
∙ Genetically modified foods, sequencing the human genome, biotechnology and stem cell research, and other medical breakthroughs carry great promise for individuals in society, but have also raised serious concerns.
Summary
Internet Resources
www.antiphishing.org Anti-Phishing Working Group www.monsanto.com/innovations/modern agriculture Monsanto: What Is Modern Agriculture? www.bio.org Biotechnology Industry Organization www.digitaldivide.org Digital Divide Institute www.ecommercetimes.com E-Commerce Times www.eff.org Electronic Frontier Foundation genomics.energy.gov Genome Projects of the U.S. Department
of Energy, Office of Science isscr.org International Society for Stem Cell
Research www.internetsociety.org Internet Society socialmediatoday.com Social Media Today www.whatissocialnetworking.com Social Networking www.statisticbrain.com Statistic Brain Research Institute
Key Terms spam, 243 stem cell research, 256 technology, 239
behavioral addiction, 242 bitcoin, 248 biotechnology, 241 digital divide, 245 genetically modified foods, 253
human genome, 255 m-commerce, 246 mobile telephones, 246 phishing, 244 right to privacy, 250 social networking, 248
Final PDF to printer
Chapter 11 The Role of Technology 259
law43665_ch11_237-260.indd 259 11/21/18 12:26 PM
Discussion Case: To Lock or Unlock Your Phone: Personal Privacy or National Security
In 2015, Syed Rizwan Farook and Tashfeen Malik, a married couple, opened fire at an office party in San Bernardino, California, killing 14 people and injuring 22. Law enforce- ment officials believed these were acts of ideologically motivated terrorism. A few hours later, Farook and Malik died in a shootout with police. The subsequent Federal Bureau of Investigation (FBI) probe led them to Farook’s iPhone 5C, which had been issued by his employer, the county government. Although county officials gave the FBI permission to examine the phone, they did not have Farook’s passcode. The phone had a feature that would automatically erase all stored data after 10 unsuccessful password attempts.
The FBI then asked Apple, maker of the iPhone, to help them circumvent the customer’s data encryption. But the company refused. Apple CEO Tim Cook claimed that consumer privacy must be respected. He argued that compliance with the FBI request “would violate [Apple’s] First and Fifth Amendment rights: it would compel Apple to write computer code that undermines the company’s views on consumer security and privacy.”
The FBI maintained that the government had an overriding interest in obtaining infor- mation on the phone to protect the public from further acts of terrorism. During the Farook investigation, FBI director James Comey explained, “There has to be some solution that will allow us with lawful authority to be able to have the company unlock the device. [W]e have to find a way to help these companies understand what we need, why we need it, and how they can help, while still protecting privacy rights and providing network secu- rity and innovation.” A harsh critic of Apple’s position, Senator Tom Cotton of Arkansas, expressed the opinion that “Apple chose to protect a dead terrorist’s privacy over the secu- rity of the American people.”
Apple’s refusal was based on the opinion that to comply with the FBI’s wishes would require Apple to create a separate operating system for Farook’s phone and all future ver- sions of the iPhones. The new system, which would run parallel with the existing software, would not have the same level of security and privacy protections. Once the parallel oper- ating system was created, contended Apple, criminals and foreign governments could cir- cumvent the security of any phone simply by typing in the device’s identification number. Apple’s CEO (unlike his predecessor Steven Jobs, who had avoided weighing in on polit- ical or controversial issues) said that the company saw privacy as a fundamental human right and one of its core values. “We will not shrink from this responsibility. We need to decide as a nation how much power the government should have over our data and over our privacy,” said Cook.
Nearly all the world’s smartphones run on software developed by Google or Apple. According to court records, Google had been ordered to help federal agents open cell- phones in seven different states. Although the outcomes of these specific cases were not publicly known, federal prosecutors said that until late in 2015, when Apple began resist- ing such efforts, it was routine for judges to approve such requests.
Eventually, the FBI’s request came before the courts. The Justice Department argued that its request was limited to Farook’s phone and it was not trying to set a legal precedent, but it also admitted that there were 13 other pending cases in which the government was seeking court orders to force Apple to help it extract data from iPhones.
In February 2016, a federal judge ordered Apple to help the FBI circumvent the pass- code protection system on Farook’s phone based on a broad application of the All Writs Act of 1789. This act afforded the federal government widespread authority to access information based on national security. Apple’s Cook said the company would oppose the
Final PDF to printer
260 Part Five Business and Technology
law43665_ch11_237-260.indd 260 11/21/18 12:26 PM
order. In a strongly worded letter to Apple customers posted to the company’s website, Cook called the order “an unprecedented step which threatens the security of our custom- ers” with “implications far beyond the legal case at hand.” In a court filing, Apple claimed, “This isn’t a case about one isolated iPhone. No court has ever authorized what the govern- ment now seeks, no law supports such unlimited and sweeping use of the judicial process, and the Constitution forbids it.”
The day before the FBI director and Apple’s top lawyers were to testify before Con- gress, a federal judge in New York sided with Apple in a related case. Magistrate Judge James Orenstein rejected the Justice Department’s argument that the 18th century All Writs Act gave prosecutors the authority to compel Apple to help investigators bypass the passcode-protection system on an Apple iPhone seized in a drug investigation. He said the critical issues of 21st century privacy and technology should be decided by today’s law- makers, rather than by reinterpreting an old law.
Around this time, the media reported that an outside party had demonstrated to the FBI a possible method for unlocking Farook’s iPhone that, if successful, would eliminate the need for assistance from Apple. “This suggests that the very thing that Apple feared already exists in some form and it exists outside the walls of Cupertino [Apple’s home],” said attorney Edward McAndrew.
A month later, the FBI announced that it had cracked Farook’s iPhone and was dropping its legal case against Apple. A Justice Department spokesperson said, “While this particu- lar phone is no longer an issue, the broader fight over encryption-protected technology is likely to continue. It remains a priority for the government to ensure that law enforcement can obtain crucial digital information to protect national security and public safety.”
And the controversy may intensify in the future. FBI director Comey announced in April 2016 that the secret technique used to unlock Farook’s iPhone 5C, for which the FBI reportedly paid more than $1 million, would not work on newer iPhone models. Two years later, Apple announced that it was planning an iPhone update that would effectively disable the phone’s charging and data port—the opening where users plug in headphones, power cables, and adapters—an hour after the phone is locked. This change was seen a direct response to government efforts to unlock phones without the owner’s permission. “If we go back to the situation where we again don’t have access, now we know directly all the evidence we’ve lost and all the kids we can’t put into a position of safety,” said Chuck Cohen of the Indiana State Police task force on Internet crimes against children.
Sources: “FBI Director: Apple, Google Active ‘Above the Law’ By Locking Users’ Phones,” Daily Caller, November 3, 2014, dailycaller.com; “U.S. and Apple Dig In for Court Fight Over Encryption,” The Wall Street Journal, February 17, 2016, www. wsj.com; “Apple Files Motion Opposing Order to Unlock iPhone,” The Wall Street Journal, February 25, 2016, www.wsj.com; “Judge Sides With Apple in N.Y. Drug Case Involving Locked Phone,” The Wall Street Journal, February 29, 2016, www.wsj. com; “U.S. Says ‘Outside Party’ Could Unlock Terrorist’s iPhone,” The Wall Street Journal, March 22, 2016, www.wsj.com; “U.S. to Keep Pushing Apple to Unlock iPhone in New York Case,” The Wall Street Journal, April 8, 2016, www.wsj.com; and “Apple to Close iPhone Security Hole That Police Use to Crack Devices,” The New York Times, June 13, 2018, www.nytimes.com.
Discussion Questions
1. In the dispute between the FBI and Apple, which side do you support and why? 2. How would you counter the arguments offered by those on the other side of this debate? 3. Are there any circumstances in which you think the government’s right to information
should take precedence over an individual’s right to privacy? 4. Should any technology firm be allowed to create a privacy protection system that is so
impenetrable that it could never be overridden, regardless of the government’s need for this information?
Final PDF to printer
261
law43665_ch12_261-280.indd 261 11/22/18 10:25 AM
C H A P T E R T W E L V E
Regulating and Managing Technology The rapid advances in technology in just the past few decades have radically changed how business operates. More information than ever before—about individuals, organizations, and governments—is located on servers or in “the cloud,” and businesses increasingly include technology in their daily operations through e-business, robotics, artificial intelligence, and much more. These extraordinary developments challenge businesses and governments to manage information while protecting both data security and individuals’ privacy. What actions have governments and businesses taken, and what are the ethical implications of their actions?
This Chapter Focuses on These Key Learning Objectives:
LO 12-1 Identifying the various interventions undertaken by governments to regulate technology.
LO 12-2 Exploring how business accesses stakeholders’ personal information and understanding possible limits to this access.
LO 12-3 Understanding the increasing role of e-business in the global marketplace.
LO 12-4 Examining challenges businesses face in managing and adopting new technologies, such as the use of robotics and artificial intelligence, in business operations.
LO 12-5 Assessing the emerging role and responsibilities of the organization’s chief information officer and other organizational functions that are responsible to ensure information security and privacy.
LO 12-6 Understanding the threat of cybercrime, and the magnitude of the costs and possible causes of the increase in cybercrime.
LO 12-7 Identifying business responses and government efforts to combat cybercrime.
Final PDF to printer
262 Part Five Business and Technology
law43665_ch12_261-280.indd 262 11/22/18 10:25 AM
Over an 18-month period in 2017 and 2018, at least 15 separate cybersecurity breaches occurred at major retailers in the United States. Many of these attacks were caused by flaws in the company’s payment systems, either online or in stores. According to a KPMG study, 19 percent of consumers said they would completely stop shopping at a retailer after a breach, and 33 percent would take a break from shopping there for an extended period. The retailers hit by a cyberattack during these 18 months were Macy’s, Adidas, Sears, Kmart, Delta, Best Buy, Saks Fifth Avenue, Lord & Taylor, Under Armour, Panera Bread, Forever 21, Sonic, Whole Foods, Gamestop, and Arby’s.1
Many restaurant customers look forward to the creation of their personalized salad at a well-stocked salad bar. Yet, as most nutritionists warn, the food, and even the serving uten- sils, at salad bars are magnets for bacteria and viruses. Chowbotics, a Silicon Valley start-up, devised a partial solution to protect salad-bar customers: Sally the Salad Robot. Customers simply touch a screen to place their orders, choosing from a menu of recipes or designing their own salads. “Sally” calculates the number of calories per salad and drops the selected ingredients into a bowl in less than a minute. Despite “her” critics, Chowbotics’ executives argue that “Sally” will be good for job creation. There is going to be the need for “logistics companies, cleaning companies, service companies, robot repair companies,” said Charlie Ayers, Chowbotics’ executive chef, “Human interaction with Sally is not going away.”2
Who should protect people from attacks on the theft of their personal data, as shown in the example above? How can technology users guard against the inappropriate use of personal information? Are jobs protected as technology takes over more and more activi- ties in the workplace? What role do governments or businesses need to play to protecting individuals’ privacy and job security?
As we experience more and ever-newer technologies in our lives, Elon Musk, CEO of Tesla and SpaceX, warned of the dangers of one such technology, artificial intelligence (AI):
“The least scary future I can think of is one where we have at least democratized AI because if one company or small group of people manages to develop godlike digital superintelligence, they could take over the world. At least when there’s an evil dicta- tor, that human is going to die. But for an AI, there would be no death. It would live forever. And then you’d have an immortal dictator from which we can never escape. If AI has a goal and humanity just happens to be in the way, it will destroy humanity as a matter of course without even thinking about it. No hard feelings.”3
As this quotation implies, developments in technology and innovation need to be care- fully monitored. Artificial intelligence, for example, can be used to free individuals from tedious or dangerous tasks. But, as Musk argued, it also has the potential to turn on and harm humanity.
Government Regulation of Technology
With the increased use of the Internet and cloud storage of personal information, some governments have stepped in to protect their citizens. In 2014, an important legal case in Europe raised the issue of the right to be forgotten, meaning an individual’s right to have their personal information removed from online search results upon request.
1 “If You Shopped at These 15 Stores in the Last Year, Your Data Might Have Been Stolen,” Financial Times, July 10, 2018, www.ft.com. 2 “A Robot Makes a Mean Caesar Salad, but Will It Cost Jobs?” The New York Times, October 6, 2017, www.nytimes.com. 3 “Elon Musk Warns A.I. Could Create an Immortal Dictator from Which We Can Never Escape,” CNBC, April 6, 2018, www.cnbc.com.
Final PDF to printer
Chapter 12 Regulating and Managing Technology 263
law43665_ch12_261-280.indd 263 11/22/18 10:25 AM
The right to be forgotten concept was upheld when the European high court ruled against Google in a dispute with an individual user, a Spanish attorney. The attorney had sued, asking that Google remove from its search results some personal information about him that he believed was damaging. The court agreed with the attorney and ordered Google to set up a system to respond to requests from European customers. This case and its ramifications are further explored in a case at the end of this book.
By 2018, the European Union passed the General Data Protection Regulation (GDPR), regulating the processing of personal information of EU residents by an individual, a com- pany, or an organization. It gives people more control over their personal data and forces companies to make sure the way they collect, process, and store data is safe.4
Governments also have protected individuals and companies’ ideas. With advances in technology, protecting the ownership of these ideas have become more challenging than ever. The ideas, concepts, and other symbolic creations of the human mind are often referred to as intellectual property. In the United States, intellectual property is protected through a number of special laws and public policies, including copyrights, patents, and trademark laws. Not all nations have policies similar to those in the United States.
The illegal copying of copyrighted software, or software piracy, is a global problem. According to the Business Software Alliance (BSA), in a survey of more than 20,000 con- sumers and PC users in 110 national and regional economies, 37 percent of the software installed on personal computers around the world in 2018 was not properly licensed. This problem is critical for businesses, who spend nearly $359 billion a year worldwide to pre- vent hacking vulnerabilities due to unlicensed software used by employees.5
In 1998, the United States passed the Digital Millennium Copyright Act, making it a crime to circumvent antipiracy measures built into most commercial software agreements between the manufacturers and their users. In 2015, six people pleaded guilty to charges related to more than $100 million in stolen software, in one of the largest such piracy schemes pros- ecuted by the U.S. government. The theft including about 170,000 access codes for Adobe Systems and Microsoft products, including Windows 7 and Windows XP.6
In China, the government announced that computer makers must ship all their prod- uct with licensed operating systems preinstalled, and inspected all government computer systems for licensed software. To emphasize its commitment to the enforcement of this law, China sent 11 people to prison for manufacturing and distributing pirated Microsoft software throughout the world. Microsoft called the group part of “the biggest software counterfeiting organization we have ever seen, by far” and estimated its global sales at more than $2 billion.7 Laws attempting to stem software piracy and reinforce intellectual property rights exist in many other countries, including Saudi Arabia, the United Arab Emirates, Vietnam, and India.8 As expected, some laws are more rigorously enforced and more successful in stemming the use of pirated software than others.
4 “2018 Reform of EU Data Protection Rules,” European Commission, n.d., ec.europa.eu; and “What Is GDPR? Everything You Need to Know about Europe’s New Data Law,” CNN Tech, May 21, 2018, money.cnn.com. 5 “Software Management: Security Imperative, Business Opportunity,” 2018 BSA Global Software Survey, 2018, gss.bsa.org. 6 “Six Plead Guilty in $100 Million Software Piracy Case,” The Mercury News, December 18, 2015, www.mercurynews.com. 7 “Chinese Court Jails 11 in Microsoft Piracy Ring,” New York Times, January 1, 2009, www.nytimes.com. 8 For additional information on the U.S. Digital Millennium Copyright Act, see “About the Digital Millennium Copyright Act,” Knowledge Base, Indiana University, May 14, 2018, kb.iu.edu/d/alik; and, for information on India’s Copyright Amendment Act, see “The Indian Copyright (Amendment) Act, 2012 and Its Functioning So Far,” Intellectual Property Watch, October 23, 2014, www.ip-watch.org.
Final PDF to printer
264
law43665_ch12_261-280.indd 264 11/22/18 10:25 AM
Should the government regulate individual access to the Internet and services delivered online? Exhibit 12.A describes government rules on net neutrality, which refers to the principle that Internet service providers should give customers equal access, that is, they should not favor or block particular content and applications.
Next the focus shifts to business organizations and their collection of confidential infor- mation and the potential for invasions of privacy or lack of security measures. How much information about the company’s stakeholders should be acquired or shared? How much protection is necessary to safeguard individual and corporate confidential information?
The Role of Technology in Business
In the course of conducting ordinary business, all companies utilize technology in their operations. Technology provides access to various types of information, the opportunity for electronic transactions, the use of robotics or automation, and the assimilation of artifi- cial intelligence into business practices. Many businesses have designated an information, security, or technology officer to oversee and manage the use of technology in their work- place. The benefits from these technological innovations and their challenges for business are discussed in this section.
Some businesses increasingly acquire large amounts personal information from various stakeholders and are then faced with the challenge of using it appropriately. Technology gives businesses access to a great deal of information-sometimes called big data. Yet, with
Net Neutrality: Repeal or Retain?
Net neutrality rules were created in 2015 under the Obama Administration, when the Democratic-controlled Congress voted to ensure that Internet providers treat all web traffic equally. Regulators, consumer advo- cates, and Internet companies were worried that broadband companies might wield their increasing power by restricting pathways to the Internet—blocking or slowing down apps owned or operated by their Internet providers. For example, under the net neutrality rules, the Internet provider Comcast could not charge Netflix users more for a faster path to Netflix programming than it could charge its own customers. This was gener- ally how the Internet had worked since its inception. In 2017, the Federal Communications Commission, controlled by Republican commissioners, voted 2-to-1 to open debate over the need for net neutrality rules. A few months later, Congress voted along party lines to overturn these rules. Within weeks, the attorneys general for 21 states had filed suits to challenge the FCC and Congress’s decisions launching a legal battle that could go on for years. Two months later, Washington became the first state to enact its own net-neutrality requirements. “We know when D.C. fails to act, Washing- ton state has to do so,” said Governor Jay Inslee. Nearly 800 technology-user companies sent a letter to the FCC challenging its decision and said they were “deeply concerned” about this action. “Our companies should be able to compete . . . on the quality of our products and services, not our capacity to pay tolls to Internet-access providers.” Other businesses, such as Alphabet’s Google and Facebook, supported this regulatory change. These companies’ activities were regulated by the Federal Trade Commission, which imposed less stringent standards. With net neutrality gone, Internet service providers were free to offer a website faster and more reliable delivery of its content in exchange for a fee. A broadband provider could also raise the transmission speed of its own content relative to that of its competitors. Broadband providers would also be free to block sites they find objectionable, which could open them up to political and public pressure.
Sources: “FCC Votes to Scale Down Net Neutrality Rules,” The Wall Street Journal, May 18, 2017, www.wsj.com; “The End of Net Neutrality: What It All Means,” CNN Tech, December 14, 2017, money.cnn.com; “What You Need to Know about Net Neutrality,” Politifact, December 14, 2017, www.politifact.com; “States, Activists Challenge FCC Rollback of Net-Neutrality Rules,” The Wall Street Journal, January 16, 2018, www.wsj.com; and “Tech Firms, Cable Companies Take Sides in Net-Neutrality Battle,” The Wall Street Journal, April 26, 2018, www.wsj.com.
Exhibit 12.A
Final PDF to printer
Chapter 12 Regulating and Managing Technology 265
law43665_ch12_261-280.indd 265 11/22/18 10:25 AM
large amounts of data come challenges of how to use that data in practical and useful ways. As Victor Nilson, senior vice president of big data at AT&T explains,
“We always start with the customer experience. That’s what matters most. . . . So how do we simplify the process for both the customer-care agent and the customer at the same time, whenever there’s an interaction? We’ve used big data techniques to analyze all the different permutations to augment that experience to more quickly resolve or enhance a particular situation. We take the complexity out and turn it into something simple and actionable.”9
Access to Stakeholders’ Personal Information Two major market stakeholders targeted by business organizations for the collection of information are employees and consumers. Examples of many companies’ inability to pro- tect the information about their customers was profiled at the beginning of this chapter.
The employer–employee relationship, discussed in Chapter 15, is changing due to technological advances. Some employees are embracing these changes; others are more hesitant.
More than 50 of the 80 employees at Three Square Market, a technology company in Wisconsin, voluntarily agreed to have the company implant a microchip under their skin between their thumb and index finger. The microchip allowed employees to enter the building by swiping a scanner at the front door or pay for food in the employee cafeteria. Sam Bengston, a software engineer at Three Square, volun- teered because “in the next five to ten years, this is going to be . . . normal. I like to jump on the bandwagon with these kinds of things early, just to say that I have it.” Others at Three Square were more cautious. “Because it’s new, I don’t know enough about it yet,” said Melissa Timmins, Three Square’s marketing director. “I’m a little nervous about implanting something into my body.”10
Is it acceptable for employers to implant microchips into their employees if it is vol- untary? What if it is a mandatory condition for employment? How will this technology be used? A Carnegie Mellon University professor commented, “Companies often claim that these chips are secure and encrypted, but encrypted is a pretty vague term which could include anything from a truly secure product to something that is easily hackable.” Other critics were concerned that this technology, while designed for one thing—such as entrance to a building or payment at the cafeteria—might be used for another. They warned, for example, that the company could begin tracking the length of employee bath- room or lunch breaks without their consent or even knowledge. The Three Square CEO assured critics that “All it is is an RFID chip reader. It’s not a GPS tracking device. It’s a passive device and can only give data when data’s requested.”11
Consumers’ shopping habits are also a rich source of data for businesses. While individ- uals may believe they are just an anonymous or nameless shopper among a pool of millions of shoppers, companies tracking big data, sometimes called metadata, can pick out specific details about an individual’s shopping habits, preferences, or tendencies. Researchers at MIT analyzed credit-card transactions by 1.1 million shoppers and claimed they needed only four bits of secondary information, such as location or time, to identify the unique
9 “How Companies Are Using Big Data and Analytics,” McKinsey & Company Interview, April 2016, www.mckinsey.com. 10 “Microchip Implants for Employees? One Company Says Yes,” The New York Times, July 25, 2017, www.nytimes.com. 11 Ibid., The New York Times, July 25, 2017, www.nytimes.com.
Final PDF to printer
266 Part Five Business and Technology
law43665_ch12_261-280.indd 266 11/22/18 10:25 AM
individual purchasing patterns of 90 percent of the people involved in their study. Even when the data was cleaned of names, account numbers, and other obvious identifiers, the shoppers’ identity could be found.12
Cybersecurity experts warned Verizon in 2015 that the company was putting the privacy of its customers at risk by using computer codes, called unique ID headers, to tag and follow its mobile subscribers around the web. These codes created databases that could make the consumers more vulnerable to covert tracking and profiling. Johnathan Mayer, a lawyer and computer science graduate student at Standard University, warned that the cybersecurity experts’ fears were valid. He used computer code to track individuals even after they tried to delete their digital footprints. “Verizon is not in a position to control how others use its [ID] headers,” said Mayer. “There is no doubt that this particular approach does introduce new privacy problems.”13
The collection of consumer information raises important ethical issues of privacy and security. (These issues are further explored in Chapter 14.)
The question of how much information companies should collect about their stakeholders and whether the collection of stakeholders’ information benefits these stakeholders or not remain controversial. Whether businesses have adequately built protections against unwanted invasions of stakeholder privacy and breaches of information security remain to be seen.
E-Business During the most recent phases of technological development, shown in Figure 11.1 in the prior chapter, electronic business exchanges between businesses and between businesses and their customers emerged. These electronic exchanges, generally referred to as e-business, consist of buying and selling goods and services between businesses, organizations, and individuals electronically, that is, via Internet-based systems. During the past decade, global e-business revenue increased at a fast pace, as shown in Figure 12.1, and more than that of traditional, or nonelectronic, business. E-business revenues were predicted to continue to rise signifi- cantly through 2020 and into the next decade, fueled by consumers in emerging markets.
12 “Metadata Can Expose Person’s Identity Even without Name,” The Wall Street Journal, January 2, 2015, www.wsj.com. 13 “Verizon’s Mobile ‘Supercookies’ Seen as Threat to Privacy,” The New York Times, January 25, 2015, www.nytimes,com.
FIGURE 12.1 Global E-business Sales Growing
Source: “Top E-commerce Trends to Inform your 2017 Marketing Strategy,” Smart Insights, June 7, 2017, www. smartinsights.com.
500
S a
le s
in b
ill io
n s
o f
d o
lla rs
1000
1500
2000
2500
3000
3500
4000
2019 (estimated)
Years
20182017201620152010 2011 2012 2013 2014
Final PDF to printer
Chapter 12 Regulating and Managing Technology 267
law43665_ch12_261-280.indd 267 11/22/18 10:25 AM
In the United States, online sales have consistently been around $300 to $400 billion annually since 2014. E-business sales in China, however, have risen dramatically since 2014, from around $400 billion annually to an estimated $2 trillion by 2019.
Businesses, especially small-sized companies, discovered that adopting new technology and embracing e-business opportunities could save them money in the long run and give them a competitive edge over rivals by enabling them to add new services and operate more efficiently. One United Kingdom website explains these advantages:
Worldwide Presence: The major advantage of engaging business online is to have presence nationwide or worldwide. IBM used e-business to provide services to the customer and was one of the first companies to use this approach. Other firms, such as Dell and Amazon, quickly followed, becoming global leaders in their markets.
Cost Effective Marketing and Promotions: Using the Internet to market products required a very simple strategy but generally guaranteed a worldwide reach. Pay per click advertising, for example, is an effective technique that ensures that a business only pays for advertisements that were actually viewed.
Better Customer Service: Many customers can visit a firm’s website at same time. Some websites have an online chat feature to help the customer to find out more about the product they are interested in. Moreover, orders can be placed online by process- ing payments securely over the Internet and products can be shipped directly to the customer. Online customers do not have to leave the house or workplace to shop.
The U.K. website also warns of the disadvantages of e-business or online transactions. Some consumers prefer to see or touch products physically before buying; maintaining the website can be costly; and consumers may have security concerns regarding their privacy. Yet, it appears that both businesses and consumers have embraced online sales, and e-business’s growth is likely to continue.
These new trends toward greater e-business gave rise to the notion of omnichannel, the idea that every distribution channel must work together to deliver a unified and consistent customer experience. Businesses are adjusting and attempting to serve the multiple needs of their customers.
Amazon is building dozens of “fulfillment centers,” brick-and-mortar stores located in major cities to have high-demand products close enough to consumers for same- day or next-day delivery. Brick-and-mortar stores, such as those operated by Apple or Verizon, understand that customers can find out about inventory on their phones before coming to the store. Retailers are focusing more on providing technical assis- tance for their customers in the stores, equipping employees with tablets or mobile technology to check inventory at other stores, locate complimentary accessories, or enable faster payment of items ordered.14
As technology changes the shopping experiences for customers, businesses, too, must understand how they need to change to accommodate and better serve their customers.
The Use of Robots and Artificial Intelligence at Work
Another area where technology has made a significant impact on business is the develop- ment of robotic engineering and the increased availability of robots. Initially, robots were
14 “Retail in Crisis: These Are the Changes Brick-and-Mortar Stores Must Make,” Forbes, February 12, 2014, www.forbes.com
Final PDF to printer
268 Part Five Business and Technology
law43665_ch12_261-280.indd 268 11/22/18 10:25 AM
used in high-risk situations, such as bomb detection or handling toxic chemicals, but as they have become more affordable and smarter, they have generated new opportunities for businesses. McKinsey and Company, a global management-consulting firm, recog- nized that robotic technology and its next-generation extension, artificial intelligence (AI), the ability of a digital computer or computer-controlled robot to perform tasks commonly associated with intelligent beings, will become pervasive throughout business practice.
“Senior executives need to understand the tactical as well as strategic opportunities, redesign their organizations, and commit to helping shape the debate about the future of work. We are on the cusp of a new age of automation. . . . Robots have long been familiar on the factory floor . . . but rapid strides being made in artificial intelligence and robotics mean machines are now encroaching on activities previously assumed to require human judgment and experience.”15
A new breed of machines, called collaborative machines, were designed to work alongside people in close settings. Many manufacturers, such as toy makers, used these machines—which were priced as low as $20,000—to increase overall productivity and lower labor costs.
Panek Precision, founded in 1945 as a small, precision machine shop in North- brook, Illinois, uses robots to place metal pieces into cutting machines and remove the parts after the cutting is completed. A job difficult for a human employee because of its tediousness, robots can accomplish the tasks quickly, effectively, and less expensively than machine operators paid $16.50 per hour. The robot doubled the output of a human worker “because robots work overnight and don’t take a lunch break and they just keep going,” said Panek Precision’s president.16
Robots have found their way into other type of work. They can replace workers that could be injured from doing the work previously assigned to humans. “It’s gotten easier to substitute machines for many kinds of labor. We should be able to have a lot more wealth with less labor,” explained economist Erik Brynjolfsson.17
However, the spread of robots in the workplace posed a clear threat to workers’ employ- ment. Within two decades, economists at Oxford University forecast, nearly half of the current jobs would be performed by machine technology. In the U.K., economists pre- dicted that 10 million jobs would be taken over by computers and robots over the next 20 years. They said that people earning less than £30,000, or about $46,000, a year, were most likely to see their jobs eliminated. The International Labor Organization estimated that millions of lower-paying jobs in southeast Asia could be displaced by automation during the next two decades.
In the crosshairs are middle-class workers such as clerks and bookkeepers. Today’s computers can conduct legal research, write stock reports and news stories, and translate conversations. At banks, machines can produce government-required documents to flag potential money laundering—all work done by humans a short time ago. Banks using auto- mated teller machines (ATMs) spread quickly throughout the United States from the 1980s to today. In 1985, the United States employed 484,000 bank tellers; by 2014 this number had fallen to 361,000, a drop of more than 25 percent.
Despite these “gloom-and-doom” predictions, some jobs appear to be safe from robotic takeover. McKinsey and Company predicted that jobs that involve managing and developing
15 “A CEO Action Plan for Workplace Automation,” McKinsey Quarterly, July 2017, www.mckinsey.com. 16 “Robots Work their Way into Small Factories,” The Wall Street Journal, September 17, 2014, online.wsj.com. 17 “What Clever Robots Mean for Jobs,” The Wall Street Journal, February 24, 2015, www.wsj.com.
Final PDF to printer
Chapter 12 Regulating and Managing Technology 269
law43665_ch12_261-280.indd 269 11/22/18 10:25 AM
people have an only 9 percent automation potential, and work that applies expertise to deci- sion making, planning or creative work has an 18 percent automation potential. Some experts claim, “robots aren’t destroying enough jobs. Too many sectors, such as health care or per- sonal services, are so resistant to automation that they are holding back the entire country’s standard of living.” Others argue that robots and advanced technology might actually increase labor demand, especially for low-skilled laborers. The presence of technology might allow low-skilled workers to perform tasks previously assigned only to high-skilled employees.
So, what role will robots play in the workplace of the future? The 2017 changes to the U.S. tax code provided incentives for businesses to invest in robotics technology, as they could deduct the entire cost of this investment over five years. Yet, no one fully under- stands how robots will influence business in the future. Will robots create more jobs than they replace? Will businesses wholly embrace the use of robots in the workplace, or not? What most experts in these fields seem to agree upon is that the potential impact of tech- nology through robotics will be undeniably profound.
Artificial intelligence is also making its mark in the workplace. According to a study conducted by IBM in 2017, more than 73 percent of 6,000 CEOs surveyed predicted that cognitive computing, or artificial intelligence, technologies would play a “key role” in their business’s future. And, 15 percent of the CEOs expected a return on their AI investments.
For example, Royal Dutch Shell, the energy company, had used AI to create algo- rithms enabling their managers to determine the most efficient allocation of work among employees and to coordinate with many self-employed and part-time work- ers. Shell applied AI technology to evaluate their digital business models in the car-maintenance sector to locate Shell staffers with the right expertise and assigned the job with a click. Using machine-learning software, Shell could match workers and projects, track performance, and evaluate this activity so it could refine the next round of matches.18
BlackRock, the world’s largest asset manager, used automated computer-driven systems, to make stock buy-or-sell decisions, relying more on artificial intelligence decision systems than human decision systems. Before the company had turned to artificial intelligence deci- sion making, BlackRock customers had complained that the human stockbrokers’ decisions often lagged behind their competitors and had begun to withdraw their money.19
Artificial intelligence has also been applied in the development of autonomous vehicles. Also known as driverless or self-driving cars, these vehicles are capable of sensing the sur- rounding environment and navigating without human input or control. The discussion case at the end of the chapter discusses the costs and benefits of autonomous vehicles.
How will these many technological breakthroughs be successfully managed? Many companies have created and empowered a new executive: the chief information officer, dis- cussed next.
The Chief Information, Security, Technology Officer
Businesses often entrust the responsibility for managing information technology and its many privacy and security issues to the chief information officer (CIO) or individuals with other similar titles such as chief security officer or chief technology officer. Many firms have elevated the role of their data processing managers by giving them the title of chief
18 “IBM: 73% of CEOs Predict AI, Cognitive Computing to Play ‘Key Role’ in Future of Business,” TechRepublic, July 6, 2017, www.techrepublic.com; and “Meet Your New Boss: An Algorithm,” The Wall Street Journal, December 10, 2017, www.wsj.com. 19 “BlackRock Bets on Robots to Improve Its Stock Picking,” The Wall Street Journal, March 28, 2017, www.wsj.com.
Final PDF to printer
270 Part Five Business and Technology
law43665_ch12_261-280.indd 270 11/22/18 10:25 AM
information officer. With the emergence of robotics and artificial intelligence in the work- place, the role of the CIO to manage this digital transformation has become even more critical. In a 2018 study of CIOs by Korn/Ferry International, 83 percent said their role was more strategic than it was three years ago. Another 67 percent said they were on their com- pany’s executive committee (a committee made up of the firm’s CEO and other senor executives), up from 55 percent in a similar survey from 2017.20 Recently this role has expanded even more to include broader responsibilities and greater influences on corpo- rate policies and practices. Given the increase in costly cyberattacks, as discussed next in this chapter, the CIO plays an even more critical role for the business organization.
According to Steven Fox, a security expert, “The CIO is a ‘General.’ Generals are not concerned with how the weapons function or how the rank-and-file are per- forming. This is the job of the lieutenants. The General focuses on the strategic application of resources on the battlefield. It is his/her duty to bring the plans of the sovereign (e.g. the CEO, the Board of Directors) to fruition.”21
In recent years, the CIO’s role has changed dramatically, becoming more integrated into the overall strategic direction of the firm. “CIOs themselves are in the midst of a make-or- break personal change-management project: CIOs who can only take orders, who can’t speak the language of the business, who can’t step out of the proverbial back-office and into the front lines of customer service, social media or supply chain management will soon go the way of the ancient tech gear,” warned Thomas Wailgum of CIO Magazine. Wayne Shurts, CIO of the grocery chain SuperValu concurred, “You’re part of the strategic leadership team; you’re on the inside of all the issues to help the company win today, tomorrow, and the next decade.”22 As shown in Figure 12.2, the duties assigned to a CIO are quite diverse.
20 “Tech Chief Role Grows More Strategic, Korn Ferry Survey Finds,” CIO Journal, June 19, 2018, blogs.wsj.com. 21 Steven Fox, “The Art of CIO Success,” CSO Security and Risk, June 29, 2009, blogs.csoonline.com. 22 “The New CIO Role: Big Changes Ahead,” CIO.com, August 20, 2010, www.cio.com.
FIGURE 12.2 The Roles and Responsibilities of the Chief Information Officer (CIO)
Sources: The Meta Group study of the role of the CIO can be found at “New Roles, New Responsibilities: Today’s CIO,” n.d., www.cioupdate. com. Additional information for this exhibit is from “What Are the Duties of a CIO?” eHow, n.d., www.ehow.com; and “The Duties of a CIO,” Ezine Articles, n.d., ezinearticles.com.
In a study conducted by the Meta Group entitled The CIO as Enterprise Change Agent, almost half (47 percent) of the CIOs surveyed reported that they have broadened their responsibilities beyond the traditional CIO-only role. Some of these emerging responsibilities include:
• Establishing an innovative language to enable everyone throughout the organization to be clear of the objectives, processes, and timetables for any project that involves technology or information.
• Providing structure to welcome inventive thinking and creating protocols for testing and reviewing these novel ideas.
• Educating others in the organization to help open the eyes of organizational members to what is possible or what is not regarding technological initiatives or information.
• Applying marketing knowledge to ensure that innovative ideas reach the proper stakeholders inside and outside of the organization and have a meaningful impact.
• Acting as the lead security officer to protect information and data integrity by overseeing all functions of information technology in the organization.
• Participating in organizationwide committees and projects to maintain a clear emphasis on the value of information, as well as protect against threats to information.
In the past decade since the creation of the CIO position within most business organizations, the CIO role has evolved from primarily being focused only on the collection and protection of information to a senior executive role essential to all business functions and operations.
Final PDF to printer
Chapter 12 Regulating and Managing Technology 271
law43665_ch12_261-280.indd 271 11/22/18 10:25 AM
IT issues have become more prominent in the national agenda, with implications for employment, privacy, and more. This emphasis was very evident in 2017, when the CEOs and CIOs of Apple, Amazon, and other technology companies met with President Trump at the White House. It was apparent from this gathering how critical the role of CIOs, with their expertise in many different fields of digital transformation and technology, had become not only for businesses but also for the country. CIOs clearly were ascending to greater leadership roles within the companies and for our society.23
Cybercrime: A Threat to Organizations and the Public
One of the most profound challenges for CIOs worldwide is to protect their organization’s information from unauthorized access or cybercrime. Cybercrime is criminal activity done using computers and the Internet. This includes anything from downloading illegal music files to stealing millions of dollars from online bank accounts. Cybercrime also includes nonmonetary offenses, such as creating and distributing viruses on other computers or posting confidential business information on the Internet. One of the largest cybercrimes in the United States occurred at Equifax, discussed in the case at the end of Chapter 6.
Cybercrime is often committed by individuals or groups gaining unauthorized access to a business organization through its computer system. They are called hackers. Hackers are individuals, acting alone or in groups often with advanced technology training, who, for thrill or profit, breach a business’s information security system. Hackers may be individuals employed by the business organization, or formerly employed, or are strangers and com- pletely unknown to the business. Some violations are simply careless actions, while others are intentional. Some of the hackers’ motivations for taking these actions are explored in the next section.
Exploring Why Hackers Hack Hacking into businesses and other organizations is undoubtedly a powerful and destruc- tive force. Why do hackers do it? The many reasons seem to be to make money, to retal- iate against a company or government, or to gain media attention for an issue or the hackers themselves, as shown in Figure 12.3. This section explores these selected moti- vations for hacking.
A website, called Hacker’s List, seeks to match hackers, who are seeking financial reward, with people looking to gain access to e-mail accounts, take down unflat- tering photos from a website, or gain access to a company’s database often out of
23 “The Morning Download: CIOs Expand Leadership Role as Digital Business Rises on National Agenda,” The Wall Street Journal, June 19, 2017, www.wsj.com.
FIGURE 12.3 Why Do Hackers Hack?
While hackers may have any number of reasons underlying the motivations for their actions, three of the more common motivations appear to be
• Hackers hack to profit from their actions—the financial-incentive motive, • Hackers hack in retaliation against action or inaction by a company or government—the retaliation
motive, • Hackers hack to gain media attention for their political or social viewpoint or to boost their own
ego—the seeking media attention motive.
Final PDF to printer
272 Part Five Business and Technology
law43665_ch12_261-280.indd 272 11/22/18 10:25 AM
retaliation for a prior action. In its first three months of operation, over 800 hacking jobs were posted for bid asking hackers—obviously using anonymous names—to bid on performing the task. A man in Sweden posted that he would pay $2,000 to anyone who could break into his landlord’s website. A California woman agreed to pay $500 for someone to hack into her boyfriend’s Facebook and Gmail accounts to see if he is cheating on her. And the list continues and grows each day.24
At the core of this business arrangement is the hacker’s motivation to profit from her or his computer skills and willingness to break the law for payment. The Hacker’s List web- site received a favorable review on hackerforhirereview.com, which specializes in assess- ing the legitimacy of such services. The owner of the site gave his top rating to Hacker’s List because “it’s a really cool concept” that limits the ability of customers and hackers to take advantage of one another.25
Other hackers are more politically motivated. In 2018, U.S. federal prosecutors accused nine Iranians of orchestrating years of cyberattacks on behalf of the Iranian government to steal data from hundreds of universities and businesses in the United States and abroad. Many of the hackers worked on behalf of the Islamic Revolutionary Guard Corps, an Ira- nian government group responsible for gathering intelligence. The group has been labeled a terrorist organization by the United States.26
Some hackers are just trying to prove a point—your system is vulnerable and subject to attack. Some of these efforts are welcomed by businesses; others are not. White hatters are individuals employed by businesses or governments to hack their systems deliberately to discover possible vulnerabilities of their own systems; typically, the discovered weak- nesses are used to strengthen these systems’ defenses. Grey hatters are hackers working on their own, often seeking media attention, but inclined to share their hacking exploits with the businesses they hacked in the expectation that the firm will pay them for the information. The grey hatters are less welcomed by businesses since they might expose the company’s security weaknesses publicly to bring greater attention to the need for more aggressive security measures.27
Whether the motivation is for personal profit, retaliation against a company or govern- ment, or to gain public attention, the instances of hacking are numerous and the potential for damage profound. The following section discusses the costs of cybercrime.
Costs of Cybercrime Stephen Schmidt, chief information security officer at Amazon Web Services explained in a 2017 interview,
“The biggest threat that most organizations are facing right now is a combination of excessive access for their employees and an increased focus by nation-state actors on access to sensitive information. . . . So we have to focus on how to reduce that access, how to prevent people from getting unnecessary access to information, whether it be sales data, intellectual property, material about the next thing you’re building, etc.”28
24 “Owner of Anonymous Hackers-for-Hire Site Steps Froward,” The New York Times, May 12, 2015, www.nytimes.com. 25 “Need Some Espionage Done? Hackers Are for Hire Online,” The New York Times, January 15, 2015, dealbook.nytimes.com. 26 “U.S. Charges Nine Iranians with Cyberattack Campaign,” The Wall Street Journal, March 23, 2018, www.wsj.com. 27 “Hacking—A New Classification System,” Truth Lies Deception and Coverups, www.truthliesdeceptioncoverups.info, accessed June 10, 2015. 28 “Where the Cybersecurity Threats Are,” The Wall Street Journal, December 18, 2017, www.wsj.com.
Final PDF to printer
Chapter 12 Regulating and Managing Technology 273
law43665_ch12_261-280.indd 273 11/22/18 10:25 AM
Moreover, artificial intelligence has made it easier for hackers to invade corporate secu- rity systems. Darktrace, a global IT security company, discovered a cyberattack on a client company in India that used basic machine learning, AI, to observe and learn patterns of normal user behavior inside the firm’s network. The machine began to mimic that normal behavior, effectively blending into the background and becoming harder for security tools to spot the intruder. Nicole Eagan, CEO of Darktrace, said, “We do imagine that there will be a time when attackers use machine learning and artificial intelligence as part of the attack. We have seen early signs of that.”29
What are the costs of these increasing hacks? In 2016, Steve Langan, chief executive at Hiscox Insurance, reported, “cybercrime cost the global economy over $450 billion, over 2 billion personal records were stolen, and in the U.S. alone over 100 million Americans had their medical records stolen.” The financial impact of cyberthreats has risen in the United States, with the average cost of a data breach now over $7 million, according to research by the Ponemon Institute. In the United Kingdom, the average cost of the most severe online breaches for large companies was valued at $2.24 million in 2015, up from under $1 million a year earlier.30
What accounted for these rising costs? A Poneman Institute study noted that most costs were incurred when detecting the intrusion and attempting to recover. It took an average of 46 days, at an average cost of $21,155 per day, for a business to resolve or recover from a cyberattack. Nevertheless, it was imperative that companies do so: seventy-six percent of U.S. adults surveyed said they would stop doing business with companies with a high number of data breaches.
In addition, the Poneman Institute study found that firms encountered significant costs due to disruption of the business organization’s computer systems. Business disruption accounted for 39 percent of total external costs, including business process failures and lost employee productivity. Breaches can also result in regulatory fines, legal costs, and an increase in the average cost for each lost or stolen record containing sensitive and con- fidential information—increasing from $217 in 2015 to $221 in 2016. A report from the U.S. Consumer Bankers Association indicated that re-issuing cards affected by the Target data breach cost the firm over $172 million.31
Globally a new type of cyberattack emerged—ransomware attacks. A ransomware attack is a kind of cyberattack in which malware (short for malicious software) locks the data on a victim’s computer and demands payment to decrypt the data. This type of attack was responsible for 51 percent of all cyberattack incidents reported in 2017. Symantec, a global security company, found that the average amount paid by victims of ransomware had risen to $1,077. It estimated that one out of every 131 e-mail messages worldwide harbored some type of cyberthreat.32
Research conducted by McKinsey & Company in partnership with the World Economic Forum suggested that companies were struggling to keep up with criminals when it came to cyber–risk management. As more and more highly visible breaches occurred with growing regularity, most technology executives believed that they were losing ground to cyberat- tackers. Current strategies were ineffective, and many managers admitted that they had
29 “Era of AI-Powered Cyberattacks Has Started,” The Wall Street Journal, November 15, 2017, www.wsj.com. 30 “Understanding the Costs of Cyber Crime: A Report of Key Findings from the Costs of Cyber Crime Working Group,” Home Office Science Advisory Council, January 2018, assets.publishing.service.gov.uk. 31 “Data Breaches Cost US Businesses an Average of $7 Million—Here’s the Breakdown,” Business Insider, April 27, 2017, www.businessinsider.com. 32 Cybercrime Costs the Global Economy $450 billion: CEO,” CNBC, February 7, 2017, www.cnbc.com; and “Ransomware Attacks around the World Grow by 50%,” BBC, April 27, 2017, www.bbc.com.
Final PDF to printer
274 Part Five Business and Technology
law43665_ch12_261-280.indd 274 11/22/18 10:25 AM
difficulty quantifying the true impact of risks and mitigation plans. Moreover, much of the economic harm incurred by business organizations came from an inadequate response to the breach rather than the breach itself.33 What businesses have done to minimize these costs is explained next.
Business Responses to Invasions of Information Security
Faced with the serious and costly threat of cybercrime, many businesses have gone to great lengths to build strong defenses to protect information and ensure stakeholder privacy. These defenses must be comprehensive, cut across all organizational functions and receive the support of the organization’s executive leadership.
Cybersecurity experts point out that most business organizations only protect their digital perimeters with intrusion detection devices. Yet, any strong-minded hacktivist or organized criminal syndicate can find a way to penetrate a business’s information sys- tem. Experts encourage companies to develop an incident-response plan for cyberattacks. These plans compliment the effort to prevent access to information but also focuses on what to do when a breach occurs.
McKinsey & Company partnered with the World Economic Forum to explore how companies were combating the increasing number of cyberattacks. They conclude that businesses around the world were losing this battle. As more and more highly publicized breaches occurred more frequently, most executives entrusted with their company's technology security admitted that they were unsuccessful in addressing the increasing cyberattackers. Past strategies were no longer effective, and many managers admitted that they were no longer able to quantifying the mounting risks. Moreover, much of the economic harm incurred by business organizations came from their lack of an adequate response to the breach, even greater damage than coming from the breach itself.34 What businesses have done to minimize these costs is explained next.
Most businesses have recognized the likelihood and damaging impact of a cyber- attack. After its own bank’s cybersecurity was breached, JPMorgan Chase CEO Jamie Dimon announced that his firm would double its spending on cybersecurity over the next five years, totaling more than $500 million annually. Other U.S. banks have followed this lead and quietly launched a doomsday project they hope will prevent a debilitating attack on the country’s financial system. Called the Sheltered Harbor, banks and credit unions controlling about 400 million consumer and business accounts require members to individually back up data so it can be available to other firms to serve the customers of a disabled bank.35
Technology-based firms are also addressing the issue of preventing cyberattacks or more quickly responding when the attacks occur. Facebook offered a privacy checkup to every one of its 1.28 billion users. Facebook CEO Mark Zuckerberg said the company is more sensitive to privacy and it also is good for business to be more vigilant. According to Pam Dixon, executive director of the World Privacy Forum, “They [tech companies] have gotten enough black eyes at this point that I tend to believe that the realized they have
33 “The Rising Strategic Risks of Cyberattacks,” McKinsey & Company, May 2014, www.mckinsey.com. 34 For a more thorough description see “How Good Is Your Cyberincident-Response Plan?” McKinsey & Company, December 2013, www.mckinsey.com. 35 “Banks Build Line of Defense for Doomsday Cyberattack,” The Wall Street Journal, December 3, 2017, www.wsj.com.
Final PDF to printer
Chapter 12 Regulating and Managing Technology 275
law43665_ch12_261-280.indd 275 11/22/18 10:25 AM
to take care of consumers a lot better.” Some firms are taking an even more aggressive, proactive approach.
Texas Hospital Association president and chief executive, Fernando Martinez, real- ized that the number or ransomware attacks were on the rise and were gaining media attention. It had become a critical issue for his organization. He wanted to test his employees about their cybersecurity awareness and sent a phishing e-mail to the association’s employees. Robert Valdez, manager of risk advisory services at Kaufman Rossin, a professional services firm, explained, “You don’t want to tell employees at the beginning. You want true insight into what is your actual expo- sure, how many people are clicking and what happens to the organization.” When association employees fell prey to the phishing e-mail, the employee was re-directed at that moment to receive additional cybersecurity training. Shortly thereafter, they were sent a second phishing e-mail to measure the effectiveness of the training they received. After assessing the program, Martinez reported that the association had seen 60 percent improvement in the reduction of click rates to the phishing e-mails. “This shows the training is extremely effective.”36
Another method some businesses use is to reduce criminal intrusion of their sites by pay- ing hackers, often called white hatters and discussed earlier in this chapter. Businesses use the white hatters’ computer skills to identify weaknesses in the company’s information systems.
