business ethics


Business, Government, and Society

Thirteenth Edition

John F. Steiner George A. Steiner

A Managerial Perspective Text and Cases

B usiness, G

overnm ent, and S




anagerial P erspective T

ext and C ases

Steiner Steiner

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

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

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

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

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

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

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

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

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

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

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

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

Thirteenth Edition

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

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

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

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

This book is printed on acid-free paper.

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

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

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

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

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Brief Table of Contents Preface xi

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

1 The Study of Business, Government, and Society 1

2 The Dynamic Environment 22

3 Business Power 55

4 Critics of Business 83

PART TWO The Nature and Management of Corporate Responsibility

5 Corporate Social Responsibility 121

6 Implementing Corporate Social Responsibility 157

PART THREE Managing Ethics

7 Business Ethics 194

8 Making Ethical Decisions in Business 238

PART FOUR Business and Government

9 Business in Politics 271

10 Regulating Business 316

PART FIVE Multinational Corporations and Globalization

11 Multinational Corporations 352

12 Globalization, Trade, and Corruption 395

PART SIX Corporations and the Natural Environment

13 Industrial Pollution and Environmental Regulation 436

14 Managing Environmental Quality 476

PART SEVEN Consumerism

15 Consumerism 512

PART EIGHT Human Resources

16 The Changing Workplace 549

17 Civil Rights, Women, and Diversity 585

PART NINE Corporate Governance

18 Corporate Governance 630

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Table of Contents

Preface xi

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

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

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

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

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

Chapter 2 The Dynamic Environment 22

Royal Dutch Shell PLC 22 Deep Historical Forces at Work 24

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

Dominant Ideologies 34 Great Leadership 35 Chance 35

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

Concluding Observations 45 Case Study: The American Fur Company 47

Chapter 3 Business Power 55

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

The Dominance Theory 65 Pluralist Theory 71

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

Chapter 4 Critics of Business 83

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

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

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

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

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

PART TWO The Nature and Management of Corporate Responsibility

Chapter 5 Corporate Social Responsibility 121

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

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

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

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

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

Chapter 6 Implementing Corporate Social Responsibility 157

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

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

How Effectively Is CSR Implemented? 174 Corporate Philanthropy 175

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

Concluding Observations 183 Case Study: Marc Kasky versus Nike 183

PART THREE Managing Ethics

Chapter 7 Business Ethics 194

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

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Table of Contents vii

Major Sources of Ethical Values in Business 200

Religion 201 Philosophy 202 Cultural Experience 204 Law 206

Factors That Influence Managerial Ethics 212

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

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

Chapter 8 Making Ethical Decisions in Business 238

David Geffen 238 Principles of Ethical Conduct 241

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

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

Probing Ethical Decisions 254 Emotions and Intuition 256

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

PART FOUR Business and Government

Chapter 9 Business in Politics 271

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

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

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

Lobbying Methods 288 Power and Limits 290 Regulation of Lobbyists 291

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

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

Chapter 10 Regulating Business 316

The Federal Aviation Administration 316

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

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

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

Chapter 12 Globalization, Trade, and Corruption 395

McDonald's Corporation 395 Globalization 397

Ascent and Inertia 400 Trade 402

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

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

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

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

PART SIX Corporations and the Natural Environment

Chapter 13 Industrial Pollution and Environmental Regulation 436

The Majestic Hudson River 436

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

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

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

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

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

PART FIVE Multinational Corporations and Globalization

Chapter 11 Multinational Corporations 352

The Coca-Cola Company 352 The Multinational Corporation 354

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

Foreign Direct Investment 362 FDI in Developing Economies 364

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

How the OECD Guidelines Work 369 Vedanta Resources 371

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Table of Contents ix

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

In Defense of Consumerism 523 Consumerism as a Protective Movement 524

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

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

Concluding Observations 538 Case Study: Alcohol Advertising 538

PART EIGHT Human Resources

Chapter 16 The Changing Workplace 549

Ford Motor Company 549 External Forces Shaping the Workplace 552

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

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

Work and Worker Protection in Japan and Europe 569

Japan 569 Europe 570

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

Pollution 438 Human Health 439 The Biosphere 440

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

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

The Environmental Protection Agency 447 Principal Areas of Environmental Policy 448