An ethical hacking contest was held at a Swiss security conference in Geneva. So-called bug bounty programs became popular in Silicon Valley’s high-tech sec- tor. PayPal paid about 1,000 hackers for confidentially reporting on big security holes found in their systems. “If you care about the product [and] care about your customers, you care about your customers’ security—this is what you have to do,” said the director of security intelligence at PayPal. As Yahoo’s chief security offi- cer also explained, “There are thousands of people out there with the skill sets that could help us find these bugs and get them fixed faster. And there’s nothing lost by bringing them into the fold and giving them the opportunity to participate.”37
Many companies have institutionalized their attention toward protecting information by hiring managers trained in this field, creating new programs to train employees to spot potential hacking activity, or other strong safeguards within the company and its system.
Government Efforts to Combat Cybercrime
What steps have governments taken to protect sensitive information from cybercrime? Tar- gets can range from individual information that should remain private, such as financial or medical records, to commercial or government information, such as data used to run criti- cal infrastructure like oil pipelines, railroads, water treatment facilities, and the power grid. Leon Panetta, former U.S. Secretary of Defense, predicted that it would take a “cyber-Pearl Harbor,” referring to the devastating attack on the U.S. military base in Hawaii that cata- pulted the United States into World War II against the Japanese, to wake up the nation to the vulnerabilities in its computer systems. While no such attack has occurred—yet—the question remains: What have governments done to slow down, if not stop, the wave of cyberattacks?
36 “Firms Go Phishing to Bolster Company Cybersecurity,” The Wall Street Journal, December 11, 2017, www.wsj.com. 37 “Banks Reluctant to Use ‘White Hat’ Hackers to Spot Security Flaws,” National Public Radio, November 5, 2014, www.npr.org.
Final PDF to printer
276 Part Five Business and Technology
law43665_ch12_261-280.indd 276 11/22/18 10:25 AM
Given the global nature of the problem, some believe international government coordina- tion is necessary. Since 2007, representatives from the United States and dozens of European countries have gathered annually for what is known as Data Privacy Day, held annually on January 28th. This event, which brings together privacy professionals, government leaders, academics, students, and business executives, was designed to raise awareness and empower people to protect their privacy, control their digital footprint, and escalate the protection of privacy and data as everyone’s priority. Led by the National Cyber Security Alliance, a non- profit, public–private partnership, people can sign-up for free security checks, check their privacy settings, and access various resources for parents, educators and businesses.
More dramatic and legal measures were taken at the multinational level in 2014 when leaders of the North Atlantic Treaty Organization (NATO) ratified a change in the orga- nization’s mission of collective defense. For the first time, a cyberattack on any of the 28 NATO nations could be declared an attack on all of them, much like a ground invasion or an airborne bombing. The most obvious target of the new policy was Russia, which was believed to be behind computer attacks that disrupted financial and telecommunication systems in Estonia in 2007 and Georgia in 2008. NATO officials also pointed to increased cyberactivity by China and Iran—calling them “patriotic hackers”—and the need for the organization to keep up with increasingly sophisticated modern warfare.
The Equifax data breach in 2017, discussed in Chapter 6, highlighted the fact that there are 48 different state disclosure laws within the United States and none appears to be strong enough to induce a company to share information with the affected individuals or the government during a cyberattack. Some advocated the passage of federal legislation that mandates the sharing of information, something firms are often hesitant to do under the protection of trade secrets and competitive information.
As discussed earlier in this chapter, the European Union passed the General Data Protection Regulation in 2018, which forced companies that did business in the 28 countries that comprised the European Union and the United Kingdom to disclose promptly when personal data had been breached. Initially, firms that did not comply would be warned, but if they persisted they could be fined as much as €20 million (more than $23 million U.S.) or 4 percent of a company’s total global revenue, whichever was larger.38
Additional coordinated efforts by international governmental agencies are needed to better ensure that the threat of cyberattacks on the infrastructure of a country or the inva- sion of citizens’ information are thwarted. These efforts must be in harmony with busi- nesses’ anti-cybercrime efforts.
38 “What Is General Data Protection Regulation?” Forbes, February 14, 2018, www.forbes.com; and General Data Protection Regulation—European Commission, ec.europa.eu/info/law/law-topic/data-protection_en.
∙ In some countries, governments have taken steps to protect their citizens’ personal data from terrorism and other threats. These governments have also attempted to better ensure protection of intellectual property.
∙ Two major market stakeholders targeted by business organizations for the collection of information are employees and consumers, raising numerous ethical issues. The access to big data can be at odds with the protection of individuals’ rights to their own information.
Summary
Final PDF to printer
Chapter 12 Regulating and Managing Technology 277
law43665_ch12_261-280.indd 277 11/22/18 10:25 AM
∙ Businesses increasingly use electronic exchanges, or e-business, for the buying and selling of goods and services between businesses, organizations, and individuals via Internet-based systems.
∙ Robotic technology, artificial intelligence, collaborative machines, autonomous auto- mobiles, and other technological advances increasingly assume a greater role in busi- ness operations. This transformation of business practices also raises important ethical concerns, such as the loss of jobs for humans and whether artificial intelligence systems can make ethical decisions.
∙ Many businesses are relying on technology to enhance their operations and increasingly entrusted the management of technology to their chief information officer. These man- agers often report to the company’s CEO and are being entrusted with greater strategic responsibilities within the company.
∙ Cybercrime is criminal activity committed by individuals or groups, called hackers, which gain unauthorized access to a business organization through its computer system. It imposes substantial costs on businesses that are hacked. Hackers appear motivated by financial incentives, government or business retaliation, or media attention for an issue or the hackers themselves. Hackers are commonly motivated by financial reward, retaliation, or political beliefs.
∙ Given the serious and costly threats of cybercrime, businesses have created comprehen- sive defenses, cutting across all organizational functions and supported by the organiza- tion’s executive leadership. Experts encourage companies to develop incident-responses plans against cyberattacks. International and national government groups have attacked cybercrime through regulatory and voluntary efforts. Additional coordinated efforts are needed and must be in harmony with businesses’ anti-cybercrime efforts.
Key Terms intellectual property, 263 net neutrality, 264 omnichannel, 267 ransomware attacks, 273 right to be forgotten, 262 software piracy, 263
artificial intelligence (AI), 268 autonomous vehicles, 269 big data, 264 chief information officer (CIO), 269
cybercrime, 271 Digital Millennium Copyright Act, 263 e-business, 266 General Data Protection Regulation (GDPR), 263 hackers, 271
Internet Resources
www.ama-assn.org American Medical Association www.ftc.gov/datasecurity Bureau of Consumer Protection, Data Security www.bsa.org Business Software Alliance www.cio.com Chief Information Officer professional Website www.ecommercetimes.com E-Commerce Times hackercombat.com Hacker Combat Community www.foresight.org Foresight Institute www.issa.org Information Systems Security Association www.dhs.gov U.S. Department of Homeland Security www.robotics.org Robotics Industries Association
Final PDF to printer
278 Part Five Business and Technology
law43665_ch12_261-280.indd 278 11/22/18 10:25 AM
Discussion Case: The Arrival of Autonomous Cars—Bright Future or Looming Threat?
As Elaine Herzberg walked her bicycle across a six-lane road in Tempe, Arizona, around 10 o’clock at night, she was fatally struck by a Volvo SUV, a prototype autonomous vehicle that Uber had modified to test its self-driving technology. A series of safety failures had combined to cause this fatal accident. First, the sensors mounted on the car failed to spot Herzberg in sufficient time to slow the vehicle down from its 38 miles-per-hour speed. Second, according to police video cameras, the safety driver, a human sitting in the vehicle charged with monitoring the driving, did not have his hands on the steering wheel and was apparently distracted. Third, the car’s brakes were never applied by the safety driver or the car’s system.
In another incident, a Tesla Model X SUV traveling on Highway 101 in Mountain View, California, slammed into a concrete highway lane divider and burst into flames, killing the driver, Wei Huang. Tesla reported that the autopilot system was engaged and provided warnings to Huang of a potential collision, but Huang failed to take control of the vehicle. According to the company’s press release, Huang, “had received several visual and one audible hands-on warnings earlier in the drive and the driver’s hands were not detected on the wheel for six seconds prior to the collision. The driver had about five seconds and 150 meters of unobstructed view of the concrete divider . . . but the vehicle logs show that no action was taken.”
While the self-driving technology was state-of-the-art in both vehicles at the time of the fatal accidents, it had not been sufficient in either case to prevent tragedy. Some thought that the problem was that the humans in the cars had simply been too slow to react to an unexpected event when they thought the car was in charge. According to Constantine Samaras, a university engineering professor, “When humans are the backup systems, we’re pretty bad at doing [what is necessary to prevent crashes]. This is a challenge for this tran- sition to automation, where there’s this muddled mixture of human responsibility and robot responsibility.”
Many saw autonomous vehicles as a way to improve—not degrade—road safety. In 2017, more than 37,000 people died in car crashes in the United States. Clearly, humans were not perfect drivers. Self-driving cars, by contrast, did not get tired, frustrated, dis- tracted, or drunk, as humans often did when behind the wheel. A study by the Virginia Tech Transportation Institute analyzed more than 50 self-driving vehicles commissioned by Google, which had travelled about 1.3 million miles on roads in California and Texas. The Google fleet was involved in just 17 crashes over six years, with none of the incidents being the fault of the self-driving vehicles. Another study by McKinsey estimated that autonomous vehicles could reduce U.S. auto accidents by 90 percent.
However, others saw negative consequences in a world of autonomous driving. Driver- less vehicles could cost truckers, taxi drivers, and other driving professionals their jobs. Already, driverless trucks were being used to move iron ore at mines in Australia, and Canadian-based Suncor Energy had automated its truck fleet, eliminating the jobs of 800 drivers. Companies engaged in other forms of transportation, such as busses, trains and airplanes, could see fewer customers, as people might choose to travel by car when if they were not burdened with the driving. If the number of accidents declined, auto repair shops and mechanics would likely have less business, and layoffs could occur.
Another issue raised by critics of autonomous automobiles was the possibility that the vehicle’s computer systems might be hacked. As part of a planned experiment, hackers Charlie Miller and Chris Valasek were able to access the controls of a self-driving Jeep
Final PDF to printer
Chapter 12 Regulating and Managing Technology 279
law43665_ch12_261-280.indd 279 11/22/18 10:25 AM
Cherokee remotely, instructing it to roll out of a parking lot and into a grassy ditch. The person in the driver’s seat at the time, a journalist from Wired magazine, was not con- trolling the steering wheel or the pedals. Effectively safeguarding against such hacking can be challenging, since self-driving cars have far higher levels of connectivity than human- driven vehicles currently on the road.
Will autonomous vehicles be widely adopted in our society? The answer to this ques- tion is unclear. In a survey reported in The Washington Post, most Americans said they thought autonomous cars would be quite common within 15 years. Seventy-four percent, however, said they did not expect to own one, and more than 60 percent said they would not want to walk or ride a bicycle anywhere near one. A study conducted by the Ameri- can Automobile Association (AAA) shortly after the Uber and Tesla accidents reported that 73 percent of Americans said they would not ride in an autonomous vehicle. Greg Bannon, director of engineering at the AAA said, “Any incident involving an autonomous vehicle is likely to shake consumer trust, which is a critical component to the widespread acceptance of autonomous vehicles.”
Yet, as autonomous vehicle technology gained momentum, governments stepped in to regulate. In 2017, the National Highway and Transportation Safety Administra- tion (NHTSA) released new federal guidelines for Automated Driving Systems (ADS). By 2017, 29 states had enacted legislation governing autonomous vehicles. Some states, such as Florida and Arizona, encouraged the safe development, testing, and operation of self-driving vehicles on their public roads, seeing this as an opportunity to encour- age business development. Delaware established the Advisory Council on Connected and Autonomous Vehicles, tasked with developing recommendations for innovative tools and strategies that could be used to prepare Delaware’s transportation network for these vehicles—an action also taken by numerous other states.
While most people expect that fatal crashes involving autonomous vehicles will occur again in the future, the question of whether self-driving cars impose an acceptable level of risk relative to their benefits to society is a matter of ongoing debate.
Sources: “Study Says Self-Driving Cars Are Safer Than Human-Driven Vehicles: Should You Believe It?” Tech Times, January 12, 2016, www.techtimes.com; “Hackers Have Self-Driving Cars in their Headlights,” Financial Times, March 15, 2018, www.ft.com; “Autonomous Car Crashes: Who—or What—Is to Blame?” Knowledge@Wharton, April 6, 2018, knowledge.wharton.upenn.edu; “Are Autonomous Cars Really Safer than Human Drivers?” The Conversation, February 2, 2018, theconversation.com; “Autonomous Vehicles/Self-Driving Vehicles Enacted Legislation,” National Conference of State Legislatures, May 21, 2018, www.ncsl.org/research/transportation; “33 Industries other than Auto that Driverless Cars Could Turn Upside Down,” CB Insights, May 24, 2018, www.cbinsights.com; and “Most People Expect Driverless Cars to Become Common, and They Worry,” The Washington Post, June 4, 2018, www.washington.post.
Discussion Questions
1. What are the benefits and costs, or advantages and disadvantages, of autonomous driv- ing technology to various corporate stakeholders and society?
2. Are the threats of harm from autonomous vehicles simply an acceptable risk, especially when compared to fatalities caused by human-driven vehicles?
3. What steps could business, government, or individual drivers take to reduce the risk of hacking in autonomous vehicles?
4. Do you think federal or state governments should regulate the emergence of autono- mous driving technology, and if so how?
5. If you were the chief technology officer of a company that was developing autonomously driven vehicles, what steps would you take to manage this technology appropriately?
Final PDF to printer
law43665_ch12_261-280.indd 280 11/22/18 10:25 AM
Final PDF to printer
law43665_ch13_281-304.indd 281 01/23/19 02:38 PM
P A R T S I X
Business and Its Stakeholders
Final PDF to printer
282
law43665_ch13_281-304.indd 282 01/23/19 02:38 PM
Shareholders occupy a position of central importance in the corporation because they own shares of the company’s stock. As owners, they pursue both financial and nonfinancial goals. How can share- holders’ rights best be protected? What are the appropriate roles of top managers and boards of directors in the governance of the corporation? How can their incentives be aligned with the pur- poses of the firm, including the interests of the company’s shareholders? And how can government regulators best protect the rights of investors and promote good corporate governance?
This Chapter Focuses on These Key Learning Objectives:
LO 13-1 Identifying different kinds of shareholders and understanding their objectives and legal rights.
LO 13-2 Knowing how corporations are governed and explaining the role of the board of directors in pro- tecting the interests of investors and other stakeholders.
LO 13-3 Analyzing the function of executive compensation and debating if top managers are paid too much.
LO 13-4 Evaluating various ways shareholders can promote their economic and social objectives.
LO 13-5 Understanding how the government protects against stock market abuses, such as fraudulent accounting and insider trading.
Shareholder Rights and Corporate Governance
C H A P T E R T H I R T E E N
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 283
law43665_ch13_281-304.indd 283 01/23/19 02:38 PM
Twenty-first Century Fox, the media company, settled a massive shareholder lawsuit in 2017. Shareholders had sued top executives and the board of directors, saying they had allowed a “toxic culture” of sexual and racial harassment to infect the company, damaging its reputation and stock value. The settlement called for the defendants to pay $90 million to the company, for the benefit of shareholders, and to set up a Workplace Professionalism and Inclusion Council to prevent similar situations from arising in the future. Said the investors who brought the suit, “Corporate boards can no longer pretend that such conduct is isolated, nor can corporate boards pretend that their conduct does not and will not pose a grave risk to companies and their shareholders.”1
In early 2018, two large institutional investors, Jana Partners and the California State Teachers’ Retirement System (CalSTRS), wrote an open letter to the board of directors of Apple Inc. Together, the two organizations—one a hedge fund and the other a public pension fund—owned around $2 billion worth of the tech company’s stock. The letter cited evidence that children who were heavy users of Apple products such as iPhones and iPads were distracted in class, at risk for depression, less empathetic than their peers, and often sleep-deprived. It called on the company to make it easier for parents to control their children’s use of technology. “We believe that addressing this issue now will enhance long- term value for all shareholders,” the letter concluded.2
In 2017, the chairman of the board of SeaWorld Parks, an operator of theme parks and water parks based in Florida, resigned after failing to win the support of the compa- ny’s shareholders. Although he ran uncontested, the chairman did not receive the votes of a majority. Shareholders were apparently angered by high executive compensation, even when attendance and revenues were falling in the wake of the critical documen- tary Blackfish. The day the election results were announced, the company’s stock rose by 7 percent. Said an industry analyst, “The message they’re sending is they’re going to keep management and the board of directors on a relatively short leash to do the right thing for shareholders.”3
As these three examples illustrate, the relationships among shareholders, top execu- tives, and boards of directors in today’s companies are multiple and complex. In these cases, shareholders used a variety of techniques to assert their rights—a lawsuit, public persuasion, and voting for the board of directors. This chapter will address the important legal rights of shareholders and how corporate boards, government regulators, managers, and activist investors can protect them. It will also discuss changes in corporate practice and government oversight designed to better guard shareholder interests, in both the United States and other nations.
Shareholders Around the World
Shareholders (or investors or stockholders, as they also are called) are an important market stakeholder of the firm, as explained in Chapter 1. By purchasing shares of a company’s stock, they become owners. For this reason, they have a stake in how well the company performs.4
1 “Massive Derivative Suit Settlement for Alleged Management Failure to Prevent Sexual Misconduct,” The D&O Diary, November 21, 2017. 2 “Open Letter from Jana Partners and CalSTRS to Apple Inc.,” January 6, 2018. 3 “SeaWorld Stockholders Vote Off Board Chairman, Orlando Sentinel, June 14, 2017, and “SeaWorld Calls Time on Chairman after Shareholder Revolt,” Financial Times, September 13, 2018. 4 The following discussion refers to publicly held corporations; that is, ones whose shares of stock are owned by the public and traded on the various stock exchanges. U.S. laws permit a number of other ownership forms, including sole proprietorships, partnerships, and mutual companies. (A privately held company, by contrast, is one whose shares are not publicly traded.)
Final PDF to printer
284 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 284 01/23/19 02:38 PM
Stock ownership today is increasingly global. In 2015, the total value of stocks in the world was $62 trillion, slightly down from $64 trillion before the stock market collapse of 2008–09. The market capitalization (total value) of stocks in the United States is by far larger than that of any other country, but stock ownership has grown in many other parts of the world.5 One way to compare the extent of stock ownership among countries is to exam- ine their market capitalization as a percentage of their GDP (gross domestic product, a measure of the size of their economies). By this yardstick, the United States leads, but many other countries are not far behind, as shown in Figure 13.1.
Who Are Shareholders? Whether in the United States or other countries, two main types of investors own shares of stock in corporations: individual and institutional.
∙ Individual shareholders are people who directly own shares of stock issued by compa- nies. These shares are usually purchased through a stockbroker and are held in brokerage accounts. For example, a person might buy 100 shares of Apple or Sony Corporation for his or her portfolio and hold these in an account at a firm such as Edward Jones, Fidelity, or Charles Schwab. Such shareholders are sometimes called “Main Street” investors, because they come from all walks of life.
∙ Institutions, such as pensions, mutual funds, insurance companies, and university endowments, also own stock. For example, mutual funds such as Vanguard Wellington and pensions such as the California Public Employees Retirement System (CalPERS) buy stock on behalf of their investors or members. These institutions are sometimes called “Wall Street” investors. For obvious reasons, institutions usually have more money to invest and buy more shares than individual investors.
5 Comprehensive data on stock market capitalization by countries is available in “Market Capitalization of Listed Companies,” at http://data.worldbank.org.
FIGURE 13.1 Stock Market Capitalization as a Percentage of Gross Domestic Product, for Selected Countries, 2016
Source: “Stocks Traded, Total Value (% of GDP), 2016,” at http://data.worldbank.org.
0 50 100 150 200 250
Australia
Brazil
India
China
Indonesia
Japan
Korea
Russian Federation
United States
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 285
law43665_ch13_281-304.indd 285 01/23/19 02:38 PM
Since the 1960s, growth in the numbers of such institutional investors has been phe- nomenal. In 2016, institutions accounted for about 60 percent of the value of all equities (stocks) owned in the United States, worth a total of about $23 trillion. In 2017, slightly over half of all U.S. households (54 percent) owned stocks, either directly or indirectly through holdings in mutual funds or retirement accounts, according to a Gallup survey. This proportion had fallen significantly since just before the stock market collapse of 2008 (when 65 percent owned stocks), possibly reflecting investors’ lower confidence. Although people of every age, race, and socioeconomic status owned stocks, ownership tended to be higher among some groups than others. For example, whites (60 percent) were more likely to own stocks than African Americans (36 percent), and the college educated (78 percent) were more likely than those with less education (43 percent). The affluent (with household incomes of $100,000 or more) (89 percent) owned stocks as a higher rate than lower income people (with household incomes of less than $30,000) (21 percent). Age also made a difference: 62 percent of people between 50 and 64 years old owned stocks, compared with just 31 percent of young adults under 30.6
Figure 13.2 shows the relative stock holdings of individual and institutional investors from the 1960s through 2016 in the United States. It shows the growing influence of the institutional sector of the market over the past five decades, although the relative share of the institutional sector has leveled off since the financial crisis.
Objectives of Stock Ownership Individuals and institutions own corporate stock for several reasons. Foremost among them is to make money. People buy stocks because they believe stocks will produce a return greater than they could receive from alternative investments. Shareholders make money when the price of the stock rises (this is called capital appreciation) and when they receive
6 “U.S. Stock Ownership Down Among All but Older, Higher-Income,” May 24, 2017, http://news.gallp.com. Data are based on Gallup’s annual economics and personal finance survey.
FIGURE 13.2 Household versus Institutional Ownership in the United States, 1965–2016, by Market Value
Source: Securities Industry and Financial Markets Association, 2017 Fact Book (New York, SIFMA, 2017); U.S. Census Bureau, Statistical Abstract of the United States, 2012, Table 1201; and Securities Industry Association, Securities Industry Fact Book (New York: Securities Industry Association, 2008). Household sector includes nonprofit organizations. Based on Federal Reserve Flow of Funds Accounts (revised).
839 2,270 8,481 17,627 18,512 23,293 38,685735
Households
Institutions
1975 1985 1995 2000 2005 2010 2016 0
10
20
30
40
50
60
70
80
90
1965 Year
(in billions of dollars) Total
market value
Final PDF to printer
286 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 286 01/23/19 02:38 PM
their share of the company’s earnings (called dividends). Most companies pay dividends, but some—particularly new companies with good prospects for rapid growth—do not. In this case, investors buy the stock with the goal of capital appreciation only.
Stock prices rise and fall over time, affected by both the performance of the company and by the overall movement of the stock market. For example, in 2008 and early 2009 share values declined sharply—for example, the Dow Jones Industrial Average, a widely tracked index, lost almost half its value in just a year and a half—as the global economy fell into a severe recession. This is called a bear market. This was followed by a period in which markets rose again in a bull market, which produced gains for many investors. Typically, bull and bear markets alternate, driven by the health of the economy, interest rates, world events, and other factors that are often difficult to predict. Although stock prices are sometimes volatile, stocks historically have produced a higher return over the long run than investments in bonds, bank certificates of deposit, or money markets.
Shareholders are not a uniform group. Some seek long-term appreciation, while others seek short-term returns. Some are looking for capital gains, while others are looking for dividend income. Although the primary motivation of most shareholders is to make money from their investments, some have other motivations as well. Some investors use stock ownership to achieve social or ethical objectives, a trend that is discussed later in this chapter. Investors may also buy stock to take control of a company in a hostile takeover bid. Some investors have mixed objectives; for example, they wish to make a reasonable return on their investment but also to advance social or ethical goals.
Shareholders’ Legal Rights and Safeguards As explained in Chapter 1, managers have a duty to all stakeholders, not just to those who own shares in their company. Nevertheless, in the United States and most other countries, shareholders have extensive legal rights, as shown in Figure 13.3. They have the right to share in the profits of the enterprise if directors declare dividends. They have the right to receive annual reports of company earnings and company activities and to inspect the corporate books, provided they have a legitimate business purpose for doing so and that it will not be disruptive of business operations. They have the right to elect members of the board of directors, usually on a “one share equals one vote” basis. They have the right to hold the directors and officers of the corporation responsible for their actions, by lawsuit if they want to go that far. For example, in 2017 the home health care giant Amedisys paid $44 million to settle a lawsuit brought by its shareholders, whose share values had dropped by half after the company was found to have committed Medicare fraud.7 Furthermore,
7 “Amedisys Will Pay $43.8 Million to Settle Class-Action Lawsuit,” Modern Healthcare, June 16, 2017.
• To receive dividends, if declared • To vote on Members of board of directors Major mergers and acquisitions Charter and bylaw changes Proposals by stockholders • To receive annual reports on the company’s financial condition • To bring shareholder suits against the company and officers • To sell their own shares of stock to others
FIGURE 13.3 Major Legal Rights of Shareholders
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 287
law43665_ch13_281-304.indd 287 01/23/19 02:38 PM
shareholders usually have the right to vote on mergers, some acquisitions, and changes in the charter and bylaws, and to bring other business-related proposals. And finally, they have the right to sell their stock.
Many of these rights are exercised at the annual shareholders’ meeting, where directors and managers present an annual report and shareholders have an opportunity to approve or disapprove management’s plans. Typically, however, only a small portion of shareholders vote in person. Those not attending are given an opportunity to vote by absentee ballot, called a proxy. Evidence shows that institutional investors are more likely to vote their proxies; 91 percent of institutions vote, compared with only 29 percent of individual share- holders.8 The use of proxy elections by activists to influence corporate policy is discussed later in this chapter.
Who protects these rights? Within a publicly held company, the board of directors bears a major share of the responsibility for making sure that the firm is run with the interests of shareholders, as well as those of other stakeholders, in mind. We turn next, therefore, to a consideration of the role of the board in the system of corporate governance.
Corporate Governance
The term corporate governance refers to the process by which a company is controlled or governed. Just as nations have governments that respond to the needs of citizens and estab- lish policy, so do corporations have systems of internal governance that determine overall strategic direction and balance sometimes divergent interests.
The Board of Directors The board of directors plays a central role in corporate governance. The board of direc- tors is an elected group of individuals who have a legal duty to establish corporate objec- tives, develop broad policies, and select top-level personnel to carry out these objectives and policies. The board also reviews management’s performance to be sure the company is well run, and all stakeholders’ interests are protected, including those of shareholders. In recent years, the role of the board has expanded, with greater emphasis given to strat- egy development, talent management, and investor relations. Like any group, it also has its own interests, which it seeks to protect. Boards typically meet in full session around six times a year, with about a third of boards now also scheduling strategy retreats and other off-site work.9
Corporate boards vary in size, composition, and structure to best serve the interests of the corporation and its shareholders. Some patterns are evident, however. According to a survey of its members by the Society for Corporate Governance, corporate boards typi- cally have between 9 and 11 members. Most of them are outside directors (not managers of the company, who are known as inside directors when they serve on the board). (The New York Stock Exchange requires the boards of listed companies to have a majority of outsiders.) Board members may include chief executives of other companies, major share- holders, bankers, former government officials, academics, representatives of the commu- nity, or retired executives from other firms. Women now make up 20 percent of the boards of Fortune 500 companies; African Americans, 8 percent; Latinos, 3 percent; and Asian Americans, 2 percent. (The representation of women on boards of directors and laws
8 “Small Investors Support the Boards. But Few of Them Vote,” The New York Times, October 6, 2017. 9 “How Boards of Directors Are Reshaping to Meet New Challenges,” Forbes, May 26, 2017.
Final PDF to printer
288 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 288 01/23/19 02:38 PM
mandating quotas for women on boards in some European countries are further discussed in Chapter 16.) The average tenure of a director is eight to ten years.10
Board structure in Europe is quite different from its counterpart in the United States. Many European boards use what is called a two-tier system. This means that instead of one board, as is common in the United States, these companies have two boards. One, which is called the executive board, is made up of the CEO and other insiders. The other, which is called the supervisory board, is made up of outsiders—sometimes including labor representatives—and has an independent chairperson. These boards operate autonomously, but of course also coordinate their work. This system is used in all firms in Germany and Austria and in many firms in Denmark, Finland, the Netherlands, Norway, Poland, and Switzerland. Other European nations often use a hybrid system, which has elements of both the unitary and two-tiered systems.11
Corporate directors are typically well paid. Compensation for board members is com- posed of a complex mix of retainer fees, meeting fees, grants of stock and stock options, pensions, and various perks. In 2017, median compensation for non-management directors at the largest U.S. corporations was $300,000. This amount had risen steadily over time (it had been $225,000 a decade earlier). Of this compensation, 40 percent was paid in cash and 60 percent in stock or stock options.12 Some critics believe that board compensation is excessive, and that high pay contributes to complacency by some directors who do not want to jeopardize their positions by challenging the policies of management. (Compensa- tion of executives is discussed later in this chapter.)
Most corporate boards perform their work through committees as well as in general ses- sions. The compensation committee (required by U.S. law and staffed exclusively by out- side directors) administers and approves salaries and other benefits of high-level managers in the company. The nominating committee is responsible for finding and recommending candidates for officers and directors. The executive committee works closely with top man- agers on important business matters. A significant minority of corporations now has a spe- cial committee devoted to issues of corporate responsibility. Often, this committee works closely with the firm’s department of corporate citizenship, as discussed in Chapter 3.
One of the most important committees of the board is the audit committee. Present in virtually all boards, the audit committee is required by U.S. law to be composed entirely of outside directors and to be “financially literate.” It reviews the company’s financial reports, recommends the appointment of outside auditors (accountants), and oversees the integ- rity of internal financial controls. Their role is often critical; at Enron, for example, lax oversight by the audit committee was a major contributor to the firm’s collapse in 2001. Directors who fail to detect and stop accounting fraud, as occurred at Enron, may be liable for damages.
How are directors selected? Board members are elected by shareholders at the annual meeting, where absent owners may vote by proxy, as explained earlier. Thus, the system is formally democratic. However, as a practical matter, shareholders often have little choice. Typically, the nominating committee, working with the CEO and chairman, develops a list of possible candidates and presents these to the board for consideration. When a final
10 Deloitte and Society for Corporate Governance, 2016 Board Practices Report, 10th ed. (2017), and Deloitte and Alliance for Board Diversity, Missing Pieces Report: The 2016 Board Diversity Census of Women and Minorities on Fortune 500 Boards (2017). 11 Information about corporate governance in Europe is available in Heidrick & Struggles, “Towards Dynamic Governance 2014: European Corporate Governance Report,” at www.heidrick.com. 12 “Pay for Big Company Directors Tops $300,000,” The Wall Street Journal, June 28, 2018.
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 289
law43665_ch13_281-304.indd 289 01/23/19 02:38 PM
selection is made, the names of these individuals are placed on the proxy ballot. Share- holders may vote to approve or disapprove the nominees, but because alternative candi- dates are rarely presented, the vote has little significance. The selection process therefore tends to produce a kind of self-perpetuating system. This has begun to change, however, as shareholders have increasingly demanded the right to nominate their own candidates, in a move for greater proxy access. Sixty percent of U.S. companies now have rules permitting shareholders to nominate directors under some circumstances.13 And, as shown in one of the opening examples, board members will sometimes step down when they fail to win the support of a majority of shareholder votes, even if they are running unopposed. Because boards typically meet behind closed doors, scholars know less about the kinds of processes that lead to effective decision making by directors than they do about board composition and structure.
In their book Back to the Drawing Board, Colin Carter and Jay Lorsch observe, based on their extensive consulting experience, that boards develop their own norms that define what is—and is not—appropriate behavior. For example, pilot boards see their role as actively guiding the company’s strategic direction. Watchdog boards, by contrast, see their role as assuring compliance with the law—and intervening in management decisions only if something is clearly wrong. These norms are often powerfully influenced by the chairman. Boards that share a consensus on behavioral norms tend to function more effectively as a group than those that do not.14
Principles of Good Governance In the wake of the corporate scandals of the early 2000s and the financial crisis later in the decade, many sought to define the core principles of good corporate governance. What kinds of boards were most effective? By the late 2010s, a broad consensus had emerged among public agencies, investor groups, and stock exchanges about some key features of effective boards. These included the following:
∙ Select outside directors to fill most positions. (Outside directors are also called indepen- dent directors.) Normally no more than two or three members of the board should be current managers. Moreover, the outside members should be truly independent; that is, should have no current connection to the corporation other than serving as a director. This would exclude, for example, directors who had served as employees of the com- pany within the past three years, who provided consulting services for the company, who were officers of other firms that had a business relationship with the company, or who had a close personal relationship with the CEO. The audit, compensation, and nominating committees should be comprised solely of outsiders. By the late 2010s, vir- tually all major companies were following these practices.
∙ Hold open elections for members of the board. In recent years, dissident shareholders have organized to put their own candidates for the board on the proxy ballot, creating elections with genuine choice. For example, in 2017 investor Nelson Peltz ran for a seat on the board of Procter & Gamble, in a move opposed by management—an example further discussed later in this chapter. Contested board elections are rare, however; more often, dissidents simply vote against candidates nominated by management. Some have argued that candidates should have to get at least 50 percent of votes to be elected (most
13 EY Center for Board Matters, “2017 Proxy Season Review,” Ernst & Young, June 2017. 14 Colin B. Carter and Jay W. Lorsch, Back to the Drawing Boards: Designing Corporate Boards for a Complex World (Boston: Harvard Business School Press, 2003).
Final PDF to printer
290 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 290 01/23/19 02:38 PM
companies required only a plurality; that is, more votes than other candidates, but not necessarily a majority of votes cast).
∙ Hold elections for all directors annually. Some boards are classified; this means that board elections are staggered; only some directors (“a class”) stand for election each year, and then serve for a multi-year term. Proponents of declassification believe that all directors should stand for election every year, allowing more opportunities to unseat underperforming directors. This can increase accountability and responsiveness to shareholders. In the past five years, many boards have switched to annual elections; in fact, in 2017, 90 percent of large U.S. companies had declassified boards, up from two- thirds in 2011. Declassified boards are also more likely to be diverse.15
∙ Appoint an independent lead director (also called a nonexecutive chairman of the board.) Many experts in corporate governance believed that boards should separate the duties of the chief executive and the board chairman, rather than combining the two in one person as done in some corporations, especially in the United States. The inde- pendent lead director can hold meetings without management present, improving the board’s chances of having completely candid discussions about a company’s affairs. For example, after John Stumpf resigned as Wells Fargo’s CEO and chairman, the board decided to split the roles of CEO and chairperson. (The unauthorized customer accounts scandal that led to Stumpf’s departure is further described in a case at the end of this book.) One study found that separating the positions of CEO and chairman was most likely in companies that had experienced shareholder activism and had recently appointed a new chief executive. In 2016, 50 percent of S&P 500 companies separated the roles of CEO and chairperson.16
∙ Diversify board membership. Many good governance experts have argued that boards should include many different kinds of people. Diversity on the basis of gender, eth- nicity, age, nationality, and other dimensions widens the range of experiences, per- spectives, and values brought to the boardroom. Such “cognitive variety,” in this view, expands options and enriches discussions—potentially improving leadership. A survey of nearly 900 directors conducted by PwC in 2017 found that 73 percent thought that board diversity was beneficial. Of those, 82 percent thought it enhanced board perfor- mance.17 The academic literature on the impacts of board diversity is further discussed in Chapter 16.
The movement to improve corporate governance has been active in other nations and regions, as well as the United States, as some of these examples show. The Organization for Economic Cooperation and Development (OECD), representing 34 nations, has issued a set of principles for corporate governance to serve as a benchmark for companies and policymakers worldwide. For its part, the European Union has worked hard to modernize corporate governance practices and harmonize them across its member states.18 Corporate governance reforms have also taken hold in South Africa, India, and many other nations.
15 “Declassified Boards Are More Likely to Be Diverse,” August 15, 2017, Harvard Law School Forum on Corporate Gover- nance and Financial Regulation. 16 Korn Ferry Institute (in partnership with the National Association of Corporate Directors), Annual Survey of Board Leader- ship, 2017 Edition, www.kornferryinstitute.com. Data based on boards of directors at the 500 U.S.-based firms that made up the S&P Large Cap Index, as of December 31, 2016; and “Results of Public Company Governance Survey,” op. cit. 17 “16 & of Corporate Board Members Say Racial and Gender Diversity Has No Benefit at All,” Fortune, October 17, 2017. 18 The OECD’s corporate governance principles are available at www.oecd.org/corporate. Information about recent changes in corporate governance practices in Europe is available at the website of the European Corporate Governance Institute, www.ecgi.org.
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 291
law43665_ch13_281-304.indd 291 01/23/19 02:38 PM
In short, by the late 2010s the movement to make boards more responsive to sharehold- ers was an international one.
Special Issue: Executive Compensation
Setting executive compensation is one of the most important functions of the board of directors. The emergence of the modern, publicly held corporation in the late 1800s effec- tively separated ownership and control. That is, owners of the firm no longer managed it on a day-to-day basis; this task fell to hired professionals. This development gave rise to what theorists call the agency problem. If managers are merely hired agents, what will guarantee that they act in the interests of shareholders rather than simply helping themselves? The problem is a serious one, because shareholders are often geographically dispersed, and government rules make it difficult for them to contact each other and to organize on behalf of their collective interests. Boards meet just a few times a year. Who, then, is watching the managers?
An important mechanism for aligning the interests of the corporation and its share- holders with those of its top managers is executive compensation. But, as this section will show, the system does not always work the way it is supposed to.
Executive compensation in the United States, by international standards, is very high. In 2017, the median total compensation of the 200 highest paid chief executives in the United States was $17.5 million, including salaries, bonuses, and the present value of retirement benefits, incentive plans, and stock options, according to the compensation firm Equilar. The highest paid executive in 2017 was Hock E. Tan, CEO of Broadcom (a semiconductor company based in San Jose, California), who took home an eye-popping $103 million. A spokesperson for Broadcom said that the CEO’s compensation was justified because the company’s share value had increased more than 680 percent in five years under Tan’s leadership.19 Because the Equilar survey included only public companies, it did not capture the often-outsized pay of hedge fund and private equity firm executives. In many cases, these individuals earned much more than their public company counterparts. Raymond Dalio, founder of Bridgewater, one of the world’s largest hedge funds, for example, earned an astonishing $1.4 billion in 2016.20 (Hedge funds and private equity firms are further discussed later in this chapter.)
Many companies, like Broadcom, compensate their senior executives in part with grants of stock or stock options. The latter represent the right (but not obligation) to buy a company’s stock at a set price (called the strike price) for a certain period. The option becomes valuable when, and if, the stock price rises above this amount. Grants of stock and stock options are often used to align executives’ interests with those of shareholders. The idea behind such pay-for-performance approaches is that executives will work hard to improve the company’s results, because this will increase the stock price and therefore the value of their compensation. In 2017, more than half (54 percent) of executive pay was performance-based.21 But critics have highlighted a danger of equity-based compensation: that unscrupulous executives may become so fixated on their performance pay that they will do anything to increase the stock price, even if this involves unethical accounting prac- tices or actions that would hurt employees, customers, or other stakeholders. The classic
19 Equilar compensation data for 2017 are available at www.equilar.com/reports/56-equilar-new-york-times-highest-paid- ceos-2018. See also “Media CEO Pay for the 100 Largest Companies Reached a Record $15.7 Million in 2017,” The Wash- ington Post, April 11, 2018. 20 “Highest Earning Hedge Fund Managers 2017,” at www.forbes.com. 21 “CEOs Awarded More Cash Pay,” The Wall Street Journal, April 20, 2015.
Final PDF to printer
292 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 292 01/23/19 02:38 PM
example of this was Enron, where fraudulent financial reports made the company seem more successful than it really was—temporarily increasing its stock price and benefiting its top executives (whose compensation was mostly performance-based). Enron later col- lapsed, devastating its employees, customers, and shareholders. Evidence on the relation- ship between company performance and equity-based compensation is discussed later in this chapter.
By contrast to the United States, top managers in other countries earn much less. Although the pay of chief executives elsewhere is catching up, it is still generally well below what comparable managers in the United States earn. Figure 13.4 represents graphically the large gap between executive pay in the United States and that of other developed nations.
These disparities have caused friction in some global firms.
A case in point is Carlos Ghosn, the Brazilian-born chief executive of the Renault-Nissan-Mitsubishi Alliance, a strategic partnership of automakers that ranks second after Volkswagen and sells more than one in ten cars worldwide. In 2017, Ghosn received $7.9 million for his services as CEO of the French partner Renault. Although his compensation was above average for CEO pay in France, it did not seem excessive for a leader that Forbes magazine called an “exceptional manager and visionary.” But in Japan, where he earned a separate $9.8 million as CEO of Nissan, his compensation seemed out of line to many. “I understand the sensitivity of the issue,” said Ghosn, who regularly commuted between homes in Paris and Tokyo. “[But] being in Japan should not be a handicap to attract talent.”22
22 “Nissan Says CEO Ghosn’s Salary Rose 2.5 Percent Last Year,” Reuters, June 26, 2017.
FIGURE 13.4 Relative Average Annual CEO Compensation in the United States and Selected Developed Nations, in Millions of Dollars, 2014
Sources: Harvard Business School; Washington Post. Statista 2018.
Poland
0 2 4 6 8 10 12 14
Portugal
Japan
Denmark
Sweden
Czech Republic
Israel
United Kingdom
Australia
Austria
Germany
Norway
France
Spain
Switzerland
United States
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 293
law43665_ch13_281-304.indd 293 01/23/19 02:38 PM
Another way to look at executive compensation is to compare the pay of top managers with that of average employees. In the United States, CEOs in 2016 made 347 times what the average worker did. Figure 13.5 shows that since 1990 the ratio of average executive to average worker pay has increased markedly during periods of economic expansion, such as the “dot com” boom of the late 1990s, but fallen back during periods of economic contrac- tion, such as the Great Recession of 2008–09. The ratio, which has started to rise again, is now more than three times greater than it was in 1990. Research published in the Harvard Business Review found that the U.S. public thought the “ideal” pay ratio would be much, much smaller: 6.7 to one. The average ideal in the 16 countries surveyed was 4.6 to one.23
A provision of the 2010 Dodd-Frank Act (introduced in Chapter 7) required major U.S. firms for the first time to disclose the ratio of their CEO’s compensation to the median compensation of all their employees. This rule went into effect in 2018, revealing informa- tion that some employees might find startling. For example, at Live Nation Entertainment, an employee earning the median wage of $24,406 would have to work for 2,893 years to earn as much as the CEO. Companies that operated their own supplier factories in low- wage countries like China—such as the toy maker Mattel—had unusually high pay ratios. But those that outsourced their production to others had relatively low pay ratios.24
23 “CEOs Get Paid Too Much, According to Pretty Much Everyone in the World,” Harvard Business Review, September 23, 2014. 24 “Want to Make Money Like a CEO? Work for 275 Years,” The New York Times, May 25, 2018, and “SEC Adopts Interpretive Guidance on Pay Ratio Rule,” press release, September 21, 2017, at www.sec.gov.
FIGURE 13.5 Ratio of Average CEO Pay to Average Production Worker Pay, 1990–2016
Sources: Data for 2013, 2014, and 2016 are from the AFL-CIO Corporate Watch website at www.aflcio/corporate watch. Data for earlier years are drawn from the Institute for Policy Studies’ Executive Excess annual surveys conducted by the Institute for Policy Studies and United for a Fair Economy, available at www.ips-dc.org and www.faireconomy.org.
1990 1993 1996 1999 2002 20082005 2010 2013 2014 2016 0:1
100:1
200:1
300:1
400:1
500:1
600:1
Ratio
Final PDF to printer
294 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 294 01/23/19 02:38 PM
Why are American executives paid so much? Corporate politics play an important role. In their book, Pay without Performance: The Unfulfilled Promise of Executive Com- pensation, Lucian A. Bebchuk and Jesse M. Fried argue that one reason salaries are so high is that top managers have so much influence over the pay-setting process. Compen- sation committees are made up of individuals who are selected for board membership in part by the CEO, and they are often linked by ties of friendship and personal loyalty. Many are CEOs themselves and sensitive to the indirect impact of their decisions on their own salaries. Moreover, compensation committees rely on surveys of similar firms and usually want to pay their own executives above the industry average, over time ratcheting up pay for all.25
Some observers say that the comparatively high compensation of top executives is justified. In this view, well-paid managers are simply being rewarded for outstanding performance. For example, Amazon CEO Jeff Bezos earned just $1.7 million, while his shareholders enjoyed a return of 56 percent; few shareholders would complain that he was overpaid as leader of the astonishingly successful company. Supporters also argue that high salaries provide an incentive for innovation and risk taking. In an era of intense global competition, restructuring, and financial instability, the job of CEO of large corporations has never been more challenging, and the tenure in the top job has become shorter. Another argument for high compensation is a shortage of labor. In this view, not many individuals are capable of running today’s large, complex organizations, so the few that have the nec- essary skills and experience can command a premium. Today’s high salaries are necessary for companies to attract or retain top talent. Why shouldn’t the most successful business executives make as much as top athletes and entertainers?
On the other hand, critics argue that inflated executive pay hurts the ability of U.S. firms to compete with foreign rivals. High executive compensation diverts financial resources that could be used to invest in the business, increase shareholder dividends, or pay average workers more. Multimillion-dollar salaries cause resentment and sap the commitment— and sometimes lead to the exodus of—hard-working lower and mid-level employees who feel they are not receiving their fair share. As for the performance issue, most empirical evidence finds little relationship overall between executive pay and company success. A study of 500 large U.S. companies by the nonprofit organization As You Sow, published in 2018, found no statistically significant relationship between total shareholder return (capital gains and dividends) and top executive compensation averaged over the preceding five-year period. In other words, higher paid executives did not necessarily produce higher returns for shareholders. For example, Thomas Rutledge, the CEO of Charter Communi- cations, was paid nearly six times as much as might have been expected, based on share- holder returns.26
Executive compensation has also been the subject of government regulations. Under U.S. government rules, companies must clearly disclose what their five top executives are paid and lay out a rationale for their compensation. Companies must also report the value of various perks, from the personal use of corporate aircraft to free tickets to sporting events, which had previously escaped investor scrutiny. Under the so-called say-on-pay provisions of the Dodd-Frank Act, which went into effect in 2011, public companies must hold shareholder votes on executive compensation at least once every three years.
25 Lucian A. Bebchuk and Jesse M. Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge, MA: Harvard University Press, 2004). 26 As You Sow, “The 100 Most Overpaid CEOs 2018: Are Fund Managers Asleep at the Wheel?” February 2015, and private correspondence. Calculations were contributed by HIP Investor, a partner of As You Sow. The organization’s work on execu- tive compensation is available at www.asyousow.org/our-work/ceo-pay.
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 295
law43665_ch13_281-304.indd 295 01/23/19 02:38 PM
Many voluntarily now do so annually. For example, in 2018 a majority of shareholders voted against the proposed pay package of CEO Robert Iger, which they apparently thought was excessive.27 Although such say-on-pay referendums are not binding on man- agement, they provide a mechanism for shareholders to voice displeasure over excessive compensation—and boards often take notice. The governments of the United Kingdom, Norway, and Australia require such votes. A study found that in Australia, executive com- pensation had fallen relative to average workers’ pay after these rules went into effect—a “testament to investor vigilance,” the study concluded.28
The SEC has also proposed, but not finalized, a rule that would require companies to take back incentive-based compensation after a restatement of financial disclosures, a pro- cess known as clawback. In other words, if executives lied to pump up their compensation, they would have to pay it back. Even in the absence of SEC requirements, some boards of directors had acted. At Wells Fargo, for example, the board clawed back $75 million in compensation from two senior executives under whose watch the bank fraudulently opened customer accounts without their knowledge.29
Some unusual companies have voluntarily set caps on executive pay or pay differen- tials, and some executives have taken pay cuts. In 2015, the CEO of Gravity Payments, a Seattle credit card processor, slashed his own pay and set the minimum salary of workers at $70,000, saying that he thought that “CEO pay is way out of whack.” (This story is the subject of the discussion case in Chapter 3.) Whole Foods Market set a rule that no execu- tive’s salary could be more than 19 times what the average worker made, but this rule was likely to be revoked after the grocer was acquired by Amazon in 2017.30
Legal scholar Michael Dorff recommended in his book Indispensable and Other Myths that performance pay be eliminated, or at least restructured. Citing evidence that performance pay does not actually improve company performance—and, in fact, may simply “focus executives on their chances of winning the pay lottery rather than on running the company”—Dorff proposed that executives be paid mostly in cash. Base pay could be supplemented by carefully constructed bonuses based on meeting performance targets that are easy to measure, hard to manipulate, and within the executives’ control.31
How to structure executive compensation to best align managers’ interests with those of shareholders and other stakeholders will remain a core challenge of corporate governance.
Shareholder Activism
Shareholders do not have to rely exclusively on the board of directors. Some owners, both individual and institutional, have also acted directly to protect their own interests, as they define them. This section will describe the increased activism of three shareholder groups: large institutions (including hedge funds and private equity firms), social investors, and owners seeking redress through the courts.
27 “Disney Shareholders Reject CEO Iger’s Pay Package,” Market Watch, March 8, 2018. 28 Australian Council of Superannuation Investors, “Boards Respond to Investors on CEO Pay,” press release, September 19, 2013. 29 “Wells Fargo to Claw Back $75 Million from 2 Former Executives,” The New York Times, April 10, 2017. 30 “Whole Foods’ CEO Pay Discount Expires,” June 21, 2017, www.bloomberg.com. 31 Michael B. Dorff, Indispensable and Other Myths: Why the CEO Experiment Failed and How to Fix It (Berkeley: University of California Press, 2014).
Final PDF to printer
296 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 296 01/23/19 02:38 PM
The Rise of Institutional Investors As shown earlier, institutional investors—pensions, mutual funds, endowment funds, and the like—have enlarged their stockholdings significantly over the past two decades and have become more assertive in promoting the interests of their members.
One reason institutions have become more active is that it is more difficult for them to sell their holdings if they become dissatisfied with management performance. Large insti- tutions have less flexibility than individual shareholders, because selling a large block of stock could seriously depress its price, and therefore the value of the institution’s holdings. Accordingly, institutional investors have a strong incentive to hold their shares and orga- nize to change management policy.
The Council of Institutional Investors (CII) is an organization that represents pension funds, endowments, and foundations with combined assets of $3.5 trillion. The council has devel- oped a Shareholder Bill of Rights and has urged its members to view their proxies as assets, voting them on behalf of shareholders rather than automatically with management. Two orga- nizations, ISS (formerly Institutional Shareholder Services) and Glass Lewis, analyze share- holder resolutions and advise institutions how to vote. The activism of institutional shareholders has often improved company performance. One study showed that in the five years before and after a major pension fund became actively involved in the governance of companies whose shares it owned, stock performance improved dramatically, relative to the overall market.32
The activism of institutional investors has begun to spread to other countries. In many cases, U.S.–based pension and mutual funds that have acquired large stakes in foreign companies have spearheaded these efforts. As of 2017, U.S. investors had allocated about a fifth of their portfolios to foreign securities. To protect their globalized investments, fund managers have become active in proxy battles in Japan, Britain, Hong Kong, and many other countries. In addition, sovereign wealth funds operated by the governments of Singapore, Abu Dhabi, and China have recently become more active as institutional investors.
Another important group of activist investors is made up of private equity and hedge funds. Private equity firms are managed pools of money invested by very wealthy individ- uals and institutions (they are not usually open to ordinary individuals). Hedge funds are also pools of private capital; they are so-called because of the aggressive strategies they use to earn high returns for their investors. Their net asset values in 2017 were $2.9 trillion and $3.7 trillion, respectively.33 Both types of funds often invest in public companies with the intention of intervening to dramatically improve their shareholder returns.
For example, in 2017 an activist hedge fund called Trian Partners, headed by Nelson Peltz, waged an aggressive campaign for a seat on the board of Procter & Gamble, the giant consumer staples conglomerate. Trian, which owned a 1.5 percent stake, argued that P&G had not delivered for shareholders and called for the company to be split into three independent global business units. During the three-month campaign, P&G’s stock rose 8 percent, as shareholders anticipated that Peltz would improve the company’s value. After the shareholder vote yielded a virtual tie, the board offered a seat to the activist investor. “Peltz’s experience in the consumer product space will add value to P&G’s board,” said the director of corporate governance at the California teachers’ retirement system.34
32 “The ‘CalPERS Effect’ on Targeted Company Share Price,” July 31, 2009, at www.calpers-governance.org. 33 “Private Fund Statistics,” January 17, 2018, Securities and Exchange Commission Division of Investment Management Analytics Office. 34 “Procter & Gamble Bets on Electoral Math to Keep Nelson Peltz Away,” The New York Times, October 6, 2017, and “P&G Concedes Proxy Fight, Adds Nelson Peltz to Board,” The Wall Street Journal, December 15, 2017.
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 297
law43665_ch13_281-304.indd 297 01/23/19 02:38 PM
Although some individual investors no doubt welcomed the intervention of activist shareholders like Trian, others sounded an alarm. Commented Jeffrey Sonnenfeld, a pro- fessor at the Yale School of Management, “Too often activists pressure companies to cut costs, add debt, sell divisions and increase share repurchases, rather than invest in jobs, R&D, and growth. They do all this in the name of creating shareholder value. But that value is often short-lived.”35
Social Investment Another movement of growing importance among a very different kind of activist share- holder is social investment, sometimes also called socially responsible investment or sus- tainable, responsible, and impact investment (all these terms use the acronym SRI). Social investment refers to the use of stock ownership as a strategy for promoting social, environ- mental, and governance (ESG) objectives. This can be done in two ways: through selecting stocks according to various social criteria, and by using the corporate governance process to raise issues of concern.
Stock Screening
Shareholders wishing to choose stocks based on social, environmental, or governance cri- teria often turn to screened funds. A growing number of mutual funds and pension funds use social screens to select companies in which to invest, weeding out ones that pollute the environment, overpay their executives, discriminate against employees, make dangerous products like tobacco or weapons, or do business in countries with poor human rights records. In 2016, according to the Global Sustainable Investment Alliance, $23 trillion of assets were managed using responsible investment strategies, making up more than a quar- ter of all managed assets globally. $8.7 trillion in the United States was invested in mutual funds or pensions using social responsibility as an investment criterion, accounting for more than one in every five investment dollars. In recent years, socially responsible invest- ing has also grown rapidly in Europe, Latin America, and Asia.36 Growth has been driven, in part, by government rules requiring pension funds to disclose the extent to which they use social, environmental, or governance criteria in selecting investments. It has also been influenced by growing demand by investors who want to align their investment choices with their values. Most evidence shows that ESG–screened portfolios provide returns that are competitive with or superior to the broad market. For example, a study by Morgan Stanley found that sustainable investment (investment in companies focused on creat- ing social and environmental as well as economic benefits) “had usually met, and often exceeded, the performance of comparable traditional investments” on both an absolute and risk-adjusted basis.37
Social criteria may also be used when selling stocks. For example, some have at various times called for divestment (sale of stock) from companies that had operations in China, where some products were made by forced labor, and in Nigeria, Myanmar (Burma), and Sudan, where repressive regimes had been accused of human rights abuses. More recently, activists have called for divestment from companies that mine, extract, and market fossil fuels, because of their impact on climate change.
35 “Activist Shareholders, Sluggish Performance,” The Wall Street Journal [commentary], April 1, 2015. 36 Global Sustainable Investment Alliance, “2016 Global Sustainable Investment Review,” at www.gsi-alliance.org. Data are as of early 2016. 37 Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies,” March 2015.
Final PDF to printer
298 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 298 01/23/19 02:38 PM
Social Responsibility Shareholder Resolutions
Another important way in which shareholders have been active is by sponsoring social responsibility shareholder resolutions. This is a resolution on an issue of corporate social responsibility placed before shareholders for a vote at the company’s annual meeting.
The Securities and Exchange Commission (SEC), a government regulatory agency that is further described later in this chapter, allows shareholders to place resolutions concern- ing appropriate social issues, such as environmental responsibility or alcohol and tobacco advertising, in proxy statements sent out by companies. The SEC has tried to minimize harassment by requiring a resolution to receive minimum support to be resubmitted— 3 percent of votes cast the first time, 6 percent the second time, and 10 percent the third time it is submitted within a five-year period. Resolutions cannot deal with a company’s ordinary business, such as employee wages or the content of advertising, since that would constitute unjustified interference with management’s decisions.38
In 2018, shareholder activists sponsored more than 400 resolutions dealing with major social issues. Backers included faith-based institutions, individual shareholders, unions, environmental groups, socially responsible asset managers, universities, and public pen- sion funds. In the 2018 proxy season, some of the issues most commonly raised in these resolutions included corporate political activity, sustainability and climate change, work- place diversity, and governance practices such as board composition.39
When a social responsibility shareholder resolution is filed, several outcomes are possi- ble. In some cases, managers enter into a dialogue with shareholder activists and resolve an issue before the election. For example, activists withdrew a shareholder proposal at Exxon- Mobil after the company met their key request to issue a report on its forecasts of energy demand and how it was positioning itself for a “lower-carbon future.”40 Many companies now engage with shareholder activists, and in 2017 about a quarter of shareholder propos- als resulted in some company action, as it did at ExxonMobil. If no resolution is reached, the proposal will generally be submitted for a vote by shareholders. In 2017, proposals on climate-related risks and proxy access were supported by more than a third of voters, a threshold at which many boards pay serious attention.41
Shareholder Lawsuits Another way in which shareholders can seek to advance their interests is by suing the company. If owners think that they or their company have been damaged by actions of company officers or directors, they have the right to bring lawsuits in the courts, either on behalf of themselves or on behalf of the company (the latter is called a derivative lawsuit). Shareholder lawsuits may be initiated to check many abuses, including insider trading, an inadequate price obtained for the company’s stock in a buyout (or a good price rejected), or failure to disclose material information in a timely manner. The outcome can be very expensive for companies, as illustrated by the following example.
Multiple groups of shareholders sued LendingClub, a company that runs a digital platform connecting consumers who need loans with lenders, banks, and credit partners. After revelations that some loan information had been falsified—and the
38 Current SEC rules on shareholder proposals may be found at www.sec.gov/rules/final. 39 As You Sow, “Proxy Preview 2018: Helping Shareholders Vote Their Values,” Oakland, Calif.: 2018. 40 “ExxonMobil Gives in to Shareholders on Climate Risk Disclosure,” Fortune, December 17, 2017. 41 EY Center for Board Matters, “2017 Proxy Season Review,” Ernst & Young, June 2017. This and additional information about shareholder resolutions are available at www.ey.com/gl/en/issues/governance-and-reporting/center-for-board-matters.
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 299
law43665_ch13_281-304.indd 299 01/23/19 02:38 PM
company’s internal controls had failed to flag these irregularities—the stock fell by 35 percent, destroying $950 million in market value. In 2018, LendingClub settled its shareholder lawsuits for $125 million.42
Lawsuits brought by shareholders against the board of Wynn Resorts after a sexual harassment scandal hurt the firm’s share price are described in the discussion case at the end of this chapter.
In many ways—whether through their collective organization, the selection of stocks, the shareholder resolution process, or the courts—shareholder activists can and do protect their economic and social rights.
Government Protection of Shareholder Interests
The government also plays an important role in protecting shareholder interests. This role expanded as legislators responded to the corporate scandals of the early 2000s and the financial crisis later in the decade.
Securities and Exchange Commission The major government agency protecting shareholders’ interests is the Securities and Exchange Commission (SEC). Established in 1934 in the wake of the stock market crash and the Great Depression, its mission is to protect shareholders’ rights by making sure that stock markets are run fairly, and that investment information is fully disclosed. The agency, unlike most in government, generates revenue to pay for its own operations. (The revenue comes from fees paid by companies listed on the major stock exchanges.)
Government regulation is needed because shareholders can be damaged by abusive practices. Two areas calling for regulatory attention are protecting shareholders from fraudulent financial accounting and from unfair trading by insiders.
Information Transparency and Disclosure Giving shareholders more and better company information is one of the best ways to safe- guard their interests, and this is a primary mission of the SEC. By law, shareholders have a right to know about the affairs of the corporations in which they hold ownership shares. Those who attend annual meetings learn about past performance and future goals through speeches made by corporate officers and documents such as the company’s annual report. Those who do not attend meetings must depend primarily on annual reports issued by the company and the opinions of independent financial analysts.
In recent years, management has tended to disclose more information than ever before to shareholders and other interested people. Prompted by the SEC, professional accounting groups, and individual investors, companies now disclose a great deal about their financial affairs, with much information readily available on investor relations sections of company web pages. Shareholders can learn about sales and earnings, assets, capital expenditures and depreciation by line of business, details of foreign operations, and many other financial matters. Corporations also are required to disclose detailed information about directors and top executives and their compensation. In addition, many companies have begun reporting detailed information about social and environmental, as well as financial, performance, as discussed in Chapters 3, 10, and 17.
42 “LendingClub Agrees to Settle Shareholder Litigation for $125 Million,” American Banker, February 20, 2018, and “Lend- ingClub CEO Fired Over Faulty Loans,” The Wall Street Journal, May 9, 2016.
Final PDF to printer
300 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 300 01/23/19 02:38 PM
Insider Trading Another area the SEC regulates is stock trading by insiders. Insider trading occurs when a person gains access to confidential information about a company’s financial condition and then uses that information, before it becomes public knowledge, to buy or sell the company’s stock. Since others do not know what an inside trader does, the insider has an unfair advantage.
In 2011, Raj Rajaratnam, founder and former manager of the prominent hedge fund Galleon Group, was sentenced to 11 years in prison for 14 counts of illegal insider trading, the longest-ever sentence for this crime at that time. He was also ordered to pay $157 million in fines and forfeitures. Federal prosecutors built their case from wiretap evidence. Over several months, they listened as Rajaratnam—as The New York Times put it—“brazenly and matter-of-factly swapped inside stock tips with corporate insiders and fellow traders.” In one particularly shocking example, a member of the board of directors of Goldman Sachs called Rajaratnam seconds after a board meeting to share earnings information. The government said that Gal- leon Group had made $63 million in all from illegal trades. “The defendant knew the rules, but he did not care,” said one of the government prosecutors. “Cheating became part of his business model.”43
Insider trading is illegal under the Securities and Exchange Act of 1934, which outlaws “any manipulative or deceptive device.” The courts have generally interpreted this to mean that it is against the law to trade stock (or stock options) based on material, nonpublic information. This includes company officials, of course, who may have inside information based on their work. But it also includes also other individuals who obtain such informa- tion through a “breach of trust,” that is, a tip from someone who has an obligation to keep the information confidential. The tipper can also be guilty, if he or she benefits from the exchange. It is not, however, illegal to trade based on information developed from publicly available sources. Unfortunately, drawing these distinctions in practice has been challeng- ing, and the courts and Congress and the courts have gone back and forth trying to pin down exactly what constitutes a consequential benefit to the tipper, and what information can be said to come from inside versus public sources. Insider trading is also illegal in most other countries.
Insider traders are not necessarily high-placed executives, wealthy individuals, or household names. In 2017, the SEC brought insider trading charges against Daniel Rivas, who worked for the Bank of America, saying he had passed nonpublic infor- mation about upcoming mergers and acquisitions to his girlfriend’s father, James Moodhe. Moodhe generated $2 million in profits by trading on the tips. Several of the two men’s friends and associates were also charged. Rivas and Moodhe both pleaded guilty.44
The best-known kind of insider trading—as in this case—occurs when people improp- erly acquire confidential information about forthcoming mergers and acquisitions before these are announced to the public. A startling study conducted by professors at New York University and McGill University, which examined stock trades between 1996 and 2012,
43 “Hedge Fund Billionaire is Guilty of Insider Trading” and “A Circle of Tipsters Who Shared Illegal Secrets,” The New York Times, May 11, 2011; and “Rajaratnam Ordered to Pay $92.8 Million Penalty,” The New York Times, November 8, 2011. 44 “Seven Charged in Insider Trading Ring Linked to Bank of America Leaks,” Fortune, August 17, 2017, and “Insider Trading Case to Be a Test of the Role of Friendship,” The New York Times, August 21, 2017.
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 301
law43665_ch13_281-304.indd 301 01/23/19 02:38 PM
found that insider trading had probably occurred in no less than a quarter of all such deals.45 In another kind of insider trading, called front-running, traders place buy and sell orders for stock in advance of the moves of big institutional investors. They also track big trades in real time and act on them quickly; with today’s high-speed trading, even a few millisec- onds of advance notice of news about to hit the market can be enough to execute valuable insider trades.
Insider trading is contrary to the logic underlying the stock markets: All stock buyers and sellers ought to have access to the same information. In the Galleon Group case described above, Rajaratnam had insider information that ordinary investors did not—information that he used to give his fund and its investors an unfair advantage over others. If ordinary investors think that insiders can use what they know for personal gain, the system of stock trading could break down from lack of trust. Insider trading laws are important for inves- tors to have full confidence in the fundamental fairness of the markets.
Another responsibility of the SEC is to protect investors against fraud. One situation where they apparently failed to guard against a massive scheme to cheat investors was the fraud perpetrated by Bernard Madoff.
The victims of Madoff’s fraud—including prominent universities, charities, and cultural institutions, as well as individual investors—lost as much as $65 billion. Where were the government regulators in all of this? In congressional hearings, SEC chairman Christopher Cox admitted that his agency had missed repeated warnings, dating back to 1999, that things might be amiss at Madoff’s firm. “I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them,” said Cox. The New York Times wrote in a harsh editorial that the agency’s failure to uncover the Madoff fraud “exemplifies its lackadaisical approach to enforcing the law on Wall Street.”46
Some evidence suggested that the SEC had become less aggressive in pursuing finan- cial crimes since President Trump’s appointee as SEC chair, a Wall Street attorney, took over in 2017.47
Shareholders and the Corporation
Shareholders have become an increasingly powerful and vocal stakeholder group in cor- porations. Boards of directors, under intense scrutiny after the recent wave of corporate scandals and business failures, are giving close attention to their duty to protect owners’ interests. Reforms in the corporate governance process are under way that will make it easier for them to do so. Owners themselves, especially institutional investors, are pressing directors and management more forcefully to serve shareholder interests. The government, through the Securities and Exchange Commission, has taken important new steps to pro- tect investors and promote fairness and transparency in the financial marketplace.
Clearly, shareholders are a critically important stakeholder group. By providing capital, monitoring corporate performance, assuring the effective operation of stock markets, and
45 “Study Asserts Startling Numbers of Insider Trading Rogues,” The Wall Street Journal, June 16, 2014. 46 “Standing Accused: A Pillar of Finance and Charity,” The New York Times, December 13, 2008; “SEC Issues Mea Culpa on Madoff,” The New York Times, December 17, 2008; “SEC Knew Him as a Friend and Foe,” The New York Times, December 18, 2008; and “You Mean That Bernie Madoff?” The New York Times [editorial], December 19, 2008. 47 “Wall Street Penalties Have Fallen in Trump’s First Year, Study Says,” November 14, 2017, www.bloomberg.com.
Final PDF to printer
Key Terms social investment, 297 social responsibility shareholder resolutions, 298 stock option, 291
board of directors, 287 corporate governance, 287 executive compensation, 291 hedge fund, 296 insider trading, 300 institutional investors, 285
private equity firm, 296 proxy, 287 proxy access, 289 say-on-pay, 294 Securities and Exchange Commission (SEC), 299 shareholders, 283 shareholder lawsuits, 298
302 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 302 01/23/19 02:38 PM
bringing new issues to the attention of management, shareholders play a very important role in making the business system work. A major theme of this book is that the relation- ship between the modern corporation and all stakeholders is changing. Corporate leaders have an obligation to manage their companies in ways that attempt to align investors’ inter- ests with those of employees, customers, communities, and others. Balancing these various interests is a prime requirement of modern management. While shareholders are no longer considered the only important stakeholder group, their interests and needs remain central to the successful operation of corporate business.
∙ Individuals and institutions own shares of corporations primarily to earn dividends and receive capital gains, although some have social objectives as well. Shareholders are entitled to vote, receive information, select directors, and attempt to shape corporate policies and action.
∙ In the modern system of corporate governance, boards of directors are responsible for setting overall objectives, selecting and supervising top management, and assuring the integrity of financial accounting. The job of corporate boards has become increasingly difficult and challenging, as directors seek to balance the interests of shareholders, managers, and other stakeholders. Reforms have been proposed to make boards more responsive to shareholders and more independent of management.
∙ Some observers argue that the compensation of top U.S. executives is justified by per- formance, and that high salaries provide a necessary incentive for innovation and risk taking in a demanding position. Critics, however, believe that it is too high. In this view, high pay hurts firm competitiveness and undermines employee commitment.
∙ Shareholders have influenced corporate actions by forming organizations to promote their interests, intervening in board elections, and by filing lawsuits when they feel they have been wronged. They have also organized under the banner of social investment. These efforts have included screening stocks according to social and ethical criteria, and using the voting process to promote shareholder proposals focused on issues of social responsibility.
∙ Recent enforcement efforts by the Securities and Exchange Commission have focused on improving the accuracy and transparency of financial information provided to inves- tors. They have also focused on curbing insider trading, which undermines fairness in the marketplace by benefiting those with illicitly acquired information at the expense of those who do not have it.
Summary
Final PDF to printer
Chapter 13 Shareholder Rights and Corporate Governance 303
law43665_ch13_281-304.indd 303 01/23/19 02:38 PM
Discussion Case: Corporate Governance and Executive Misconduct at Wynn Resorts
On January 26, 2018, The Wall Street Journal published an explosive story about Steve Wynn, the chief executive and chairman of the board of Wynn Resorts, a leading operator of luxury hotels and casinos. The Journal reported that dozens of people had recounted “a decades-long pattern of sexual misconduct” involving Wynn’s unwanted advances on mas- sage therapists, cocktail waitresses, and other women who worked at his properties. One of the most serious allegations was that in 2005 the CEO had forced a manicurist to remove her clothes and have sex with him. After the woman filed a detailed complaint about the episode, Wynn had settled privately with her for $7.5 million. The executive immediately challenged the Journal story, saying, “The idea that I ever assaulted any woman is preposterous.”
The day the article came out, the share price of Wynn Resorts dropped by 10 percent, wiping out $2 billion in shareholder value.
Steve Wynn, 76, had begun his career as a young man by taking over his father’s bingo parlors in Maryland. He moved on to Las Vegas, Nevada, where he renovated the Golden Nugget, and later developed (and sold) the Mirage, Bellagio, and Treasure Island proper- ties. Over his long career, Wynn was widely credited with driving the transformation of Las Vegas from a seedy strip into a world-class destination for entertainment and gaming. A larger-than-life character, Wynn was said to be inspiration for the casino owner played by Andy Garcia in the “Ocean’s” films.
In 2018, Wynn Resorts owned the Wynn Las Vegas and two hotel casinos in Macau, an autonomous zone in southeast China that permitted gambling, and was in the process of building a new property in Massachusetts, expected to open in 2019. The firm had more than 24,000 employees and earned revenues in 2016 of $4.5 billion, about three-quarters of which came from its Macau operations. Wynn’s signature was the company’s logo.
In 2016, Steve Wynn’s total compensation was $28.2 million, placing him tenth on the list of top-paid U.S. CEOs. The research organization As You Sow ranked Wynn sixth on its list of “most overpaid” CEOs, based on a comparison of his compensation with total return to shareholders over the prior five years. But the company defended Wynn’s com- pensation package, pointing out in its proxy statement that between the initial public offer- ing in 2002 and 2017, shareholders had averaged a total return of 19 percent per year, well above the 9 percent return of the S&P 500 during that period. “Mr. Wynn is the founder, creator and name behind our brand,” the company said. “We believe he brings extraordi- nary talent . . . that is unrivaled in our industry.”
Wynn Resorts’ board of directors was comprised of ten people. Wynn served as chair- man, a role he had held continuously since the company went public. The other nine
Internet Resources
www.nyse.com New York Stock Exchange www.cii.org Council of Institutional Investors www.ussif.org Forum for Sustainable and Responsible Investment www.socialfunds.com Site for socially responsible individual investors www.ecgi.org European Corporate Governance Institute www.issgovernance.com ISS (formerly Institutional Shareholder Services) www.calpers.ca.gov California Public Employees Retirement System www.sec.gov U.S. Securities and Exchange Commission
Final PDF to printer
304 Part Six Business and Its Stakeholders
law43665_ch13_281-304.indd 304 01/23/19 02:38 PM
directors, although nominally independent, had close personal ties with the chief execu- tive. They included D. Boone Wayson, whose father had been Steve Wynn’s father’s part- ner in the bingo business; Edward Virtue, who had managed the Wynn family money; and Robert Miller, a former Nevada governor, who had known the CEO for more than 40 years. Patricia Mulroy, the sole woman on the board, was a former member of the Nevada gaming commission. The nine outside directors served staggered terms, with three standing for election or re-election to three-year terms each year. Their annual compensation ranged from $362,406 to $517,973.
Wynn Resorts’ board was widely viewed as compliant with the CEO’s wishes. The board had voted against Wynn only three times since 2002. The sole board member who was ever opposed for re-election was Elaine Wynn, Steve’s ex-wife, who lost the support of the other directors after the couple’s divorce. Glass Lewis, a proxy advisory firm, had given the company’s corporate governance practices an “F” grade in both 2016 and 2017. In the latter year, 41 percent of shareholders—including the big institutional investors Van- guard Group and BlackRock Inc.—had opposed the company’s compensation policies in a “say-on-pay” vote.
On the day the Journal article broke, the board issued a statement affirming the compa- ny’s commitment to maintaining a respectful culture and announced it had formed a com- mittee, headed by Mulroy, to investigate the allegations. But these actions failed to stem a tide of negative press. On February 6, Wynn resigned as CEO and chairman, saying he could no longer be effective. The board accepted his resignation “with a collective heavy heart,” calling Wynn a “beloved leader and visionary.” A week later, it hired Gibson Dunn, a law firm that had represented the board in earlier litigation, to conduct an inquiry.
Less than four weeks after the publication of the allegations against Steve Wynn, New York state’s public pension fund filed a lawsuit against the Wynn Resorts board of direc- tors, saying the board had done nothing to prevent the CEO’s sexual abuse and harassment and had allowed him to resign without being held accountable. The pension fund called for the defendants to “disgorge” (give back) all compensation obtained from wrongful con- duct. Other states, union pensions, and individual shareholders also filed suit, and gam- bling regulators in Massachusetts, Nevada, and Macau opened investigations.
“The story of Steve Wynn is a cliché: a powerful man preying on the powerless,” said the state of Oregon in its shareholder lawsuit. “But the directors of Wynn Resorts were not powerless. They were the only people with the knowledge and ability—and duty to the company—to investigate and stop Steve Wynn’s conduct.”
Sources: “Dozens of People Recount Pattern of Sexual Misconduct by Las Vegas Mogul Steve Wynn,” The Wall Street Journal, January 26, 2018; “Wynn Board Faces Scrutiny Following Allegations Against Steve Wynn,” The Wall Street Journal, January 30, 2018; “Wynn Steps Down as Wynn Resorts CEO,” and “The Board of Wynn Resorts Needs to Go, Too,” The Wall Street Journal, February 7, 2018; “Who’s Going to Fix Wynn Resorts? Not Its Board,” February 14, 2018, www.bloomberg. com; “Stockholders File Class Action Lawsuit Against Wynn Resorts,” The Real Deal, February 23, 2018; “Oregon Sues Steve Wynn, Board of Directors for Failing to Stop Sexual Misconduct,” March 7, 2018; www.hollywoodreporter.com; “Steve Wynn Remade Vegas, But China is Where He Makes Real Money,” January 29, 2018, http://money.cnn.com; “Steve Wynn’s Tarnished Name and Now a Tainted Brand,” The New York Times, February 11, 2018; and John L. Smith, Running Scared: The Life and Treacherous Times of Las Vegas Casino King Steve Wynn (Cambridge, MA: Da Capo Books, 2001).
Discussion Questions
1. Do you think Steve Wynn’s executive compensation was justified, and why or why not? 2. Did the board of directors of Wynn Resorts operate according to the principles of good
corporate governance, as described in this chapter? Why or why not? 3. Do you think Wynn Resorts’ institutional and individual shareholders used the rights
described in this chapter effectively to protect their interests? Why or why not? 4. What do you recommend senior executives and the board of Wynn Resorts do now?
Final PDF to printer
305
law43665_ch14_305-326.indd 305 11/28/18 07:50 AM
C H A P T E R F O U R T E E N
Consumer Protection
Safeguarding consumers while continuing to supply them with the goods and services they want, at the prices they want, is a prime social responsibility of business. Many companies recognize that providing customers with excellent service and product quality is an effective, as well as ethical, business strategy. Consumers, through their organizations, have advocated for their rights to safety, to be informed, to choose, to be heard, and to privacy. Government agencies serve as watchdogs for consumers, supplementing the actions taken by consumers to protect themselves through self- advocacy and use of the courts and by the actions of socially responsible corporations.
This Chapter Focuses on These Key Learning Objectives:
LO 14-1 Knowing the five major rights of consumers.
LO 14-2 Analyzing the reasons for consumer advocacy and the methods consumer organizations use to advance their interests.
LO 14-3 Assessing the ways in which government regulatory agencies protect consumers and what kinds of products are most likely to be regulated.
LO 14-4 Determining how consumer privacy online can best be protected.
LO 14-5 Examining how the courts protect consumers and efforts by businesses to change product liability laws.
LO 14-6 Evaluating how socially responsible corporations can proactively respond to consumer needs.
Final PDF to printer
306 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 306 11/28/18 07:50 AM
On late-night television infomercials, celebrity hairstylist Chaz Dean promoted a line of hair care products under the brand name WEN (“new” spelled backwards in a vaguely new-age script). The pitch was appealing: a single product could take the place of shampoo, conditioner, and detangler. The line was a hit with consumers, bringing in $100 million in just its first year of sales. But there was a problem: the products’ ingre- dients apparently caused itching, rash, hair loss, and even total baldness. Twenty-one thousand complaints poured into WEN Hair Care from extremely upset users, and oth- ers expressed their frustrations in online forums. “I was a professional model with beau- tiful long natural hair,” said one angry customer. “After using this product, my scalp and face broke out in boils and my hair fell out in chunks. This shampoo destroyed my life.” Many sued WEN and its marketing partner Guthy-Renker in a class-action lawsuit. Eventually, the company settled, agreeing to pay customers $26 million, although it insisted its products were safe and denied any link between WEN and hair loss. WEN began mailing out checks to its aggrieved customers in 2018—but continued to sell the product line.
One reason so many consumers were exposed to a potentially harmful product is that the government has limited authority to regulate beauty and personal care products. Phar- maceutical drugs and medical devices must be tested and shown to be safe and effective before they can be sold to the public. But in 2018 that was not true for most cosmetics and personal care products such as shampoo, lipstick, and deodorant. Companies like WEN Hair Care were not required to report adverse reactions to the government, even if a cus- tomer was seriously injured or died. In response to the WEN case and others like it, a bipartisan group of senators proposed legislation called the Personal Care Products Safety Act. Backed by environmentalists, public health organizations, and some big com- panies like Estée Lauder and Procter & Gamble, this proposed law would require compa- nies to report problems with personal care products to the government and give regulators the power to recall dangerous ones. It would also require that ingredients be tested for safety. But many smaller companies, represented by a trade group called Independent Cosmetic Manufacturers and Distributors, opposed the bill, saying the regulations would be too onerous. A few firms in the industry backed a competing bill that had weaker con- sumer protections.1
The story of WEN’s hair care products illustrates some of the complex relationships among consumers, business firms, government regulators, and the courts. Who should bear responsibility for protecting consumers’ rights and making sure they are not harmed, as many of WEN’s users were? Consumers expect businesses to ensure their products’ safety, promote their services honestly, and be transparent in their advertising. But the relationship is not a one-way street: consumers must themselves use care in selecting and using products and services, organize to protect themselves in the marketplace, and even bring a lawsuit as a last resort. Government regulators and the courts must ultimately back up consumers’ rights. Today, companies face challenging—and often conflicting— demands to produce a safe and high-quality product or service, keep prices down, protect privacy, prevent fraud and manipulation, and meet the changing expectations of diverse customers around the world. This chapter examines various ways that consumers and their advocates, government regulators, the courts, and proactive business firms have dealt with these issues.
1 “200 Women Sue WEN Hair Care,” The Daily Beast, December 10, 2015; “Their Hair Fell Out. Should the F.D.A. Have the Power to Act?” The New York Times, August 15, 2106; “Is Your Lipstick Bad for You?” The New York Times, August 17, 2016; and “Competing Cosmetic Safety Bills Would Each Expand FDA Regulatory Authority,” November 28, 2017, at www.bdlaw. com. The website for the class action settlement is at www.wenclasssettlement.com.
Final PDF to printer
Chapter 14 Consumer Protection 307
law43665_ch14_305-326.indd 307 11/28/18 07:50 AM
The Rights of Consumers
Over time, consumers and their advocates have defined five core rights to which they are entitled in their relationships with business. (Consumer advocacy is further described in the following section.) These five rights are:
1. The right to be informed: to be protected against fraudulent, deceitful, or grossly mis- leading information, advertising, and labeling, and to be given the facts to make an informed purchasing decision.
2. The right to safety: to be protected against the marketing of goods that are hazardous to health or life.
3. The right to choose: to be assured, wherever possible, access to a variety of products and services at competitive prices; and in those industries in which competition is not workable and government regulation is substituted, to be assured satisfactory quality and service at fair prices.
4. The right to be heard: to be assured that consumer interests will receive full and sym- pathetic consideration in the formulation of government policy and fair and expeditious treatment in the courts.
5. The right to privacy: to be assured that information disclosed during a commercial transaction or while using social media or searching online—such as health conditions, financial status, or identity—is not shared with others unless authorized.
Figure 14.1 shows the four main ways that these core rights of consumers can be pro- tected. Consumers and their advocates can act to protect their own interests in their inter- actions with business. The government can protect consumers through the regulation of product safety, quality, data privacy, and fair dealing. People can use the courts to seek compensation when they have been injured by unsafe products or unfair practices and to compel businesses to pay greater attention to consumer rights. And finally, companies can
FIGURE 14.1 Four Methods of Protecting Consumers
Consumerism Government Regulation
Consumers act to protect their own interests
The government regulates product safety and protects consumer privacy
•
Law/Courts
People sue when they are injured by a product
•
Industry “self- regulation”
Businesses and industries protect their customers through product recalls, quality programs, and voluntary codes
•
•
Final PDF to printer
308 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 308 11/28/18 07:50 AM
proactively protect their own customers through careful attention to safety and quality and by taking swift action when something goes wrong. This chapter will take up each of these methods in turn, beginning with consumer self-organization and advocacy.
Self-Advocacy for Consumer Interests
As long as business has existed—since the ancient beginnings of commerce and trade— consumers have tried to protect their interests when they buy goods and services. They have haggled over prices, taken a careful look at the goods they were buying, compared the quality and prices of products offered by other sellers, and complained loudly when they felt cheated by shoddy products. So, consumer self-reliance—best summed up by the Latin phrase caveat emptor, meaning “let the buyer beware”—has always been one form of consumer protection and is still practiced today.
However, the increasing complexity of economic life has led to organized, collective efforts by consumers to safeguard their own rights in many nations. These organized activ- ities are usually called consumerism or the consumer movement. Today, many organized groups actively promote and speak for the interests of millions of consumers.
Consumers International (CI) is an international nongovernmental organization that represents more than 200 consumer groups in more than 100 nations. Headquar- tered in London, it has offices in Asia, Latin America, and Africa. Its growth since 1960 has paralleled the expansion of global trade and the integration of many devel- oping nations into the world economy, as discussed in Chapter 4. CI’s approach is to partner with member organizations to deliver coordinated, multi-national cam- paigns to address common problems faced by consumers in the global marketplace. For example, in 2017 CI hosted a Consumer Summit in Berlin, Germany, focused on “building a digital world consumers can trust.” “As tech increasingly integrates into people’s lives, it is no longer sufficient to tell consumers it will bring conve- nience and speed or save them money,” the consumer group said on its website. “[Companies] have to offer more than just a tick box, privacy notice or adjustable settings as an answer to people’s growing privacy and security concerns.”
In the United States, one organization alone, the Consumer Federation of America, brings together nearly 300 nonprofit groups to espouse the consumer viewpoint. Other active U.S. consumer advocacy organizations include Public Citizen, the National Con- sumers League, the Public Interest Research Group (PIRG), and the consumer protection unit of the American Association for Retired People (AARP). Consumer Reports (CR, formerly called Consumers Union) conducts extensive tests on selected consumer prod- ucts and services and publishes the results of its tests, with ratings on a brand-name basis, online at www.consumerreports.org. Consumers also self-organize online, for example by creating groups of people injured by a specific product on social media platforms or using review tools to express approval or disapproval of products and services. For example, Trustpilot is a Danish website where consumers can post and share reviews of online busi- nesses; the site garners half a million new reviews each month. Like other such sites, Trust- pilot has to work constantly to identify and remove fake reviews.
Through both formal and information organization, consumers band together to pro- mote and protect their interests.2
2 See www.consumersunion.org and http://hearusnow.org.
Final PDF to printer
Chapter 14 Consumer Protection 309
law43665_ch14_305-326.indd 309 11/28/18 07:50 AM
How Government Protects Consumers
The role of government in protecting consumers is extensive in many nations. This section will describe legal protections afforded consumers in the United States and offer some comparisons with other countries.
Goals of Consumer Laws Figure 14.2 lists some of the safeguards provided by U.S. consumer protection laws. Taken together, these safeguards reflect the goals of government policymakers and regulators in the context of the five rights of consumers outlined above. Many of these safeguards are also embedded in the laws of other nations.
First, some laws are intended to provide consumers with better information when mak- ing purchases. Consumers can make more rational choices when they have accurate infor- mation about the product. For example, the laws requiring health warnings on cigarettes and alcoholic beverages broaden the information consumers have about these items. Man- ufacturers, retailers, and importers must spell out warranties (a guarantee or assurance by the seller) in clear language and give consumers the right to sue if they are not honored. The Truth in Lending Act requires lenders to inform borrowers of the annual rate of inter- est to be charged, plus related fees and service charges. For example, Countrywide—the largest mortgage lender in the United States until its collapse in 2008—later paid over
Information protections Hazardous home appliances must carry a warning label. Home products must carry a label detailing contents. Automobiles must carry a label showing detailed breakdown of price and all related costs. Lenders must provide timely and understandable information about mortgages and other consumer loans. Tobacco advertisements and products must carry a health warning label. Alcoholic beverages must carry a health warning label. All costs related to real estate transactions must be disclosed. Warranties must specify the terms of the guarantee and the buyer’s rights. False and deceptive advertising are prohibited. Food and beverage labels must show complete nutritional information. Food advertising must not make false claims about nutrition. Direct hazard protections Hazardous toys and games for children are banned from sale. Safety standards for motor vehicles are required. National and state speed limits are specified. Hazardous, defective, and ineffective products can be recalled under pressure from the EPA, CPSC, NHTSA, and FDA. Pesticide residue in food is allowed only if it poses a negligible risk. Pricing protections Unfair pricing, monopolistic practices, and noncompetitive acts are regulated by the FTC and Justice Department and by states. Liability protections When injured by a product, consumers can seek legal redress. Privacy protections Limited collection of information online from and about children is allowed. Other protections No discrimination in the extension of credit is allowed.
FIGURE 14.2 Major Consumer Protections Specified by Consumer Laws
Final PDF to printer
310 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 310 11/28/18 07:50 AM
$8 billion to settle charges that it had used unfair, deceptive, or fraudulent practices in dealing with its customers.
U.S. law also requires food manufacturers to adopt a uniform nutrition label, specifying the amounts of calories, fat, salt, and other nutrients contained in packaged, canned, and bottled foods. Labels must list the amount of trans fat—partially hydrogenated vegetable oils believed to contribute to heart disease—in cakes, cookies, and snack foods. Nutritional information about fresh fruits and vegetables, as well as fish, must be posted in supermar- kets. Strict rules also define what can properly be labeled “organic.”
Deceptive advertising is illegal in most countries. Manufacturers may not make false or misleading claims about their own product or a competitor’s product, withhold rele- vant information, or create unreasonable expectations. In the United States, the Federal Trade Commission (FTC) enforces the laws prohibiting deceptive advertising, and the U.S. Justice Department enforces related laws prohibiting false claims.
For example, in 2016 DeVry University, a for-profit chain of colleges, agreed to pay $100 million to settle charges brought by the Federal Trade Commission. The gov- ernment said that DeVry had misled prospective students with deceptive ads that exaggerated its graduates’ job prospects and earnings. The university had falsely claimed, for instance, that its alums earned 15 percent more a year after graduation than those from other colleges. Under the settlement, DeVry was required to pay $49 million to qualifying students who were harmed by the ads and to forgive $51 million worth of loans it had issued to them for tuition, books, and fees. “When people are making important decisions about their education and their future, they should not be misled,” said the chairperson of the FTC.3
The discussion case at the end of this chapter describes deceptive advertising used by Volkswagen to promote its diesel vehicles in the United States.
A second aim of consumer legislation is to protect consumers against possible haz- ards. As the opening example about WEN hair care products showed, consumers can be injured by dangerous products. U.S. laws seek to safeguard consumers in many ways, such as requiring warnings about possible side effects of pharmaceutical drugs, placing limits on flammable fabrics, restricting pesticide residues in fresh and processed foods, banning lead-based paints, and requiring regular inspections to eliminate contaminated meats. In 2008, following a major recall of toys contaminated with lead paint, Congress passed the Consumer Product Safety Improvement Act, which required that toys and infant products be tested before sale and gave regulators more resources to work with. For example, under this legislation a new rule went into effect in 2018 banning certain phthalates—dangerous chemicals used to make plastic more pliable—from children’s toys and child care articles.
The third and fourth goals of consumer laws are to promote competitive pricing and consumer choice. When competitors secretly agree to divide up markets among them- selves, or when a single company dominates a market, this artificially raises prices and limits consumer choice. Antitrust laws in the U.S. and Europe forbid these practices, as discussed in Chapter 7. For example, in 2017 the Federal Trade Commission opened an antitrust investigation of Mylan Pharmaceuticals for keeping the price of EpiPen artifi- cially high. EpiPen was a potentially lifesaving device that automatically injected a dose of epinephrine when a person experienced a dangerous allergy attack.4
3 “DeVry University Agrees to $100 Million Settlement with FTC,” press release, December 15, 2016, at www.ftc.gov. 4 “FTC Opens Antitrust Investigation of Mylan over EpiPen’s Market Dominance,” Consumer Reports, January 31, 2017.
Final PDF to printer
Chapter 14 Consumer Protection 311
law43665_ch14_305-326.indd 311 11/28/18 07:50 AM
A fifth and final goal of consumer laws is to protect privacy. This issue has recently received heightened regulatory attention, as discussed later in this chapter. The Children’s Online Privacy Protection Act limits the collection of information online from and about children under the age of 13. The Federal Trade Commission has established a “do not call” list to protect individuals from unwanted telemarketing calls at home, and some have called for similar “do not track” rules to protect Internet users. Unwanted calls to a person’s mobile phone are also illegal. Other threats to privacy caused by the widespread use of digital technologies are discussed later in this chapter and in Chapters 11 and 12.
Major Consumer Protection Agencies Figure 14.3 depicts the principal consumer protection agencies that operate at the federal level of the U.S. government, along with their major areas of responsibility.
In addition to the eight agencies listed in Figure 14.3, several others are also involved in consumer protection. The Civil Rights Division of the Department of Justice enforces the provisions of the Civil Rights Act that prohibit discrimination against consumers. For example, in 2018, the department settled a case with a sports bar and lounge in Houston called 360 Midtown, charging that the venue had illegally turned away African American, Asian, and Hispanic patrons, by selectively imposing a cover charge and enforcing a dress code. “No individuals should be denied admission to any place of public accommodation because of the color of their skin,” said a representative of the Civil Rights Division.5
The National Highway Traffic Safety Administration (NHTSA), which is part of the Department of Transportation, affects many consumers directly through its authority over automobile safety. For example, the agency develops regulations for car air bags, devices that inflate rapidly during a collision, preventing the occupant from striking the steering wheel, dashboard, or side window. Another issue the NHTSA is involved in is distracted driving, any activity that diverts the driver’s attention from the road. The NHTSA has issued guidelines for carmakers to encourage them to design vehicles that allow drivers to interact safely with communications, navigation, entertainment, and other tools.6
One consumer protection agency with particularly significant impact on the business community is the Food and Drug Administration (FDA). The FDA’s mission is to assure the safety and effectiveness of a wide range of consumer products, including pharmaceuti- cal drugs, medical devices, foods, and cosmetics. The agency has authority over $1 trillion of products, about a quarter of all consumer dollars spent each year.
One of the FDA’s main jobs is to review many new products prior to their introduction. This job requires regulators to walk a thin line as they attempt to protect consumers. On one hand, the agency must not approve products that are ineffective or harmful. On the other hand, the agency must also not delay beneficial new products unnecessarily. The FDA can also pull existing products off the market or put restrictions on their use, if they are found to harm consumers. Historically, the FDA has had a reputation as a cautious agency that has advocated tough and thorough review before approval. This policy has stood in contrast to those of its counterparts in Europe and some other nations, which have tended to favor quick approval followed by careful field monitoring to spot problems.
One group of products that is not fully regulated by the FDA is dietary supplements, such as the vitamins, minerals, and herbal remedies often sold at health food stores. In 1994, the supplement industry successfully lobbied Congress for a law that exempted their
5 “DOJ Settles Discrimination Lawsuit Against Houston Bar 360 Midtown,” February 26, 2018, www.newsfix.com; and “Midtown Sports Bar Settles Suit for Racial Discrimination,” Houston Chronicle, February 1, 2018. 6 The most recent rules concerning air bags are available at www.nhtsa.dot.gov.
Final PDF to printer
312 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 312 11/28/18 07:50 AM
FIGURE 14.3 Major Federal Consumer Protection Agencies and Their Main Responsibilities
Federal Trade Commission
Food and Drug Administration
Competitive pricing Deceptive trade practices Packaging and labeling Consumer credit disclosure and reporting Online privacy
Safety, e�ectiveness, and labeling of drugs, foods, food additives, cosmetics, and medical devices Standards for radiation exposure Toxic chemicals research
Consumer Product Safety Commission
Safety standards for consumer products Flammable fabrics, hazardous substances, poison prevention packaging
Consumer Financial Protection Bureau
Fairness and transparency in consumer financial products and services
Department of Agriculture
Safety of meat and poultry
National Transportation Safety Board
Airline safety
Department of Justice
Fair competition Consumer civil rights
National Highway Tra�c Safety Administration
(Transportation Department)
Motor vehicle safety standards Automobile fuel economy standards National uniform speed limit Consumer safeguards for altered odometers
Final PDF to printer
313
law43665_ch14_305-326.indd 313 11/28/18 07:50 AM
products from most government regulation. As a result, unlike pharmaceutical drugs, sup- plements do not have to be approved by the FDA before being sold, although the manufac- turer itself is supposed to ensure that that the product is safe—and the government can act after a supplement is on the market.
For example, the FDA banned ephedra, an herbal stimulant, after several users, including a professional athlete, died. But some supplement makers continued to sell body-building and weight-loss products containing a similar substance called DMAA and other stimulants that had not been proven safe. “Most supplement man- ufacturers are committed to ensuring quality and safety. But there are a few irre- sponsible and unscrupulous companies out there, and their actions are putting consumers at risk,” said a research scientist.7
In the absence of full government regulation, a private standards-setting organization called NSF International has worked to provide certification of dietary supplements, to give consumers greater confidence in their safety.
In 2010, Congress established, as part of the Dodd-Frank Act (also discussed in Chapters 7 and 13), a new consumer regulatory body, called the Consumer Financial Protection Bureau. The purposes and actions of this agency are described in Exhibit 14.A. The debate over whether government should become involved in protecting consumer pri- vacy is discussed in the next section of this chapter.
7 “Potentially Harmful Stimulants Found in Six Weight-Loss and Pre-Workout Supplements,” November 8, 2017, at www.nsf.org. Information on the FDA’s policies on dietary supplements is at www.fda.gov/food/dietarysupplements.
The Consumer Financial Protection Bureau
In 2010, as part of the Dodd-Frank Act, Congress created a new agency called the Consumer Financial Protec- tion Bureau (CFPB). Its purpose was “to make markets for consumer financial products and services work in a fair, transparent, and competitive manner.” The CFPB consolidated under one roof various consumer financial protection activities, which had previously been spread across seven different federal agencies. Among its mandates were to ensure that consumers had timely and understandable information about loans, to protect them from unfair and deceptive practices and discrimination, and to promote healthy innovation in the finan- cial services industry. It also had oversight of previously unregulated financial institutions, such as payday lenders, which regularly provided short-term, emergency loans at high interest rates to the working poor. One of the bureau’s initiatives was “Know Before You Owe,” a campaign to help consumers clearly under- stand the costs and risks of various financial products, such as student loans. In 2018, the amount owed on student loans—estimated at $1.5 trillion—was second only to mortgages as a portion of household debt. But students and their families had difficulty comparing aid packages, because colleges often failed to distin- guish clearly between loans and scholarships or to disclose the total debt a student would accumulate during their education. The bureau worked with the Department of Education to develop a standardized disclosure form that would allow students to make side-by-side comparisons of financial aid offers from several col- leges; for example, by seeing how much their monthly payments would be after graduation. The CFPB also acted against unscrupulous student loan debt collectors, ordering them to stop hounding people for money they did not owe and compensate consumers they had harmed. In 2017, the Department of Education, headed by Trump appointee Betsy DeVos, stopped collaborating with the CFPB, in part by no longer sharing information about federal student loans. This weakened the bureau’s efforts to protect student borrowers.
Sources: “A Look at Shocking Student Loan Debt Statistics for 2018,” at https://studentloanhero.com; “The Department of Education Cuts Off a Student Loan Watchdog,” September 20, 2017, at www,npr.org; and “DeVos Tells CFPB to Back Off on Student Loans,” September 8, 2017, at www.bloomberg.com. The CFPB’s website is at www.consumerfinance.gov.
Exhibit 14.A
Final PDF to printer
314 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 314 11/28/18 07:50 AM
All eight government regulatory agencies shown in Figure 14.3 are authorized by law to intervene directly into the very center of free market activities, if that is considered necessary to protect consumers. In other words, consumer protection laws and agencies substitute government-mandated standards and the decisions of government officials for decision making by private buyers and sellers.
Consumer Privacy in the Digital Age
Rapidly evolving information technologies have given new urgency to the broad issue of consumer privacy. Shoppers have always been concerned that information they reveal during a sales transaction—for example, their credit card or driver’s license numbers— might be misused. But in recent years, digital technologies have increasingly enabled busi- nesses to collect, buy, sell, and use vast amounts of personal data about their customers and potential customers. The danger is not only that this information might rarely be used fraudulently, but also that its collection represents a violation of privacy and might lead to unanticipated harms.
Individuals are often unaware of how much information about themselves they reveal to others as they shop, interact with friends, play games, use their mobile phones, or look for information online. A variety of technologies make this possible. Many websites place cookies—or more powerful Flash cookies—on a computer hard drive or mobile device, to identify the user during each subsequent visit and to build profiles of their behavior over time. Web beacons embedded in e-mails and websites retrieve information about the viewer. In deep packet inspection, third parties access and analyze digital packets of infor- mation sent over the Internet, such as pieces of e-mails or Skype calls, to infer character- istics of the sender. GPS technology on smartphones and other mobile devices enables service providers to track their customers’ location in real time. The Internet of things— smart thermostats and home alarm systems, for example—give service providers a trans- parent window into very personal aspects of their customers’ lives.
Many companies track their customers. Retailers know what they shop for and buy, search engine operators know what they are interested in, and mapping service providers know where they are. So-called data aggregators such as Acxiom Corporation purchase and combine data about individuals collected from various sources and compile them into highly detailed portraits to be sold to retailers, service providers, and advertisers.8
Today, a major aggregator of personal information for use in marketing is social media. The leading social media company in the world is now Facebook, which has 2.1 billion users worldwide. The company collects and analyzes vast amounts of information about its users, which they must agree to when they sign up for the service; the company explicitly tells its users that its data collection “includes information about the websites and apps you visit, your use of our services on those websites and apps, as well as information the developer or publisher of the app or website provides to you or us.” Although Facebook does not sell this information to others, it uses it to recruit advertisers, who are able to target with high accuracy the exact people they wish to reach on Facebook’s platform. This business model has proven astonishingly successful: in 2017, the company had $40 billion in annual revenue and a market value greater than $500 billion.9
8 This discussion of the use of technology to collect information about customers draws on Dipayan Ghosh and Ben Scott, “#Digital Deceit: The Technologies Behind Precision Propaganda on the Internet,” New America Public Interest Technology, January 2018. 9 “What You Don’t Know about How Facebook Uses Your Data,” The New York Times, April 11, 2018.
Final PDF to printer
Chapter 14 Consumer Protection 315
law43665_ch14_305-326.indd 315 11/28/18 07:50 AM
The main reason for all this tracking, as the Facebook example illustrates, is to tailor commercial messages to individuals. The term behavioral advertising refers to advertising that is specifically targeted to individuals, based on their observed online behavior. For example, a shopper might view a dress while browsing online for an outfit for an upcoming event, and then later when checking a news site might see an advertisement for the same dress pop up on her screen. In 2017, revenue from digital advertising was around $85 billion, surpassing revenue from TV advertising.10
Advertisements tailored to a user’s interests and preferences have many advantages for both buyer and seller. The buyer is more likely to receive messages that are relevant, and the seller is more likely to reach prospective customers. For example, Amazon tracks its customers’ preferences, so on subsequent visits to the website it can recommend books, electronics, and other products that a person might like—a potential benefit to shoppers. But the vast collection of information that makes behavioral advertising possible also car- ries risks. For example, in a practice called weblining, individuals may be denied oppor- tunities, such as credit, based on their online profiles. After reports spread that Russia had used data harvested from Facebook (and later sold to a company called Cambridge Analytica) to interfere in the 2016 U.S. election, many expressed concerns that data aggre- gation could facilitate not only targeted advertising, but also the spread of misinformation to those that were vulnerable to it. These events are the topic of the discussion case at the end of Chapter 7.
What do Americans feel about all this? Recent research suggests that most U.S. technol- ogy users are willing to share personal information if they feel they receive benefits—such as free services, useful information, or discounts—in exchange, but they are also increas- ingly concerned about the safety and security of their data. Consumers’ trust is fairly low; another study found that only a quarter (26 percent) of adults were “very” or “somewhat” confident that the companies and retailers they did business with would keep their infor- mation “private and secure.” Consumers expressed particular concern about social media; 80 percent of users said that were concerned about advertisers and businesses accessing data they shared on these platforms.11
The dilemma of how best to protect consumer privacy in the digital age, while still fostering legitimate commerce, has generated a wide-ranging debate. Three major solu- tions have been proposed: consumer self-help, industry self-regulation, and privacy legislation.
∙ Consumer self-help. In this view, the best solution is for users to employ technolo- gies that enable them to protect their own privacy. For example, specialized software can manage cookies and Flash content, encrypt e-mail and text messages, anonymize searches, erase programs, and set default “opt out” preferences. Individuals can learn about and use privacy settings on websites they access. “We have to develop mecha- nisms that allow consumers to control information about themselves,” commented a representative of the Center for Democracy and Technology, a civil liberties group.12 Critics of this approach argue that many unsophisticated users may be unaware of these mechanisms, or even of the need for them.
10 Digital Ad Revenue on Pace for $85 Billion in Another Record-Breaking Year,” December 20, 2017, at http://adage.com. 11 “Americans’ Complicated Feelings about Social Media in an Era of Privacy Concerns,” March 27, 2018, “Privacy and Infor- mation Sharing,” January 14, 2016, and “Americans’ Attitudes about Privacy, Security, and Surveillance,” May 20, 2015, at www.pewinternet.org. 12 More information about privacy protection for consumers is available at www.cdt.org (Center for Democracy and Technol- ogy), www.epic.org (Electronic Privacy Information Center), and www.privacyrights.org (Privacy Rights Clearinghouse).
Final PDF to printer
316 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 316 11/28/18 07:50 AM
∙ Industry self-regulation. Many Internet-related businesses have argued that they should be allowed to regulate themselves. In their view, the best approach would be for compa- nies to adopt voluntary policies for protecting individual privacy. For example, the Dig- ital Advertising Alliance, a marketing trade group, has developed an icon—a turquoise triangle placed in the upper right-hand corner of some online ads—that users can click to shield their behavior from tracking; and has introduced other features that allow con- sumers to set preferences for data collection and advertising on their mobile phones.13 One advantage of this approach is that companies, presumably sophisticated about their own technology, might do the best job of defining technical standards. Critics, however, feel that self-regulation would inevitably be too weak. After all, companies often made money from selling personal information to advertisers or allowing advertisers to target their messages, giving them a disincentive to protect it.
∙ Privacy legislation. Some favor new government regulations protecting consumer privacy online. Consumer privacy protections are generally stronger in the European Union than in the United States. Under the EU’s General Data Protection Regulation, which took effect in 2018, consumers in European nations gained extensive privacy protections. (These regulations also applied to companies based elsewhere that pro- vided services to European customers.) Under these rules, individuals must affirma- tively consent to the collection of information about them, and they have the right to carry their data from one service provider to another (“portability”) and to remove it under some circumstances (“erasure”). Companies must protect consumers’ informa- tion against loss or exposure and notify them quickly of any data breach, and they are required to appoint data protection officers to assure compliance.14 In 2018, after data breaches at Equifax (described in the discussion case at the end of Chapter 6) and other companies, some considered whether the United States should follow the EU’s lead in strengthening consumer privacy protections.
A European court recently ruled on the right of individuals to remove information about themselves from Google searches; this development is explored in a case at the end this book, “Google and the Right to be Forgotten,” as well as in Chapter 12.
Any approach to online privacy would face the challenge of how best to balance the legitimate interests of consumers—to protect their privacy—and of business—to deliver increasingly customized products and services in the digital age.
Using the Courts and Product Liability Laws
Who is at fault when a consumer is harmed by a product or service? This is a complex legal and ethical issue. The term product liability refers to the legal responsibility of a firm for injuries caused by something it made or sold. Under laws in the United States and some other countries, consumers have the right to sue and to collect damages if harmed by an unsafe product. Consumer advocates and trial attorneys have generally supported these legal protections, saying they are necessary both to compensate injured victims and to deter irresponsible behavior by companies in the first place. Some in the business com- munity, by contrast, have argued that courts and juries have unfairly favored plaintiffs, and they have called for reforms of product liability laws. This section describes how consum- ers can use product liability laws and the courts to protect their rights.
13 The website of the Digital Advertising Alliance is at https://digitaladvertisingalliance.org. 14 The website of the European General Data Protection Regulation is www.eugdpr.org.
Final PDF to printer
Chapter 14 Consumer Protection 317
law43665_ch14_305-326.indd 317 11/28/18 07:50 AM
Strict Liability In the United States, the legal system has generally looked favorably on consumer claims. Under the doctrine of strict liability, courts have held that manufacturers are responsible for injuries resulting from use of their products, even if they were not negligent. That is, they may be found to be liable, whether they knowingly did anything wrong or not. Consumers can also prevail in court even if they were partly at fault for their injuries.
Some product liability cases have led to large settlements, as the following example illustrates.
In 2018, a jury in Missouri ordered Johnson & Johnson, the health care and con- sumer products company, to pay $4.7 billion to 22 women and their families. In their product liability lawsuit, the plaintiffs had argued that J&J had failed to warn them that talcum powder made by the company raised their risk of ovarian cancer. The cause, they said, was asbestos fibers mixed with talc, an ingredient in the prod- uct. Johnson & Johnson challenged the science behind the argument. Saying that the trial had been “fundamentally unfair,” it vowed to appeal. But the cases of 9,000 other women were still pending, threatening potentially huge liability for the company.15
Huge product liability settlements, like the Johnson & Johnson case, are often well publicized, but they remain the exception. According to the U.S. Department of Justice, one in five noncriminal cases was a tort (liability) case, and plaintiffs (the people suing companies) won 34 percent of product liability cases filed. The average settlement in all tort cases was $201,000, although a few settlements were much higher.16
The product liability systems of other nations differ significantly from that of the United States. In Europe, for example, judges, not juries, hear cases. Awards are usually smaller, partly because the medical expenses of victims are already covered under national health insurance, and partly because punitive damages are not allowed.
Historically, product liability cases have been exceedingly rare in China. But that began to change in 2009, in the wake of China’s tainted-milk scandal. The previous year, almost 300,000 children became ill—and at least six died—after drinking baby formula contaminated by the industrial chemical melamine. Milk producers had apparently knowingly added the hazardous chemical to boost the formula’s pro- tein content. More than 200 families sued the formula companies, even though the government sought to keep the case out of the courts. Eventually, two people were executed for their roles in the scandal, and the company most responsible was fined and declared bankruptcy.17
The controversial issue of food industry liability for obesity is explored in Exhibit 14.B.
Product Liability Reform and Alternative Dispute Resolution Many businesses have argued that the evolution of strict liability has unfairly burdened them with excess costs. Liability insurance rates have gone up significantly, especially for
15 “J&J Hit with $4.7 Billion Jury Verdict in Baby Powder Suit,” The Wall Street Journal, July 12, 2018. 16 The most recent data may be found at the website of the U.S. Department of Justice, Office of Justice Programs, Bureau of Justice Statistics, at www.ojp.gov/bjs. 17 “China Milk Scandal: First Court Agrees to Hear Case,” May 25, 2011, www.huffingtonpost.com; “Two Executed in China over Tainted Milk,” CNN World, http://articles.cnn.com; “Tainted-Milk Victims File Lawsuit in China’s Highest Court,” The Wall Street Journal, January 20, 2009; and “Chinese Parents File Milk Lawsuit,” The Wall Street Journal, October 1, 2008.
Final PDF to printer
318
law43665_ch14_305-326.indd 318 11/28/18 07:50 AM
small businesses, as have the costs of defending against liability lawsuits and paying large settlements to injured parties. Moreover, businesses argue that it is unfair to hold them financially responsible in situations where they were not negligent.
Businesses have also argued that concerns about liability exposure sometimes slow research and innovation. For example, many pharmaceutical companies halted work on new contraceptive methods because of the risk of being sued. Despite the need for new contraceptives that would be more effective and provide protection against viral diseases, such as herpes and AIDS, research had virtually come to a halt by the late 1990s, according to some public health groups.
In 2005, Congress passed the Class Action Fairness Act, the first significant reform of product liability laws in many years. The two key elements of this legislation were:
∙ Most large class-action lawsuits were moved from state to federal courts. This provision applied to cases involving $5 million or more and that included plaintiffs from more than one state. Supporters of the law said this would prevent lawyers from shopping for friendly local venues in which to try interstate cases.
∙ Attorneys in some kinds of cases were paid based on how much plaintiffs actually received, or on how much time the attorney spent on the case. Under the old system,
Big Fat Liability
Should the food industry—such as fast-food restaurants and snack-makers—be held liable for their custom- ers’ obesity? Although some evidence shows that rates of obesity are stabilizing, they remain remarkably high: 71 percent of adults and 33 percent of children in the United States are either obese or overweight, by the most recent measures. Obesity is a major cause of breathing problems, type 2 diabetes, heart disease, arthritis, infertility, and some kinds of cancer. According to the Institute of Medicine, an independent group that advises the government, the annual cost of treating obesity-related chronic disease and disability is now around $190 billion annually. “Left unchecked,” the institute concluded, “obesity’s effects on health, health care costs, and our productivity as a nation could become catastrophic.” Some observers felt that the food industry was at least partly at fault—and possibly even legally liable for the epidemic of obesity. Fast food had become a big part of Americans’ diets. In 1970, they spent $6 billion a year on it; by 2014, they spent nearly $200 billion. This trend seemed to parallel the rise in obesity rates. The problem was not just the relatively high fat and sugar content of fast foods, but the super-sizing of portions. When fast- food restaurants increasingly began to compete based on value—more for less—customers simply ate more. For their part, food companies had concentrated on developing processed products, such as candy, gum, snacks, and bakery goods, which carried high profit margins along with excessive calories. They had intro- duced many more new products in these categories than entrées, fruits, and vegetables since the early 1980s, data showed. Moreover, both restaurants and food processors, in their critics’ view, had failed to communicate adequately the health risks of some foods and had inappropriately marketed their products to children. By contrast, others felt that individuals should be held responsible for their own weight—or in the case of children, the parents should be held responsible. Americans consume, on average, more than 2,500 calories a day, well above the healthy amount for most people. Only 3 percent of Americans meet the government’s dietary recommendations, and less than one-fifth exercise enough. Unlike cigarettes, food products are not normally addictive. Moreover, obesity has many causes, and the exact role of specific companies is unclear. How could one know whether a person’s obesity was caused by eating specific foods, overeating generally, a sedentary lifestyle, or genetic predisposition?
Sources: The Institute of Medicine, “Accelerating Progress in Obesity Prevention: Solving the Weight of the Nation,” (2012) at www.iom.edu. Overweight and obesity statistics are available from the Center for Disease Control’s National Center for Health Statistics (www.cdc.gov/nchs) and the office of the U.S. Surgeon General (www.surgeongeneral.gov). Data on fast-food industry revenues are from www.statista.com.
Exhibit 14.B
Final PDF to printer
Chapter 14 Consumer Protection 319
law43665_ch14_305-326.indd 319 11/28/18 07:50 AM
attorneys were often paid a percentage of the settlement amount. This sometimes led to excessive compensation for the lawyers.
Although most businesses welcomed these changes, some called for further reforms, such as shifting the burden of proof to consumers and limiting punitive damages.
Product liability reforms such as those included in the Class Action Fairness Act have faced vigorous opposition from consumers’ organizations and from the American Trial Lawyers Association, representing plaintiffs’ attorneys. These groups have defended the existing product liability system, saying it puts needed pressure on companies to make and keep products safe.
Plaintiffs scored a legal victory in 2009 when the U.S. Supreme Court decided an important case called Wyeth v. Levine. Diana Levine, a musician, was injected with an antinausea drug made by Wyeth after complaining of migraines. The drug’s label said that “extreme care” should be used to avoid hitting an artery, which could lead to “gangrene requiring amputation.” Unfortunately, this happened to the musi- cian, whose right arm had to be amputated. In the ensuing lawsuit, Wyeth defended itself on the ground that because the FDA had approved the warning label, the com- pany was shielded from the lawsuit. The Supreme Court disagreed and said the suit could go forward—federal regulatory approval had not preempted the company’s liability under state laws.18
One approach to settling disagreements between companies and consumers, other than going to court, is alternative dispute resolution (ADR). ADR can take the form of mediation, a voluntary process to settle disputes using a neutral third party, or arbitration, the use of an impartial individual to hear and decide a case outside of the judicial system. The American Arbitration Association (AAA), for example, offers mediation of mortgage fore- closure claims and disputes over insurance claims arising from natural disasters. AAA also offers due process guidelines for companies that want to utilize arbitration to resolve disputes over products or services. Proponents of ADR argue that it is a faster and less expensive way to resolve company–consumer disputes and does not tie up the judicial system with minor issues.
A controversial aspect of consumer ADR is the use of mandatory arbitration clauses. These are clauses in a purchase agreement—for example, for cell phone service, a credit card, or moving services—that require customers to agree to take any future disputes to arbitration rather than to court. A study by the Consumer Financial Protection Bureau found that mandatory arbitration clauses were in place in 44 percent of checking accounts, 53 percent of credit cards, 99 percent of payday loans, and almost 100 percent of mobile wireless service contracts. Companies often favor such clauses, because they enable them to avoid sometimes-expensive lawsuits and, they contend, charge customers less. Consumer rights organizations, on the other hand, have tried to restrict the use of mandatory arbitra- tion because it limits consumers’ rights to file suit when they have been harmed. In 2017, the CFPB issued a rule allowing consumers to bypass mandatory arbitration clauses to file individual or class-action lawsuits. But this change never went into effect, because Con- gress and the president blocked it, in a victory for banks and other service providers.19
18 “High Court Eases Way to Liability Lawsuits,” The Wall Street Journal, March 5, 2009. 19 Consumer Financial Protection Bureau, “CFPB Issues Rule to Ban Companies from Using Arbitration Clauses to Deny Groups of People Their Day in Court,” July 10, 2017, at www.consumerfinance.gov; “Congressional Republicans Use Special Maneuver to Kill Arbitration Rule,” The Washington Post, October 25, 2017; and Consumer Financial Protection Bureau, Arbitration Study: Report to Congress Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act, March 2015. The percentage figure refers to the percentage of the relevant market, not the percentage of contracts.
Final PDF to printer
320 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 320 11/28/18 07:50 AM
Positive Business Responses to Consumerism
The consumer movement has demonstrated that business is expected to perform at high levels of efficiency, reliability, and fairness to satisfy the consuming public. Because busi- ness has not always responded quickly or fully enough, consumer advocates have turned to government for protection. On the other hand, much effort has been devoted by individ- ual business firms and by entire industries to encourage voluntary responses to consumer demands. Some of the more prominent positive responses are discussed next.
Managing for Quality One way that many businesses address consumer interests is to manage quality in a highly proactive way. Quality has been defined by the International Organization for Standard- ization (ISO) as “a composite of all the characteristics, including performance, of an item, product, or service that bear on its ability to satisfy stated or implied needs.” Quality management, by extension, refers to “all the measures an organization takes to assure qual- ity.” These might include, for example, defining the customer’s needs, monitoring whether a product or service consistently meets these needs, analyzing the quality of finished prod- ucts to assure they are free of defects, and continually improving processes to eliminate quality problems. Taking steps at all stages of the production process to ensure consistently high quality has many benefits. Responsible businesses know that building products right the first time reduces the risk of liability lawsuits and builds brand loyalty.
Chrysler Corporation, the U.S. car company, worked hard to boost its products’ quality as it emerged from bankruptcy in the early 2010s. Understanding the crucial role of mechanical reliability and consistent fit-and-finish, the company invested $20 million in upgrading the Illinois factory where it planned to build its Dart, Jeep Compass, and Jeep Patriot models, and trained workers to audit vehicles randomly for problems. Chrysler’s CEO empowered its quality chief to shut down production or delay a model launch if he needed to—as he did when inspectors found that the rear taillight on the new Chrysler 300 was not completely flush with the body. “Chrysler has made good strides in the products that are in the showrooms now, but it will take time,” said the director of Consumer Reports’ automotive test center.
Managing for product and service quality is an attempt by business to address its cus- tomers’ needs. It is an example of the interactive strategy discussed in Chapter 2, where companies try to anticipate and respond to emerging stakeholder expectations.
The Malcolm Baldrige National Quality Award, named for a former U.S. Secretary of Commerce, is given annually to organizations that demonstrate quality and per- formance excellence. A 2017 recipient was the Southcentral Foundation, a nonprofit health care organization owned and managed by Alaskan Natives, who lived in a widely dispersed area including 55 villages reachable only by plane. The foundation was cited for its high rankings on many outcome and quality measures, such as 90th percentile rankings for diabetes, heart health, and cancer screenings, even though its customers were spread out over a vast area. Said CEO Kathleen Gottlieb, “This award reflects the collaborative effort of our Tribal leadership, customer-owners, and employees.”20
20 “Best of the Best Win U.S. National Excellence Honor,” November 16, 2017, www.commerce.gov, and “Southcentral Foun- dation Accepts Second Malcolm Baldridge Award,” press release, April 12, 2018.
Final PDF to printer
321
law43665_ch14_305-326.indd 321 11/28/18 07:50 AM
The challenging issue of business’s responsibility for products that are safe and of high quality—but used by others in illegal or dangerous ways—is profiled in Exhibit 14.C.
Voluntary Industry Codes of Conduct In another positive response, businesses in some industries have banded together to agree on voluntary codes of conduct, spelling out how they will treat their customers. This action may be taken to forestall even stricter regulation by the government. One such voluntary code is described in the following example.
The Western Growers Association, a trade association of farmers, adopted volun- tary guidelines for growers and handlers of leafy green vegetables. The move fol- lowed an outbreak of E. coli poisoning, in which three people died and hundreds were sickened. Public health investigators traced the rash of illnesses to spinach grown on a California farm that had become contaminated with infected wild pig feces. Over 100 farm companies subsequently signed on to the new standards to alleviate customer concerns—and to reduce pressure for mandatory government rules. Voluntary standards have also been developed to assure the safety of other kinds of fresh produce, including melons and tomatoes.21
21 “Current Issues in Product Safety: The Packinghouse,” Food Safety News, February 25, 2015.
General Electric and the Use of Ultrasound Technology in Asia
What should a company do when customers use a legitimate product for an illegal or unethical purpose? This problem confronted General Electric (GE), the diversified global technology firm, in Asia. Among GE’s many health care products was a line of lightweight, portable ultrasound scanners used for diagnostic imaging. These devices were less expensive and easier to transport than earlier models, making their use in develop- ing nations and rural areas more practical—and popular. For example, by the mid-2000s, sales of ultrasound devices in India, where GE was the market leader, had reached $77 million annually. But GE’s portable ultrasound machines were, in some settings, used in a shocking and unexpected way: to identify the gender of female fetuses, which were then aborted. In some cultures, including parts of India and China, many families had a strong preference for sons over daughters. Sometimes, this preference reflected a belief that sons were responsible for caring for their parents in old age, or for carrying on the family name or traditions. At other times, poor families felt they could not afford the high cost of a dowry when a daughter married. Whatever the reason, some unscrupulous medical practitioners used GE’s ultra- sound devices to facilitate the selective abortion of female fetuses. In 2011, the ratio of boys to girls in India was 112 to 100; in China it was 121 to 100. (In nature, the ratio is 105 to 100). Millions of girls were simply never born. As it became aware of the scope of the problem, General Electric moved proactively to prevent the uneth- ical use of its products. In both India and China, laws prohibited the use of ultrasound for sex selection. GE worked closely with regulators responsible for enforcing these laws to assure that its products were only sold to (and serviced for) properly licensed practitioners, and it trained its sales representatives not to deal with anyone suspected of participating in selective abortions. It followed up with audits. The company also promoted positive images of women, for example, by sponsoring female athletes. GE wrote in a blog posted to its website that its experience had shown that “a manufacturer can take [steps] to reduce the risk that its products will be misused in ways that violate human rights.”
Sources: Mara Mvistendahl, Unnatural Selection: Choosing Boys over Girls and the Consequences of a World Full of Men (New York: PublicAffairs, 2011); “The War Against Girls,” The Wall Street Journal, June 24, 2011; and “Medical Quandary: India’s Skewed Sex Ratio Puts GE Sales in Spotlight,” The Wall Street Journal, April 18, 2007.
Exhibit 14C
Final PDF to printer
322 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 322 11/28/18 07:50 AM
Consumer Affairs Departments Many large corporations operate consumer affairs departments, often placing a vice president in charge. The consumer affairs officer typically manages a complex network of contacts with customers. The contact infrastructure usually includes a website with a self-service component; many sites are interactive, allowing customers to post comments or questions that are answered electronically by customer relations staff. Most companies also host a call center, using an interactive voice response system that leads callers to an appropriately trained customer service representative.
Increasingly, companies and their consumer relations professionals use sophisticated soft- ware to analyze large amounts of customer data from multiple channels, including interac- tions on a wide range of online platforms. In the past, such data was used mainly to understand what had already happened; that is, what an individual had looked at, purchased, or reviewed. But increasingly, companies are using such “big data” to predict what an individual might do or wish for in the future and to prescribe the best way to meet these needs. They often use machine learning to do this. Said one expert, the “continuous collection of data . . . provides the ability to prescribe products or offers that are custom-designed for an individual.”22
An example of a company that has made extensive use of big data analytics to improve customer service and satisfaction is Netflix. The media services provider began by sending movie DVDs to customers in the mail, but soon expanded into online streaming and film and television production. The company, which in 2018 had 125 million subscribers, has succeeded in large part because of its sophisticated data algorithms. Netflix knows what its customers watch, in what order, for how long—and what shows or movies they quit in the middle of viewing. It uses this information to suggest new titles to each customer, and to predict which films and series they are considering are most likely to be hits.23
Successful companies are learning to use data analytics to improve customer satisfac- tion and anticipate concerns.
Product Recalls One way companies deal with consumer dissatisfaction is by recalling faulty products. A product recall occurs when a company, either voluntarily or under an agreement with a govern- ment agency, takes back all items found to be dangerously defective. Sometimes these products are in the hands of consumers; at other times they may be in the factory, in wholesale ware- houses, or on the shelves of retail stores. Wherever they are in the chain of distribution or use, the manufacturer tries to notify consumers or potential users about the defect. For example, in 2018 Anheuser-Busch voluntarily recalled some packages of Stella Artois beer, because a flaw in some bottles could cause small pieces of glass to break off and fall into the beer. After announcing which lots were affected, the company and its suppliers fixed the production problem, worked with retailers to get affected units off the shelves, and offered to reimburse customers.24 The case “General Motors and the Ignition Switch Recalls,” which appears at the end of this book, describes a series of recalls carried out by General Motors to correct defects in the ignition switches of some of its models, which caused the cars to stall while moving.
One problem with recalls is that the public may not be aware of them, so dangerous prod- ucts continue to be used. For example, several babies were killed when Playskool Travel-Lite
22 “Leveraging the Three Stages of Analytics,” Customer Relationship Management, March 2017. 23 “How Netflix Uses Big Data to Drive Success,” January 20, 2018, at https://insidebigdata.com. 24 “Voluntary Partial Recall of 11.2-Ounce Bottles of Stella Artois,” April 2, 2018, press release, www.anheuser-busch.com.
Final PDF to printer
Chapter 14 Consumer Protection 323
law43665_ch14_305-326.indd 323 11/28/18 07:50 AM
portable cribs unexpectedly collapsed, strangling them. Although the Consumer Product Safety Commission (CPSC) ordered an immediate recall, not all parents and child care pro- viders heard about it, and additional deaths occurred.25 Some consumer organizations advo- cated a system that would require manufacturers of certain products—such as cribs—to include purchaser identification cards so users could be quickly traced in the event of a recall.26
The four major government agencies responsible for most mandatory recalls are the Food and Drug Administration, the National Highway Traffic Safety Administration, the Environ- mental Protection Agency (which can recall polluting motor vehicles), and the Consumer Product Safety Commission.
Consumerism’s Achievements
The leaders of the consumer movement can point to important gains in both the United States and other nations. Consumers today are better informed about the goods and ser- vices they purchase, are more aware of their rights when something goes wrong, and are better protected against inflated advertising claims, hazardous or ineffective products, and unfair pricing. Several consumer organizations serve as watchdogs of buyers’ interests, and a network of government regulatory agencies act for the consuming public.
Some businesses, too, have heard the consumer message and have reacted positively. They have learned to assign high priority to the things consumers expect: high-quality goods and services, reliable and effective products, safety in the items they buy, fair prices, and marketing practices that do not threaten important human and social values.
All these achievements, despite negative episodes that occasionally occur, bring the consuming public closer to realizing the key consumer rights: to be safe, to be informed, to have choices, and to be heard—as well as the newer right to privacy.
25 David Zivan, “The Playskool Travel-Lite Crib (A), (B), and (C),” Center for Decision Research, University of Chicago, November 5, 2002. 26 For information on initiatives to protect children from dangerous products, see www.kidsindanger.org.
∙ The five key consumer rights are the rights to safety, to be informed, to choose, to be heard, and to privacy.
∙ The consumer movement represents an attempt to promote the interests of consumers by balancing the amount of market power held by sellers and buyers.
∙ Consumer protection laws and regulatory agencies attempt to assure that consumers are treated fairly, receive adequate information, are protected against potential hazards, have free choices in the market, and have legal recourse when problems develop.
∙ The widespread use of digital technologies has given new urgency to the issue of con- sumer privacy. Three approaches to safeguarding online privacy are consumer self-help, industry self-regulation, and protective legislation.
∙ Business has complained about the number of product liability lawsuits and the high cost of insuring against them. Although consumer groups and trial attorneys have opposed efforts to change product liability laws, modest tort reforms have been legislated.
∙ Socially responsible companies have responded to the consumer movement by giving serious consideration to consumer problems, increasing channels of communication with customers, instituting arbitration procedures to resolve complaints, and recalling defective products. They have also pursued voluntary codes of conduct and quality management to meet, and even anticipate, consumers’ needs.
Summary
Final PDF to printer
324 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 324 11/28/18 07:50 AM
Discussion Case: Volkswagen’s “Clean Diesel” Campaign Owners of Volkswagen, Audi, and Porsche diesel cars were shocked to learn in September 2015 that their “clean diesel” vehicles were not so clean after all. Under pressure from U.S. regulators, Volkswagen admitted it had fraudulently equipped certain VW, Audi, and Porsche diesel models with so-called “defeat devices,” software designed to cheat on gov- ernment emissions tests. Cars marketed as environmentally friendly were in fact, unknown to their owners or the public, fouling the air with dangerous pollutants.
Said one owner of a diesel Jetta wagon, “I was very interested in fuel economy and low emissions, and power, but I remember thinking when I bought the car that it almost seemed too good to be true. Now it turns out that is really was too good to be true. I feel completely duped.”
In 2007, Martin Winterkorn, the newly appointed CEO of Volkswagen, announced an ambitious goal: to become the world’s leading carmaker, pulling ahead of both Toyota and General Motors. A key element of the strategy was the rollout of a new generation of die- sels in the United States. This would require the development of a new diesel engine that could deliver lively performance and good gas mileage, while also complying with tough U.S. limits on emissions of nitrogen oxides (a toxic pollutant that causes health problems and contributes to smog). The company’s engineers struggled to meet this challenge within tight budgetary and time constraints.
Finally, under increasing pressure, the engineers hit on a solution: software that could detect when the vehicle was undergoing emissions testing. When the vehicle was on rollers and its steering wheel immobilized, the emissions control equipment would be switched on, reducing pollution to permitted levels. At other times—that is, during normal driving—the emissions control equipment would be dialed down, allowing the car to achieve better mileage and sportier performance. Such defeat devices were explicitly pro- hibited under U.S. environmental law.
To promote its new models, Volkswagen launched a major marketing campaign for its “Clean Diesel” TDI (turbocharged direct injection) technology. The campaign’s purpose
Internet Resources
www.consumersinternational.org Consumers International www.cpsc.gov U.S. Consumer Product Safety Commission www.ftc.gov U.S. Federal Trade Commission www.bbb.org Better Business Bureau www.consumerfed.org Consumer Federation of America www.consumeraffairs.com Consumer news and resource center www.beuc.eu The European Consumer Organization www.consumerreports.org Consumer Reports
Key Terms product liability, 316 product recalls, 322 quality management, 320 strict liability, 317
alternative dispute resolution, 319 behavioral advertising, 315 consumer affairs officer, 322
consumer movement, 308 consumer privacy, 314 consumer protection laws, 309 deceptive advertising, 310
Final PDF to printer
Chapter 14 Consumer Protection 325
law43665_ch14_305-326.indd 325 11/28/18 07:50 AM
was to counteract the stigma associated with diesel engines and convince car buyers that VW diesels were fun to drive, economical, and environmentally responsible. One ad proclaimed:
This ain’t your daddy’s diesel. Stinky, smoky, and sluggish. Those old diesel reali- ties no longer apply. Enter TDI “clean” diesel. Ultra-low sulfur fuel, direct injection technology, and extreme efficiency. We’ve ushered in a new era of diesel.
Other print ad tag lines included: “Diesel is no longer a dirty word,” “Diesel has really cleaned up its act,” and “Protect the environment and look good doing it.”
A series of humorous TV spots, dubbed “Old Wives’ Tales,” depicted three older women in a diesel VW Passat, arguing about its characteristics. In one, “Old Wives Talk Dirty,” the passengers agree the car is beautiful, but insist that it’s dirty. To prove it’s not, the driver gets out and holds her white scarf against the tailpipe. It comes away pristine.
Another ad, aired during the 2010 Super Bowl, featured the “Green Police” arresting citizens for various environmental transgressions, such as drinking from plastic water bot- tles, failing to compost orange peels, and using incandescent light bulbs. Then, at a road block set up to catch polluting vehicles, the Green Police allow a diesel-powered Audi A3 to skip the line, saying, “You’re good to go, sir.” The pleased driver zips off, under the tag line “green car of the year.”
The marketing campaign was a great success. From 2009 to 2015, VW sold around 580,000 vehicles with the defeat device in the United States, including VW, Audi, and Porsche-branded TDI (diesel) models. Consumers paid a premium for these cars: a VW diesel cost on average $5,755 more than a comparably equipped gasoline version. (Some operating costs were lower, however, since diesels got better gas mileage.)
Volkswagen’s deception began to unravel in 2013, when researchers from West Virginia University set out to study how much various cars polluted on the road, rather than in the lab. They were startled to discover that a VW Jetta and a VW Passat, both with diesel engines, emitted as much as 40 times the nitrogen oxides allowed under federal rules. California air regulators, alerted to these findings, began an investigation that led eventu- ally to Volkswagen’s admission of fraud.
Owners of the tainted vehicles suddenly faced difficult choices. They could continue driving their cars, knowing they were emitting dangerous pollutants way over the legal limit. They could attempt to sell their vehicles, but their value had dropped precipitously. Drivers with leases found themselves suddenly “upside down,” owing more on their con- tracts than their cars were worth.
Hundreds of owners chose to sue Volkswagen. In 2016, these cases were consolidated in a single class action in federal court, representing all owners of the affected vehicles. Separately, the U.S. Justice Department and the Federal Trade Commission also sued Volkswagen. In a series of negotiated settlements, Volkswagen agreed to buy back the tainted vehicles (for what the cars were worth before the scandal broke) or to terminate their leases without penalty. If the customer preferred, the company would repair the vehicle’s emissions controls (although experts predicted that doing so would reduce per- formance and fuel economy). In the either case, customers would receive additional resti- tution of five to ten thousand dollars. The total cost to Volkswagen was estimated at more than $15 billion.
Sources: “Volkswagen Expected to Pay Another $1 Billion in Emissions Scandal,” The New York Times, December 20, 2016; “Federal Judge Approves $14.7 Billion Settlement in Volkswagen Emissions Class Actions,” Legal News Line, October 27, 2016; “How VW’s Scandal Unfolded,” The New York Times, October 23, 2015; “VW’s Pitch to Americans Relied on Fun and Fantasy,” The New York Times, September 27, 2015; “Behind Volkswagen’s Settlement, Speed and Compromise,” The New York Times, July 15, 2016; Jack Ewing, Faster, Higher, Farther: The Volkswagen Scandal (New York: W.W. Norton, 2017), especially Chapter 10, “The Cheat;” “In Re: Volkswagen ‘Clean Diesel’ Marketing Sales Practices, and the Products Liability Litigation,” amended consolidated consumer class action complaint, United States District Court, Northern District of California, San Francisco Division.
Final PDF to printer
326 Part Six Business and Its Stakeholders
law43665_ch14_305-326.indd 326 11/28/18 07:50 AM
Discussion Questions
1. In what ways were consumers (car owners) harmed by Volkswagen’s actions? 2. Did Volkswagen violate any U.S. consumer protection laws, and if so, which ones? 3. What were the potential benefits and risks to Volkswagen of its decision to defraud
consumers and regulators? 4. If you were an owner of a VW, Audi, or Porsche vehicle equipped with a defeat device,
what would be your options? What would you choose to do, and why? 5. What are the advantages and disadvantages to consumers of a class action lawsuit of the
kind described here? 6. Was the settlement fair to consumers, or not?
Final PDF to printer
327
law43665_ch15_327-349.indd 327 01/23/19 02:40 PM
C H A P T E R F I F T E E N
Employees and the Corporation Employees and employers are engaged in a critical relationship affecting the corporation’s perfor- mance. There is a basic economic aspect to their association: Employees provide labor for the firm, and employers compensate workers for their contributions of skill and productivity. Yet, also present in the employee–employer exchange are numerous social, ethical, legal, and public policy issues. Attention to the rights and duties of both parties in this relationship can benefit the firm, its workers, and society.
This Chapter Focuses on These Key Learning Objectives:
LO 15-1 Understanding workers’ rights to organize unions and bargain collectively.
LO 15-2 Knowing how government regulations assure occupational safety and health and what business must do to protect workers.
LO 15-3 Evaluating the limits of employers’ duty to provide job security to their workers.
LO 15-4 Analyzing employer obligations to pay workers fairly and how pay policies can contribute to income inequality.
LO 15-5 Appraising the extent of employees’ right to privacy, when businesses monitor employee communications, police romance in the office, test for drugs or alcohol, or subject employees to honesty tests.
LO 15-6 Debating if employees have a duty to blow the whistle on corporate misconduct, or if employees should always be loyal to their employer.
Final PDF to printer
328 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 328 01/23/19 02:40 PM
During the first days of a new position, workers are often asked to sign papers verifying their identity, work status, and benefits. So, Krishna Regmi, a personal care aid for a Pitts- burgh home health agency, did not think twice about signing a stack of forms during his first days on the job. Little did he realize that when he later left his position for a better paying one at a rival agency, he would be sued under the terms of a non-compete agreement he had unsuspectingly signed. In some cases, franchisees are also bound by non-compete clauses. For example, franchise owners of Burger King, Carl’s Jr., and Pizza Hut are not allowed to hire workers away from another franchise under their contract with the parent corporation. This no-hire rule is estimated to affect fast-food employees in more than 70,000 restaurants in the United States. Non-compete clauses were originally restricted to executives or professionals who had access to a company’s trade secrets or client lists and were meant to protect a company’s intellectual property. But more recently, employees holding low-skilled, low-wage jobs are increasingly being required to sign such clauses. One of every six employees with a college degree in an entry-level position is now being asked to sign a non-compete agreement. Critics claim that non-compete clauses are being used not to protect trade secrets, but rather to keep wages low by making it difficult if not impossible for employees to seek higher-paying jobs.1
What is a fair pay level for workers? Who or what should determine wages—the free mar- ket, the employer acting unilaterally, collective bargaining negotiations between employers and unions, or government mandates such as minimum wage laws? Should employers be permitted to require employees—even in low-level jobs—to sign non-compete clauses?
Applying for a position as a correctional officer, a man was startled when the inter- viewer asked him for his Facebook login information, saying it was needed to check for possible gang affiliations. The man did as he was asked but later complained, calling the demand “invasive” and a “violation of [my] personal privacy.” Increasingly, employers are conducting background checks on prospective hires by reviewing their social media history, and some use specialized services that “scrape” the web for anything applicants might have done or said online. By 2015, legislation prohibiting employers from asking for access to applicants’ social media accounts had been adopted in 21 states and was under consideration in several others.2
Should employers, like the correctional services department in this example, have a right to review job applicants’ social media pages? What if the job was not in the cor- rection services field but in some other line of work, would the employer have the right to review an applicant’s Facebook page then? Who should be responsible for protecting applicant and employee privacy?
In 2014, Starbucks announced it would make changes to its scheduling practices to pro- vide more “stability and consistency” for its 130,000 baristas. According to the new rules, the company said it would post hours at least a week in advance, end the practice of “clo- pening” (requiring a worker to close a store and then reopen it the next morning, just a few hours later), and allow local managers more say in overriding scheduling software. Fast-forward two years to 2016, and inconsistent, variable scheduling was still a common practice at Starbucks. Barista Darrion Sjoquist led a letter-writing campaign asking man- agement to provide stable scheduling and confronted CEO Harold Schultz at a
1 “How Noncompete Clauses Keep Workers Locked In,” The New York Times, May 13, 2017; “These Days, Even Janitors Are Being Required to Sign Non-compete Clauses,” USA Today, May 27, 2017; and “Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue” The New York Times, September 27, 2017. 2 “Will Employers Still Ask for Facebook Passwords in 2014?” USA Today, January 10, 2014; and “Some U.S. Employers Asking for Applicants’ Facebook Login Info,” Associated Press, March 21, 2012. The current status of state legislation may be found on the website of the National Conference of State Legislatures, at www.ncsl.org.
Final PDF to printer
329
law43665_ch15_327-349.indd 329 01/23/19 02:40 PM
shareholders’ meeting about support for stable work hours. The worker’s campaign led to Starbucks’ adoption of two weeks advance notice and a guarantee of eight hours rest between shifts. In 2016, the Seattle city council passed a policy requiring companies like Starbucks to provide stable schedules.3 The issue of fair scheduling is discussed in more detail in Exhibit 15.A.
What is the best way to balance the employer’s need for flexibility and efficiency in scheduling part-time workers’ hours with the employee’s need for predictability in orga- nizing his or her life and finances? Should scheduling be subject to government regulation, or be left to employers and employees to work out?
All these difficult questions will be addressed later in this chapter. As the situations giv- ing rise to them suggest, the rights and duties of employers and employees in the modern workplace are incredibly complex.
The Employment Relationship
As noted in Chapter 1, employees are a market stakeholder of business—and a critically important one. Businesses cannot operate without employees to make products, provide services, market to customers, run the organization internally, and plan for the future. At the same time, employees are dependent on their employers for their livelihood—and often much more, including friendship networks, recreational opportunities, health care, retire- ment savings, even their very sense of self. Because of the importance of the relationship
3 “Starbucks to Revise Policies to End Irregular Schedules for Its 130,000 Baristas,” The New York Times, August 14, 2014; and “A Push to Give Steadier Shifts to Part-Timers,” The New York Times, July 15, 2014.
Fair Scheduling: An Emerging Issue
The director of the Fair Workweek Initiative at the Center for Popular Democracy calls predictable schedules the “working class issue of our time.” Unstable work schedules negatively impact health, family life, and economic well-being. Inconsistent schedules can make it difficult for workers to budget, save, or set aside money for emergencies. The negative impact of unpredictable work schedules extends beyond financial consequences. Employ- ees with inconsistent schedules are less happy and experience more psychological distress than employees with stable work hours. Parents are particularly hard-pressed to secure child care on evenings and week- ends. Many are forced to rely on family and friends for child care while they are working. Often the employee must ask for help on short notice, upsetting the plans of family and friends and damaging important relation- ships. Parents working jobs with unstable schedules spend less time on developmental activities with young children. In 2017, Oregon became the first state to pass a “fair scheduling law.” Starting in 2018, companies in Oregon were required to provide work schedules at least seven days in advance. This legislation also said that large retail, hospitality, and food service companies would have to provide schedules at least 14 days in advance. The same year, New York City passed an ordinance requiring that employers provide schedules 14 days in advance, with two hours extra pay for last minute assignments. The ordinance also required that employers pay employees for four hours for scheduled shifts that were cancelled within 72 hours of the start time. Some employers pushed back, saying that legislators did not fully appreciate the negative impact the legislation would have on business.
Sources: “Why a Fair Workweek is the Working Class Issue of Our Time,” October 31, 2017, at www.slate.com/blogs/ better_life_lab/2017/10/why_predictable_schedules_are_the_working_class_issue_of_our_time.html; and Daniel Schneider and Kristin Harknett, “Schedule Instability and Unpredictability and Worker and Family Health and Wellbeing,” Washington Center for Equitable Growth, 2016.
Exhibit 15.A
Final PDF to printer
330 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 330 01/23/19 02:40 PM
to both parties, it must be carefully managed, with consideration for both legal and ethical obligations.
As further explained in Chapter 5, a right means someone is entitled to be treated a cer- tain way. Some of these responsibilities are legal or contractual; others are social or ethical in nature. Employees have several major rights, as shown in Figure 15.1.
But employees also have a duty to behave in acceptable ways. (Duties are obligations to act responsibly toward others.) For example, most would agree that employees should not abuse drugs or alcohol in a way that impairs their work performance, use company e-mail to send offensive messages, or take the employer’s property for their own personal use. Employees should deal with customers and coworkers in an honest, fair, and nondiscrimi- natory way. They should not reveal proprietary information to others outside the company, unless there is compelling reason to do so—such as an imminent threat to the public’s safety. This chapter considers the rights and duties of employees. The following chapter explores the related issue of workforce diversity and discusses the specific legal and ethical obligations of employers with respect to equal employment opportunity.
Workplace Rights
Employees in the United States enjoy several important legal guarantees. They have the right to organize and bargain collectively and to have a safe and healthy workplace. Some workers have a right to due process if they are fired, providing them some measure of job security. This section will explore these three rights, emphasizing U.S. laws and regulation, but with comparative references to policies in other nations. Later sections of this chapter will explore the other three rights listed in Figure 15.1: fair wages, privacy, and free speech.
The Right to Organize and Bargain Collectively In the United States, and in most other nations, employees have a fundamental legal right to organize labor unions and to bargain collectively with their employers. The exceptions
FIGURE 15.1 Major Rights of Employees
To organize and bargain collectively
To a safe and healthy workplace
To due process on the job
To fair and decent wages
To privacy
To blow the whistle and free speech
Final PDF to printer
Chapter 15 Employees and the Corporation 331
law43665_ch15_327-349.indd 331 01/23/19 02:40 PM
are some communist countries (such as China, Vietnam, Cuba, and the People’s Demo- cratic Republic of Korea) and some military dictatorships (such as Eritrea), where work- ers are not permitted to form independent unions. Labor unions are organizations, such as the Service Employees International Union or the Teamsters, which represent workers on the job. Under U.S. laws, most private and public workers have the right to hold an election to choose what union they want to represent them, if any. Unions negotiate with employers over wages, working conditions, and other terms of employment. Employers are not required by law to agree to the union’s demands, but they are required to bargain in good faith. Sometimes, if the two sides cannot reach agreement, a strike occurs, or employees apply pressure in other ways, such as appealing to politicians or refusing to work overtime.
Workers are more highly unionized in some countries than in others. Figure 15.2 shows the percentage of employees who are represented by unions in selected industrialized nations. It shows that unionization rates are very high in the Scandinavian countries; of all countries shown, the unionization rate is the lowest in the United States, South Korea, and Turkey.
The influence of labor unions in the United States has waxed and waned over the years. During the New Deal period in the 1930s, many workers, particularly in manufacturing industries such as automobiles and steel, joined unions, and the ranks of organized labor grew rapidly. Unions negotiated with employers for better wages, benefits such as pensions and health insurance, and improved job safety—significantly improving the lot of many workers. In 2017, the median weekly pay of full-time workers who were members of unions ($1,041) was 20 percent higher than that of nonunion workers ($829). (All workers, whether they are members of unions or not, are protected by wage and hour laws that require employers to pay at least a minimum wage and extra pay for certain kinds of over- time work.) Since the mid-1950s, the proportion of American workers represented by unions has declined. In 2017, only about 11 percent of all employees were union members.
FIGURE 15.2 Unionization Rates in Selected Industrialized Countries
Source: Organization for Economic Cooperation and Development, at https://www .statista.com/chart/99199/the- state-of-the-unions/. Figures have been rounded to the nearest integer. All data are for 2015.
Iceland 91.8
Sweden
Belgium
Italy
Ireland
Canada
United Kingdom
Germany
Japan
Australia
Mexico
France
United States
South Korea
Turkey
67
55.1
37.3
26.5
26.5
24.7
17.7
17.4
17
13.1
11.2
10.6
9
6.3
0 10 30 50 70 9020 40 60 80 100
Final PDF to printer
332 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 332 01/23/19 02:40 PM
The percentage was higher—34 percent—in government employment than in the private sector, where just 7 percent were unionized.4
In the wake of the Great Recession, elected officials in several states sought to weaken unions by limiting the rights of public sector workers. For example, the Wisconsin legisla- ture passed a law that took away the right of public sector unions (except those representing public safety officers) to bargain over pensions and health care benefits. In 2017, Missouri joined 27 other states in adopting a so-called right-to-work law, which barred unions from requiring all workers they represented to pay dues or fees.5 In 2018, the Supreme Court ruled in an important case, known as the Janus decision, that public sector unions (such as those representing public school teachers, city and state employees, and public safety officers) could not negotiate contracts that required workers to pay dues or fees. Many observers believed that this ruling would weaken unions in the government sector, as some workers would elect not to pay fees.6 Although unions overall remained weak, some groups of workers continued to organize.
Dissatisfied with representation from an independent union, in 2016 Cleveland water workers voted to join the Utility Workers Union of America (UWUA), an affiliate of the AFL-CIO. “When they contacted us, we showed them all the water locals we have in our union,” says Local 270 President Frank Meznarich. “These guys work in the water distribution plant and they fit in with us very well. . . . So they decided to become part of something bigger that could represent them.” The workers overwhelmingly approved joining the union by a vote of 43-to-4 with one vote for no representation. “They decided to go with the UWUA—an honest, straight talking, straight shooting union with a lot of power,” asserted Larry Kelly, the national organizer who led the effort to unionize the Cleveland workers. In a climate that had been hostile to union organizing, with efforts by Ohio legislators to limit union influence, the AFL-CIO called this a “major victory for organizing efforts in Ohio.”7
Other significant recent union organizing wins occurred at IKEA’s furniture factory in Virginia; Smithfield Pork in North Carolina, the world’s largest pork slaughterhouse; and Delta Pride, a catfish processor in Mississippi.8 In 2018, a wave of teacher strikes in West Virginia, Oklahoma, Arizona, and other states led in some instances to significant pay raises.9
In addition to traditional approaches to organizing workers by occupation and sector, unions such as the Service Employees International Union (SEIU) attempted to broaden their influence through funding advocacy groups that supported low-wage workers in occupations that had historically been difficult to unionize. For example, the SEIU sup- ported Justice for Janitors and Fast Food Forward to organize walkouts of custodial and fast-food employees.10 Labor unions sought to exercise influence in other ways, as well. Unions organized in the political arena, using political action committees (PACs) and other
4 U.S. Bureau of Labor Statistics, “Union Members 2017,” January 19, 2018, www.bls.gov/news.release/pdf/union2.pdf. 5 “Right to Work States,” National Right To Work Legal Defense Foundation, at www.nrtw.org/right-to-work-states. 6 “Supreme Court Deals Blow to Public-Sector Unions,” The Wall Street Journal, June 27, 2018; and “Janus Decision Reins in Unions’ Political Power,” The New York Times, June 27, 2018. 7 “Cleveland Water Workers Join the UWUA: A Major Organizing Victory for Utility Workers,” The Utility Worker Magazine, Winter 2017, April 18, 2017. 8 “Gawker Media Employees Vote to Form a Union, and the Bosses Approve,” The New York Times, June 4, 2015. 9 “Teacher Walkouts: A State-by-State Guide,” April 25, 2018, at www.npr.org. 10 “The Fast-Food Strikes Have Been a Stunning Success for Organized Labor,” Slate, September 2, 2014; “Fast-Food Workers Seeking $15 Wage Are Planning Civil Disobedience,” The New York Times, September 1, 2014.
Final PDF to printer
Chapter 15 Employees and the Corporation 333
law43665_ch15_327-349.indd 333 01/23/19 02:40 PM
methods (discussed in Chapter 8), and voted shares of stock in which their pension funds were invested (discussed in Chapter 13) to pursue their institutional objectives.
One issue that unions and others have been concerned with is job safety and health. It is discussed next.
The Right to a Safe and Healthy Workplace Many jobs are potentially hazardous and a threat to worker health and safety. In some industries, the use of high-speed and noisy machinery, high-voltage electricity, extreme temperatures, or hazardous gases or chemicals poses risks. Careful precautions, extensive training, strict regulations, and tough enforcement are necessary to avoid accidents, inju- ries, illnesses, and even deaths on the job. According to the Bureau of Labor Statistics, most workplace fatalities are the result of transportation accidents, falls, and being struck by an object.
Wanda Holbrook was a journeyman maintenance technician at Ventra Ionia, a com- pany that performed stamping, molding, and related services in the production of bumpers and trailer hitches. Holbrook was killed when a malfunctioning robot crushed her skull between two parts of a hitch assembly as Holbrook was perform- ing routine maintenance. The robot was not supposed to have access to the area where Holbrook was conducting inspections. Holbrook’s husband filed a lawsuit against five companies for the accidental death of his wife, saying the automation system in the work area violated numerous safety regulations.11
Over the past few decades, new categories of accidents or illnesses emerged, includ- ing the fast-growing job safety problem of musculoskeletal disorders (MSDs). MSDs, which are caused by repetitive motion, often result in chronic pain, such as the wrist pain sometimes experienced by supermarket checkers, meat cutters, or keyboard operators. Other occupations suffered muscle strains affecting the neck, upper back, lower back, and shoulders. Poor working conditions have also caused hearing and vision impairment. In response, many businesses have given greater attention to ergonomics, adapting the job to the worker, rather than forcing the worker to adapt to the job. For example, ergonomically designed office chairs that conform to the shape of the worker’s spine may help prevent low productivity and lost time due to back injuries.
Annually, slightly more than three million workers in private industry are injured or become ill while on the job, according to the U.S. Department of Labor. This amounts to more than three hurt or sick workers out of every hundred. Some of the most dangerous jobs are in protective services (police, fire fighters, and prison guards); transportation and material moving; farming; and buildings and grounds maintenance and cleaning. In gen- eral, manufacturing and construction jobs are riskier than service jobs—although workers in nursing homes and hospitals suffer relatively high rates of injury. In 2016, 5,190 work- ers died from occupational injuries, the highest rate of occupational injuries since 2008.12 The reasons range from vehicle accidents, to contact with dangerous equipment, to explo- sion or fire. For example, a massive explosion at the Upper Big Branch coal mine in West Virginia in 2010 killed 29 workers in the worst coal mining disaster in the United States in 40 years. The causes of this disaster are explored in a case study at the end of this book.
In the United States, the Occupational Safety and Health Act, passed in 1970 during the great wave of social legislation discussed in Chapter 7, gives workers the right to a job
11 “Work Robot Blamed for Michigan Woman’s Death,” Courthouse News Service, March 8, 2017; and. “Husband Sues after Rogue Robot Kills Wife at Work,” WCVB, Boston Massachusetts, March 15, 2017. 12 U.S. Bureau of Labor Statistics data, “Fatal Occupational Injuries in 2016 (Charts)” www.bls.gov/iif/oshwc/cfoi/cfcu0015.pdf.
Final PDF to printer
334 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 334 01/23/19 02:40 PM
“free from recognized hazards that are causing or likely to cause death or serious physical harm.” This law is administered by the Occupational Safety and Health Administration (OSHA). Congress gave OSHA important powers to set and enforce safety and health stan- dards. Employers found in violation can be fined and, in the case of willful violation caus- ing the death of an employee, jailed as well. In 2009, for example, OSHA fined BP $87 million—on top of $21 million the company had already paid—for safety violations linked to an explosion of a refinery in Texas that killed 15 workers and injured 170, the largest fine ever levied by the agency.13
OSHA has had considerable success in improving worker safety and health. Although workers—such as the victims of the Upper Big Branch coal mine and BP refinery explosions—continue to die on the job, since OSHA’s creation in 1970 the number of workplace deaths has fallen by more than two-thirds, even as the workforce has almost doubled. Very serious occupational illnesses, such as brown lung (caused when textile workers inhale cotton dust) and black lung (caused when coal miners inhale coal dust), have been significantly reduced. The rate of lead poisoning suffered by workers in smelters and battery plants, among other workplaces, has also fallen dramatically.
Although many businesses have credited OSHA with helping reduce lost workdays and worker compensation costs, others have criticized the agency’s rules as being too costly to implement and administer. For example, OSHA withdrew a proposed noise exposure stan- dard, intended to prevent hearing loss, after employers complained it would be too expen- sive.14 Some studies showed that the burdens of complying with regulations fell hardest on small businesses.15 In part in response to employer criticisms, OSHA has entered into cooperative partnerships with employers, aimed at improving occupational safety and health for the benefit of both companies and their workers.
Although problems remain, four decades of occupational safety and health regula- tion in the United States and efforts by businesses and unions have significantly lowered deaths and injuries on the job. In many developing nations, however, conditions remain brutally dangerous. In Bangladesh, for example, a fast-growing garment and textile industry—mostly sourcing apparel to Western companies—has been the site of numer- ous tragedies, including a terrible building collapse at the Rana Plaza garment factory complex in 2013 that killed more than 1,100 workers. This incident—and the involve- ment of Western retailers whose products were manufactured there—is profiled in a case at the end of this book.
Job Security and the Right to Due Process What obligations do employers have to their employee stakeholders, with respect to job security? Job security is generally not considered a right. However, once someone is hired, under what circumstances is it legal—or fair—to let him or her go? That is, to what extent do employees have due process rights? In recent years, the expectations underlying this most basic aspect of the employment relationship have changed, both in the United States and in other countries around the globe.
In the United States, since the late 1800s, the legal basis for the employment rela- tionship has been employment-at-will. Employment-at-will is a legal doctrine that means
13 “U.S. Department of Labor’s OSHA Issues Record Breaking Fines to BP,” press release, October 30, 2009, at www.osha.gov. 14 “OSHA Withdraws Proposed Interpretation Involving Occupational Noise Exposure Standard,” Washington DC Employment Law Update, January 19, 2011, at www.dcemploymentlawupdate.com. 15 “U.S. House of Representatives Committee on Oversight and Government Reform,” Assessing Regulatory Impediments to Job Creation, February 9, 2011, at http://oversight.house.gov.
Final PDF to printer
Chapter 15 Employees and the Corporation 335
law43665_ch15_327-349.indd 335 01/23/19 02:40 PM
that if employees are hired without a written employment contract, they can be fired for a good cause, a bad cause, or no cause at all. This doctrine assumed that employees and employers had equal power: employees could leave jobs they no longer wanted, and employers could fire employees for any reason. However, over time, the public and leg- islators became aware that employers had economic, political, and social advantages that made the relationship unequal. As a result, laws and court decisions have dramatically curtailed the ability of employers to terminate employees at will. Some of the restrictions include the following:
∙ An employer may not fire a worker because of race, gender, religion, national origin, age, or disability. The equal employment and other laws that prevent such discrimina- tory terminations are further described in Chapter 16.
∙ An employer may not fire a worker if this would constitute a violation of public policy, as determined by the courts. For example, if a company fired an employee just because he or she cooperated with authorities in the investigation of a crime, this would be illegal.
∙ An employer may not fire a worker if, in doing so, it would violate the Worker Adjust- ment Retraining Notification Act (WARN). This law, passed in 1988, requires most big employers to provide 60 days’ advance notice whenever they lay off a third or more (or 500 or more, whichever is less) of their workers at a work site. If they do not, they must pay workers for any days of advance notice that were missed.
∙ An employer may not fire a worker simply because the individual was involved in a union organizing drive or other union activity.
∙ An employer may not fire a worker if this would violate an implied contract, such as a verbal promise, or basic rules of “fair dealing.” For example, an employer could not legally fire a salesperson just because he or she had earned a bigger bonus under an incentive program than the employer wanted to pay.
Of course, if workers are covered by a collective bargaining agreement, it may impose additional restrictions on an employer’s right to terminate. Many union contracts say employees can be fired only “for just cause,” and workers have a legal right to appeal the employer’s decision through the union grievance procedure. Some states also recognize three exemptions to the at-will doctrine: public policy, implied contract, and just cause. Fourteen states recognize all three of these exemptions. Conversely, three states do not recognize any exceptions to the at-will doctrine: Florida, Georgia, and Rhode Island.16 Many European countries and Japan have laws that extend just-cause protections to all workers, whether they are covered by a union contract or not.
The commitments that employers and employees make to each other go beyond mere legal obligations, however. Cultural values, traditions, and norms of behavior also play important roles. Some have used the term social contract to refer to the implied understand- ing (not a legal contract, but rather a set of shared expectations) between an organization and its stakeholders. This concept includes, perhaps most significantly, the understanding between businesses and their employees.
Research suggests that the social contract governing the employment relationship has varied across cultures, and also across time. For example, in Europe, employers have historically given workers and their unions a greater role in determining company policy
16 Charles Muhler, “The employment-at-will doctrine: three major exceptions” Monthly Labor Review, U.S. Bureau of Labor Statistics January 2001: pp. 3–11. “Employment at Will Exceptions by State” National Conference of State Legislatures, at http://www.ncsl.org/research/labor-and-employment/at-will-employment-exceptions-by-state.aspx.
Final PDF to printer
336 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 336 01/23/19 02:40 PM
than do most U.S. employers. Employee representatives are often included on boards of directors, in a practice sometimes called codetermination. For many years, big Japanese companies offered a core group of senior workers lifelong employment; in exchange, these workers felt great loyalty to the company. This practice has declined in recent years, however.
Fierce global competition and greater attention to improving the bottom line have resulted in significant corporate restructuring and downsizing (termination) of employees in many countries. This trend has led some researchers to describe a new social contract. Increasingly, bonds between employers and employees have weakened. Companies aim to attract and retain employees not by offering long-term job security, but rather by emphasiz- ing interesting and challenging work, performance-based compensation, and ongoing pro- fessional training. For their part, employees are expected to contribute by making a strong commitment to the job task and work team and to assume a share of responsibility for the company’s success. But they cannot count on a guaranteed job.17
An important aspect of the weakening of the social contract between employers and workers has been the elimination of defined benefit pensions (which provide a fixed payout based on age at retirement, years of service, and average pay). In the 1980s, about 60 percent of private sector employers in the United States offered such a pension. But by 2017, only 8 percent of private sector employers offered a defined benefit plan, compared with 48 percent that offered a defined contribution plan such as a 401(k). Such plans gave workers more control over their investments and enabled them to carry their retirement savings with them when they changed jobs but were also much less secure. “People just have to deal with a lot more risk in their lives, because all of these things that used to be more or less assured—a job, health care, a pension—are now variable,” said one expert.18
Should companies have strong or weak bonds with their employees? When businesses invest in their employees by providing a well-structured career, job security, and benefits including pensions, they reap the rewards of enhanced loyalty, productivity, and com- mitment. But such investments are expensive, and long-term commitments make it hard for companies to adjust to the ups and downs of the business cycle. Some firms resolve this dilemma by employing two classes of employees: permanent workers, who enjoy stable employment and full benefits, and temporary workers and independent contractors, who do not. This temporary work sector is sometimes referred to as the “gig economy.” The rise of the gig economy has allowed companies to become more cost-efficient, but it has also shifted risk to workers, sowed anxiety, and in many cases driven down incomes. And although some workers preferred the flexibility of jobs in the gig economy, many ended up there simply because they could not find stable, permanent employment.19
Some of the challenges facing workers in the so-called sharing economy, in which they function as independent contractors rather than employees, are further explored in Exhibit 15.B.
17 James E. Post, “The New Social Contract,” in Oliver Williams and John Houck, eds., The Global Challenge to Corporate Social Responsibility (New York: Oxford University Press, 1995). 18 U.S. Bureau of Labor Statistics, “Employee Benefits Survey,” from National Compensation Survey 2017, at www.bls.gov/ ncs/ebs/benefits/2017/ownership/private/table01a.htm. 19 “Growth in the ‘Gig Economy’ Fuels Work Force Anxieties,” The New York Times, July 12, 2015.
Final PDF to printer
337
law43665_ch15_327-349.indd 337 01/23/19 02:40 PM
Fair Wages and Income Inequality
An important right of employees, as noted in Figure 15.1, is to receive a fair and decent wage. Yet, how wages should be determined, and what exactly is fair or decent, remains contentious. This issue has taken on greater prominence in recent years, as public attention has turned to growing income inequality in the United States and other developed nations. What is the relationship between inequality and wages, and what responsibility if any does business bear for the sharp differences in life circumstances between those at the top and bottom of society?
Figure 15.3 shows changes in the level of income inequality in the United States over the past century, as measured by the share of all income going to the top 10 percent of households. (As explained in Chapter 4, inequality can be expressed for both wealth and income; this figure shows inequality of income.) The figure shows that income inequality fell dramatically during World War II and stayed low during the postwar years until around 1980, and since then has increased dramatically.
The rise in income inequality, as illustrated by Figure 15.3, has many causes, and some have little directly to do with business practices. These include federal and state minimum wage laws, taxation policy, economic growth, unionization rates, and other factors. But corporate policy plays an important role. When businesses decide to pay very high execu- tive compensation (as discussed in Chapter 13) and to keep wages as low as possible for ordinary employees, they are contributing to inequality in the broader society.20
What can companies do to address income inequality? The simple answer is to increase wages—and to reduce pay differentials within their organizations. In 2018, Walmart, identified by the National Employment Law Project as one of the lowest-paying employers, announced it would raise its minimum wage to $11 per hour and would give
20 Brookings Institute, “Thirteen Facts About Wage Growth,” September 25, 2017; and Economic Policy Institute, “Wage Stag- nation in Nine Charts,” January 6, 2015.
Workers in the Sharing Economy
A study conducted by Time Magazine and the consulting firm Penn Schoen Berland estimated that in 2016, about 45 million U.S. “gig workers” offered a product or provided services requested by a “peer” via online “platforms.” Why are the words “peer,” “platforms,” and “gig workers” in quotation marks? It turns out that how actors involved in these transactions are labeled has significant economic and legal consequences. Postmates, for example, describes itself as an on-demand platform that connects peers wanting prod- ucts from businesses that do not deliver with peers who are willing to deliver them. Recently, gig workers filed a suit claiming that Postmates deliberately misclassified them as independent contractors rather than employees to escape traditional employer obligations. Postmates defended itself, saying that “While we do not comment on the specifics of pending litigation, we believe the flexibility Postmates exercise over how, if, and when they use the platform reflects their independent contractor status.” Policymakers are increasingly concerned about the unintentional consequences of the sharing economy. According to Time, about a third of gig workers use this type of work for 40 percent or more of their income— making this a major part of their work identity. Some legislators have expressed concern that this type of employment arrangement can burden welfare and unemployment services if the gig does not pay enough to live on. As one senator observed, “Without a social contract, the social safety net will be stressed much more later on. For some of these workers, the gig economy is good until it’s not.”
Sources: “See How Big the Gig Economy Really Is,” Time Magazine, January 6, 2016; and “Why the Sharing Economy Keeps Getting Sued,” Vanity Fair, November 9, 2017.
Exhibit 15.B
Final PDF to printer
338 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 338 01/23/19 02:40 PM
employees bonuses of up to $1,000. In 2017, Wells Fargo announced plans to raise the company’s minimum wage to $15 an hour. A few companies—such as Gravity Payments, discussed in Chapter 3—have taken even more dramatic actions to improve compensation for their employees.
One approach, taken by a small minority of companies, has been to commit to paying all employees what is called a living wage. This has been defined by the Ethical Trading Initiative as a wage “that enables workers, for their labour during a standard work week, to support half the basic needs of an average-sized family, based on local prices near the workplace.”21 A living wage is generally well above the legally mandated minimum wage. (Minimum wages are set at both the federal and state levels; state minimum wages can be equal to or more than, but not less than, the federal minimum.)
Figure 15.4 shows how well legal minimum wages enable a family of two working adults with two children to sustain themselves in different states. The deeper shades of color indicate that the state minimum wage covered a higher percentage of a living wage for two working adults with two children. None of the 50 states had a minimum wage that resulted in a living wage for such a family. At the top is the District of Columbia, where the minimum wage covered 69 percent of a living wage; at the bottom, Tennessee, South Carolina, Alabama, Mississippi, and Louisiana had no minimum wage.22
Some companies have taken steps to pay their workers living wages. For example, Novar- tis, a major multinational pharmaceutical firm, has committed to paying a living wage to all
21 Ethical Trading Initiative, at www.ethicaltrade.org/in-action/issues/living-wage/standards. 22 Amy K. Glasmeier “Living Wage Calculator,” at www.livingwage.mit.edu, and U.S. Department of Labor, “Consolidated Mini- mum Wage Table,” January 1, 2018, at www.dol.gov/whd/minwage/mw-consolidated.htm.
FIGURE 15.3 Income Inequality in the United States, 1917–2015
Source: Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics, 118(1), 2003, updated at http://emlab.berkeley.edu/users/saez.
To p
1 0
% In
co m
e S
h a
re
Year
50%
45%
40%
35%
30%
25%
19 17
19 22
19 27
19 32
19 37
19 42
19 47
19 52
19 57
19 67
19 62
19 72
19 77
19 87
19 82
19 92
19 97
20 02
20 07
20 12
20 15
Final PDF to printer
Chapter 15 Employees and the Corporation 339
law43665_ch15_327-349.indd 339 01/23/19 02:40 PM
its employees around the world.23 U.S. companies that pay well above minimum wage for entry-level work (although they have not necessarily committed to the living wage concept) include Costco, Trader Joe’s, In-N-Out Burger, Gap, Shake Shack, CVS Health, and Whole Foods.24 Evidence suggests that companies that adopt such a “good jobs” strategy reap bene- fits from doing so. Of course, paying workers well costs more, and in that way can detract from the bottom line. But a study of four retail chains that paid above-average wages by MIT professor Zeynep Ton found that these firms had achieved healthy growth and excellent shareholder returns. They had done so because they had “invest[ed] in their employees with the expectation that they [would] get even more back in terms of labor productivity, customer service, cost-cutting, innovation, and flexibility during difficult times,” the researcher con- cluded.25 In short, a high-road strategy had paid off for these socially responsible companies.
The Right to Privacy in the Workplace
An important right in the workplace, as elsewhere, is privacy. In the business context, employee privacy refers primarily to protecting an individual employee’s personal life from
23 “Implementing a Living Wage Globally—The Novartis Approach,” at www.novartis.com/downloads/corporate-responsibility/ responsible-business-practices/living-wage.pdf. 24 “20 Chains That Pay More than Minimum Wage,” The Motley Fool, March 20, 2018. 25 Zeynep Ton, The Good Jobs Strategy (Boston: Houghton Mifflin, 2014). See also the Good Jobs Institute, at http://goodjobsinstitute.org.
FIGURE 15.4 Percentage of Living Wage Covered by Minimum Wage
Sources: Developed by the authors based on data from “Living Wage Calculator,” Amy K. Glasmeier, Department of Urban Studies and Planning, MIT, at http://livingwage. mit.edu, and “Consolidated Minimum Wage Table,” January 1, 2018 Department of Labor, at www.dol.gov/whd/minwage/mw-consolidated.htm.
68%
60%
57%
51% 45%
64% 47%
59%
32%
46%
50% 48%
62%
59%
49%
47%
49%
58%
45% 60%
49%
52%
60%
0%
49% 48% 56%
46%
49%
47%
0%
0% 0% 34
52%
0%
48%
42% 60%
63%
45%
64%
61%
56% 60%
47% 51% 51%
69%
55%
62%
51% to 60%
61% to 69%
41% to 50%
31% to 40%
0%
Lowest to Highest Percentage
Final PDF to printer
340 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 340 01/23/19 02:40 PM
unwarranted intrusion by the employer. Many people believe, for example, that their reli- gious and political views, their health conditions, their credit history, and what they do and say off the job are private matters and should be safe from snooping by the boss. Exceptions are permissible only when the employer’s interests are clearly affected. For example, it may be appropriate for the boss to know that an employee is discussing with a competitor, through e-mail messages, the specifications of a newly developed product not yet on the market.
But other areas are not so clear-cut. For example, should a job applicant who is experi- encing severe financial problems be denied employment out of fear that he may be more inclined to steal from the company? Should an employee be terminated after the firm dis- covers that she has a serious medical problem, although it does not affect her job perfor- mance, since the company’s health insurance premiums may dramatically increase? At what point do company interests weigh more heavily than an employee’s right to privacy? This section will address several key workplace issues where these privacy dilemmas often emerge: electronic monitoring, office romance, drug and alcohol abuse (including medical marijuana), and honesty testing.
Electronic Monitoring As discussed in Chapters 11 and 12, changing technologies have brought many ethical issues to the forefront. One such issue is employee electronic monitoring. A wide range of technologies—e-mail and messaging, social media sites, cell phones, location tracking, Internet browsing, and digitally stored video—enable companies to gather, monitor, and analyze information about employees’ activities. For example, a company called Sociomet- ric Solutions makes sensor-rich badges that can be worn by employees. They are equipped with microphones, a location sensor, and an accelerometer (similar to those used in fitness trackers). The company uses “big data” technology to analyze the resulting information and provides a summary in aggregated form to the employer. The use of such monitoring techniques has become increasingly pervasive. One report found that 78 percent of major companies monitored employees’ e-mail, Internet use, or phone; the companies surveyed employed over 25 percent of the U.S. workforce. Such data analytics can help companies make more productive use of their employees’ time and can also inform discipline or ter- mination decisions.26
A company’s need for information, particularly about its workers, may be at odds with an employee’s right to privacy, however. The European Court of Human Rights affirmed these privacy rights in an important 2017 decision.
Bogdan Barbulescu, an employee in Romania, created a Yahoo Messenger account to communicate with clients. On a few occasions he also used this account to communicate with his brother and fiancée. His company discovered these texts and fired Mr. Barbulescu. When the matter was originally heard in Romanian courts, the court ruled in favor of the employer, stating that it was appropriate for the employer to monitor employee actions during work hours. However, the high court overturned this ruling, stating that Mr. Barbulescu “had not been informed in advance of the extent and nature of his employer’s monitoring, or the possibility that the employer might have access to the actual contents of his messages.”27
26 “Active Employee Monitoring of Employees Rises to 78%,” ABC News, April 18, 2017; “The Office is Watching You,” May 22, 2015, at www.fastcompany.com; and “Unblinking Eyes Track Employees,” The New York Times, June 21, 2014. 27 “European Court Limits Employers’ Right to Monitor Workers’ Email,” The New York Times, September 5, 2017.
Final PDF to printer
Chapter 15 Employees and the Corporation 341
law43665_ch15_327-349.indd 341 01/23/19 02:40 PM
Management justifies the increase in employee monitoring for a number of reasons. Employers have an interest in efficiency. When employees log on to the Internet at work or use a company-issued phone to trade stocks, plan their vacations, and message friends and family, this is not a productive use of their time or company resources. Employers also fear lawsuits if employees act in inappropriate ways. An employee who views pornographic pictures on a computer at work, for example, might leave the com- pany open to a charge of sexual harassment—if other workers observed this behavior and were offended by it. (Sexual harassment is further discussed in the following chap- ter.) The employer also needs to make sure that employees do not disclose confiden- tial information to competitors or make statements that would publicly embarrass the company or its officers. And monitoring is often used for training and quality control purposes.
Is electronic monitoring by employers legal in the United States? For the most part, yes. The Electronic Communications Privacy Act (1986) exempts employers. In general, the courts have found that privacy rights apply to personal, but not business, information, and that employers have a right to monitor job-related communication. The courts have generally ruled that employers may monitor employee e-mail, messages, and texts. How- ever, it is widely recommended that employers inform employees that they are being monitored. An evolving area of the law involves GPS tracking. In 2018, Amazon success- fully patented wristband technology that can detect an employee’s proximity to the cor- rect bin or shelf for an item. Using this information, the wristband nudges the employee via vibrations if it detects the employee’s arm is close to the incorrect bin or shelf, indi- cating that they may be about to misplace the items. Other companies hand out wearable technology, such as fitness trackers as part of their wellness programs. One vending com- pany offered to implant microchips in employees’ hands to make buying snacks easier. Critics complain that while this technology may be helpful, it invades employees’ pri- vacy, and data collected could be misused by the employer.28 (Employee monitoring is further discussed in Chapter 12.)
In seeking to balance their employees’ concerns about privacy with their own con- cerns about productivity, liability, and security, businesses face a difficult challenge. One approach is to monitor employee communication only when there is a specific reason to do so, such as poor productivity or suspicion of theft. For example, the chipmaker Intel Corporation chose not to check its employees’ e-mail routinely, feeling this would under- mine trust. Most management experts recommend that employers, at the very least, clearly define their monitoring policies, let employees know what behavior is expected, and apply any sanctions in a fair and evenhanded way.
Romance in the Workplace Another issue that requires careful balancing between legitimate employer concerns and employee privacy is romance in the workplace. People have always dated others at work. In fact, a 2017 survey showed that 57 percent of workers said they had participated in some type of office romance. Twenty-one percent of these romances were reported as “random hook-ups,” 16 percent developed into long-term relationships, and 14 percent
28 “Amazon Wristbands Could Track Workers; New Technology Raises Concerns about Privacy, Discrimination: Workplace Technology,” Dayton Daily News, March 4, 2018. A summary of the law with respect to employee monitoring may be found in “Fact Sheet 7: Workplace Privacy and Employee Monitoring,” at the website of the Privacy Rights Clearinghouse at www.privacyrights.org
Final PDF to printer
342 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 342 01/23/19 02:40 PM
resulted in on-going casual relationships.29 In fact, workplace dating has probably become more common, as 10 percent of workers participating in the 2017 study reported meeting their spouse or partner at work. One human resources director commented, “It’s a reality that work is where people meet these days. When you don’t meet at college, that’s a pool of people that’s taken away from you.”
Yet office romance poses problems for employers. Some relationships are consensual, but others are not. The #MeToo and #TimesUp movements cast a bright light on abuses that can occur when one person in a relationship is in a position of authority over the other and uses that authority coercively. Recent evidence shows that these movements have affected peoples’ perception of workplace romance. Forty-three percent of employees sur- veyed in 2018 thought that relationships between colleagues at different levels was unac- ceptable, up sharply from 28 percent the previous year.30
For many years, most businesses had a strict policy of forbidding relationships in the workplace outright. They assumed that if romance blossomed, one person—usually the subordinate—would have to find another job. Today, however, companies are more likely to draw distinctions, permitting some kinds of office relationships, and not others. A sur- vey by the Society for Human Resource Professionals found that 42 percent of companies had either a written or verbal policy on workplace romance. Almost all these policies (99 percent) banned relationships within a direct chain of command (such as between a supervisor and subordinate.) Forty-five percent banned romances between employees of significantly different rank. But less than a third of companies banned relationships between workers of the same rank who reported to the same supervisor, and only 12 percent banned relationships between workers in different departments. A small proportion of companies (about 5 percent) require their managers to sign a document, sometimes called a consensual relationship agreement, stipulating that an office relationship is welcome and voluntary—to protect against possible harassment lawsuits if the people involved later break up.31
Employee Drug Use and Testing Abuse of drugs, both illegal drugs such as heroin and methamphetamine and legal drugs such as OxyContin or Xanax when used inappropriately, can be a serious problem for employers. Only a small fraction of employees abuse illegal or prescription drugs. But those who do can cause serious harm. They are much more likely than others to produce poor-quality work, have accidents that hurt themselves and others, and steal from their employers. Some break the law by selling drugs at work to support their habits. Drug abuse costs U.S. industry and taxpayers an estimated $193 billion a year. This figure includes the cost of lost productivity, medical claims, rehabilitation services, and crime and accidents caused by drugs.32
One way that businesses have protected themselves from these risks is through drug testing. Significant drug testing first began in the United States following passage of the Drug-Free Workplace Act of 1988, which required federal contractors to establish and maintain a workplace free of drugs. At that time, many companies and public agencies began drug testing to comply with government rules. Today, the landscape for testing for and regulating drug use has gotten more complicated with the increasing abuse of legal
29 “Work is for Lovers: Vault’s 2017 Office Romance Survey Results,” February 13, 2017, at www.vault.com. 30 “The 2018 Vault Office Romance Survey Results,” February 12, 2018, at www.vault.com. 31 “Forbidden Love: Workplace-Romance Policies Now Stricter,” September 24, 2013, at www.shrm.org. 32 “Consequences of Illicit Drug Use in America,” April 2014, at www.whitehouse.gov.
Final PDF to printer
Chapter 15 Employees and the Corporation 343
law43665_ch15_327-349.indd 343 01/23/19 02:40 PM
drugs such as prescription opioids and the legalization of marijuana in some states. Opi- oid use as been observed to have negative impacts on job performance and increase risk of on the job accidents or injuries. One study estimated that two-thirds of opioid abusers were gainfully employed. While 57 percent of employers surveyed by the National Safety Council reported using drug tests, only about three in five of these screened for opioids.33
The legalization of marijuana in some states has also caused confusion among employ- ers about how to address marijuana use in their drug policies. Can an employer discipline or fire an employee for marijuana use in a state where it is legal? It’s complicated. Twenty-eight states and the District of Columbia have legalized medical marijuana, and eight states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington) have also legalized recreational use. Since marijuana remains illegal under federal law, employers in all states have the legal right to test for it—even in states where marijuana use is legal. As a result, it is left up to the employer’s discretion whether to adhere to state or federal law. A few employers in Colorado, the first state to legalize marijuana for recreational use, no longer screen for marijuana in their preemployment and random drug tests. Increasingly, employers report that testing for marijuana in states where recreational use is legal makes it harder to find qualified employees. Furthermore, some states mandate that employers accommodate employees who use the drug for medical rea- sons. As policymakers continue to debate the use of marijuana, employers are having a difficult time establishing effective policies.34
Typically, drug testing is used on three different occasions.
∙ Preemployment screening. Some companies test all job applicants or selected appli- cants before hiring, usually as part of a physical examination, often informing the appli- cant ahead of time that there will be a drug screening.
∙ Random testing of employees. This type of screening may occur at various times throughout the year. In many companies, workers in particular job categories (e.g., operators of heavy machinery) or levels (e.g., supervisors) are eligible for screening at any time.
∙ Testing for cause. This test occurs when an employee is believed to be impaired by drugs and unfit for work. It is commonly used after an accident or some observable change in behavior.
Employee drug testing is controversial. Although businesses have an interest in not hiring, or getting rid of, people who abuse drugs, many job applicants and employees who have never used drugs feel that testing is unnecessary and violates their privacy and due process rights. In general, proponents of testing emphasize the need to reduce potential harm to other people and the cost to business and society of drug use on the job. Opponents challenge the benefits of drug testing and emphasize its intrusion on individ- ual privacy.
Alcohol Abuse at Work Another form of employee substance abuse—which causes twice the problems of all ille- gal drugs combined—is alcohol use and addiction. About 9 percent of full-time employees
33 “HireRight Annual Employment Screening Benchmark Report, 2015 Edition” at http://hireright.com/benchmarking; “The opioid crisis spills into the workplace,” Chicago Tribune, September 25, 2017. 34 “Can my employer fire me for legally using marijuana?” The Denver Post, December 4, 2016, and “Should Marijuana be Removed from Pre-Employment Drug Screens?” Talent Acquisition: Society for Human Resource Management, April 6, 2017, at www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/marijuana-removed-preemployment-drug-screens.aspx.
Final PDF to printer
344 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 344 01/23/19 02:40 PM
are heavy drinkers—that is, they had five or more drinks on five or more occasions in the past month. Like drug abusers, they can be dangerous to themselves and others. Studies show that up to 40 percent of all industrial fatalities and 47 percent of industrial inju- ries are linked to alcohol. The problem is not just hard-core alcoholics, however. Most alcohol-related problems in the workplace, one study found, were caused by people who occasionally drank too much after work and came in the next day with a hang- over, or who went out for a drink on their lunch break. U.S. businesses lose an estimated $88 billion per year in reduced productivity directly related to alcohol abuse.35
Company programs for drug abusers and alcohol abusers are often combined. Many firms recognize that they have a role to play in helping alcoholic employees. As with drug rehabilitation programs, most alcoholism programs work through employee assistance programs (EAPs). These programs, generally offered as part of a company’s benefits pack- age, provide referrals to and paid consultations with outside counselors who can help with substance abuse, as well as other problems employees face. Most U.S. companies employ- ing 1,000 or more workers—and about three-quarters of smaller ones—provide EAPs for alcohol and drug abusers.36
Employee Theft and Honesty Testing Employees can irresponsibly damage themselves, their coworkers, and their employer by stealing from the company. Employee theft has emerged as a significant economic, social, and ethical problem in the workplace. A 2017 survey of large retail stores in the United States showed that almost 30 percent of all inventory losses were due to employee theft (shoplifting, administrative error, and vendor fraud accounted for most of the rest). The retail value of goods stolen by employees was almost $15 billion.37
Employee theft is also a problem in other parts of the world, as well. According to the Global Retail Theft Barometer, so-called retail crime costs European, North American, and Asian-Pacific businesses around $124 billion annually, or about 1.2 percent of sales. Of this, 39 percent was due to employee theft (shoplifting, administrative error, and vendor fraud accounted for the rest). The items most commonly stolen were batteries, footwear, mobile device accessories, razor blades, wine, and spirits.38
Some companies have used written psychological tests that seek to predict employee honesty on the job by asking questions designed to identify desirable or undesirable qual- ities. These instruments, sometimes called honesty tests, are controversial. The American Psychological Association noted there is a significant potential for these tests to generate false positives, indicating the employee probably would or did steal from the company even though this is not true. Critics also argue that the tests intrude on a person’s privacy and discriminate disproportionately against minorities.
35 The statistics reported in this paragraph are from the U.S. Substance Abuse and Mental Health Services Administration (SAMHSA) at www.samhsa.gov; 10th Annual Report to the U.S. Congress on Alcohol and Health, at http://pubs.niaaa.nih.gov/ publications/10report/intro.pdf; and the website of the National Drug-Free Workplace Alliance at www.ndwa.org. 36 Kenneth Matos, Ellen Galinsky, and James T. Bond, “2016 National Study of Employers,” at http://familiesandwork.org. 37 Richard C. Hollinger and the National Retail Federation, 2017 National Retail Security Survey (University of Florida and the National Retail Federation, 2017). 38 These data are for the 12-month period ending December 2015. The Global Retail Theft Barometer is available at www.globalretailtheftbarometer.com.
Final PDF to printer
Chapter 15 Employees and the Corporation 345
law43665_ch15_327-349.indd 345 01/23/19 02:40 PM
In all these areas—monitoring employees electronically, policing office romance, test- ing for drugs, and conducting psychological tests—businesses must balance their needs to operate safely, ethically, and efficiently with their employees’ right to privacy.
The Right to Blow the Whistle and Free Speech in the Workplace
Free speech in the workplace is a controversial issue. Do employees have the right to openly express their opinions about their company and its actions? If so, under what con- ditions do they have this right?
The U.S. Constitution protects the right to free speech. This means the government can- not take away this right. For example, the legislature cannot shut down a newspaper that editorializes against its actions or those of its members. However, the Constitution does not explicitly protect freedom of expression in the workplace. Generally, employees are not free to speak out against their employers, since companies have a legitimate interest in operating without harassment from insiders. Company information is generally considered to be proprietary and private. If employees, based on their personal points of view, were freely allowed to expose issues to the public and allege misconduct, a company might be thrown into turmoil and be unable to operate effectively.
On the other hand, there may be situations in which society’s interests override those of the company, so an employee may feel an obligation to speak out. When an employee believes his or her employer has done something that is wrong or harmful to the public, and he or she reports alleged organizational misconduct to the media, government, or high- level company officials, whistle-blowing has occurred.
A manager at a Wells Fargo branch in Los Angeles alleged that he was unjustly terminated for whistle-blowing fraudulent behavior. The manager observed question- able actions by two bankers under his supervision that he suspected constituted bank, wire, and mail fraud. He reported this behavior to his supervisors and the bank ethics hotline—and then was himself terminated. As part of its whistle-blower protection program, OSHA investigated the manger’s claim and found evidence of retaliation and unjust termination. In 2017, regulators ordered Wells Fargo to pay $5.4 million dollars and reinstate the manager to his previous position. This judgment repre- sented the largest individual award for whistle-blowing violations to date.39
Some observers speculated that this manager’s firing may have been associated with the larger scandal at the bank, in which thousands of employees were found to have set up unauthorized bank and credit card accounts on behalf of customers. This situation is further explored in a case at the end of this book.
While this specific case ended well for the whistle-blower, many do not. Speaking out against an employer can be risky; many whistle-blowers find their charges ignored—or worse, find themselves ostracized, demoted, or even fired for daring to go public with their criticisms. Whistle-blowers in the United States have some legal protection against retaliation by their employers, though, as suggested by the Wells Fargo example. As noted earlier in this chapter, most workers are employed at will, meaning they can be fired for any reason. However, most states now recognize a public policy exception to this rule. Employees who are discharged in retaliation for blowing the whistle, in a situation that affects public welfare, may sue for reinstatement and in some cases may even be entitled
39 “Wells Fargo Whistle-Blower Wins 5.4 Million and His Job Back,” The New York Times, April 3, 2017.
Final PDF to printer
346 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 346 01/23/19 02:40 PM
to punitive damages. The federal Sarbanes-Oxley Act, passed in 2002 (and described more fully in Chapters 5 and 13), makes it illegal for employers to retaliate in any way against whistle-blowers who report information that could have an impact on the value of a company’s shares. More recently, the Dodd-Frank Act of 2010 (described more fully in Chapters 7 and 14) requires the government to pay a reward to whistle-blowers who vol- untarily provide information that leads to successful prosecutions for violations of federal securities laws. Dodd-Frank also prohibits retaliation against employees who do so.40
Moreover, whistleblowing is not restricted to employees reporting ethically question- able behavior to the authorities. The U.S. False Claims Act (also known as the Lincoln Law), as amended in 1986, allows individuals to sue federal contractors for fraud and receive up to 30 percent of any amount recovered by the government. In the past decade, the number of whistle-blower lawsuits—perhaps spurred by this incentive—increased sig- nificantly, exposing fraud in the country’s defense, health care, municipal bond, and phar- maceutical industries. In 2017, the Justice Department recovered over $900 million dollars in damages as a result of individuals suing companies for fraud on behalf of the govern- ment. In many instances, the company in question settled out of court to avoid unfavorable court judgements. For example, Shire Pharmaceuticals paid $350 million to address a whistle-blower’s allegations that Shire and its subsidiary, Advanced BioHealing (ABH), had persuaded clinics and physicians to use its bioengineered human skin by offering perks and kickbacks. Shire and ABH had also marketed the skin substitute for non-approved used and made false statements to inflate its price.41
Whistle-blowing has both defenders and detractors. Defenders point to the successful detection of fraudulent activities and prosecution of wrongdoers. Under the False Claims Act, $56 billion had been recovered by the federal and state governments that would other- wise have been lost to fraud.42 Situations dangerous to the public or the environment have been exposed and corrected because insiders have spoken out. Yet opponents cite hundreds of unsubstantiated cases, often involving disgruntled workers seeking to blackmail or dis- credit their employers.
When is an employee morally justified in blowing the whistle on his or her employer? According to one expert, four main conditions must be satisfied to justify informing the media or government officials about a corporation’s actions. These are
∙ The organization is doing (or will do) something that seriously harms others. ∙ The employee has tried and failed to resolve the problem internally. ∙ Reporting the problem publicly will probably stop or prevent the harm. ∙ The harm is serious enough to justify the probable costs of disclosure to the
whistle-blower and others.43
Only after each of these conditions has been met should the whistle-blower go public.
40 “SEC Approves New Rewards for Whistleblowers,” Washington Post, May 25, 2011; and Securities and Exchange Commission, “Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934,” August 12, 2011, at www.sec.gov. 41 “Shire PLC Subsidiaries to Pay $350 Million to Settle False Claims Act Allegations,” press release, January 11, 2017, at www.justice.gov. 42 “Justice Department Recovers Over 3.7 Billion from False Claims Act Cases in Fiscal Year 2017,” U.S. Department of Justice, at www.justice.gov/opa/pr/justice-department-recovers-over-37-billion-false-claims-act-cases-fiscal-year-2017. 43 Manohar Kumar and Daniele Santoro, “A Justification of Whistleblowing,” Philosophy & Social Criticism 43(7), June 2017. See also Manuel G. Velasquez, Business Ethics: Concepts and Cases, 7th ed. (Upper Saddle River, NJ: 2012).
Final PDF to printer
Chapter 15 Employees and the Corporation 347
law43665_ch15_327-349.indd 347 01/23/19 02:40 PM
Key Terms social contract, 335 whistle-blowing, 345
drug testing, 342 electronic monitoring, 340 employee assistance programs (EAPs), 344 employee privacy 339 employment-at-will, 334
ergonomics, 333 labor union, 330 living wage, 338 minimum wage, 331 Occupational Safety and Health Administration (OSHA), 334
Internet Resources
www.workplacefairness.org Workplace Fairness www.aclu.org American Civil Liberties Union www.fair-wage.com Fair Wage Network www.drugfreeworkplace.org Institute for a Drug-Free Workplace www.osha.gov Occupational Safety and Health Administration www.whistleblowers.org National Whistleblowers Center www.aclu.org American Civil Liberties Union www.afl-cio.org American Federation of Labor-Congress of Industrial
Organizations www.workrights.org National Workrights Institute www.business.com/human-resources Business.com (human resources topics)
∙ U.S. labor laws give most workers the right to organize unions and to bargain collec- tively with their employers. Although unions have weakened over time, they continue to represent workers in some parts of the economy, particularly in the public sector. Unions are stronger in most other countries.
∙ Job safety and health concerns have increased as a result of rapidly changing technology in the workplace. U.S. employers must comply with expanding OSHA regulations and respond to the threat of violence at work.
∙ Employers’ right to discharge “at will” has been limited, and employees now have a number of bases for suing for wrongful discharge. The expectations of both sides in the employment relationship have been altered over time by globalization, business cycles, and other factors.
∙ Corporate wage policies contribute to growing income inequality. Paying living wages and pursuing a “good jobs” strategy can benefit a company through high productivity, strong customer service, and innovation.
∙ Employees’ privacy rights are frequently challenged by employers’ needs to have infor- mation about their health, their work activities, and even their off-the-job lifestyles. When these issues arise, management has a responsibility to act ethically toward employees while continuing to work for a high level of economic performance.
∙ Blowing the whistle on one’s employer is often a last resort to protest company actions considered harmful to others. In recent years, U.S. legislation has extended new protec- tions to government whistle-blowers.
Summary
Final PDF to printer
348 Part Six Business and Its Stakeholders
law43665_ch15_327-349.indd 348 01/23/19 02:40 PM
Discussion Case: The Ugly Side of Beautiful Nails For many people, going to a nail salon for a manicure or pedicure is a small, affordable luxury and a pleasant way to relax. For workers in these salons, however, the story is often less glamorous: low pay, abusive working conditions, and constant exposure to dangerous chemicals that threaten to ruin their health.
Nail care is very popular. In 2017, women (and some men) spent more than $8 billion a year on nail care at around 200,000 nail salons across the nation. The publisher of the magazine Nails explained the phenomenon this way: “Nail care isn’t just about grooming anymore; it’s self-expression. Just as tattoos have become mainstream, nail art has too.” Technical innovations such as gel polishes, which last longer and are easier to remove, also drove the trend. For most customers, the price of the service—averaging less than $20 for a manicure—was easy to fit into their budgets.
Who were the manicurists and pedicurists laboring over all these hands and feet? According to Nails, 380,000 people worked in nail salons in the United States. Ninety-four percent were women. Over half were Vietnamese, although ethnicity varied by location; in New York City, for example, Koreans dominated the industry. Many workers had limited English proficiency, and a significant proportion were undocumented immigrants.
Wages were very low. According to government data, the median annual wage for a mani- curist was $19,620. Only a quarter of the 100 workers interviewed by a reporter for The New York Times said they had been paid the equivalent of the state minimum wage. The Times’ exposé also reported that sometimes workers were not paid at all; many new workers were required to pay a so-called training fee and to work without wages during an apprenticeship period. Overtime pay was “almost unheard-of,” the newspaper found, even though long work days and weeks were commonplace. Nails magazine reported that more than a fifth of nail salon workers’ income came from tips, which relied entirely on the goodwill of customers.
Most salons were small. Barriers to entry were low: an operator could set up business by renting a storefront and investing a few thousand dollars in furnishings, equipment, and supplies. Eighty-one percent of manicurists and pedicurists worked in a shop with three or fewer technicians. The industry was highly competitive, and salons went in and out of business frequently.
Nail technicians worked with polishes, solvents, hardeners, and glues that caused respi- ratory and skin ailments, reproductive harm, and even cancer. Although occupational health in nail salons had not been fully studied, the three most dangerous chemicals used there were believed to be toluene (which made polish glide on smoothly), dibutyl phthal- ate (which made it pliable), and formaldehyde (which hardened it). Workers also inhaled acrylic dust; acquired fungal infections from customers’ hands and feet; and injured their backs, necks, and shoulders from constant repetitive motion. Nails reported that more than half of nail technicians said they suffered from a work-related ailment.
The Occupational Safety and Health Administration set standards for workplace expo- sure to many of the chemicals used in nail salons and urged workers to wear protective gear like gloves and masks and to properly ventilate their salons. States also set safety and health rules. But as a practical matter these rules were routinely ignored, and inspections were conducted only in response to specific complaints.
In New York, in the wake of the exposé published by The New York Times, officials rushed to assemble a task force to address conditions in the industry and said they would post a manicurist’s “bill of rights” in 10 languages in every salon, describing minimum wage laws and required safety measures. “We will not stand idly by as workers are deprived of their hard-earned wages and robbed of their most basic rights,” said the governor of
Final PDF to printer
Chapter 15 Employees and the Corporation 349
law43665_ch15_327-349.indd 349 01/23/19 02:40 PM
New York. But it was unclear how much impact these measures would have. One official observed that manicurists were particularly reluctant to cooperate with investigators, say- ing, “They are totally running scared in this industry.”
Sources: “The Price of Nice Nails,” The New York Times, May 7, 2015; “Perfect Nails, Poisoned Workers,” The New York Times, May 8, 2015; “Cuomo Orders Emergency Measures to Protect Workers at Nail Salons,” The New York Times, May 11, 2015; “New York Salons Now Required to Post Workers’ Bill of Rights,” The New York Times, May 29, 2015; California Health Nail Salon Collaborative, Overexposed and Underinformed: Dismantling Barriers to Health and Safety in California Nail Salons (April 2009); and 2014–2015 Nails Big Book, at http://files.nailsmag.com/site/NAILS-Magazine-Big-Book-2014.pdf. Wage data are from the Bureau of Labor Statistics at www.bls.gov.
Discussion Questions
1. This section describes several “workplace rights.” Which of these rights are violated in the nail salon industry, and what evidence do you have of this?
2. To what degree do you think managers in the nail salon industry would be able to improve conditions voluntarily if they wished to do so, and why do you think so?
3. What factors make it particularly difficult for workers in the nail industry to organize to improve their own conditions, and how could these factors be overcome?
4. What factors make it particularly difficult for government policymakers and regula- tors to make rules for the nail industry and enforce them? How could these factors be overcome?
5. What do you think is the best way to improve conditions for workers in the nail industry?
Final PDF to printer
350
law43665_ch16_350-373.indd 350 01/23/19 05:54 PM
C H A P T E R S I X T E E N
Managing a Diverse Workforce The workforce in the United States is more diverse than it has ever been, reflecting the entry of women into the workforce, immigration from other countries, the aging of the population, and shift- ing patterns of work and retirement. Equal opportunity laws and changing societal expectations have challenged corporations to manage workforce diversity effectively. Full workplace parity for women and persons of color has not yet been reached. However, businesses have made great strides in reforming policies and practices to draw on the skills and contributions of their increasingly varied employees.
This Chapter Focuses on These Key Learning Objectives:
LO 16-1 Knowing in what ways the workforce of the United States is diverse and evaluating how it might change in the future.
LO 16-2 Understanding where women and persons of color work, how much they are paid, and the roles they play as managers and business owners.
LO 16-3 Identifying the role government plays in securing equal employment opportunity for historically disadvantaged groups and debating whether or not affirmative action is an effective strategy for promoting equal opportunity.
LO 16-4 Assessing the ways diversity confers a competitive advantage.
LO 16-5 Formulating how companies can best manage workforce diversity, making the workplace welcom- ing, fair, and accommodating to all employees.
LO 16-6 Understanding what corporate policies and practices are most effective in helping today’s employ- ees manage the complex, multiple demands of work and family obligations.
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 351
law43665_ch16_350-373.indd 351 01/23/19 05:54 PM
Ultimate Software is a technology firm providing cloud-based human resource manage- ment software. Based in Weston, Florida, the company employs 3,972 people and earned revenues of more than $800 million in 2017. In an industry noted for its lack of diversity, Ultimate Software is different—43 percent of its employees are minorities, and 49 percent are female. The company acknowledges that one size does not fit all when it comes to developing a workplace that works for everyone. Ultimate Software employees—or “Ulti- Peeps” as they call themselves—enjoy many flexible scheduling options, and half tele- commute. Female employees can expect 50 days fully paid maternity leave, and male employees can use 60 days of job-protected paternity leave, with 20 of them fully paid. These policies extend to non-birth parents in same-sex relationships. In addition, Ulti- mate Software offers child care services, a lactation room, and paid sick leave to care for a sick child or relative. In addition to these family-friendly policies, the company has explicit written policies prohibiting discrimination and formal programs that support pro- fessional development for underrepresented racial and ethnic minority groups, women, and LGBTQ employees.
The effectiveness of these diversity initiatives is demonstrated by the presence of minorities and women in leadership positions. Women represent 43 percent of frontline managers and supervisors, 42 percent of mid-level managers, and 37 percent of senior management positions. For their part, minorities represent 33 percent of frontline manag- ers and supervisors, 21 percent of mid-level managers, and 7 percent of senior manage- ment positions. This diverse workplace yields dividends for all UltiPeeps, with 98 percent reporting that Ultimate Software is a great place to work, and 99 percent reporting taking great pride in working at the company. Ultimate Software has been ranked #2 of the Best Workplaces for Parents in 2017, #1 Best Workplace for Technology in 2018, and #3 of the Fortune 100 Best Companies to Work for in 2018.1
Ultimate Software’s success and recognition as an industry leader demonstrates the benefits that result from significant investment of resources required to attract, retain, and develop a diverse workforce. Having many kinds of workers can greatly benefit businesses, giving them a wider pool from which to recruit talent, many points of view and experi- ences, and an ability to reach out effectively to a diverse, global customer base. Yet, it also poses great challenges, as business must meet the mandates of equal employment laws and help people who differ greatly in their backgrounds, values, and expectations get along— and succeed—in the workplace.
The Changing Face of the Workforce
Human beings differ from each other in many ways. Each person is unique, as is each employee within an organization. Individuals are also similar in many ways, some of which are more readily visible than others. The term diversity refers to variation in the important human characteristics that distinguish people from one another. The primary dimensions of diversity are age, ethnicity, gender, mental or physical abilities, race, and sexual orien- tation. The secondary dimensions of diversity are many; they include such characteristics as communication style, ways of thinking and interacting, family status, and first language. Individuals’ distinguishing characteristics clearly impact their values, opportunities, and perceptions of themselves and others at work. Workforce diversity—diversity among employees—thus represents both a challenge and an opportunity for businesses.
1 “Reviews: Great Place to Work, Ultimate Software,” at http://reviews.greatplacetowork.com/ultimate-software.
Final PDF to printer
352 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 352 01/23/19 05:54 PM
Today, the U.S. workforce is as diverse as it has ever been, and it is becoming even more so. Consider the following major trends:2
∙ Immigration has profoundly reshaped the workplace. In 2015, the U.S. immigrant population reached 45 million, representing about 14 percent of the U.S. population. The Pew Research Center projects that by 2065, the immigrant population will reach 78 million, or about 18 percent of the U.S. population. In 2017, 27 million immigrants were working in the United States, comprising almost 17 percent of the workforce. The top five countries of origin were Mexico, China (including Hong Kong and Taiwan), India, the Philippines, and El Salvador. It is estimated that 11 million or one out of every four U.S. immigrants are undocumented immigrant workers (noncitizens working without the legally required documents). Some children of undocumented immigrants were brought to the United States as infants or very young children and do not know life in any other country. Many of these “Dreamers,” as they are called, have grown up, attended college, and are working for Fortune 500 companies. The discussion case at the end of this chapter explores their status and its implications for their employers.
∙ Ethnic and racial diversity is increasing. In 2016, Hispanics (defined by the Census as persons of Spanish or Latin American ancestry) were about 17 percent of U.S. workers. Asians comprise 6 percent of workers, and African Americans 12 percent. By 2022, the U.S. workforce is projected to be about 39 percent nonwhite (this category includes persons of Hispanic origin).
∙ The workforce will continue to get older. As the baby boom generation matures, birth rates drop, and people live longer and healthier lives, the population will age. Many of these older people will continue to work, whether out of choice or necessity. By 2024 the U.S. Bureau of Labor Statistics projects that 36 percent of 65- to 69-year-olds will continue to work, up from 22 percent in 1994. This trend is not limited to the United States. Globally, almost 20 percent of workers are planning to work beyond age 70. Employers will have to find new ways to accommodate older workers.3
∙ Millennials are entering the workforce. Even as many baby boomers extend their working years, so-called millennials—young people born in the 1980s and 1990s and reaching adulthood around the turn of the century—have entered the workforce in large numbers, bringing fresh perspectives and practices. In 2015, millennials became the largest generation in the U.S. workforce, and more than a quarter say they are already in management positions. Research conducted by the Pew Research Center found that college-educated millennials had longer track records with their employers than Gener- ation X did in 2000 when they were the same age.4
Workforce diversity creates many new employee issues and problems. This chapter will consider the changing face of today’s workplace, and its implications for management. Laws
2 Except as noted, the figures in the following paragraphs are drawn from “Foreign-Born Workers: Labor Force Characteristics—2016” News Release, Bureau of Labor Statistics, May 18, 2017; “Key Findings about U.S. Immigrants,” Pew Research Center, May 3, 2017, at www.pewresearch.org/fact-tank/2017/05/03/key-findings-about-u-s-immigrants; and “Household Data, Annual Averages, Table 3: Employment Status of Civilians in Non-institutional Population by Age, Sex, and Race;” Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics, 2017; “The Population Clock” U.S. Census Bureau, 2017; “Projections of the Size and Composition of the U.S. Population: 2014–2060: Population Estimates and Projections” U.S. Census Bureau, March 2015. 3 U.S. Bureau of Labor Statistics, Monthly Labor Review, “Labor Force Projections to 2022,” December 2013. Towers Watson, “Workers Still Uneasy About Financial Security and Retirement,” March 2014. “Working past 70: Americans Can’t Seem to Retire” Bloomberg, July 10, 2017. 4 “Millennials Aren’t Job-Hopping Any Faster than Generation X Did,” April 19, 2017, Fact Tank, Pew Research Center.
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 353
law43665_ch16_350-373.indd 353 01/23/19 05:54 PM
and regulations clearly require that businesses provide equal opportunity and avoid discrimi- nation and harassment. How to meet—and exceed—these mandates presents an ongoing chal- lenge to businesses seeking to reap the benefits of a well-integrated, yet culturally diverse work population. We turn first to two important dimensions of workforce diversity: gender and race.
Gender and Race in the Workplace
Gender and race are both important primary dimensions of workforce diversity. Women and persons of color have always worked, contributing both paid and unpaid labor to the economy. Yet, the nature of their participation in the labor force has changed, posing new challenges to business.
Women and Minorities at Work One of the most significant changes in the past six decades has been the growing labor force participation of women. The labor force participation rate is the proportion of a group of people who are either actively employed or seeking work. The proportion of women working outside the home rose dramatically between 1950 until the late 2000s and has remained between 46 and 47 percent since then. Analysts suggest that the lack of family-friendly policies continue to constitute barriers to women’s labor force participa- tion, as women report caring for a family member as an important reason for not partic- ipating in the workforce. (These policies will be discussed later in this chapter.) Men’s participation rates declined during this period; between 1950 and 2016, the proportion of adult men who worked fell from 70 percent to about 53 percent. Figure 16.1 shows the convergence of the proportion men and women in the labor force over the past six decades.
Why are the rates for men and women converging? Illness, disability, and incarceration have negatively impacted men more than women. Incarceration makes it less likely that someone will be employed even after they have served their time. The increase in women’s labor force participation has been attributed to higher levels of educational attainment, delayed child bearing and a decreasing tendency of women staying home to raise children.5
5 “Factors Affecting the Labor Force Participation of People 25–54,” Congressional Budget Office, February 2018.
FIGURE 16.1 Proportion of Women and Men in the Labor Force, 1950–2016
Source: U.S. Bureau of Labor Statistics, Current Population Survey, Civilian Labor Force by Sex, 1948–2016, Annual Averages.
80
70
60
50
40
30
20
10
0 1950 1955 19651960 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016
Women
Men
Final PDF to printer
354 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 354 01/23/19 05:54 PM
Labor force participation rates for minorities, unlike those of women, have always been high. In 1970 about 62 percent of all African Americans (men and women combined) par- ticipated in the labor force; and currently is just under 60 percent. Participation rates have also been consistently high for most other minority groups; for Asians, it is 63 percent; for Hispanics, 66 percent. While high proportions of these minority groups participate in the labor force, they also experience higher levels of unemployment. (Unemployment rates identify the proportion of individuals who report that they are not employed but are seeking work.) In 2016, national unemployment rate in the United States was 5.8 percent for Hispanics and 8.4 percent for African Americans—both well over the national average of 4.9 percent. Asians experienced the lowest level of unemployment rates at 3.9 percent. While these statistics indicate a move of persons of color into a wider range of jobs and better representation in the ranks of managers, professionals, and the skilled trades, dispro- portionate rates of unemployment suggest that discrimination and bias remain.6
The face of success in the United States is just as diverse as the workforce. Con- sider Geisha Williams, CEO and president of Pacific Gas & Electric (PG&E), the first Latina CEO of a Fortune 500 Company. Williams emigrated to the United States with her family from Cuba when she was five years old and earned her degree in engineering from the University of Miami. She began her career at Flor- ida Power & Light, where she was encouraged by an older female manager to pur- sue a series of managerial positions, and later moved to PG&E, the largest utility company in California. In 2016, PG&E’s board of directors elected Williams to be CEO. Under her leadership, PG&E has invested in modernizing its electricity infra- structure and moved to become a leader in clean energy. “Geisha transformed us from old grid to grid of the future,” said her predecessor as CEO, Tony Early.7
The Gender and Racial Pay Gap One persistent feature of the working world is that women and persons of color on average receive lower pay than white men do. This disparity, called the pay gap, has narrowed but not closed over the past quarter century. Figure 16.2 shows the pay disparity among demographic groups in 2017. The bags in the figure show the average weekly earnings of various groups relative to those of white men, expressed as cents to the dollar.
Figure 16.2 does not include Asian Americans. Data show that the one group that tops white men in median weekly earnings is Asian American men; they make about $1.17 for every dollar that a white man earns, on average. (Asian American women make 87 cents for every dollar of what white men earn.) An important reason is education; about half of Asian American adults hold a bachelor’s degree or above, far more schooling than any other ethnic or racial group.8
Experts disagree about the cause of the pay gap between women and men. Some believe the continuing gender disparity in pay is evidence of sex discrimination by employers; others believe the gap reflects women’s choices to pursue lower-paying jobs or slower advancement because of time off for family responsibilities. Many observers agree, how- ever, that the pay gap persists, in part, because of what is called occupational segregation. This term refers to the inequitable concentration of a group, such a minorities or women, in
6 “Labor Force Characteristics by Race and Ethnicity,” Bureau of Labor Statistics Reports 1070, October 2017. 7 “PG&E’s Bolt of Energy,” Fortune, June 15, 2017; “Williams Elected CEO and President of PG&E Corporation as Part of Lead- ership Succession Plan,” PG&E press release, November 14, 2016. 8 Pew Research Center, “Racial, Gender Wage Gaps Persist in U.S. Despite Some Progress,” July 1, 2016.
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 355
law43665_ch16_350-373.indd 355 01/23/19 05:54 PM
particular job categories. For example, the large pay gap for Hispanic workers partly reflects their concentration in several low-paid occupations. According to the U.S. Bureau of Labor Statistics, almost two-thirds of drywall installers, half of all agricultural workers and over a third of all grounds maintenance workers and housekeepers are of Hispanic origin—although they make up only 17 percent of the total workforce. Although women, for their part, have made great strides in entering occupations where they were formerly underrepresented, many remain concentrated in a few sex-typed jobs that some have called the “pink-collar ghetto.” Women still make up over 90 percent of preschool and kindergar- ten teachers, hairdressers, and dental hygienists, for example. Eliminating the pay gap will require, therefore, business programs and government policies that create opportunity for women and people of color to move out of more segregated jobs into ones where the pay and chances for upward mobility are greater.9
Occupational segregation is common in other societies, as well. According to the European Commission, jobs among member countries of the European Union con- tinue to be split along gender lines. The Commission found that in 2016 women working in the EU were concentrated in the personal care, teaching, and cleaning professions. Women made up 89 percent of workers in the personal care category, 84 percent of cleaners, 80 percent of office clerks, 78 percent of health techni- cians, and 71 percent of teachers. Men were concentrated in occupations related to construction, transportation, industry, and science. Men comprised 97 percent of builders in the EU, 96 percent of drivers and heavy machine operators, 96 percent of metal workers, and 74 percent science and engineering professionals.10
One area of the economy where racial and gender discrimination seems stubbornly per- sistent is high technology. The challenges faced by minorities and women in the world of high tech is profiled in Exhibit 16.A.
The most prestigious and highest-paying jobs in a corporation are in top management. Because most corporations are organized hierarchically, management jobs—particularly
9 The data in this paragraph are drawn from two reports by the U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Household Data Annual Averages Table 11: Employed persons by detailed occupation, sex, race, and Hispanic or Latino Ethnicity,” January 2018. 10 “Jobs Still Split along Gender Lines,” March 8, 2018. Data are from the European Labour Force Survey at http://ec.europa. eu/eurostat/en/web/products-eurostat-news/-/EDN-20180307-1.
FIGURE 16.2 The Gender and Race Pay Gap, 2017 (median weekly earnings of full- time workers, as a percentage of those of white men)
Source: U.S. Bureau of Labor Statistics: Median Usual Weekly Earnings of Full-Time Wage and Salary Workers by Age, Race, Hispanic or Latino Ethnicity, and Sex, Fourth Quarter 2017 Averages, Not Seasonally Adjusted, Table 3, January 17, 2018.
64 Hispanic women
Hispanic men
Black women
White women
Black men
69
72
73
81
Final PDF to printer
356
law43665_ch16_350-373.indd 356 01/23/19 05:54 PM
those at the top—are few. For that reason, only a small fraction of workers, of whatever gender or race, can hope to reach the upper levels in the business world. White men have traditionally filled most of these desirable spots. Business’s mandate now is to broaden these high-level leadership opportunities for women and persons of color, a topic to which we turn next.
Where Women and Persons of Color Manage Slightly more than 9 million U.S. women were working as managers by the mid-2010s. As Figure 16.3 reveals, in 2018 around half of all managers and professionals were women. Women are more likely to be managers, though, in occupational areas where women are more numerous at lower levels, such as health care and education.
Where do persons of color manage? As Figure 16.3 shows, African Americans and His- panics are underrepresented in management and professional ranks in the United States, although Asian Americans are overrepresented there. Blacks have made the most progress in educational administration and human resources; Hispanics in property and real estate management; and Asians in information systems.
Breaking the Glass Ceiling A few exceptional women and persons of color—and some women of color—have reached the pinnacles of power in corporate America.
The Dearth of Diversity in High-Tech Firms
Despite a few high-profile exceptions such as Marissa Meyer of Yahoo! and Sheryl Sandberg of Facebook, women and minorities are grossly underrepresented in the fast-moving world of high-tech. At Yahoo! 61 percent of employees were white, 31 percent Asian, 3 percent Hispanic, and 1 percent African American. Men made up 63 percent of all employees. At Facebook, 49 percent of employees were white and 40 percent Asian; only 5 percent were Hispanic and 3 percent African American. Men made up 65 percent of all employees. The story was similar at Google, where 56 percent of employees were white and 35 percent Asian; only 4 percent were Hispanic and 2 percent African American. Many companies explained these figures by pointing to a lack of diversity in the pipeline of qualified women and minorities in technology-related fields. However, Silicon Valley’s well-known “bro” culture may also have been a factor. In 2017, Google software engineer James Damore released an internal memo sug- gesting that women’s underrepresentation was due to “‘biological factors’ such as women’s supposedly greater interest in people and their predisposition to anxiety and stress at work” and that “they are less intrigued by ‘things’ than men are.” Google CEO Sundar Pichai had to determine a response that was con- sistent both with Google’s culture of self-expression and its credo to “Do No Evil.” Pichai ultimately fired Damore, stating that parts of the memo violated the company’s code of conduct and created a hostile work environment for women. This decision came on the heels of a Department of Labor investigation of Google for wage discrimination against female employees. However, when asked to comment on his decision, Pichai stated that “This isn’t a question of legality or policy. This is a question of virtue signaling.” The decision to fire Damore, he implied, was less a response to the legal investigation than a demonstration of commitment to the company’s values as expressed in its code of conduct.
Sources: “You’re Fired; Work Culture in Silicon Valley,” The Economist, August 12, 2017; “Google’s Silent Majority; Did the Tech Giant Just Fire One of Its Most Moderate Employees?” The Wall Street Journal, August 11, 2017; “Distribution of Facebook Employees Worldwide from 2014–2017, by Gender,” Statistica, at https://www.statista.com/statistics/311776/yahoo-employee- gender-global/ and “Distribution of Facebook Employees Worldwide from 2014 – 2017, by Ethnicity,” Statistica, at www.statista. com/statistics/311847/facebook-employee-ethnicity-us, “Google is Making Slow Progress on Hiring People Who Aren’t White Men,” Business Insider, June 30, 2017, and “The Alarming Downsides to Tech Industry Diversity Reports,” Gizmodo, at https:// gizmodo.com/the-alarming-downsides-to-tech-industry-diversity-report-1789797486, December 16, 2016.
Exhibit 16.A
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 357
law43665_ch16_350-373.indd 357 01/23/19 05:54 PM
In 2017, Rosalind Brewer became the first woman and African American to be named chief operating officer of Starbucks. Brewer’s path to this role was serendip- itous. Brewer was a senior level executive at Walmart, heading the Sam’s Club divi- sion. After speaking on a panel with Starbucks CEO Howard Schultz at Walmart’s Headquarters, Brewer was invited to visit the Starbucks’ headquarters in Seattle. The company’s leaders were impressed and asked her to serve on the board of directors. Awed by her “insightful questions, ability to connect with people and her operational prowess,” Starbucks named Brewer as COO.11
High achievers such as Rosalind Brewer and Geisha Williams remain unusual, however. Although women and minorities are as competent as white men in managing people and organizations, they rarely attain the highest positions in corporations. Their ascent seems to be blocked by an invisible barrier, sometimes called a glass ceiling. According to Cata- lyst, an advocacy organization for female executives, in 2017 women held 26 (about 5.2 percent) of CEO positions at S&P 500 companies.12 In 2015, people of color held 25 (5 percent) of CEO positions at Fortune 500 companies. The latter group included Kenneth Chenault of American Express, George Paz of Express Scripts, and Ajaypal Banga of
11 “How Rosalind Brewer, Starbucks’ First Woman COO, Got the Job” Fortune Magazine September 7, 2017. 12 “Women CEOs of the S&P 500,” March 13, 2018, at www.catalyst.org/knowledge/women-ceos-sp-500.
FIGURE 16.3 Snapshot of Diversity in Selected Occupations
Sources: U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey Table 11: Employed Persons by Detailed Occupation, Sex, Race and Hispanic or Latino Ethnicity, January 19, 2018.
Snapshot of diversity in selected occupations (Reported in percentages)
Property, real estate, & comm. assn. managers 48.6
69.8
70.8
28.6
45.3
9.5 12.5 1246.3
64.2
34.1
51.6
46.9 12.1 16.96.2
8.3 11.4
9.4 9.68.1
4.5
12.9 2.1 10.3
12.3
6.6
6 6.1 10.2
6.613
4.3 7.9
52.3 10.6 3.3 9.1
11.6 3.5 14.4
14 5.7 9.1Medical and health services managers
Purchasing managers
Human resources managers
Computer and information systems managers
Marketing and sales managers
Food service managers
Educational administrators
General and operations managers
Management, professional, and related occupations
All occupations
Female Black Asian Hispanic
Final PDF to printer
358 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 358 01/23/19 05:54 PM
MasterCard. In 2017, Chenault retired from his post at American Express. Industry observ- ers have expressed concern that as CEOs from underrepresented groups retire, they are being replaced by white men, essentially reversing progress that had been made.13 (The S&P 500 and Fortune 500 are both lists of large companies and have considerable overlap, but the latter includes private as well as public companies.) In Europe, diversity in top executive ranks is also rare.
Another key measure of diversity is the representation of women on corporate boards. Worldwide, women held 15 percent of directorships in 2016.14 This number, however, obscures significant variations among nations, as shown in Figure 16.4.
What explains the sharp differences in board diversity shown in Figure 16.4? A key factor is that several nations in Europe have passed laws that set quotas for women’s repre- sentation on boards of directors. Most recently, in 2015 Germany required companies to
13 “Why Top 50 Companies Beat Fortune 500 in Diversity Recruiting, Promotions,” DiversityINC, posted April 23, 2015; and “There are Currently 4 Black CEOs in the Fortune 500,” The Atlantic, October 26, 2017. 14 “Women in the Boardroom: A Global Perspective” 5th edition, Global Center for Corporate Governance, Deloitte, 2017.
FIGURE 16.4 Women as a Percentage of Members of Boards of Directors, Selected Countries, 2016.
Source: Women in the Boardroom: A Global Perspective 5th edition, Global Center for Corporate Governance, Deloitte, 2017. Data are as of December 2016.
0 5 10 15 20 25 30 35 40 45
United Arab Emirates
South Korea
Japan
Russia
Mexico
Brazil
Indonesia
China
Turkey
India
United States
Spain
Canada
South Africa
Germany
United Kingdom
Australia
Netherlands
Denmark
Finland
New Zealand
Italy
Sweden
France
Norway
Percentage of Women on Boards
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 359
law43665_ch16_350-373.indd 359 01/23/19 05:54 PM
give 30 percent of board seats to women, joining Norway, Spain, France, Iceland (with 40 percent quotas), Italy (33 percent), and Belgium (30 percent). “The proof is in the pud- ding: regulatory pressure works,” said the European Union’s justice commissioner, a leader in the campaign for gender parity.15 In the United States and the United Kingdom, where similar legislation was unlikely, some institutional investors had started pressuring compa- nies to appoint more women and minorities to directorships.16
Does greater diversity on boards make a difference? The evidence is mixed. A 2017 sur- vey of board members found that 73 percent of them thought that diversity was beneficial.17 A study by MSCI, an investment research firm, found that companies with a higher propor- tion of women on their boards were less likely to be involved in corruption and earned higher scores for management of carbon emissions, toxic releases, water, labor, and health and safety issues than other firms.18 Likewise, a study of Australian firms found that board diver- sity was positively associated with financial performance.19 But another recent review of academic studies concluded that greater gender diversity on boards did not make much dif- ference, one way or the other. This might have been, the authors concluded, because women directors were quite similar to men serving on boards in all respects other than gender.20
Why would adding women to boards improve performance? Gender-diverse boards may be more likely to avoid a rush to consensus and realistically consider alternative courses of action. Women bring different life experiences to the table and are more likely to raise multiple stakeholder concerns.21 Judith Samuelson, executive director of the Business and Society program at the Aspen Institute, has argued that women simply lead differently, demonstrating traits such as empathy, collaboration, and skill at conflict resolution.22
What continues to hold women and minorities back—in the executive suite and on boards of directors? Female and minority managers are often found in staff positions, such as public relations or marketing, rather than in line positions in such core areas as finance, operations, and the law, where they can acquire the broad management skills that are more likely to lead to the executive suite.23 Another problem is that in filling top positions, recruiters rely on word-of-mouth—the old boys’ network from which women and persons of color are often excluded. Sometimes women voluntarily choose to step off the career track to care for children or elderly relatives. Other causes include a company’s lack of commitment to diversity and too little accountability at the top management level for equal employment opportunity. However, recent advances by both women and minorities in the executive suite suggest that the glass ceiling may finally be cracking.
Women and Minority Business Ownership Some women and minorities have evaded the glass ceiling and risen to the top by founding or taking over their own businesses. By the mid-2010s, of the 28 million small businesses
15 “Germany Sets Gender Quota in Boardrooms,” The New York Times, March 6, 2015; “Push for Gender Balance on Boards Gains Steam,” The New York Times, January 24, 2013. 16 “Women Still Hold Only 19 Percent of U.S. Board Seats. What Could Change That?” The Washington Post, January 13, 2015. 17 “16% of Board Members Say Racial and Gender Diversity Has No Benefit at All,” Fortune, October 17, 2017. 18 MSCI, “Governance Issue Report: 2014 Survey of Women on Boards,” November 2014. 19 “Board Diversity and Financial Performance in the Top 500 Australian Firms,” Australian Accounting Review, 25(4), 413–427. 20 “Does Gender Diversity on Boards Really Boost Company Performance?” May 18, 2017, at http://knowledge.wharton.upenn.edu. 21 The Conference Board, “Diversity on Corporate Boards: How Much Difference Does Difference Make?” February 2015. 22 Judith Samuelson, “Do Women Lead Differently? Yes, Thank Goodness,” November 8, 2015, at www.linkedin.com. 23 “What’s Holding Women Back?” Harvard Business Review, June 1, 2003. The reports of the Glass Ceiling Commission of the U.S. Department of Labor may be accessed at www.dol.gov/oasam/programs/history/reich/reports/ceiling.pdf.
Final PDF to printer
360 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 360 01/23/19 05:54 PM
in the United States, 36 percent were owned by women, and 15 percent were owned by minorities, according to the Small Business Administration.24
Hamdi Ulukaya came to the United States from Turkey 23 years ago on a student visa. In Turkey, his family raised goats and sheep, making cheese and yogurt to sell in their village. After college, Ulukaya worked on a dairy farm and started a feta cheese busi- ness. One day, Ulukaya spotted an advertisement for the sale of a fully equipped yogurt plant in upstate New York, then owned by Kraft Foods. Working with a regional bank and the Small Business Administration, Ulukaya was able to buy the facility, saving 200 factory jobs. Today, Chobani Yogurt is the best-selling brand in America. The plant now employs 1,000 employees paying above average wages, and Chobani brings $2 billion annually into the regional economy. In gratitude for his success, Ulukaya gave 10 percent equity in the company to his employees, stating “It’s not a gift. . . . It’s the right thing to do. It is something that belongs to them that I recognize.”25
In 2015, there were almost one million minority-owned businesses in the United States, according to the U.S. Census Bureau. More than 50 percent of these firms were owned by Asians. Hispanics owned about 32 percent, and African Americans about 11 percent.26 Immigrants were responsible for a good share of the entrepreneurial spirit in the minority community. In 2015, immigrants were reported as twice as likely as native born U.S. citizens to start a new business. In 2016, 40 percent of firms in the Fortune 500 had at least one founder who was either an immigrant or the child of immigrants.27
Government’s Role in Securing Equal Employment Opportunity
Eliminating workplace discrimination and ensuring equal job opportunity has been a major goal of public policy in the United States for four decades. This section reviews the major laws that govern business practices with respect to equal opportunity, affirmative action, and sexual and racial harassment.
Equal Employment Opportunity Beginning on a major scale in the 1960s, U.S. presidents issued executive orders and Congress enacted laws intended to promote equal treatment of employees—that is, equal employment opportunity. These government rules apply to most businesses in the following ways:
∙ Discrimination based on race, color, religion, sex, national origin, physical or mental disability, or age is prohibited in all employment practices. This includes hiring, pro- motion, job classification and assignment, compensation, and other conditions of work. (Discrimination based on sexual orientation and gender identity is not prohibited by federal law, although it is prohibited by some state laws.)
∙ Government contractors must have written affirmative action plans detailing how they are working positively to overcome past and present effects of discrimination in their workforce. However, affirmative action plans must be temporary and flexible,
24 U.S. Small Business Administration, “Frequently Asked Questions About Small Businesses,” March 2014. 25 “Chobani’s Billionaire Founder on Creating Jobs in America,” from “Chief of Chobani,” 60 Minutes, CBS News, aired April 9, 2017. 26 U.S. Census Bureau, “Number of Minority-Owned Employer Firms Increased in 2015,” July 13, 2017; and U.S. Census Bureau, “Statistics for U.S. Employer Firms by Sector, Gender, Ethnicity, Race, and Veteran Status for U.S. States and Top 50 MSA: 2015: Company Summary 2015.” 27 New American Economy, “Reason for Reform: Entrepreneurship,” October 2016.
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 361
law43665_ch16_350-373.indd 361 01/23/19 05:54 PM
designed to correct past discrimination, and cannot result in reverse discrimination against whites or men.
∙ Women and men must receive equal pay for performing equal work, and employers may not discriminate based on pregnancy.
Figure 16.5 outlines the major laws and one executive order that are intended to pro- mote equal opportunity in the workplace. The major agency charged with enforcing equal employment opportunity laws and executive orders in the United States is the Equal Employment Opportunity Commission (EEOC). The EEOC was created in 1964 and given added enforcement powers in 1972 and 1990.
The following section describes three specific areas of government regulation: affirma- tive action, sexual harassment, and racial harassment.
Affirmative Action One way to promote equal opportunity and remedy past discrimination is through affirmative action. Since the mid-1960s, major government contractors have been required by presidential executive order to adopt written affirmative action plans specifying goals, actions, and timetables for promoting greater on-the-job equality. Their purpose is to reduce job discrimination by encouraging companies to take positive (that is, affirmative) steps to overcome past employment practices and traditions that may have been discriminatory.
Affirmative action has long been controversial. Some states have passed laws banning or limiting affirmative action programs in public hiring and university admissions, and the issue has been debated in Congress and in the courts. Backers of affirmative action argued that these programs provided an important tool for achieving equal opportunity. In this view, women and minorities continued to face discriminatory barriers, and affirmative action was necessary to level the playing field. Some large corporations backed affirmative action pro- grams, finding them helpful in monitoring their progress in providing equal job opportunity. General Electric, AT&T, and IBM, for example, have said that they would continue to use affirmative action goals and timetables even if they were not required by law.
Equal Pay Act (1963)—Mandates equal pay for substantially equal work by men and women.
Civil Rights Act (1964; amended 1972, 1991, 2009)—Prohibits discrimination in employment based on race, color, religion, sex, or national origin.
Executive Order 11246 (1965)—Mandates affirmative action for all federal contractors and subcontractors.
Age Discrimination in Employment Act (1967)—Protects individuals who are 40 years of age or older.
Equal Employment Opportunity Act (1972)—Increases power of the Equal Employment Opportunity Commission to combat discrimination.
Pregnancy Discrimination Act (1978)—Forbids employers to discharge, fail to hire, or otherwise discriminate against pregnant women.
Americans with Disabilities Act (1990)—Prohibits discrimination against individuals with disabilities.
Family and Medical Leave Act (1993)—Requires companies with 50 or more employees to provide up to 12 weeks unpaid leave for illness, care of a sick family member, or the birth or adoption of a child.
Genetic Information Nondiscrimination Act (2008)—prohibits the use of genetic information in employment decisions.
Lilly Ledbetter Fair Pay Act (2009)—Eliminates certain time restrictions for filling pay discrimination lawsuits.
FIGURE 16.5 Major Federal Laws and Executive Orders Prohibiting Job Discrimination
Final PDF to printer
362 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 362 01/23/19 05:54 PM
Critics, however, argued that affirmative action was inconsistent with the principles of fairness and equality. In some cases, one group could be unintentionally discriminated against in an effort to help another group. For example, if a more qualified white man were passed over for a job as a police officer in favor of a less qualified African American man to remedy past discrimination in a police department, this might be unfair to the white candidate.
In 2017, the Eleventh Circuit of the U.S. Court of Appeals heard a case brought by Frank Voudy, a white deputy in the Broward County Sheriff’s Office in Florida. Voudy claimed that two African American deputies who had scored lower than him on the promotional exam were unjustly promoted over him. In the initial case heard in a lower court, Voudy lost. However, the Court of Appeals decided that “Without any evidence indicating how the identified criteria were weighed or considered in Voudy’s case, we can do no more than speculate as to why the other two officers were promoted while Mr. Voudy was not.” The higher court ordered the lower court to re-open the case for trial.28
Critics of affirmative action also argued that these programs could actually stigmatize or demoralize the very groups they were designed to help. For example, if a company hired a woman for a top management post, other people might think she got the job just because of affirmative action preferences, even if she were truly the best qualified. This might undermine her effectiveness on the job or even cause her to question her own abilities. For this reason, some women and persons of color called for less emphasis on affirmative action, preferring to achieve personal success without preferential treatment.29
Sexual and Racial Harassment Government regulations ban both sexual and racial harassment. Of the two kinds, sexual harassment cases are more prevalent, and the law covering them is better defined. But racial harassment cases are a growing concern to employers.
Sexual harassment at work occurs when any employee, woman or man, experiences repeated, unwanted sexual attention or when on-the-job conditions are hostile or threaten- ing in a sexual way. It includes both physical conduct—for example, suggestive touching— as well as verbal harassment, such as sexual innuendoes, jokes, or propositions. Sexual harassment is not limited to overt acts of individual coworkers or supervisors; it can also occur if a company’s work climate is blatantly and offensively sexual or intimidating to employees. Women are the targets of most sexual harassment.
In October 2017, The New York Times published a story about workplace sexual harassment that would send shock waves through many workplaces and ignite the MeToo and Time’s Up movements. Interviewing actresses and film industry work- ers, New York Times reporters Jodi Kantor and Megan Twohey chronicled about 30 years of unwanted sexual advances, innuendo, and nonconsensual sexual encounters at the hands of the powerful Hollywood mogul Harvey Weinstein. These disclo- sures empowered other victims of workplace sexual harassment to come forward, accusing dozens of influential men in multiple industries—in some cases, leading
28 “Frank Voudy v. Sheriff of Broward County, Florida,” United States Court of Appeals, Eleventh Circuit: http://caselaw .findlaw.com/us-11th-circuit/1867787.html, and “Deputy Sheriff’s Reverse Discrimination Case Reinstated,” Business Insurance, July 14, 2017. 29 See, for example, Ward Connerly, Creating Equal: My Fight Against Race Preferences (San Francisco: Encounter Books, 2000).
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 363
law43665_ch16_350-373.indd 363 01/23/19 05:54 PM
to these men’s removal from their positions of influence. Put on notice, employers have increased efforts to improve protocols for reporting, investigating, and addressing allegations of sexual harassment.30
Sexual harassment is illegal, and the U.S. Equal Employment Opportunity Commission (EEOC) is empowered to sue on behalf of victims.
Women employees regularly report that sexual harassment is common. From 40 to 70 percent of working women (and from 10 to 20 percent of working men) have told researchers they have been sexually harassed on the job. In almost two-thirds of the cases, the individual who was the target did not report the incident.31 This kind of conduct is most likely to occur where jobs and occupations are (or have been) sex-segregated and where most supervisors and managers are men. It is also common where women workers have low power relative to their supervisors. One study found, for example, that female farm- workers were commonly sexually harassed and assaulted. About 60 percent were illegal immigrants, the study found, and many were afraid of deportation if they complained. “It’s easiest for abusers to get away with sexual harassment where there’s an imbalance of power, and the imbalance of power is particularly stark on farms,” said the study’s author.32
Although the European Union has recognized sexual harassment as a form of gen- der discrimination, these behaviors remain all too common. A 2014 study found that 45 to 55 percent of women in the 28 EU nations had experienced sexual harass- ment. It was most frequent in Denmark, Sweden, the Netherlands, France, and Belgium (where 30 percent or more of survey respondents reported being harassed in the past year). Young women were more likely to be harassed than older women; they also were more likely to experience online victimization, such as unwanted sexually explicit e-mails or text messages. “This is no minor issue. We’re talking about mothers, sisters, daughters across the EU,” said the director of the European Agency for Fundamental Rights, which had conducted the survey.33
Harassment can occur whether the targeted employee cooperates or not. It need not result in the victim’s firing or cause severe psychological distress; the presence of a hostile or abusive workplace can itself be the basis for a successful suit. Moreover, a company can be found guilty as a result of actions by a supervisor, even if the incident is never reported to top management.
Racial harassment is also illegal, under Title VII of the Civil Rights Act. Under EEOC guidelines, ethnic slurs, derogatory comments, or other verbal or physical harassment based on race are against the law, if they create an intimidating, hostile, or offensive work- ing environment or interfere with an individual’s work performance. Although fewer racial than sexual harassment charges are filed, their numbers have more than doubled since the early 1990s, and employers have been liable for expensive settlements.
For example, in 2017 the EEOC sued Aaron’s Inc., a nationwide rent-to-own chain, for racial harassment at one of their warehouses in Jamaica, New York. Supervisors had regularly used racial slurs, using the “n” word and referring to African American employees as “monkeys.” African American employees had also been assigned more difficult and unpleasant tasks than other workers. “The law is clear,” stated EEOC New York District Director Kevin Berry, “Employers have a responsibility
30 “Harvey Weinstein Paid Off Sexual Harassment Accusers for Decades,” The New York Times, October 5, 2017, and “After Weinstein: 71 Men Accused of Sexual Misconduct and Their Fall from Power,” The New York Times, February 8, 2018. 31 “Sexual Harassment Statistics in the Workplace,” www.sexualharassmenlawfirms.com. 32 “Report: Sexual Abuse of Female Farmworkers Common,” The Washington Post, May 16, 2012. 33 European Agency for Fundamental Rights, “Violence Against Women: An EU-Wide Survey,” 2014.
Final PDF to printer
364 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 364 01/23/19 05:54 PM
to ensure that their workplaces are free from racial harassment and cannot ignore racist behavior by their managers.”34
What can companies do to combat sexual and racial harassment—and protect them- selves from expensive lawsuits? The Supreme Court has ruled that companies can deflect lawsuits by taking two steps. First, they should develop a zero-tolerance policy on harass- ment and communicate it clearly to employees. Then they should establish a complaint procedure—including ways to report incidents without retaliation—and act quickly to resolve any problems. Companies that take such steps, the court said, would be protected from suits by employees who claim harassment but have failed to use the complaint procedure.
Developing mechanisms for preventing sexual and racial harassment is just one impor- tant action companies can take. Others positive steps by business are discussed in the fol- lowing section.
What Business Can Do: Diversity and Inclusion Policies and Practices
All businesses, of course, are required to obey the laws mandating equal employment opportunity and prohibiting sexual and racial harassment; those that fail to do so risk expensive lawsuits and public disapproval. But it is not enough simply to follow the law. The best-managed companies go beyond compliance; they not only assemble diverse teams but implement a range of policies and practices to include all employees in a workplace that is welcoming, fair, and accommodating. A recent study by Deloitte Consulting explained that “promoting diversity is an expected commitment; it’s now a ticket to play.” The next essential step, the study concluded, was to “create a work environment that promotes inclu- sion in all its variations.” In this context, inclusion means policies and practices that tap into the diverse perspectives, life experiences, and approaches that every individual brings to the workplace. As Deloitte put it, “diversity is the measure; inclusion is the mechanism.”35
Companies that manage diversity and promote inclusion effectively take several related actions, in addition to obeying all relevant laws. Research shows that these actions include the following.
Articulate clear diversity goals set, quantitative objectives, and hold managers account- able. An important trend in diversity management is metrics—setting specific goals and offering incentives for meeting them.
An example of a company that has done this is the German carmaker BMW. His- torically, BMW has had difficulty attracting and retaining female executives, even though women make up a large share of its customers. Believing that “what gets measured is what gets done,” the company set numerical goals for the proportion of women at all levels—including doubling the number of women managers by 2020. To assure that the job got done, BMW included specific targets in the annual per- formance reviews of its top executives. Their success in meeting them would impact their annual bonuses. These targets were cascaded down to lower management lev- els as well. “You need to hold people accountable,” declared the company’s human resource and industrial relations director.36
34 “EEOC Sues Aaron’s For Race Harassment,” Press Release: U.S. Equal Employment Opportunity Commission,” December 13, 2017, and “Labor Law: Racial Harassment in the Workplace Still Occurring, But Employers Cannot Tolerate It,” Richmond Times-Dispatch, February 26, 2018. Information on the latest government policies on racial and sexual harassment may be found at the EEOC website at www1.eeoc.gov//eeoc/statistics/enforcement/race_harassment. 35 Deloitte Consulting LLP, Global Human Capital Trends 2014: Engaging the 21st Century Workforce. 36 “Hard-Wiring Diversity into Your Business,” Boston Consulting Group Perspectives, June 8, 2011, at www.bcgperspectives.com.
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 365
law43665_ch16_350-373.indd 365 01/23/19 05:54 PM
Spread a wide net in recruitment, to find the most diverse possible pool of qualified candidates. Those in charge of both hiring and promotion need to seek all workers who may be qualified—both inside and outside the company. This often involves moving beyond word-of-mouth networks, which may produce a pool of applicants who are similar to people already working for the company or in particular jobs. One company’s efforts to promote diversity in its hiring using a range of techniques that are described in the following example.
The accounting firm KPMG works hard to build a diverse workforce. The firm actively recruits at historically black colleges and universities and is a member of INROADS, a program that places minorities in internships with the company. It sponsors the PhD Project, which supports persons of color in doctoral programs that lead to faculty positions in colleges of business—where they can serve as role models for many students. KPMG has embraced the use of technology to cast a wider net in hiring, holding “virtual” recruiting fairs where registrants from around the world can interact with company recruiters online. Its seven national diversity networks engage nearly 40 percent of its employees globally. “All of our people are able to bring their whole self to work,” said the company website.37
Incorporate selection techniques that diminish the opportunity for bias. Sometimes ini- tial preemployment screening techniques inadvertently eliminate talent from diverse labor pools. When companies focus on a perceived prototype of an ideal candidate instead of on the knowledge, skills, abilities, and other characteristics actually required, qualified candi- dates from underrepresented groups can inadvertently be overlooked.
Kedar Iyer, co-founder and CEO of GapJumper, had a hard time getting companies to consider his application for computer science jobs seriously. While Iyer had experience, he did not have a degree, and it took him a long time to convince a company to hire him for a job related to computer science. This experience moti- vated Iyer to start GapJumper, a company that attempts to lessen bias by eliminat- ing consideration of demographic factors in client companies’ hiring processes. Applicants are given a job-related assignment, and then hiring managers assess the completed task without any information that could identify their race, gender, eth- nicity, national origin, work experience, or educational background. This technique has worked. GapJumper’s clients have seen a 60 percent increase in applications from traditionally underrepresented groups make it beyond the initial screening pro- cess to secure an interview. Not only has this resulted in a more diverse workforce, GapJumper’s clients have reduced the time it takes to fill positions by 40 percent.38
Identify promising women and persons of color and provide them with mentors and other kinds of support. What techniques work to shatter the glass ceiling? Some companies have promoted inclusion by assigning mentors—more senior counselors—to promising women and minority managers and providing them with opportunities for wide-ranging line experience. For example, Chevron Corporation, the energy company, has adopted a wide range of programs to foster inclusion, including employee networks that operate an extensive mentoring program. Adriana Sandoval, as information management supervisor, explained the importance of such mentorship in her career. She recalled that her father had asked her why she has chosen to work for an oil company. “You’re a Latina; you’re going to get lost,” her father had told her. But her first day on the job, “a woman who was a Latina
37 Information on KPMG’s diversity initiatives is available at https://home.kpmg.com/us/en/home/about/ corporate-responsibility/diversity-and-inclusion. 38 “Five Leaders Who Are Disrupting Diversity,” HR Magazine, January 16, 2017.
Final PDF to printer
366 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 366 01/23/19 05:54 PM
was there, and she was a representative of SOMOS, the Hispanic employees’ network. . . . There’s a lot of attention to making sure that folks have the opportunity to grow and learn within the company.”39
Set up diversity councils to monitor the company’s goals and progress toward them. A diversity council is a group of managers and employees responsible for developing and implementing specific action plans to meet an organization’s diversity goals. Sometimes, a diversity council will be established for a corporation as a whole; sometimes, it will be established within particular business units. A related practice is the formation of special groups of employees to promote professional development for traditionally underrepre- sented groups.
An example of a company that has used these practices effectively is Northrop Grumman, which in 2018 ranked #2 on DiversityInc’s list of top 50 companies for diversity councils. The company has a diversity and inclusion leadership council, co-chaired by its chairman and CEO. It also operates 12 employee resource groups, including ones supporting African American, Asian Pacific Islander, Hispanic, Native American, women, veteran, and LGBT employees; 19,000 employees participate in them. “While their interests may vary,” the company said of these groups, “their goal is one: to offer opportunities to each and every member of [the] Northrop Grumman team.”40
Businesses that manage diversity and inclusion effectively enjoy a strategic advan- tage. While fundamental ethical principles, discussed in Chapters 5 and 6, dictate that all employees should be treated fairly and with respect for their basic human rights, there are also bottom-line benefits to doing so.
∙ Having a widely diverse workforce boosts innovation, many executives believe. Businesses with employees from varied backgrounds can often more effectively serve customers who are themselves diverse and can provide valuable insights into changing tastes and prefer- ences. “Across EY, we recognize that our strength comes from our diversity. We also know that an inclusive culture that values our people’s unique perspectives is critical to drive quality and innovation for our clients—and a better working world for all of us.” asserted Steve Howe, U.S. Chairman and Americas Managing Partner for the accounting firm EY.41
∙ The global marketplace demands a workforce with language skills, cultural sensitiv- ity, and awareness of national and other differences across markets. For example, Dr. Sally Saba, vice president for operations performance and compliance [and] diversity and inclusion for the Kaiser Foundation Health Plan, was born into a Muslim family in Egypt and later came to the United States, where she successfully ran a small business. Her own experiences as a minority business owner have given her deep insight into the challenges of promoting diversity and inclusion. “All of my life experiences contribute to the complexity of how I view the world and how I view people,” Dr. Saba explained.42
39 “The Chevron Way: Engineering Opportunities for Women,” [video transcript], March 2015, at www.chevron.com; and “Chevron Corporation—The Chevron Way: Engineering Opportunities for Women, 2015 Catalyst Award Winner,” at www.catalyst.org. 40 “The 2018 DiversityInc Top 50 for Diversity,” at www.diversityinc.com. The company’s diversity initiatives are described at www.northropgrumman.com/CorporateResponsibility/Diversity/Pages/DiversityPrograms. 41 “EY is #1 for Diversity and Inclusion, according to DiversityInc Top 50 Companies for Diversity,” May 3, 2017, at www.ey.com/us/ en/newsroom/news-releases/news-ey-is-1-for-diversity-and-inclusion-according-to-diversityinc-top-50-companies-for-diversity-list. 42 “Diversity Management at Kaiser Permanente: This Female Muslim Entrepreneur Brings Sensitivity to Suppliers,” May 25, 2012, at http://diversity.inc.com
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 367
law43665_ch16_350-373.indd 367 01/23/19 05:54 PM
Finally, companies with effective diversity programs can avoid costly lawsuits and dam- age to their corporate reputations from charges of discrimination or cultural insensitivity.
Another important step businesses can take to manage diversity effectively is to accom- modate the wide range of family and other obligations employees have in their lives out- side work. This subject is discussed in the next section.
Balancing Work and Life The nature of families and family life has changed, both in the United States and in many other countries. The primary groups in which people live are just as diverse as the work- force itself. One of the most prominent of these changes is that dual-income families have become much more common. According to the latest U.S. government data, in 62 percent of married couples with children at home, both parents worked at least part-time. This was up from just a third of such families in 1976. (To round out the picture, in 30 percent of married couples with children, just the father worked; in about 5 percent, just the mother worked. In the remainder, both parents were unemployed.)43 Families have adopted a wide range of strategies for combining full- and part-time work with the care of children, elderly relatives, and other dependents. How to help employees trying to balance the complex, multiple demands of work and family life has become a major challenge for business.
Child Care and Elder Care One critical issue for business is supporting workers with responsibilities for children and elderly relatives.
The demand for child care is enormous. Millions of children need daily care, especially the more than half of preschool-aged children whose mothers hold jobs. A major source of workplace stress for working parents is concern about their children; and problems with child care are a leading reason why employees fail to show up for work.
Business has found that child care programs, in addition to reducing absenteeism and tardiness, also improve productivity and aid recruiting by improving the company’s image and helping to retain talented employees. Most large U.S. companies (1,000 or more employees) provide some type of child care assistance, including dependent care accounts (76 percent) and referral services (61 percent). About one in five large companies subsidizes on-site or near-site child care services. Small businesses are increasingly recognizing the benefit of assisting employees in balancing family obligations with work.44 An example is S.C. Johnson, a consumer products firm that cares for 500 children in a state-of-the-art center at its Racine, Wisconsin, headquarters. “This isn’t a benefit,” explained a company spokesperson. “It’s a good business decision because we want to attract the best.”45
In addition to caring for children, many of today’s families have responsibilities for elder care. Elder caregivers assist with personal needs, household chores, and/or arrange for care outside the home. According to a study conducted by the American Association of Retired Persons (AARP) and the National Alliance for Caregiving, 43.5 million adults in the United States now care for an adult or child of this population, the overwhelming majority of caregiv- ers (34.2 million) provide care for adults 50 years or older. More than half (56 percent) of family caregivers are currently employed. Twenty-two percent of these caregivers are
43 U.S. Bureau of Labor Statistics, “Families with Own Children: Employment Status of Parents by Age of Youngest Child and Family Type.” Data are for 2017. 44 Families and Work Institute, Society for Human Resource Management & When Work Works, “2016 National Study of Employers,” at www.whenworkworks.org/be-effective/guides-tools/2016-national-study-of-employers. 45 Information about S.C. Johnson’s child care center is available at www.scjohnson.com.
Final PDF to printer
368 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 368 01/23/19 05:54 PM
currently or have in the past cared for a person with Alzheimer’s or other form of dementia. Caregivers are predominantly female. This is a concern for employers because caregivers often have to go to work late or leave early to attend to these duties or are distracted or stressed at work by their responsibilities.46 Some have recognized the demand for family caregiving— of both children and elders—as a business opportunity, as the following example illustrates.
Entrepreneur Sheila Lirio Marcelo, a Filipina American, founded Care.com to use an online platform to connect people looking for caregivers with others looking to pro- vide these services. She got the idea for the company when her father, then 54, had a heart attack and fell down the stairs while carrying her infant son. (Fortunately, the boy was not hurt, but Marcelo realized she needed to hire a caregiver right away—for her son and her father.) The company now has 13 million users and is adding thou- sands more every day. A number of companies, including Facebook and LinkedIn, offer Care.com services as a benefit for their employees. “Caregiving is among the fastest growing job categories in the country, and there’s a need there,” said a scholar at the Pew Research Center. “It’s the most important work families do.”47
Many firms offer referral services, dependent care accounts, long-term care insurance, and time off to deal with the often-unpredictable crises that occur in families caring for children and elders.
When a mother or father is granted time off when children are born or adopted and during the important early months of a child’s development, this is called a parental leave; when the care of elderly relatives is involved, this is called a family leave. Under the Family and Medical Leave Act (FMLA), companies that employ 50 or more people must grant unpaid, job-protected leaves of up to 12 weeks to employees faced with serious family needs, including the birth or adoption of a baby. Smaller companies, not covered by the FMLA, usually do less for expectant and new parents and for those with ill family members.
Work Flexibility Companies have also accommodated the changing roles of women and men by offering workers more flexibility through such options as flextime, part-time employment, job sharing, and working from home (sometimes called telecommuting because the employee keeps in touch with coworkers, customers, and others by phone or online). An example of a company that has done so is Bank of America, the second largest bank in the United States. The bank has made the Working Mother Magazine list of 100 best companies for 29 consecutive years and has been inducted the into its Hall of Fame for its family-friendly best practices.
Ten percent of employees at Bank of America care for both a child and an older adult. These employees can depend on 16 weeks of paid parental leave, $8,000 in adoption reimbursements per child, and $240 per month in child care subsidies. Employees caring for an older adult can count on 25 days of in-home assistance for $6 per hour, free elder-care consultations, and discounted legal advice on issues related to managing the affairs of aging relatives. The effectiveness of these programs can be seen in the successful retention and advancement of women. More than 50 percent of the company’s global workforce, 40 percent of its global management team, and 30 percent of its independent directors are women. “From benefits that support creating a family to policies that help manage a family, all
46 “Caregiving in the U.S. 2015,” National Alliance for Caregiving & AARP Public Policy Institute, June 2015. 47 “Who Profits? Care.com Finds Sitters for Baby or Dad,” December 8, 2014, at www.bloomberg.com.
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 369
law43665_ch16_350-373.indd 369 01/23/19 05:54 PM
while supporting women as we strive for professional development and personal growth, working at Bank of America is truly extraordinary as a working mom,” asserted Tracy Daniels, business executive for Global Banking and Markets Operations.48
Bank of America is not the only corporation using these practices. A 2016 study found that many companies offered some kinds of flexible work schedules, such as allowing some employees to change starting or quitting times periodically (81 percent), work from home at least occasionally (66 percent), or compress workweeks into fewer days (43 percent).49 These arrangements can benefit employers by attracting and retaining valuable employees, reducing absences, and improving job satisfaction.
However, many observers believe that most careers are still structured for people who are prepared to put in 40 hours a week at the office—or 50 or 60—giving their full and undivided commitment to the organization. Many women and men have been reluctant to take advantage of various flexible work options, fearing that this would put them on a slower track, sometimes disparagingly called the Mommy track or Daddy track. In this view, businesses will need to undergo a cultural shift, to value the contributions of people who are prepared to make a serious, but less than full-time, commitment to their careers.
What would such a cultural shift look like? Some have used the term family-friendly workplace to describe firms that would fully support both men and women in their efforts to balance work and family responsibilities. Job advantages would not be granted or denied on the basis of gender. People would be hired, paid, evaluated, promoted, and extended benefits based on their qualifications and ability to do the tasks assigned. The route to the top, or to satisfaction in any occupational category, would be open to anyone with the tal- ent to take it. The company’s stakeholders, regardless of their gender, would be treated in a bias-free manner. All laws forbidding sex discrimination would be fully obeyed. Programs to provide leaves or financial support for child care, elder care, and other family respon- sibilities would support both men and women employees and help promote an equitable division of domestic work. And persons could seek, and achieve, career advancement with- out committing to a full-time schedule, year after year.50 An example of a family-friendly corporation is American Express, long admired for its support of working parents having made the Working Mother Magazine top 100 list of best companies for 26 consecutive years. Forty-eight percent of managers and executives are women, and almost half of the company’s employees telecommute. The company invests resources in training managers on how to effectively manage employee work-life flexibility concerns.51
An important step business can take is to support lesbian, gay, bisexual, and transgender employees. This issue is further explored in Exhibit 16.B.
No other area of business illustrates the basic theme of this book better than the close connection between work and life. Our basic theme is that business and society are closely and unavoidably intertwined, so that what affects one also has an impact on the other. As the workforce has become more diverse, business has been challenged to accommodate their employees’ differences and to include their multiple perspectives. When people go to
48 “Best Companies: Bank of America” Working Mother Magazine, March 5, 2018; and “Bank of America Makes Top 10 in Working Mother’s 100 Best Companies of 2017,” December 5, 2017. 49 Families and Work Institute, Society for Human Resource Management & When Work Works, “2016 National Study of Employers,” at www.whenworkworks.org/be-effective/guides-tools/2016-national-study-of-employers. 50 Working Mother magazine publishes an annual list of the “100 Best Companies for Working Mothers.” The current year’s list may be viewed at www.workingmother.com. 51 “2017 Working Mother 100 Best Companies, American Express,” Working Mother Magazine.
Final PDF to printer
370
law43665_ch16_350-373.indd 370 01/23/19 05:54 PM
work, they do not shed their identities at the office or factory door. When employees come from families where there are young children at home, or where elderly parents require care, companies must learn to support these roles. Businesses that help their employees achieve a balance between work and life and meet their obligations to their families and communities often reap rewards in greater productivity, loyalty, and commitment.
Corporate Policies on LGBT Equality
For many years civil rights for citizens in the LGBT community lagged protections extended to other groups. At work, many LGBT employees were denied access to benefits enjoyed by heterosexual employees and their families. Significant progress has been made for LGBT workplace rights since the 2015 Supreme Court ruling legalizing gay marriage, however. A 2018 report by the Human Rights Campaign Foundation found that 83 percent of the Fortune 500 companies included sexual orientation in their nondiscrimination policy, and 97 percent offered explicit prohibitions against gender identity discrimination. Transgender employees are more likely to have access to health care services: fifty-eight percent of Fortune 500 firms now provide transgender-inclusive health care, up from no firms providing this benefit in 2002. Capital One was among the 609 companies that met all the criteria in the HRC’s Corporate Equality Index in 2018. Like many com- panies, Capital One perceives sexual orientation as another aspect of diversity that is central to its success: “Diversity and inclusion is central to our business strategy and success as a company. Inclusion drives innova- tion and our success is driven by the power of perspectives at the table. . . . Our inclusive culture represented by seven associate networks (African American, Asian, CapAbilities, Hispanic, LGBT, Military, and Women’s) fosters a collaborative environment where all associates know their voice is heard and matters.”
Sources: Human Rights Campaign Foundation, Corporate Equality Index 2018: Rating American Workplaces on Lesbian, Gay, Bisexual, Transgender, and Queer Equality at www.hrc.org; and “Fortune 100 Best Companies to Work For 2018: Capital One,” at: http://reviews.greatplacetowork.com/capital-one-financial-corporation.
Exhibit 16.B
∙ The U.S. workforce is as diverse as it has ever been and is becoming more so. More women are working than ever before, many immigrants have entered the labor force, ethnic and racial diversity is increasing, the workforce is aging, and millennials are entering the workplace.
∙ Women and persons of color have made great strides in entering all occupations, but they continue to be underrepresented in many business management roles, especially at top levels. Both groups face a continuing pay gap. The number of women-owned businesses has increased sharply, and many minorities, especially immigrants, also own their own businesses.
∙ Under U.S. law, businesses are required to provide equal opportunity to all, without regard to race, color, religion, sex, national origin, disability, or age. Sexual and racial harassment are illegal. Affirmative action plans remain legal, but only if they are temporary and flex- ible, designed to correct past discrimination, and do not result in reverse discrimination.
∙ Companies that manage diversity effectively have a strategic advantage because they foster innovation, serve a diverse customer base, and avoid expensive lawsuits and pub- lic embarrassment.
∙ Successful diversity and inclusion management includes articulating goals and measur- ing progress, recruiting widely, mentoring promising women and persons of color, and establishing mechanisms for assessing progress.
∙ Many businesses have helped employees balance the complex demands of work and family obligations by providing support programs such as child and elder care, flexible work schedules, domestic partner benefits, and telecommuting options.
Summary
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 371
law43665_ch16_350-373.indd 371 01/23/19 05:54 PM
Discussion Case: Apple and the Dreamers In the first year of his presidency, Donald Trump announced he would end the Deferred Action for Childhood Arrivals (DACA) program—a policy enacted during the Obama administration that protected the foreign-born children of undocumented immigrants from deportation—in six months if Congress did not act to make it permanent. The 800,000 or so immigrants covered by DACA were often called “Dreamers,” because many were young people pursuing the American dream of higher education, careers, and public service.
Dreamers came from many global regions. According to a 2017 report by the Pew Foundation, about 94 percent of all DACA-eligible immigrants were born in Mexico, Cen- tral or South America. Three percent were born in Asia, and most of the rest hailed from countries in the Caribbean, Europe and Africa. The highest concentration of Dreamers lived in California and Texas. Most DACA recipients were 25 years old or less, and about half were enrolled in high school or college at least part-time. The half a million or so Dreamers in the labor force were concentrated in sales, office, and administrative support positions, and many worked for the top 25 Fortune 500 firms. If these individuals were deported, the potential loss of talent would be significant.
The corporate community responded swiftly to the threat posed to the DACA program. Among the corporate leaders calling for action was Tim Cook, the CEO of Apple. Cook— along with the CEOs of Microsoft, Amazon, Facebook, Google, Netflix, AirBnB, and Lyft—wrote a letter to the president, the speaker of the House, and leading legislators from both parties expressing support for DACA. “Dreamers are vital to the future of our
Internet Resources
www.eeoc.gov U.S. Equal Employment Opportunity Commission www.familiesandwork.org Families and Work Institute www.abcdependentcare.com American Business Collaboration for Quality Dependent Care www.sba.gov U.S. Small Business Administration www.catalyst.org Catalyst—“expanding opportunities for women and business” www.diversityinc.com Diversity Inc. magazine and other resources www.workingmother.com Working Mother magazine and other resources www.hrc.org Human Rights Campaign Foundation
Key Terms pay gap, 354 racial harassment, 363 sexual harassment, 362 undocumented immigrant worker, 352 workforce diversity, 351
affirmative action, 361 child care, 367 diversity, 351 diversity council, 366 elder care, 367 equal employment opportunity, 360 Equal Employment Opportunity Commission (EEOC), 361
family-friendly workplace, 369 family leave, 368 glass ceiling, 357 inclusion, 364 labor force participation rate, 353 occupational segregation, 354 parental leave, 368
Final PDF to printer
372 Part Six Business and Its Stakeholders
law43665_ch16_350-373.indd 372 01/23/19 05:54 PM
companies and our economy,” the executives wrote. “With them, we grow and create jobs. They are part of why we will continue to have a global competitive advantage.”
For its part, Apple employed around 250 Dreamers. They hailed from many countries, including Mexico, Kenya, Canada and Mongolia, and worked for the company in 28 states in customer support roles, as engineers, and in research and development. At the same time Cook was working with other industry leaders, he expressed his support for Dreamers at Apple in a memo addressed to all employees. “America promises all its people the oppor- tunity to achieve their dreams through hard work and perseverance,” he wrote. “At Apple, we’ve dedicated ourselves to creating products that empower these dreams. And at our best, we aspire to be part of the promise that defines America . . . I am deeply dismayed that [Dreamers working for Apple] may soon find themselves cast out of the only country they’ve ever called home.” He concluded that “despite this setback for our nation, I’m con- fident that American values will prevail, and we will continue our tradition of welcoming immigrants from all nations. I’ll do whatever I can to assure this outcome.”
Nationally, the threat to DACA posed difficult challenges for businesses, like Apple, that employed Dreamers. Employers that intentionally continued to employ Dreamers with expired DACA permits would face steep penalties, fines and or even jail time. Businesses that did not lay off Dreamers who were ineligible for employment due to an expired permit would be fined $548 to $4,384 per unauthorized worker for the first offense. Additional violations could result in fines and up to ten years in jail.
Although employers could be penalized for hiring or retaining Dreamers with expired permits, they also could not discriminate against individuals who were still legally pro- tected by the DACA program. Legal experts advised employers that if they asked employ- ees about their DACA status, or prematurely fired or denied employment to a DACA permit holder, their company could be sued for damages for illegal job discrimination. The Department of Justice also counselled employers that it would be illegal to take back a job offer because someone’s work authorization was set to expire in the future.
While employers were responsible for verifying the immigration status of their employ- ees before they were hired, they could not legally ask for information beyond what was included on the I-9 form, which asked prospective employees to demonstrate that they were eligible to work. Prospective employees could present one of several documents to show eligibility, including a DACA permit; once eligibility had been documented, the employer was not required to investigate further. The government relied on employers to keep track of the expiration of employment authorization documents. However, some employers did not continue to check eligibility documents after the initial hire. According to Daniel Brown, a Washington D.C.-based immigration lawyer and former Homeland Security official, “The odds of any particular employer ever being audited are fairly low. That being said, we don’t know what the government might do immediately or in the future in terms of enforcement.” With more than seven million businesses in the United States, immigration agents would find it difficult to audit each one.
Employers, including Apple, were faced with managing their talent in the context of an uncertain and shifting legal landscape. The Dreamers comprised a significant source of talent for American businesses. The CATO Institute reported in 2017 that complying with a decision to end DACA would cost employers $6.3 billion dollars because of the expenses associated with recruiting, hiring and training employees to replace displaced Dreamers. More broadly, both the private and public sectors would be negatively impacted by the loss of purchases and taxes contributed by the Dreamers.
Sources: “What Should Employers Do with Their DACA Employees” SHRM, September 25, 2017, at www.shrm.org/ resourcesandtools/hr-topics/talent-acquisition/pages/faqs-employers-daca-employees.aspx; “Amazon, Facebook, Google
Final PDF to printer
Chapter 16 Managing a Diverse Workforce 373
law43665_ch16_350-373.indd 373 01/23/19 05:54 PM
and other tech giants urge Trump to continue DACA Program,” TechCruch.com, posted September 1, 2017: https://techcrunch.com/2017/09/01/tech-giants-urge-trump-to-continue-daca-program; “CEO Tim Cook Says He Stands by Apple’s 250 DACA-Status Employees,” Washington Post, September 3, 2017; “Apple CEO Tim Cook Says He is ‘Deeply Dismayed’ By Trump’s DACA Decision,” Fortune, September 5, 2017; “Do DACA ‘Dreamers’ Work for your Company? Here’s What You’ll Need to Know,” Fortune, September 7, 2017; “The Education and Work Profiles of the DACA Population,” Migration Policy Institute, August 2017; “Key Facts about Unauthorized Immigrants Enrolled in DACA,” Pew Research Center, September 25, 2017; “Ending DACA will Impose Billions in Employer Compliance Costs,” David Bier, CATO Institute, September 1, 2017.
Discussion Questions
1. Do you consider being a Dreamer a form of workplace diversity? How is it similar to and different from other kinds of workplace diversity discussed in this chapter?
2. What are the benefits and risks to employers, such as Apple and others mentioned in this case, of continuing to hire or employ Dreamers?
3. Beyond employers, which stakeholders benefit, and which are harmed when a business hires Dreamers?
4. Do you agree with Apple’s response to the public policy threat to DACA? What else should Apple’s managers do now, and why?
5. If you a human resources manager at Apple, what steps would you take (or not take) if DACA protections were rescinded by the government?
Final PDF to printer
374
law43665_ch17_374-395.indd 374 12/17/18 03:12 PM
C H A P T E R S E V E N T E E N
Business and Its Suppliers
Corporations have complex relationships with their suppliers, other firms that provide them with goods and services and in some cases manufacture their products. In today’s interconnected world, many firms are embedded in complex, global supply chain networks. Increasingly, managers are responsible for social, ethical, and environmental issues that arise in supplier firms. A failure to man- age these issues proactively can lead to reputational and financial losses; conversely, success in doing so can yield benefits. Many companies have adopted supplier codes of conduct, carried out audits, and remediated failures. A growing trend is for lead firms to work collaboratively with their suppliers to build capabilities and create shared value.
This Chapter Focuses on These Key Learning Objectives:
LO 17-1 Understand what suppliers are, the nature of suppliers’ interests and power, and the scope of the global supply chain.
LO 17-2 Examine the social, ethical, and environmental issues that arise in global supply chains and how they can affect a company’s reputation and bottom line.
LO 17-3 Describe contemporary trends in the private regulation of supply chain practices and analyze the reasons for the emergence of company and industrywide codes of conduct.
LO 17-4 Understand the various methods businesses and nonprofit organizations use to audit global supply chains for compliance with codes of conduct and other standards.
LO 17-5 Analyze the reasons for and benefits of engaging collaboratively with suppliers to build capability and create shared value and the conditions under which such initiatives are likely to succeed.
Final PDF to printer
Chapter 17 Business and Its Suppliers 375
law43665_ch17_374-395.indd 375 12/17/18 03:12 PM
In 2017, Walmart launched Project Gigaton, a commitment to reduce greenhouse gas emissions by one billion metric tons by 2030—the equivalent of taking more than 200 million passenger vehicles off the road for a year. This effort necessarily involved the company’s suppliers, since 90 percent of its carbon footprint came from its supply chain— the vast network of farmers, manufacturers, shippers, and others that filled the retailer’s huge stores in 28 countries. The company developed a digital toolkit, organized meetings to share best practices, and engaged with its suppliers. In China, for example, Walmart rolled out the project first with its top 100 suppliers, working with them to reduce emis- sions in multiple areas, including energy, waste, deforestation, agriculture, packaging, and product use. By the following year, 400 suppliers in 30 countries had joined the effort. “Project Gigaton is an example of the transformative impact that private sector leaders can have on our greatest environmental challenges. Every company can look at their supply chain and see where they can reduce emissions and make a difference,” said the World Wide Fund for Nature, which had partnered with Walmart on the initiative.1
Monster Beverage makes a range of energy drinks, including Monster Energy, Burn, and Relentless, sold under the slogan “Lifestyle in a Can!” “At Monster,” the company declared, “all our guys walk the walk in action sports, punk rock music, partying, hangin’ out with the girls, and living life on the edge.” But in 2018, activist investors filed a share- holder resolution, calling on Monster to report on slavery and human trafficking in its supply chain—and received 20 percent of shareholder votes. The investors’ action had been prompted by a report by Know the Chain, which ranked Monster dead last among food and beverage firms in its commitment to ending forced labor. “[Monster’s] careless, rebel mindset is fine for marketing,” said the activists, “but . . . dangerous for corporate policies and practices.” Although it maintained that risk in its supply chain was low, the company pledged to “further refine our efforts related to training employees and moni- toring suppliers.”2
Patagonia is an outdoor apparel company with a long-standing commitment to the envi- ronment. The company committed to purchasing all of its merino wool—a key component of its outerwear and socks—from ranches in Argentina’s Patagonia region (after which the company had been named) that practiced rotational sheep grazing and other methods aimed not only at conserving, but actually restoring, environmentally degraded grasslands. It also worked with partners to develop the Patagonia Wool Standard, to establish guide- lines for its suppliers, and in 2018 started selling wool products sourced under these rules. The company’s actions gave a big boost to conservation efforts. “We have often sought to be sustainable,” said Patagonia’s director of environmental strategy. “But this is the first time we have actually been able to improve an environment by placing business there.”3
These three examples capture some of the extraordinary complexity of the relationship between businesses and their suppliers. Should a company concern itself with the environ- mental impact of suppliers of raw materials, or even collaborate with them to promote conser- vation? To what lengths should a company go to prevent human rights abuses in a multi-tiered supply chain? Do companies have a duty to protect the rights of workers on supplier farms or
1 “Walmart Launches Project Gigaton to Reduce Emissions in Company’s Supply Chain,” press release, April 19, 2017; “WWF Works with Walmart to Cut Carbon Emissions and Fight Climate Change,” at www.worldwildlife.org; “Inside Walmart’s Lofty Project Gigaton,” May 11, 2018, at www.triplepundit.com; “Walmart Commits to Reduce Emissions by 50 Million Metric Tons in China,” The New York Times, March 29, 2018; “Walmart: Joining Project Gigaton Doesn’t Have to Be a Heavy Lift,” February 9, 2018, at www.greenbiz.com. Project Gigaton is further described at www.walmartsustainabilityhub.com. 2 “Monster Beverage Shareholders Vote to Fix Slavery Problem,” press release, June 8, 2018, at www.asyousow.com; “Slavery Makes a Monster,” blog, May 3, 2018, at www.asyousow.org; and Know the Chain, “Food & Beverage Benchmark Findings Report,” October 2016. 3 “Wool Sourcing,” at www.patagonia.com.
Final PDF to printer
376 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 376 12/17/18 03:12 PM
factories halfway around the word? This chapter will explore the social and ethical responsi- bilities of firms toward their suppliers and people working for them, as well as the impacts of the global supply chain on surrounding communities and the natural environment.
Suppliers
In business, the term supplier refers to an organization that provides goods or services to another organization. Suppliers are also known as vendors or contractors. They are an important market stakeholder of businesses, since they provide critical inputs and often manufacture entire products that companies then sell to customers under their own brand.
Major transnational firms can have an enormous number of suppliers. Intel, for example, has 19,000 suppliers in 100 countries. The exact number of suppliers in the world is uncountable: new ones emerge, and others go out of business, every day. One study by the consultancy CVM Solutions estimated that Fortune 1000 companies (the thousand largest U.S. companies, ranked by revenue) had 4.9 million unique suppliers (meaning that suppli- ers that served multiple companies were counted only once). However, the number of widely used suppliers was much smaller: only 6 percent (about 300,000) supplied two or more companies.4 Some evidence suggests that the number of suppliers dropped in the wake of the global financial crisis. A study by the World Bank found that the crisis had accelerated lead firms’ preference for larger, more capable suppliers with whom they had ongoing stra- tegic relationships.5 (Because a business and its supplier are both companies, this chapter will sometimes use the term lead firm to distinguish a company from its supplier.)
Suppliers are a diverse group. They range from tiny—a farmer growing vegetables on a small plot for a local restaurant, for example—to enormous, such as Foxconn, the world’s largest electronics manufacturer, which makes iPads and iPhones for Apple, Kindles for Amazon, and PlayStations for Sony, among other products. Foxconn, with 1.3 million employ- ees and $148 billion in revenue in 2017, is itself a major transnational corporation. Lead firms often categorize their suppliers according to tier, or level. Tier-1 suppliers (sometimes called contractors) are hired to manufacture products and provide them directly to the company. These may in turn work with tier-2 suppliers (sometimes called subcontractors), who may in turn work with even more distant suppliers. In the automobile industry, for example, there may be six to ten levels of suppliers between the automaker and the source of raw materials, and a company may not even be aware of some of the parties that contribute at some point to the finished product. The term supply chain refers to the multiple steps involved in the move- ment of a product or service from the most distant supplier to the customer. Because of the complexity of these systems, firms sometimes refer to their supply webs or networks, rather than use the term supply chain, which implies a simple, linear relationship.
Although several steps removed, distant suppliers can still have a big impact on a com- pany’s reputation and bottom line.
The toy company Mattel learned this the hard way, when it discovered that toxic lead paint had been applied to several of its toys, including Sarge vehicles and Dora the Explorer characters. In its investigation, the company found that a tier-1 sup- plier, a Chinese firm called Early Light Industrial, had subcontracted painting to another firm, which had violated Mattel’s specifications and substituted cheaper lead paint. “Early Light . . . is every [bit as] much the victim as Mattel is,” the CEO
4 “How Many Suppliers are in the Global Supply Chain?” Industry Market Trends, August 25, 2010. 5 Olivier Cattaneo, Gary Geriffi, and Cornelia Staritz, eds., Global Values Chains in a Postcrisis World (Herndon, VA: World Bank Publications, 2010), Chapters 1 and 2.
Final PDF to printer
Chapter 17 Business and Its Suppliers 377
law43665_ch17_374-395.indd 377 12/17/18 03:12 PM
later commented. Mattel ended up spending $110 million dollars to recall the tainted toys and communicate with the public, all because of unapproved actions by a tier-2 supplier.6
As this example illustrates, companies need to understand and monitor actions by all participants throughout their supply networks, not just those with whom they have direct relationships.
Chapter 1 introduced the concepts of stakeholder interest, that is, what a stakeholder wants from its relationship with a firm, and power, a stakeholder’s ability to secure a desired outcome. What are the interests—and sources of power—of suppliers? Despite their tremendous diversity, most suppliers share an interest in obtaining orders that will enable them to make money, use their productive capacity efficiently, and build long-term, stable relationships with business customers.7 Naturally, suppliers’ power, relative to lead firms, varies. Suppliers may have many kinds of power, including economic and infor- mational power. A supplier that is a sole source for a key component or natural resource naturally has more leverage, relative to its lead firms, than one that is not. Similarly, sup- pliers that control critical worker skills, technical know-how, or relevant manufacturing infrastructure have more leverage than others. When Apple wanted to launch the iPad, for example, only one supplier—Foxconn—had the immediate capability to do the job com- petently and at scale, giving the Taiwanese company strong bargaining power. Proximity to major markets, long-standing relationships with other contractors, and a reputation for quality, speed, and low cost also enhance supplier power.
As was further discussed in Chapter 4, the world’s economy has become increasingly globalized. Although much manufacturing still occurs in the developed economies of the United States, Japan, and Germany, the developing nations of Brazil, India, and Mexico also have significant shares. Particularly striking has been the emergence of what has been called “Factory Asia.” In 2010, China passed the United States as the nation with the larg- est share of global manufacturing, and in 2016 made more than one-quarter—26 percent— of the world’s products. Almost half of all manufacturing production now takes place in Asia; and in some industries, such as footwear and apparel, the shift has been almost total.8 As the world’s economy has globalized, so has its supply chain. Richard M. Locke, a scholar who has extensively studied business–supplier relationships, has described the process this way:
Globalization, with its volatile mix of economic opportunity and social disruption, is redefining the boundaries of the firm; changing dynamics among consumers, global corporations, and their suppliers; and shaping the working conditions of the millions of individuals employed in today’s global supply chains. The world of global supply chains links thousands of firms, large and small, across multiple cul- tural and political boundaries.9
In such a network, even seemingly simple products can have a truly worldwide footprint. Consider just one familiar, everyday product: a cotton T-shirt. In her book, The Travels of a T-Shirt in the Global Economy, economist Pietra Rivoli described the probable history of
6 Pricewaterhouse Coopers (PwC) and EcoVadis in collaboration with the INSEAD Social Innovation Centre, “Value of Sustain- able Procurement Practices,” 2010. 7 Richard M. Locke, The Promise and Limits of Private Power: Promoting Labor Standards in a Global Economy (Cambridge University Press, 2013), p. 13. 8 Congressional Research Service, “U.S. Manufacturing in International Perspective,” February 21, 2018; and “Changing Global Production Landscape and Asia’s Flourishing Supply Chain,” HKTDC Research, October 3, 2017. 9 Richard Locke, p. 3.
Final PDF to printer
378 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 378 12/17/18 03:12 PM
a cotton T-shirt emblazoned with a colorful design that she had purchased at a Walgreen’s drugstore in Fort Lauderdale, Florida. This is what she surmised from her research:
Cotton for the T-shirt had been grown on a large, mechanized cotton farm near Lub- bock, Texas, and processed, graded, and baled at a nearby mill. From there, a truck carried it to the port of Long Beach, California, where it was loaded onto a freighter for shipment across the Pacific. In Shanghai, China, a mill spun the raw cotton into yarn and knitted it into fabric. Nearby, garment workers cut and sewed the fabric into plain, white T-shirts. The T-shirts were returned to the port, put back on another freighter, and shipped through the Panama Canal to Miami. There, they were purchased by a Florida maker of novelty clothing, who screened the shirts with tourist-friendly images and sold them to Walgreen’s—where the economist bought her T-shirt and took it back home to Washington D.C.10
Figure 17.1 shows a supply chain map that graphically depicts the travels of this T-shirt. A supply chain map is a visual representation of the multiple links between a lead firm (in this case, the novelty clothing maker), its suppliers, and eventually its customers. It shows the movement of a particular product from the beginning of the supply chain to the end, superimposed on a geographical map.
Social, Ethical, and Environmental Issues in Global Supply Chains
As supply chains have globalized, their social, ethical, and environmental impacts have become increasingly complex, and their potential risks to corporate reputation heightened. This section will describe these three kinds of issues and provide examples of companies
10 Pietra Rivoli, The Travels of a T-Shirt in the Global Economy, 2nd edition (Hoboken, NJ: John Wiley & Sons, 2015).
FIGURE 17.1 A Supply Chain Map for a Cotton T-Shirt
Graphic design by Colorbox Industries. © 2015. All rights reserved. Used by permission.
Final PDF to printer
Chapter 17 Business and Its Suppliers 379
law43665_ch17_374-395.indd 379 12/17/18 03:12 PM
that are actively considering social, ethical, and environmental risks in their sourcing deci- sions. It will also show some of the risks of failing to manage these issues proactively, as well as the benefits associated with doing this well.
Social Issues Global supply chains have many social impacts. Prominent among them are the wages, working conditions, and health and safety of employees in supplier factories.
Wages in overseas supplier factories are generally much lower than they would be in the United States, Europe, or the developed Asian economies of Japan and Korea. In the gar- ment industry, to cite one example, in 2018 monthly wages were $280 in China, $100 in Bangladesh and India, and just $60 in Kenya—all far below the minimum wage a U.S. employer would be required to pay.11 Low wages are, of course, one of the main reasons that brands contract with suppliers in developing countries; they reduce overall costs and enable brands to price their products more competitively. Low wages are not necessarily unethical. People in developing countries need jobs and are often willing to work at pay below what would be considered acceptable in developed nations. Employment in export-oriented factories often offer workers—particularly young women—their first point of entry into the wage economy and an alternative to domestic and farm labor. On the other hand, if a company’s customers believe that its products are made in sweatshops —a derogatory term referring to factories where workers toil long hours, at low wages, and under unsafe conditions—its reputation can be harmed. Workers who believe they are treated unfairly can quit, go on strike, or produce poor quality work.
The challenge for businesses, then, is to assure that their suppliers pay wages that are perceived as fair and that permit workers and their families to achieve a decent standard of living. (The related concept of a living wage is discussed in Chapter 15.) Minimum wages established by law may not be sufficient.
In its 2017 sustainability report, the fashion retailer H&M reported that it had made progress on its commitment to eliminate the gap between the wages its suppliers paid and wages that covered families’ basic needs. H&M said that suppliers making 40 percent of its products were now paying “fair” wages—benefiting more than 375,000 workers. The NGO Clean Clothes Campaign (CCC) criticized H&M, however, saying that the company had failed to define what it meant by a “fair” wage or to disclose what its suppliers were actually paying their workers. It also faulted the company for not saying whether it had changed its purchasing prac- tices to enable higher wages. “Measures could include rewarding factories that are willing to raise wages with larger orders, closer cooperation, or price premiums,” said a CCC representative.12
Just as what constitutes a fair wage varies across cultures and economies, so do other terms and conditions of work. For example, in some countries, unions are legal and the right to organize is protected; in others, unions are illegal or actively discouraged. Exces- sive overtime (usually defined as more than 60 hours or six days a week) is not permitted in most developed countries. Yet, in some settings, workers are eager to work as many hours as they can, to save for marriage, for example, or to remit earnings to family mem- bers. Finding the right balance can be a challenge.
11 Textile Excellence, “Labour Costs to Rise in 2018,” January 1, 2018. 12 H&M Group Sustainability Report 2017, at https://about.hm.com; Clean Clothes Campaign, “H&M Is Trying to Cover Up Its Unfulfilled Commitment on Living Wage,” April 12, 2018; and “H&M Under Fire Over Living Wage Claims,” Just-Style, April 13, 2018.
Final PDF to printer
380 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 380 12/17/18 03:12 PM
An issue of emerging importance is worker health and safety in supplier factories. Combustible dust can cause explosions and fires. Workers can be exposed to dangerous chemicals in poorly ventilated spaces. Malfunctioning or improperly guarded mechanical equipment or tools can maim and kill. In some developing countries, structurally unsound buildings have been repurposed for use as factories, with horrifying results.
In 2013, an eight-story building in Bangladesh collapsed catastrophically, killing 1,134 workers, most of them young women, who had been working in six separate garment factories on different floors. More than 2,500 others were injured, many severely. It was the worst industrial disaster in the history of the garment industry. The building, known as Rana Plaza, was partially situated on a drained swamp, and additional floors had been illegally added. The structure was carrying almost six times the weight it was designed to bear. Although workers had earlier reported large cracks in the walls, managers dismissed the problem and threatened workers if they did not report for duty. At the time Rana Plaza collapsed, dozens of well-known North American and European brands were sourcing products from factories in the building. Photos of the carnage, which were widely reported around the world, showed scattered garments—some showing their brand labels—lying alongside workers’ corpses.
This incident shocked the conscience of many customers and precipitated a reputational crisis for some brands. The collapse of Rana Plaza and the challenge it posed to Western manufacturers sourcing from Bangladesh are further profiled in a case at the end of this book.
Ethical Issues Human rights, as defined in Chapter 5, refer to basic human entitlements such as the right to life, freedom, and due process. Companies must avoid violations of human rights in their supply chains.
Human trafficking (also called forced labor) is modern-day slavery—the illegal recruit- ment and movement of people against their will, usually to exploit them for economic gain, is an important ethical issue. Of the world’s estimated 25 million victims of forced labor, about five million—almost all women and children—are forced into prostitution. Sixteen million people are coerced into domestic labor or work on farms and in factories in many industries, including food processing, construction, textiles, and hospitality, often for low pay or even no pay at all. For example, the government of Uzbekistan—a country in Cen- tral Asia that was formerly part of the Soviet Union—has routinely forced millions of its ordinary citizens and to plant, weed, and harvest cotton without compensation.13 14
A related concern is child labor. Child labor has been defined by the International Labor Organization (ILO) as “work that deprives children of their childhood, their potential and their dignity, and that is harmful to physical and mental development.” As the ILO points out, whether or not work can be considered child labor depends on a number of factors, including the child’s age, the type and hours of work performed, and the conditions under which it is performed, and may vary among cultures and countries.15 In 2017, despite prog- ress, child labor remained a persistent problem; 152 million children continued to work, most of them in agriculture and more than half in hazardous jobs.16 Many observers trace the modern antisweatshop movement to a famous photograph that appeared in Life magazine in
13 “Uzbekistan’s Forced Labor Problem,” at www.cottoncampaign.org. 14 International Labour Organization, “Forced Labour, Modern Slavery and Human Trafficking,” at www.ilo.org. 15 “What is Child Labor?” International Labor Organization, at www.ilo.org/ipec/facts. 16 International Labour Organization, “The International Partnership on Child Labour in Agriculture on the New ILO Global Estimates of Child Labour,” September 19, 2017, at www.ilo.org.
Final PDF to printer
Chapter 17 Business and Its Suppliers 381
law43665_ch17_374-395.indd 381 12/17/18 03:12 PM
1996, showing a 12-year-old Pakistani boy, crouched on a dirt floor hand-stitching the hex- agonal pieces of a Nike-branded soccer ball. Within days, activists were standing in front of Nike stores, holding up the photograph and demanding an elimination of child labor in the supply chain. Although virtually all lead companies require their suppliers, at the least, to comply with relevant national laws regarding child labor, the possibility that children continue to be employed somewhere in the supply chain poses a risk.
Few major companies, of course, knowingly tolerate human trafficking or child labor in their organizations or those of their suppliers. But in today’s complex supply networks, the presence of such labor practices can pose a serious reputational and legal risk.
In 2018, activists brought a class action lawsuit against Nestlé, saying the company had engaged in deceptive marketing. The plaintiffs said that the company had failed to disclose that it had sourced cocoa, the main ingredient in chocolate, from farms in the Ivory Coast (in West Africa) that used child and forced labor. Nestlé reacted sharply, saying that it did not tolerate illegal labor practices in its supply chain, and called for the case to be dismissed. Indeed, the company had already adopted a code of conduct, commissioned a study of its cocoa supply chain, trained farmers, and published comprehensive reports. But with most cocoa still grown on small land holdings deep in the tropical forest, child labor had remained stubbornly intractable in the Ivory Coast—and Nestlé vulnerable to charges of exploiting underage workers.17
Companies that set up operations in countries with antidemocratic, repressive regimes can be caught up in violations of human rights. Some governments require foreign firms to partner with state-owned companies in order to do business there, adding another level of risk. For example, when the energy companies Unocal and Total undertook to build a gas pipeline across Burma to link a natural gas field in the Andaman Sea to a power plant in Thailand, they were required to partner with the government, a notorious abuser of human rights. Activists later charged that the Burmese government had used brute military force to clear the pipeline area, relocating entire villages and terrorizing the civilian population. Many civilians, including women, children, and the elderly, had been forcibly conscripted to clear land and build roads, barracks, and helipads. Although Unocal and Total had not engaged in these acts directly, the companies’ critics felt that as the government’s business partners, they shared responsibility.
A specific human rights challenge in global supply chains is sourcing minerals and other valuable commodities from conflict zones. For example, much of the world’s coltan, a metallic ore used to make tantalum (which regulates electricity in portable consumer electronics) is sourced from mines in the Democratic Republic of the Congo. As further described in the discussion case at the end of Chapter 4, warring groups there have traded coltan to fund horrific civil conflict—and the electronics industry has been accused of indirectly contributing to the murder of civilians, sexual assault, and labor abuses. Other metals and minerals coming from war zones in Africa and elsewhere include tin, tungsten, and gold. Many electronics firms, including Texas Instruments, LG Innotek, and Intel have committed to buying minerals only from certified, “conflict-free” sources.
Transnational companies that depend on resources that are farmed, extracted, or mined—such as the cocoa, natural gas, metals, and minerals mentioned in this section—are particularly at risk for human rights abuses by their suppliers. Often, their choices of where and from whom to source their supplies are limited. For example, Monster Beverages,
17 “Nestlé Sued Again for Allegedly Using Child and Slave Labor to Make Chocolate,” Confectionery News, February 13, 2018; and “Nestlé Cocoa Plan: Tackling Child Labour—2017 Report,” at www.nestle.com.
Final PDF to printer
382 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 382 12/17/18 03:12 PM
mentioned in an opening example of this chapter, was at risk of human rights violations mainly because of its use of sugarcane—an agricultural sector where human trafficking had occurred. Under these conditions, these companies must take special precautions to avoid complicity in ethical violations in their supply chains.
Environmental Issues When a supplier of raw materials, parts, or finished goods contributes to climate change, dumps toxic chemicals, emits air pollution, or reduces biodiversity, it can threaten the rep- utation of companies at the top of the supply chain.
Activist stakeholders, including environmentalists and public pension funds, criti- cized ConAgra for the practices of its suppliers of palm oil, an ingredient in many processed foods. The U.S. food company sourced much of its palm oil from Indonesia and Malaysia, where tropical rainforests had been cleared to make way for commercial plantations. This destroyed the habitat of endangered species like the Sumatran orangutan, released pollutants into waterways, and destroyed peat bogs that sequestered carbon. Facing shareholder resolutions demanding change, ConAgra announced that it would buy only sustainably sourced palm oil. By the end of 2016, it reported it had secured supply chain certification for 98 percent of its production facilities that used palm oil. “The rampant deforestation for palm oil has captured public attention, creating real reputational risks for companies that use the ingredient in their branded products,” said a manager of socially responsi- ble mutual funds.18
Another issue of concern to supply chain managers is the environmental impact of transporting products long distances from where they are made, grown, or extracted to where they are further processed or sold to consumers. Much of the coffee, fruit, and fish from Latin America; toys, electronics, and garments from Asia; and wine, meat, and wool from Australia, for example, is shipped to Europe and North America on enormous container ships, which now carry more than half of global seaborne trade.19 These ships, which burn dirty bunker fuel, emit slightly more than 2 percent of all greenhouse gas emissions.20 Some companies have responded to environmental concerns by adopting a policy of local sourcing, seeking to source from nearby suppliers where practical. Retail grocery chains, for example, have increasingly adopted policies of buying fruit and pro- duce from local farmers whenever possible, to prevent waste, save money on shipping, and cater to customers who prefer fresh and seasonal offerings.21 Others have taken steps to improve efficiency in their supply chains. For example, when Patagonia, the outerwear company, made the simple decision to switch its port of entry for products coming from Asia from Long Beach to Oakland, California, it reduced the distance the goods traveled by truck to its Reno, Nevada, distribution center—reducing its carbon emissions on the route by 31 percent.22
18 Conagra Brands Citizenship Report 2017, “Certified Ingredients: Sustainable Palm Oil,” at www.conagrabrands.com; “ConAgra’s Palm Oil Commitment: Saving Forests and Reducing Greenhouse Gases,” The Guardian Sustainable Business, August 22, 2014; and “ConAgra Joins Movement to Eliminate Deforestation,” Sustainability Investment News, August 16, 2014. For more information about efforts to improve the sustainability of the palm oil supply chain, see the Roundtable on Sustainable Palm Oil, at www.rspo.org. 19 Review of Marine Transport 2013, at www.unctad.org. 20 International Maritime Organization, Third IMO Greenhouse Gas Study 2014 (Suffolk, UK: Micropress, 2015), Table 1. 21 “What Trends Will Shape Grocery Retail in 2018?” January 10, 2018, at www.foodnavigator.com. 22 “Changing Ports Pays Dividends,” at www.patagonia.com.
Final PDF to printer
383
law43665_ch17_374-395.indd 383 12/17/18 03:12 PM
The efforts the home furnishings retailer IKEA made to lessen the adverse environmen- tal impacts of cotton in its supply chain are described in the discussion case at the end of this chapter.
Supply Chain Risk In short, supply chain managers face a number of significant social, ethical, and environmen- tal issues. Failure to manage these social, ethical, and environmental risks in supply chains can be very costly, managers have learned. One study looked at the impact on stock prices of disruptions in companies’ supply chains. Over a three-year period bracketing publicly announced disruptions, these companies’ stock underperformed that of their peers by 40 percent. Operating income, return on sales, and return on assets were all adversely impacted, the researchers found, and firms did not recover quickly.23 A strike by many of the 43,000 workers at Yue Yuen Industrial Holdings, an enormous shoe factory in China, dis- rupted supplies to Adidas, Asics, and Nike, all of which had contracts with the firm. The work- ers were upset by their employer’s failure to make required payments on their behalf into a government social security program.24 In an effort to get production back on track, Adidas later worked with labor rights groups in China to seek the release of two strike leaders who had been detained.25 In the meantime, production was halted and the flow of shoes to customers stalled.
What happens in a company’s supply chain can help its reputation—as well as hurt it. Exhibit 17.A profiles the use of technology to promote supply chain transparency and build brand loyalty.
23 Kevin B. Hendricks and Vinod R. Singhal, “An Empirical Analysis of the Effect of Supply Chain Disruptions on Long-Run Stock Price Performance and Equity Risk of the Firm,” Production and Operations Management, 14, no. 1 (March 2005), pp. 35–52. 24 “Strike at Nike, Adidas China Supplier Halts Output,” Bloomberg.com, April 18, 2014. 25 “How Adidas Supported Worker Rights in China Factory Strike,” The Guardian, June 12, 2014.
Supply Chain Transparency
Supply chain transparency means that what happens in a company’s supply chain is fully disclosed to stakeholders—as if seen through a clear glass window. Some firms have realized that openly revealing supply chain information can enhance brand loyalty among consumers concerned about social, ethical, and environ- mental responsibility. Technology increasingly makes this possible at the point of purchase. Products have always been labeled, of course. But today, advances in so-called technology tags, genetic markers, mobile phone apps, and virtually unlimited cloud data storage make it possible for consumers to see how and where a product was made in startling detail. For example, Switcher, a Swiss clothing company that sources from Bangladesh, China, India, Portugal, Romania, Turkey, and Taiwan, provides a unique number on the label of each of its garments. When the customer inputs this number at the website Respect-Code.org, he or she can track every step of the specific garment’s journey, from the farm where its cotton fibers were grown to the factory where the garment was sewn. The emergence of blockchain technology holds the potential to make supply chains even more transparent. Each product can be assigned a unique identifier at its point of origin and time-stamped as it moves through multiple transactions, with each stored in the blockchain archive—allowing a buyer at the end of the chain to check if it was responsibly sourced. An advantage of such a distributed database, concluded an article in the Harvard Business Review, “is that it resolves prob- lems of disclosure and accountability between individuals and institutions whose interests aren’t necessarily aligned.” Supply chain transparency, whether supported by blockchain or other technologies, can give con- sumers confidence in the positive impacts of products they buy.
Sources: Michael J. Casey and Pindar Wong, “Global Supply Chains Are about to Get Better, Thanks to Blockchain,” Harvard Business Review, March 13, 2017; “How to Make Supply Chains Ethical and Sustainable with Blockchain,” June 5, 2018, at www.supplychaindive.com; and Steve New, “The Transparent Supply Chain,” Harvard Business Review, October 2010.
Exhibit 17.A
Final PDF to printer
384 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 384 12/17/18 03:12 PM
Private Regulation of the Business–Supplier Relationship
Who establishes the rules for social, ethical, and environmental issues in supply chains? In other words, who regulates businesses’ relationships with their suppliers?
This simple question has a complex answer. As the manufacturing supply chain has become increasingly globalized, its regulation has become more fragmented and ineffective. In response, new institutions have arisen to fill the void created by the inability of govern- ments in both developed and developing countries to police the far-flung operations of large transnational corporations and their global supply chains. Mutually agreed-on standards, developed by private firms—often working in collaboration with nongovernmental orga- nizations and United Nations affiliates such as the International Labor Organization—have emerged to complement, and in some cases even substitute for, national-level regulation.
Private regulation, also called private governance, refers to nongovernmental institu- tions that govern—that is, enable and constrain—economic activities. It occurs when pri- vate companies or groups of companies voluntarily set rules of behavior for themselves and their business partners.26 Private regulation often takes the form of company and industrywide codes of conduct that establish standards governing labor, human rights, environmental, and related practices within global supply chains. Since the 1990s and accelerating in the 21st century, private regulation has assumed increasing importance, for several related reasons.
∙ Lack of jurisdiction of home country governments. The authority of governments in the home countries of lead firms normally does not extend to supplier factories in other countries. For example, in the United States, the Department of Labor and the Occu- pational Safety and Health Administration (OSHA) establish rules governing wages, overtime, child labor, safety conditions, and other workplace matters. The reach of these regulatory agencies normally does not extend beyond their national borders, however. For example, if blocked fire exits threatened worker safety in a factory in Indonesia making clothes for an American retailer, OSHA would have no authority to intervene.
∙ Weak regulatory capacity in developing countries. Nations with growing export- oriented manufacturing sectors often lack the institutional capacity, resources, and staff to regulate their own workplaces adequately. In some cases, business elites are so politically powerful that they can effectively block regulation. In Bangladesh, for example, one in ten members of parliament (or their relatives) are themselves garment factory owners, and members of powerful trade associations in the garment and knit- wear industries sit on important government committees. Although regulatory capacity varies greatly by country, of course, in some cases, government agencies simply do not have the clout or independence to constrain the actions of powerful transnational corpo- rations and their local partners.
∙ Limited enforcement power of transnational institutions. The United Nations has sev- eral affiliates that are deeply concerned with labor and human rights; among them are the International Labor Organization (ILO), the United Nations Children’s Fund (UNICEF), and the Global Compact. All of these have developed important global stan- dards, promoted them globally, and sought to implement them. The ILO, for example, has developed a Better Factories initiative that has improved working conditions in doz- ens of countries. These institutions have moral authority, but lack enforcement power, and their influence is limited by companies’ willingness to cooperate with them.
26 Frederick Mayer and Gary Gereffi, “Regulation and Economic Globalization: Prospects and Limits of Private Governance,” Business and Politics 12, no. 3 (October 2010), pp. 1–25; and Richard M. Locke, op cit.
Final PDF to printer
Chapter 17 Business and Its Suppliers 385
law43665_ch17_374-395.indd 385 12/17/18 03:12 PM
In the absence of effective public regulation, many companies and industries have written—and undertaken to enforce—their own voluntary supply chain codes of conduct (SCCCs). A SCCC can be defined as a public set of rules, adopted by a firm or group of firms, that establishes mandatory standards governing labor, human rights, environmental, and related practices for suppliers. One of the first companies to develop such a code was Levi Strauss, a U.S. apparel maker. After the company was accused of using an unethical contractor in Saipan in 1991, the company reviewed its procedures and adopted a wide-ranging set of guidelines for its overseas manufacturing.27 Supply chain codes of conduct quickly spread, with the footwear, apparel, and electronics industries leading the way. Since 2006, the proportion of large and mid-sized firms in developed countries that have adopted a supply chain code of conduct has risen dramatically, from less than 10 percent to more than 50 percent, as shown in Figure 17.2.
Scholars have hypothesized that supply chain codes of conduct are most likely to be adopted by firms that:
∙ Have highly valuable brands and are therefore more vulnerable to reputational damage; ∙ Are highly scrutinized by the investment community, including activist shareholders; ∙ Are headquartered in countries with strong unions, social welfare policies, and cooper-
ative relationships among government, business, and labor; ∙ Are members of industry coalitions or country networks, such as those sponsored the
United Nations Global Compact, that promote supply chain responsibility; and ∙ Are targets of pressure for responsible practices by nongovernmental organizations; for
example, through campaigns, boycotts, or shareholder resolutions.28
27 Karl Schoenberger, Levi’s Children: Coming to Terms with Human Rights in the Global Marketplace (New York: Grove Press, 2000). 28 Anne T. Lawrence, Thomas G. Altura, and Ronald M. Roman, “The Global Diffusion of Supply Chain Codes of Conduct: Brand Value, Stakeholder Scrutiny, and Institutional Effects,” paper presented at the annual meeting of the Society for Business Ethics, August 6, 2017; and Frederick Mayer and Gary Gereffi, “Regulation and Economic Globalization: Prospects and Limits of Private Governance,” Business and Politics 12, no. 3 (October 2010), pp. 1–25.
FIGURE 17.2 Percentage of Large and Mid-Sized Firms in Developed Countries with a Supply Chain Code of Conduct, 2006–2015
Source: Anne T. Lawrence, Thomas G. Altura, and Ronald M. Roman, “The Global Diffusion of Supply Chain Codes of Conduct: Brand Value, Stakeholder Scrutiny, and Institutional Effects,” paper presented at the annual meeting of the Society for Business Ethics, August 6, 2017. Used by permission. 0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
10%
20%
30%
40%
50%
60%
Data are drawn from Bloomberg ESG. Firms include those that have appeared at least once on the FTSE All-World index from the years 2006 to 2015; that are domiciled and traded within a developed, OECD-member country; and have at least one identified supply chain relationship. N = 2,048 firms.
Final PDF to printer
386
law43665_ch17_374-395.indd 386 12/17/18 03:12 PM
The Responsible Business Alliance Coalition Code of Conduct
Founded in 2004 as the Electronics Industry Citizenship Coalition (EICC) and now known as the Responsi- ble Business Alliance, this group is made up of around 110 companies, mostly in the electronics industry. These include such well-known firms as Hewlett-Packard Enterprise, IBM, Apple, Dell, Intel, Lenovo, Oracle, Samsung, Sony, Microsoft, and Cisco. The coalition collaboratively developed a code of conduct and commit- ted to enforce its terms in their own operations and in their tier-1 suppliers. Over 3.5 million employees are covered by the code, which includes the following provisions, among others:
• Labor standards: No forced labor, no child labor, workweek not to exceed 60 hours except under emer- gency situations, compliance with local wage laws, no harsh or inhumane treatment, no discrimination, freedom of association.
• Health and safety: Safe and healthy workplaces, with procedures to control hazards and prevent injury and illness; access to sanitation, clean water, and eating facilities.
• Environmental standards: Pollution prevention; waste minimization; proper handling of hazardous sub- stances; proper control and treatment of water and air emissions.
• Ethics: Highest standards of integrity; fair business practices; no bribery; protection of intellectual prop- erty and privacy.
• Management: Systems in place to assure implementation, compliance, and improvement.
Source: The full code is available at www.responsiblebusiness.org.
Exhibit 17.B
Although early codes of conduct were typically developed by and were specific to individual companies, the current trend is toward adoption of common standards within industries. In part, this reflects the influence of nongovernmental organizations and standard-setting associations that have provided templates. Common standards also reflect the efforts of coalitions of companies—sometimes with participation of government offi- cials, NGOs, and worker and consumer representatives—to define industrywide standards that they can all agree to. For example, many leading high-tech companies joined forces as the Electronic Industry Citizenship Coalition (EICC), now called the Responsible Busi- ness Alliance, to establish a code of conduct that provided a uniform set of labor, health and safety, and environmental standards for their global supply chains. This code is fur- ther described in Exhibit 17.B. Supporters of this industrywide approach argue that com- mon standards improve compliance, since suppliers are not faced with myriad conflicting demands. It also can reduce the costs of monitoring, since brands can share audit results. (Supply chain auditing is further described in the following section.) Such industry coali- tions are now active in many sectors, including telecommunications, toys, jewelry, phar- maceuticals, and automobiles.
A 2016 survey of supply chain management practitioners in more than 1,300 compa- nies around the world found that the leading reason why their firms had invested in sup- plier social and environmental responsibility was to create a positive customer image and enhance brand equity. Other reasons were to reduce costs, satisfy government regulations, avoid disruptions, increase sales, and allay public criticism. These findings are shown in Figure 17.3.
Does private regulation make a difference? In an important book, The Promise and Limits of Private Power, Richard M. Locke argues that the most effective way to assure socially responsible practices in global supply chains is a combination of public and pri- vate regulation. Either, when used alone, is insufficient; they work best, he believes, when “layered” on top of each other in a kind of hybrid system. For example, private companies
Final PDF to printer
Chapter 17 Business and Its Suppliers 387
law43665_ch17_374-395.indd 387 12/17/18 03:12 PM
can rely on local laws to give legitimacy to demands for workplace changes, and govern- ment regulators can benefit from detailed workplace record keeping required by private companies’ codes of conduct. Public and private regulators can also share the work. In the Caribbean nation of the Dominican Republic, for example, one study found that govern- ment inspectors (public regulators) and auditors for major North American brands (private regulators) had developed an informal division of labor, in which the former concentrated on firms producing for the domestic market, and the latter on firms producing for export.29
Companies can adopt their own code or agree to one of the NGO or industrywide codes. But who is to say that they, and their suppliers, are actually living up to these rules? Many now conduct independent audits to determine if a code’s standards are being met. This is discussed next.
Supply Chain Auditing Once a company has developed its own code of supplier conduct or agreed to comply with an industrywide or global code, it must undertake to enforce these rules. In a simpler time, when a firm operated its own manufacturing facilities in a limited geographical area, monitoring compliance with an established set of standards was straightforward. But in today’s more complex world, obtaining this information can be extraordinarily difficult. A lead firm’s supplier code of conduct can require, for example, that all workers making its products are paid at least the minimum wage, but how can it assure that this is actually true? This assurance is usually obtained by conducting a supply chain audit. Such an audit monitors a supplier’s performance to determine if it complies with the relevant code of conduct. (Auditing is also discussed in Chapter 3.)
Companies have several choices in carrying out an audit. One is to hire and train its own staff of auditors whose job is to inspect factories—either its own or those operated by contractors—to determine whether or not they comply. This is sometimes called an inter- nal audit. For example, Gap Inc. hired its own staff of vendor compliance officers, as they were called, who visited thousands of factories where Gap products were made.30
29 Matthew Amengual, “Complementary Labor Regulation: The Uncoordinated Combination of State and Private Regulators in the Dominican Republic,” World Development 38, no. 3 (2010), pp. 405–414. 30 Gap’s corporate social responsibility reports are available at www.gapinc.com.
FIGURE 17.3 Drivers of Social and Environmental Responsibility in Supply Chains
“What is your best judgment of your board’s motivations for investing in social and environmental responsibility?”
Source: Supply Chain World, Future of Supply Chain Report, November 2016, Figure 32. Based on a survey of 1,346 supply chain practitioners. Used by permission.
0 10 20 30 40 50 60 70 80 90
Fend o� shareholder or external PR concerns
Increase sales revenue
Ensure no disruption of supply
Satisfy government regulations
Reduce costs and/or increase e�ciency
Create a positive customer image and enhance brand equity
Percentage of respondents
Final PDF to printer
388 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 388 12/17/18 03:12 PM
An advantage of an internal audit is that the company controls and manages the process. It can train its own compliance officers, determine what factories need to be audited, and learn immediately about any problems uncovered. On the other hand, a disadvantage is that stakeholders might view reports based on an internal audit as less credible, because the company would have an interest in casting itself and its suppliers in a favorable light.
A second option is to hire another organization to carry out the audit and report back to the company. This is called an external audit or a third-party audit, because it is carried out by someone other than the company or the managers of the factories that produce its goods. The three largest publicly traded, for-profit monitoring companies are Bureau Veri- tas, Intertek, and SGS. Lead firms may also engage nonprofit organizations, such as Verité, the Fair Labor Association, or the Worker Rights Consortium. Several large accounting firms such as PricewaterhouseCoopers have developed specialized services in which they will conduct a social or environmental audit for clients (rather than a financial audit, which is their traditional specialty). The advantage of an external audit is that it is often perceived by stakeholders as more objective and reliable. Companies may find, however, that the information is delayed, and it does not directly control the quality of the audit.
An audit, whether conducted internally or externally, generally consists of a review of documentation (such as payroll and personnel records), a facility inspection, and interviews with workers and managers. Companies normally do not reveal what they spend on supply chain auditing. However, The New York Times estimated that the cost of a factory audit could range from $1,000 for a one-day, “check-the-box” audit to as much as $5,000 for a thorough, multi-day inspection.31 A major firm can require hundreds of audits a year. For example, in 2017 Nike completed full assessments of 406 of its approximately 500 supplier factories.32
While audits can provide considerable insight into conditions in supplier factories, they also have drawbacks. On-site inspections are expensive and time-consuming, and therefore cannot be scaled to cover a brand’s entire supply chain, which might consist of thousands of factories. Audits are not always unannounced; in many cases, suppliers receive advance notice and are able to stage conditions to pass the inspection. Workers sometimes distrust auditors, not knowing if the inspectors represent the supplier, the brand, or an independent third party, and are therefore reluctant to share their experiences.
An emerging approach to auditing involves bypassing the factory inspection process entirely. Instead, a crowd-sourced audit gathers information about factory conditions directly from workers using their mobile phones. In this approach, rather than relying on inspectors—who may be deceived by factory managers who want conditions to appear better than they really are—workers provide information directly by responding to ques- tions generated by a recorded voice on their mobile phones when they are away from work. For example, LaborVoices, a social venture, has piloted such an approach in the garment industry in India and Bangladesh.33 Workers must trust the process and participate widely for crowd-sourced data to be reliable and useful.
Increasingly, companies are working together to audit major suppliers and to share results on a common digital platform. This avoids audit fatigue, in which supplier factories must endure audit after audit conducted by different buyers, and spares companies from duplicating efforts and incurring unnecessary costs.
EcoVadis, a French company founded in 2007, provides a secure, cloud-based digi- tal platform where lead firms, suppliers, industry groups, and auditors can share
31 “Fast and Flawed Inspections of Factories Abroad,” The New York Times, September 1, 2013. 32 Nike, “FY12/13 Sustainable Business Performance Summary,” www.nikeresponsibility.com. 33 Ronald M. Roman, Anne T. Lawrence, and Chirag Amin, “LaborVoices: Bringing Transparency to the Global Supply Chain,” Case Research Journal 34, no. 4 (Fall 2014). For more information, see www.laborvoices.com.
Final PDF to printer
Chapter 17 Business and Its Suppliers 389
law43665_ch17_374-395.indd 389 12/17/18 03:12 PM
data on environmental, social, and ethical performance in supply chains. In 2017, the platform served 30,000 subscribers in 128 countries. More than 150 major com- panies used the service, including BASF, Coca-Cola, Johnson & Johnson, and Schneider Electric. Lead firms used the data not only to track their suppliers’ com- pliance, but also to set and maintain corrective action plans and to learn from oth- ers’ innovations. EcoVadis recently raised $32 million in funding to support its artificial intelligence capabilities, to help automate the analysis of the millions of pages of documents collected annually in more than 20 different languages.34
Similar services are also offered by industry groups such as the Responsible Business Alliance and by nonprofits, such as Sedex (Supplier Ethical Data Exchange) Global.
What do companies do when an audit reveals a gap between their social, ethical, and environmental standards and a supplier’s practices? Most audits turn up at least some instances in which a company’s global operations are not in compliance. For example, inspectors may uncover underage workers, violations of environmental commitments, or discriminatory hiring practices. Sometimes, a company will terminate a supplier, if the supplier is unwilling to change or the deficiencies are egregious. For example, when Gap’s auditors found an unauthorized, makeshift factory operated by a subcontractor in India, where children were embroidering a product for GapKids, the company immediately can- celled the order and banned the subcontractor from any future work. Forty-eight percent of companies said in a survey they would terminate a supplier in certain cases, as Gap did, if violations were found.35 But increasingly, firms try to work in a positive way with suppli- ers to help them improve their practices. This topic is discussed next.
Supplier Development and Capability Building
A growing trend is for lead firms to work collaboratively with their suppliers to help them improve their social, ethical, and environmental performance. The term supplier development refers to activities undertaken by companies to improve the performance of firms in their supply chains.36 Rather than terminate or punish a supplier, a lead firm may choose instead to invest time and resources to build the supplier’s capabilities. Such an approach starts from the premise that many suppliers wish to comply, but simply lack the managerial skill, technical knowledge, or resources to do so.
Why would lead firms decide to engage in capability building, rather than simply give their contracts to someone else—or even do the work themselves? One reason is that the cost of switching suppliers may be too high. A supplier may have critical capabilities, such as technical expertise in making a specific product, or other attributes that the lead firm values, such as relationships with other firms farther upstream in the supply chain. The lead firm may feel a moral obligation to the workers and local community not to cause job loss. Or, other suppliers may not be readily available to take over the contract. For many reasons, then, a lead firm may find it preferable to work with a supplier to fix problems and improve its performance.
34 “EcoVadis Supplier Sustainability Ratings Activity Report 2016,” at www.ecovadis.com, and “Can Artificial Intelligence Make Supply Chains More Sustainable?” January 23, 2017, at www.greenbiz.com. 35 Barchi Gillai, Angharad H. Porteous, and Sonali V. Rammohan, “The Relationship between Responsible Supply Chain Prac- tices and Performance,” Stanford Global Supply Chain Management Forum, November 2013, Appendix 2, p. 9. 36 Daniel R. Krause, Robert B. Handfield, and Beverly B. Tyler, “The Relationship between Supplier Development, Commit- ment, Social Capital Accumulation, and Performance Improvement,” Journal of Operations Management 25 (2007), online at www.sciencedirect.com. See also Steven C. Dunn and Richard R. Young, “Supplier Assistance within Supplier Development Initiatives,” Journal of Supply Chain Management (Summer 2004).
Final PDF to printer
390 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 390 12/17/18 03:12 PM
Supplier development may take several forms, including training, joint problem solv- ing, and investing in equipment or infrastructure. For example, the Responsible Business Alliance, mentioned earlier, offers its members and their suppliers an e-learning platform and in-person trainings in multiple languages. An online course in “responsible supply chain management” designed specifically for factory managers, for instance, is offered in English, Chinese, Thai, Japanese, Korean, and Spanish.37 Following the catastrophic fac- tory collapse in Bangladesh, mentioned earlier in this chapter, dozens of lead firms orga- nized as the Accord on Fire and Building Safety inspected 1,100 supplier factories and found structural deficiencies in more than 100 of them. Under the terms of the accord, member brands committed to providing funds to correct these safety problems, either through loans or favorable contract terms.
Some companies have invested directly in improving the lives and professional skills of their suppliers’ workers.
Gap Inc., the apparel retailer, supports a program called Personal Advancement and Career Enhancement, or P.A.C.E., which has served 68,000 low-skilled women garment workers in 12 countries throughout its global supply chain—with plans to reach more than one million by 2020. Created in collaboration with several NGOs—the International Center for Research on Women, CARE, and the Swasti Health Resource Centre (located in India)—P.A.C.E. provides up to 80 hours of free life skills and technical training. Classes have been held in India, Cambodia, Vietnam, Bangladesh, Sri Lanka, and China. An evaluation of the program showed that women who participated had a greater sense of self-worth and were better able to manage their work and professional lives. The program also decreased worker turnover, and women who completed the program were more likely to be promoted at work.38
This initiative went beyond the factory walls to empower women and build communities. Lead firms can provide a variety of rewards to suppliers that collaborate to build capa-
bilities. For example, PUMA, the German footwear company, has partnered with the Inter- national Finance Corporation to offer lower borrowing costs to suppliers that meet strict social and environmental standards.39 Other companies have offered premium pricing, extended contracts, or other incentives. Research has shown that capability building initia- tives work best where interactions between buyer and supplier are frequent and ongoing, and where the two parties have a long-term relationship. If suppliers are unconvinced they will benefit from more orders or higher margins, they are less willing to participate. On the other hand, they are more likely to engage when lead firms are prepared to offer them stable, long-term contracts, so they feel that investing in compliance is worthwhile.40
Effective supplier development often involves careful study to determine the underly- ing cause of repeated violations of particular code requirements or standards. This is known as root cause analysis. For example, Nike’s supplier audits turned up repeated instances of excessive overtime in apparel manufacturing factories, particularly in China, despite rules prohibiting this practice. When the company studied the problem, it found that the biggest root cause was style proliferation—asking factories to make too many different styles and to switch frequently from one style to another. Each change reduced
37 “Supporting All Learners on their Path to Leadership in Supply Chain Sustainability,” at www.responsiblebusiness.org. 38 “P.A.C.E.—Changing One Million Lives,” at www.gapincsustainability.com. 39 “PUMA Launches Financing Program to Reward Suppliers for Sustainability Performance,” September 8, 2016, at www. sustainablebrands.com. 40 Locke, pp. 101–104.
Final PDF to printer
Chapter 17 Business and Its Suppliers 391
law43665_ch17_374-395.indd 391 12/17/18 03:12 PM
efficiency and required extra work hours. Nike also found other root causes, such as mis- calculations in placing orders, last-minute changes in colors and fabrics, and poor fore- casting of customer demand. In response, the company committed to reducing the number of styles contracted to each supplier.41
As this example implies, demands placed on suppliers may run at cross-purposes. If an electronics company places a rush, high-volume order for a popular new product, and at the same time prohibits excessive overtime, the supplier may be unable to fulfill both requirements at once. Or, a lead firm may pressure suppliers, on one hand, for ever-lower costs and, on the other hand, for compliance with expensive environmental standards. Sup- pliers are caught in a bind, not knowing which set of expectations is more important. These contradictory demands sometimes reflect divergent priorities within the lead firm itself. Departments of supply chain management or procurement may be focused on one set of goals, and departments of citizenship, sustainability, or social responsibility on another.
Some forward-thinking companies have directly addressed this problem. They have developed organizational mechanisms to resolve differences in priorities internally, and they have tried to communicate expectations more clearly to suppliers. One trend is the use of integrated supplier scorecards that rate suppliers on multiple dimensions, including both traditional measures (such as cost, quality, and timeliness) and newer measures of social, ethical, and environmental performance. For example, Nike has introduced a Manufacturing Index that measures and rewards suppliers on four dimensions—quality, on-time delivery, cost, and sustainability—each of which is weighted 25 percent. (The sustainability factor is broadly defined to include social, environmental, and health and safety issues.) “The [Manu- facturing] Index enables us to reward contract factories that score consistently well across all categories,” said Nike’s vice president of sustainable business and innovation.42
Research shows that when companies invest in suppliers and their employees, exchange knowledge, and collaborate on improvements, they create shared value, that is, mutual benefit for both the business and its suppliers.
One of the poorest countries in the world is Madagascar, an island nation off the east coast of the African continent. It is the source of about 80 percent of the global supply of vanilla—the world’s most popular flavor. Vanilla comes from an orchid that is cultivated by farmers on small plots, using labor-intensive methods, often in remote villages. Two major companies—Unilever, the Anglo-Dutch multina- tional consumer goods company, and Symrise, a German supplier of flavors and fragrances—partnered with NGOs and aid organizations to train vanilla farmers in Madagascar to improve yields and diversify their crops. They also invested directly in local primary schools. The result was higher income and expanded opportunities for vanilla farmers and their children, and a more stable and higher-quality supply of vanilla for their business customers. Symrise said that its goal was “to establish a supply chain that created value for everyone involved.”43
Supplier development, as shown in this example, can benefit both the lead firm and the supplier.
41 More information about Nike’s corporate responsibility and sustainability practices is available at https://sustainability.nike.com. 42 Angharad H. Porteous and Sonali V. Rammohan, “Integration, Incentives, and Innovation: Nike’s Strategy to Improve Social and Environmental Conditions in its Global Supply Chain,” Stanford Initiative for the Study of Supply Chain Responsibility, November 9, 2013; and Hannah Jones, “Forum: Can Global Brands Create Just Supply Chains,” May 21, 2013, at www.bostonreview.net/forum/can-global-brands-create-just-supply-chains/new-conversation-responsibility. 43 “Unilever, Symrise and GIZ Join Forces With Save the Children to Support Vanilla Farming Communities in Madagascar,” November 11, 2016, at www.unilever.com. Symrise’s description of the partnership is available at https://vanilla.symrise.com/ creating-shared-value.
Final PDF to printer
392 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 392 12/17/18 03:12 PM
Figure 17.4 portrays interactions between lead firms and suppliers as a sequential pro- cess that begins with monitoring and remediation, and then moves upward through capa- bility building, and finally to the creation of shared value. Firms continue activities at the lower levels, even as they progress through the next two, in cumulative steps.
FIGURE 17.4 Lead Firm Responses to Supply Chain Audits of Social, Ethical, and Environmental Performance
Source: Created by the authors, based on a figure appearing in Gap Inc., 2011/12 Social and Environmental Responsibility Report, p. 35.
Shared valueCapability building Monitoring and
remediation
∙ A supplier is an organization that provides goods or services to another organization. Suppliers are important market stakeholders, since they provide critical inputs and often manufacture branded products. Although suppliers are diverse, they share a common interest in building long-term, stable relationships with buyers. Suppliers that provide unique skills, resources, or capabilities tend to have more power. As globalization has increased, supply chains have become increasingly complex.
∙ Many social, ethical, and environmental issues arise in global supply chains. These include low wages, unsafe conditions, child and forced labor, unethical sourcing from conflict areas, and adverse environmental impacts of resource extraction, production, and trans- portation. Companies that do not manage supply chain risks effectively can suffer finan- cial and reputational damage; conversely, those that manage these risks well can benefit.
∙ Private regulation refers to nongovernmental institutions that establish rules in global supply chains. It generally takes the form of company and industrywide codes of con- duct with which suppliers must comply. Private regulation tends to arise in situations where public regulation is weak, and lead firms carry significant reputational risk because of strong consumer brands.
∙ Lead firms and groups of firms use several methods to audit compliance with supply chain codes of conduct. These include internal audit, third-party (external) audits, and crowd-sourced audits. Increasingly, companies are working together to audit major sup- pliers and to share results, often on cloud-based platforms.
∙ A growing trend is for companies to engage collaboratively with suppliers to build capability. This benefits both the firm and supplier, creating shared value. Suppli- ers are more likely to engage with lead firms with which they have stable, long-term relationships.
Summary
Final PDF to printer
Chapter 17 Business and Its Suppliers 393
law43665_ch17_374-395.indd 393 12/17/18 03:12 PM
Discussion Case: IKEA’s Sustainable Cotton Supply Chain In 2017, for the second year in a row, IKEA, the home furnishings retailer, was judged to have the most responsible cotton supply chain in the world, out of 75 consumer-goods companies that used significant amounts of cotton. A group of leading nonprofits scored these companies on three dimensions—having a strong sustainability policy, using a high percentage of sustainable cotton in their products, and tracing the origin of cotton across their entire supply chains. “This ranking shows we are well on our way, even if we all have to do more to transform the cotton and textile industry,” said IKEA’s sustainability manager.
In 2018, IKEA—founded in 1943 by Swedish entrepreneur Ingvar Kamprad—was the largest furniture retailer in the world, with annual revenues of $36 billion. The privately owned company operated 415 stores in 49 countries, selling ready-to-assemble furniture, housewares, and home décor to mass-market customers. Cotton was the company’s second most important raw material after wood. IKEA used nearly 1 percent of the world’s entire supply in a range of products, including bedding, bath towels, upholstery, mattresses, and cushions.
First grown by humans in the Indus Valley 7,000 years ago, by the 2010s cotton was grown in more than 80 countries and supported more than 250 million people worldwide, most of them in developing economies. Cotton’s supply chain was long and complex. Cot- ton was grown on a farm, then sent to a ginning mill to remove seeds, stems, and dirt and compress the lint into bales. These were then shipped to a spinning mill to be made into yarn, then to a factory to be woven or knit into fabric, and then to a separate facility to be dyed. Yet another supplier cut, stitched, and made the fabric into products for sale to IKEA or other retailers. IKEA sourced its cotton from all over the world, with the largest shares
Internet Resources
www.weforum.org/ World Economic Forum (reports on supply chain responsibility)
www.sourcingnetwork.org/ Responsible Sourcing Network https://knowthechain.org/ Forced Labor in Supply Chains www.greenbiz.com/topics/supply-chain GreenBiz supply chain topics www.responsiblebusiness.org/ Responsible Business Alliance www.gsb.stanford.edu/value-chain-innovation/ Stanford University Research on Responsible research/responsible-supply-chains Supply Chains
Key Terms supply chain map, 378 supply chain transparency, 383 sweatshop, 379 tier-1 and tier-2 suppliers, 376
capability building, 389 child labor, 380 crowd-sourced audit, 388 human trafficking, 380 integrated supplier scorecard, 391 private regulation, 384
root cause analysis, 390 supplier, 376 supplier development, 389 supply chain, 376 supply chain audit, 387 supply chain codes of conduct, 385
Final PDF to printer
394 Part Six Business and Its Stakeholders
law43665_ch17_374-395.indd 394 12/17/18 03:12 PM
coming from India (25 percent), China (23 percent), Pakistan (18 percent), and Turkey (11 percent). Only 5 percent came from the United States.
Conventional cotton farming had many adverse environmental and social effects. Cot- ton used more water than any other agricultural commodity; about 3,000 gallons were required to grow the fiber used in just one pair of jeans, depleting surface and groundwater supplies. The sector was a major user of synthetic fertilizers, pesticides (insect-killers), and herbicides (weed-killers), many of which were highly toxic—threatening worker health and polluting land and water. Many cotton farmers had poverty-level incomes, and women received on average 25 to 30 percent less pay than men doing the same work. Child labor was used in the cotton industry in 18 countries.
IKEA was an early mover in supply-chain responsibility. In 2000, it adopted a sup- ply chain code of conduct, called the IKEA Way on Purchasing Products, Materials, and Services (IWAY), which established minimum standards for environmental and social practices. The company believed this code to be consistent with its core values, which it described this way: “We want to economize with resources. We do not want to be wasteful, and we always strive to make more from less.” It also believed that clear supply-chain stan- dards would reduce risk and appeal to customers.
In its efforts to implement IWAY, the company quickly recognized cotton as a key area of concern. In 2005, IKEA joined with several other companies and NGOs—including the World Wide Fund for Nature (WWF), Oxfam, the Pesticide Action Network, The Gap, H&M, Levi Strauss, and Marks & Spencer—to form the Better Cotton Initiative (BCI), a multi-stakeholder collaboration aimed at making the global cotton industry “bet- ter for the people who produce it, better for the environment it grows in, and better for the sector’s future.” In 2009, the BCI published a set of standards calling for farms to use water efficiently, care for the soil, conserve habitats, maintain fiber quality, and promote decent work. BCI aimed to have 30 percent of the world’s cotton produced to its stan- dards by 2020.
For its part, IKEA adopted an ambitious goal of sourcing 100 percent of its cotton from sustainable sources by 2015. It started by mapping its own supply chain to better understand the long journey of cotton fiber from farm to end product. The company held workshops for tier-1 and 2 suppliers to communicate its sustainability commitments and provided them with preferred sourcing lists. It also worked directly with farmers. In Paki- stan, for example, IKEA partnered with the WWF to train cotton farmers in more sus- tainable methods. The pitch to farmers was straightforward: they could save money and increase their incomes by reducing their use of water and chemical inputs. In China, the company worked with ginners to convince them to separate sustainable from conventional cotton; although the ginners would incur extra costs, they would benefit by winning market share. IKEA announced it would no longer source cotton from Uzbekistan, where child and forced labor had been ongoing concerns. It worked with BCI to introduce specialized software that farmers, spinners, and traders could use to track sustainable cotton through the multi-tiered supply chain.
By September 2015, IKEA had met its goal: 82 percent of its cotton supplies were grown to BCI standards, and the remaining 18 percent came from recycled sources.
In a 2017 evaluation, researchers found that the BCI and allied companies like IKEA had in a sense become too successful. The proportion of the world’s cotton that was grown sustainably had increased rapidly. But demand for “better cotton” had lagged supply— even though the price was comparable—so only 21 percent of it was purchased by buyers looking specifically for sustainable cotton, with the rest entering the conventional cotton market. Several NGOs argued that the movement for sustainable cotton should shift its
Final PDF to printer
Chapter 17 Business and Its Suppliers 395
law43665_ch17_374-395.indd 395 12/17/18 03:12 PM
focus from improving practices on farms to convincing more retailers and brands to buy their output. “Without demand from buyers, more sustainable cotton will remain a niche product, and the cotton sector’s social and environmental problems will persist,” said one NGO report.
Sources: Yu Gong et al., “Multiple Multi-Tier Supply Chain Management: A Single-Case Study on IKEA’s Sustainable Cotton Initiative in China,” presented at the 12th International Conference on Operations and Supply Chain Management, Qingdao, July 12–15, 2018; Francine Laurin and Kamal Fantazy, “Sustainable Supply Chain Management: A Case Study at IKEA,” Transnational Corporations Review, November 2017; “Sustainable Cotton Ranking 2017: Assessing Company Performance,” October 2017, Pesticide Action Network, Solidaridad, and WWF; “IKEA Ranked Number 1 for the Second Year in Sustainable Cotton Report,” press release, October 2, 2017, at https://newsroom.inter.ikea.com; Better Cotton Initiative, 2016 Annual Report, July 20, 2017, at https://2016.bciannualreport.org; IKEA Group Sustainability Report FY 2016, at www.ikea.com; “Mind the Gap: Towards a More Sustainable Cotton Market,” Pesticide Action Network, Solidaridad, and WWF, April 2016; “IKEA Says 100% of its Cotton Now Comes from More Sustainable Sources,” Sustainable Brands, November 2, 2015; “People & Planet Positive: IKEA Group Sustainability Strategy for 2020,” June 2014, at www.ikea.com; and Kavita Joshi Rai, “Case Study: The IKEA Experience in Moving Towards a Better Cotton Supply Chain,” Dutch Sustainable Trade Initiative, 2011.
Discussion Questions
1. Draw a supply chain map of IKEA’s cotton supply chain. 2. What social, ethical, and environmental risks were present in IKEA’s cotton supply
chain? 3. What characteristics of the cotton supply chain made enforcing its code of conduct
especially challenging for IKEA? 4. What were the advantages and disadvantages to IKEA of working collaboratively with
other companies and NGOs to improve sustainability in its cotton supply chain? 5. What motivated actors throughout the complex cotton supply chain to comply with
IKEA’s sustainability goals? 6. What more, if anything, could IKEA do now to improve sustainability in the cotton
sector?
Final PDF to printer
396
law43665_ch18_396-418.indd 396 12/06/18 08:41 PM
C H A P T E R E I G H T E E N
The Community and the Corporation A strong relationship benefits both business and its community. Communities look to businesses for civic leadership and for help in coping with local problems, while businesses expect to be treated in fair and supportive ways by the community. As companies expand their operations, they develop a wider set of community relationships. Community relations programs, including corporate giving, are an important way for a business to express its commitment to corporate citizenship.
This Chapter Focuses on These Key Learning Objectives:
LO 18-1 Defining a community, and understanding the interdependencies between companies and the communities in which they operate
LO 18-2 Analyzing why it is in the interest of business to respond to community problems and needs.
LO 18-3 Knowing the major responsibilities of community relations managers.
LO 18-4 Examining how different forms of corporate giving contribute to building strong relationships between businesses and communities.
LO 18-5 Evaluating how companies can direct their giving strategically, to further their own business objectives.
LO 18-6 Analyzing how collaborative partnerships between businesses and communities can address today’s pressing social problems.
Final PDF to printer
Chapter 18 The Community and the Corporation 397
law43665_ch18_396-418.indd 397 12/06/18 08:41 PM
Vodafone is one of the world’s largest telecommunications companies, with networks or partner networks in 66 countries around the world. This means that the U.K.–based firm has complex relationships with multiple communities, ranging from major cities to remote villages. “We have a duty to work within these communities to create better, more equal societies,” said its CEO, Vittorio Colao. Vodafone was one of the first companies in the world to report its taxation and economic contributions country-by-country, acknowledg- ing that paying taxes was a critical contribution to community well-being. The Vodafone Foundation, the company’s charitable affiliate, donates more than $30 million a year to partner foundations and NGOs throughout the world, with a focus on using mobile tech- nology to promote health, education, and disaster relief. For example, in 2018 the founda- tion supported a program in Ghana that would anonymously track the movement of mobile phone users, to assist public health authorities prevent the spread of infections like Ebola.1
Whole Foods Market is a natural foods retailer with stores in many communities in North America and the United Kingdom. Founded in 1980 in Austin, Texas, and acquired by Ama- zon in 2017, the company believes that its business “is intimately tied to the neighborhood and larger community that we serve and in which we live.” Whole Foods donates 5 percent of its net profit to charitable causes and operates a foundation that supports rural economic development, as well as projects that support animal welfare, organic production, and healthy nutrition. Each of the company’s 484 stores hosts a community giving day several times a year, with 5 percent of the day’s total sales revenue contributed to a worthy local nonprofit organization. Whole Foods also encourages its employees to volunteer their time and exper- tise to the community. Employees have been involved in a wide range of service projects, including organizing blood donation drives, raising money for breast cancer research, devel- oping community gardens, renovating housing, and delivering “meals on wheels.”2
In 2018, the pharmaceutical company Pfizer paid a $24 million fine to settle kickback charges related to its donations to patient-assistance charities. Why should corporate dona- tions to a charity be considered illegal? Pfizer and other drug makers had donated hun- dreds of millions of dollars to charities that gave grants to Medicare patients who could not afford the out-of-pocket expenses (such as copays and deductibles) for expensive new drugs for prostate cancer and other conditions. Without this assistance, many of these patients would have gone without treatment or turned to less-expensive alternatives. But with it, they were able to fill their prescriptions—and Medicare paid the rest of the cost, which could approach $10,000 a month. The drug companies found that $1 million in tax-deductible donations to these charities could generate $21 million in sales—a great rate of return. “Pfizer knew that the third-party foundation was using [its] money to cover the copays of patients taking Pfizer drugs, thus . . . masking the effect of Pfizer’s price increases,” said the government prosecutor.3
Why do businesses as diverse as Vodafone, Whole Foods, and Pfizer invest in commu- nity organizations, projects, and charities? Why do they contribute their money, resources, and time to help others? What benefits do they gain from such activities, and are their moti- vations always appropriate? This chapter explains why many companies believe that being an involved citizen is part of their basic business mission. The chapter also looks at how companies participate in community life and how they build partnerships with other busi- nesses, government, and community organizations. The core questions that we consider in
1 “Vodafone Foundation ‘Big Data for Good’ Programme,” Financial Times, February 26, 2018. Vodafone’s sustainability report and information about its foundation are at www.vodafone.com. 2 See www.wholefoodsmarket.com/mission-values/caring-community/community-giving. 3 “Pfizer Settles Kickback Case Related to Copay Assistance for $24 Million,” The Washington Post, May 24, 2018; “U.S. Probe Sheds Light on Charities’ Role in Boosting Drug Sales,” The Wall Street Journal, June 11, 2017.
Final PDF to printer
398 Part Six Business and Its Stakeholders
law43665_ch18_396-418.indd 398 12/06/18 08:41 PM
this chapter are: What does it mean to be a good corporate neighbor? What is the business case for doing so? How do charitable activities interact with a firm’s strategic objectives?
The Business–Community Relationship
The term community, as used in this chapter, refers to a company’s area of business influ- ence. Traditionally, the term applied to the city, town, or rural area in which a business’s operations, offices, or assets were located. With the rise of large, complex business orga- nizations, the meaning of the term has expanded to include multiple localities. A local merchant’s community relationships may involve just the people who live within driving distance of its store. A bank in a large metropolitan area, by contrast, may define its com- munity as the both the central city and the suburbs where it does business. And at the far extreme, a large multinational firm such as Vodafone, ExxonMobil, or H&M has relation- ships with numerous communities in many countries around the world.
Today the term community may also refer not only to a geographical area or areas but to a range of groups that are affected by an organization’s actions, whether or not they are in the immediate vicinity. In this broader view, as shown in Figure 18.1, the geographical (sometimes called the site) community is just one of several different kinds of communities.
Whether a business is small or large, local or global, its relationship with the commu- nity or communities with which it interacts is one of mutual interdependence. As shown in Figure 18.2, business and the community each need something from the other. Business depends on the community for education, public services such as police and fire
Community Interest
Site community Geographical location of a company’s operations, offices, or assets
Fence-line community Immediate neighbors
Virtual communities People who buy from or follow the company online
Communities of interest Groups that share a common interest with the company
Employee community People who work near the company
FIGURE 18.1 The Firm and Its Communities
Source: Adapted from a discussion in Edmund M. Burke, Corporate Community Relations: The Principle of Neighbor of Choice (Westport, CT: Praeger, 1999), Ch. 6.
Business Participation Desired by Community Community Services Desired by Business
∙ Pays taxes ∙ Provides jobs and training ∙ Follows laws
∙ Supports schools
∙ Supports the arts and cultural activities
∙ Supports local health care programs
∙ Supports parks and recreation ∙ Assists less advantaged people ∙ Contributes to public safety ∙ Participates in economic development
∙ Schools—a quality educational system ∙ Recreational opportunities ∙ Libraries, museums, theaters, and other cultural
services and organizations ∙ Adequate infrastructure, e.g., sewer, water, and
electric services ∙ Adequate transportation systems, e.g., roads, rail,
airport, harbor ∙ Effective public safety services, e.g., police and
fire protection ∙ Fair and equitable taxation ∙ Streamlined permitting services ∙ Quality health care services ∙ Cooperative problem-solving approach
FIGURE 18.2 What the Community and Business Want from Each Other
Final PDF to printer
399
law43665_ch18_396-418.indd 399 12/06/18 08:41 PM
protection, recreational facilities, and transportation systems, among other things. In some cases, businesses receive financial support from a community to locate a facility there. In 2017, for example, the state of Wisconsin announced $3 billion in tax credits to induce the Taiwanese electronics giant Foxconn to locate a huge flat-panel television plant in the state. The company said the plant would directly create at least 3,000 jobs, and many more indirectly.4 On the other side, the community depends on business for jobs and economic development. Businesses support the arts, schools, health care, and the disadvantaged, and other urgent civic needs through donations of money, goods, and time. And, a key obliga- tion of companies to the communities (and nations) where they do business and earn reve- nue is, of course, paying applicable taxes.
Ideally, community support of business and business support of the community are roughly in balance, so that both parties feel that they have benefited in the relationship. Sometimes, however, a business will invest more in the community than the community seems to provide in return. Conversely, a community sometimes provides more support to a business than the firm contributes to the community. Exhibit 18.A discusses subsidies by communities to professional sports franchises, an instance in which the relationship between business and the community is sometimes perceived as out of balance.
The Business Case for Community Involvement The term civic engagement describes the active involvement of businesses and individuals in changing and improving communities. Civic means pertaining to cities or communities,
4 “Wisconsin’s Lavish Lure for Foxconn: $3 Billion in Tax Subsidies,” The New York Times, July 27, 2017.
Community Support for Professional Sports Franchises
The professional sports franchise is one kind of business that has historically been particularly dependent on support from the community. Cities often compete vigorously in bidding wars to attract or keep football, bas- ketball, baseball, hockey, and soccer teams. Communities subsidize professional sports in many ways. Gov- ernment agencies build stadiums and arenas, sell municipal bonds to pay for construction, give tax breaks to owners, and allow teams to keep revenues from parking, luxury boxes, and food concessions. Some say that public support is warranted, because high-profile teams and sports facilities spur local economic devel- opment, offer wholesome entertainment, and build civic pride. But critics argue that subsidies simply enrich affluent team owners and players at taxpayer expense and shift spending away from other more deserving areas, such as schools, police and fire protection, social services, and the arts. In this view, this is a case in which the relationship between business and the community is deeply out of balance. A recent example was the Little Caesars Arena, built in Detroit at a cost of $823 million to house the National Hockey League’s Red Wings and National Basketball Association’s Pistons. About 62 percent of the funding for the new arena came from private sources, mostly from the Ilitch family, which owned the Little Caesars pizza chain. The remaining 38 percent came from public financing, including the sale of municipal bonds structured to be paid off using local property taxes. A group of citizens sued, saying that tax revenues should go to support public goods like schools and parks, not sports arenas. But the suit failed, and the arena opened in 2017. A 2016 study by the Brookings Institution found that professional sports franchises had sur- prisingly little impact on local economic development; their facilities did not employ many people, and dollars spent on attending sporting events were typically dollars not spent on other recreational activities.
Sources: “Little Caesars Arena’s Funding Mix Not Without Critics,” The Detroit News, October 4, 2017; “Data Released on Little Caesars Arena Taxing District,” Arena Digest, December 12, 2016; and “Tax-Exempt Municipal Bonds and the Financing of Professional Sports Stadiums,” Economic Studies at Brookings, September 2016. A website critical of public subsidies to sports facilities is www.fieldofschemes.com.
Exhibit 18.A
Final PDF to printer
400 Part Six Business and Its Stakeholders
law43665_ch18_396-418.indd 400 12/06/18 08:41 PM
and engagement means being committed to or involved with something. Why should busi- nesses be involved with the community? What is the business case for civic engagement?
The ideas of corporate social responsibility and citizenship, introduced in earlier chap- ters, refer broadly to businesses acting as citizens of society by behaving responsibly toward all their stakeholders. Civic engagement is a major way in which companies carry out their corporate citizenship mission. As explained in Chapter 3, business organizations that act in a socially responsible way reap many benefits. These include an enhanced rep- utation and ability to respond quickly to changing stakeholder demands. By acting respon- sibly, companies can also avoid or correct problems caused by their operations—a basic duty that comes with their significant power and influence. They can win the loyalty of employees, customers, and neighbors. And by doing the right thing, businesses can often avoid, or at least correctly anticipate, government regulations. All these reasons for social responsibility operate at the level of the community as well, via civic engagement.
Another specific reason for community involvement is to win local support for business activity. Communities do not have to accept a business. They sometimes object to the pres- ence of companies that will create too much traffic, pollute the air or water, or engage in activities that are viewed as offensive or inappropriate. A company must earn its informal license to operate—or right to do business—from society. In communities where demo- cratic principles apply, citizens have the right to exercise their voice in determining whether a company will or will not be welcome, and the result is not always positive for business.
Walmart has encountered serious local objection to its plans to build superstores and distribution centers in a number of local communities. Although some towns have welcomed Walmart for the shopping opportunities and jobs it brings, others have mounted intense opposition to the company’s plans to move in. For example, in 2017 a judge blocked an effort by local activists in Chico, California, to stop the expansion of a Walmart store in the community. The activists, who called them- selves Chico Advocates for a Responsible Economy, said they were acting to pro- tect the community’s economy, environment, and quality of life. The problem of community opposition seems likely to grow more complex for Walmart as it contin- ues its expansion into international markets.5
Through positive interactions with the communities in which its stores are located, Walmart is more likely to avoid this kind of local opposition.
Community involvement by business also helps build social capital. Social capital has been defined as the norms and networks that enable collective action. Scholars have also described it as “the goodwill that is engendered by the fabric of social relations.”6 When companies such as Whole Foods Market, described at the beginning of this chapter, work to address community problems such as blood shortages, hunger, and dilapidated housing, their actions help build social capital. The company and groups in the community develop closer relationships, and their people become more committed to each other’s welfare. Many experts believe that high levels of social capital enhance a community’s quality of life. Dense social networks increase productivity by reducing the costs of doing business, because firms and people are more likely to trust one another. The development of social capital produces a win–win outcome because it enables everyone to be better off.7
5 “Judge Sides with Walmart,” December 7, 2017, at www.newsreview.com. For the company’s perspective on its community relationships, see www.walmart.com. 6 Paul S. Adler and S. W. Kwon, “Social Capital: Prospects for a New Concept,” Academy of Management Review 27, no. 1 (January/February 2002), pp. 17–40. For a more general discussion, see Robert D. Putnam, Bowling Alone: The Collapse and Revival of American Community (New York: Simon and Schuster, 2000). 7 Some benefits of social capital are described on the World Bank website at www.worldbank.org.
Final PDF to printer
Chapter 18 The Community and the Corporation 401
law43665_ch18_396-418.indd 401 12/06/18 08:41 PM
Community Relations
The organized involvement of business with the community is called community relations. Some corporations have established specialized community relations or community affairs departments; others house this function in a department of corporate citizenship or corpo- rate responsibility.8 The job of the community relations manager (sometimes called the community involvement manager) is to interact with local citizens, develop community programs, manage donations of goods and services, work with local governments, and encourage employee volunteerism. These actions are, in effect, business investments intended to produce more social capital—to build relationships and networks with important groups in the community. Community relations departments typically work closely with other departments that link the company to the outside world, such as public relations (discussed in Chapter 19), as well as internal departments such as human resources and marketing. Sometimes they serve in concurrent positions in a company’s foundation. All these roles form important bridges between the corporation and the community.
An example of an executive with broad responsibility in this field is Marlene Ibsen, vice president of community relations at Travelers Corporation and CEO and president of its affiliated Travelers Foundation. In these roles, she oversees around $20 million in charitable gifts annually. A focus of the company’s community engagement has been Traveler’s EDGE, a program that supports the education of young people from underrepresented communities who wish to pursue careers in insurance and finance, using metrics to track impacts. Ibsen also manages a pro- gram that matches Travelers employees with volunteer service opportunities. “From the funding we provide to nonprofits and community programs to our employees’ incredible level of volunteerism, we work to help foster resilience and vitality in local neighborhoods,” Ibsen said.9
Community relations departments have a wide range of responsibilities. According to a recent survey of professionals, these include managing employee volunteer pro- grams, sustainability reporting, corporate giving, stakeholder engagement, and disas- ter preparedness and response. Although not exhaustive, this list suggests the range of needs that a corporation’s community relations professionals are asked to address. Most of these professionals are part of small teams; three-quarters manage fewer than three people.10 These community relations managers must leverage their connections both inside and outside their companies to develop creative ways to strengthen the commu- nity. Several specific ways in which businesses and their community relations depart- ments have addressed critical concerns facing communities are discussed below.
Economic Development Business leaders and their companies are frequently involved in local or regional economic development that is intended to bring new businesses into an area or to develop workforce skills.
When the Distinct 89 Nightclub closed in downtown Newark, New Jersey, no one had much hope that the abandoned lounge would provide jobs any time soon. But that changed when a start-up called AeroFarms took over the space to test a
8 Boston College Center for Corporate Citizenship, “Profile of the Professionals 2018,” at http://ccc.bc.edu. 9 “Travelers Publishes Its 2017 Community Report,” The New York Times, April 18, 2018. 10 “Profile of the Professionals 2018,” op. cit.
Final PDF to printer
402 Part Six Business and Its Stakeholders
law43665_ch18_396-418.indd 402 12/06/18 08:41 PM
technology called aeroponics that used LED lighting, fabric, and nutrient-rich mist to grow vegetables indoors. The experiment worked so well that the company leased a former steel mill in Newark’s Ironbound district, where it created the largest vertical farm in the world in growing capacity, shipping 2 million tons of produce annually. The company chose its location because of strong community support, access to con- sumers, and a desire to support job creation. “We are very much focused on how we can drive economic development and job creation,” said the company’s cofounder.11
Housing Another community issue in which many firms have become involved is housing. Life and health insurance companies, among others, have taken the lead in programs to revi- talize neighborhood housing through organizations such as Neighborhood Housing Ser- vices (NHS) of America. NHS, which is locally controlled, locally funded, nonprofit, and tax-exempt, offers housing rehabilitation and financial services to neighborhood residents. In Newark, New Jersey, Prudential took the lead in revitalizing an abandoned downtown department store called Hahne & Company, investing $50 million to create a combination of apartments, retail, and office space with 40 percent of the housing units set aside for low- and moderate-income residents.12 Corporations also often work with nongovernmental organizations (NGOs) such as Habitat for Humanity to build or repair housing. Globally, businesses have also been active in housing issues, as illustrated by the following example.
CEMEX, a global leader in the building materials industry that is based in Mexico, is a longtime supporter affordable housing in developing countries. Through its Patrimonio Hoy (“heritage today”) program, it assists low-income families with the training, materials, and microfinancing needed to construct their own low-cost hous- ing safely and efficiently. It is also a member of Business Call to Action, an alliance of companies and governments supporting the United Nations’ Millennium Development Goals. By 2017, Cemex’s program was active in Mexico, Costa Rica, Colombia, the Dominican Republic, and Nicaragua, and had helped 2.8 million people. “CEMEX is a company that is constantly striving to innovate so that our products, services, and strengths contribute to improve the quality of life, particularly of vulnerable families,” said the company’s director of corporate responsibility.13
Aid to Minority, Women, and Disabled Veteran-Owned Enterprises Private enterprise has also extended assistance to minority, women, and disabled veteran- owned small businesses. These businesses often operate at an economic disadvantage. In some cases, they do business in economic locations where high crime rates, poor transpor- tation, low-quality public services, and a low-income clientele combine to produce a high rate of business failure. In others, they face competition from more established suppliers. Many large corporations now have supplier diversity programs that seek out partnerships with such enterprises.
AT&T has operated supplier diversity programs for more than 40 years. In 2017, the company spent $14 billion procuring products and services from certified minority, women, and disabled veteran-owned businesses—more than a fifth of its
11 A collection of news stories about AeroFarms is available on the company’s website at http://aerofarms.com/farms. 12 “Taking Care of Business,” Chronicle of Philanthropy, October 2017. 13 Cemex’s Patrimonio Hoy and other related initiatives are described in the company’s 2017 Integrated Report at www.cemex.com.
Final PDF to printer
Chapter 18 The Community and the Corporation 403
law43665_ch18_396-418.indd 403 12/06/18 08:41 PM
procurement spending. An example of such a supplier is Group O Direct, an Illinois–based firm that provides fulfillment services for customer promotions. Group O Direct, which is 100 percent Hispanic-owned, has many other high-profile clients in addition to AT&T, including Caterpillar, MillerCoors, and Best Buy, and annual revenues of about $560 million.14
Disaster, Terrorism, and War Relief One common form of corporate involvement in the community is disaster relief. Through- out the world, companies, like individuals, assist local citizens and communities when disaster strikes. When floods, fires, earthquakes, ice storms, hurricanes, or terrorist attacks devastate communities, funds pour into affected communities from companies.
Businesses from all over the world responded with great generosity to