Air 448 Water 458 Land 459

Concluding Observations 463 Case Study: A World Melting Away 464

Chapter 14 Managing Environmental Quality 476

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

Risk Assessment 480 Risk Management 486

Cost–Benefit Analysis 487 Advantages 488 Criticisms 489

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

Voluntary Regulation 498 Managing Environmental Quality 499

Environmental Management Systems 500 A Range of Actions 501

Concluding Observations 503 Case Study: Harvesting Risk 503

PART SEVEN Consumerism

Chapter 15 Consumerism 512

Harvey W. Wiley 512

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x Table of Contents

PART NINE Corporate Governance

Chapter 18 Corporate Governance 630

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

Stockholders 636 Shareholder Resolutions 638 Assessing Shareholder Influence 639

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

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

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

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

Chapter 17 Civil Rights, Women, and Diversity 585

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

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

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

Affirmative Action 597 Executive Order 11246 598

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

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

Diversity 614 Elements of Diversity Programs 616

Concluding Observations 618 Case Study: Adarand v. Peña 619

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

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

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

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

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

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

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

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

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

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

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xii Preface

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

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

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

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

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

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

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

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

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

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

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

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Preface xiii

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Edwardsville Aimee Lynn Williamson Suffolk University

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

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Acknowledgments xv

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

John F. Steiner

George A. Steiner

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About the Authors

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

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

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Chapter One

The Study of Business, Government, and Society ExxonMobil Corporation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

idea An intangible object of thought.

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

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

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

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

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

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

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

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

FIGURE 1.1 How Institutions Support Markets


Combine capital and labor, encourage risk

by limiting liability, and have continuity beyond

individual lives.



Protect property rights, encourage

investment by making dispute resolution



Protect the public and investors from

dishonesty, danger, and fraud.


Impart values, habits, and norms in family,

religious, or educational institutions.

Inform the public and stimulate

commerce with advertising.



Make economic policy, collect taxes, provide social safety

nets, check and balance business power.


Mobilize capital for saving, borrowing,

and lending.

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

FIGURE 1.2 The Market Capitalism Model Market Environment


Sociopolitical Environment

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Mrs. Hayward
Mrs. Hayward

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Business- Government


Environmental Forces FIGURE 1.3 The Dominance Model

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

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

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

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

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

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

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

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

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

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

33 Ibid., p. 363.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Environmental Catalysts

The Public

Business Government

FIGURE 1.4 The Counter- vailing Forces Model

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

36 Ralph Nader, “Time for Citizens to Convene,” Common, September 28, 2009, at

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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







Communities Employees

Secondary Stakeholders

Primary Stakeholders


Trade Associations

Political Interest Groups

Creditors Unions

Political Parties

Religious Groups

Earth’s Biosphere

Future Generations

The Poor

Educational Institutions

FIGURE 1.5 The Stakeholder Model

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

history The study of phenomena moving through time.

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

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Chapter Two

The Dynamic Environment Royal Dutch Shell PLC

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

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

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

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

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

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

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

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Chapter 2 The Dynamic Environment 23

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

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

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

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

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

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

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

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

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24 Chapter 2 The Dynamic Environment

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


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

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

FIGURE 2.1 Nine Deep Historical Forces





















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Chapter 2 The Dynamic Environment 25

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

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

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

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

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

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

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

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

6 Benjamin M. Friedman, The Moral Consequences of Economic Growth (New York: Knopf, 2005), p. 4.

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26 Chapter 2 The Dynamic Environment

FIGURE 2.2 World GDP Growth in 50- Year Intervals

Source: Bradford J. DeLong, “Estimat- ing Worldwide GDP, One Million B.C.– Present,” at http://econ161.








0 1700–1750 1750–1800 1800–1850 1850–1900 1900–1950 1950–2000

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in every nation, and often between nations, is the antagonism between rich and poor. 7

As the industrial revolution accelerated the accumulation of wealth, it worsened the persistent problem of uneven distribution. Explosive economic growth wid- ened the gap between rich and poor around the globe. Global income inequality is measured by the Gini index, a statistic in which 0 percent stands for absolute equal- ity, that is, a theoretical situation in which everyone has the same income, and 100 percent represents absolute inequality, where one person has all the income. Using this measure, inequality becomes greater as the percentage figure rises toward 100.

Figure 2.3 shows that by 1820, as the Industrial Revolution was spreading from England to Western Europe, global income inequality was already very high. The Gini index of 50 percent in 1820 climbed to 61 percent in 1910, as economies in in- dustrializing nations rapidly expanded. After that, the rise continued, but more slowly, as populous Asian countries holding the bulk of the world’s poor began to industrialize and catch up. The Gini index reached 64 percent in 1950 and contin- ued its decelerating rise to 67 percent in 2007. 8 This represents an extreme level of inequality across the world population, so high it exceeds the inequality within any single nation. It reflects a situation in which the top 5 percent of people receive about 33 percent of all income and the bottom 5 percent receive 0.2 percent. 9 The cause of this striking gap is the diverging economic fortunes of nations.

Gini index A statistical measure of inequality in which zero is perfect equality (everyone has the same amount of wealth) and 100 is absolute inequality (a single person has all wealth).

7 This observation is as old as Plato, who observed that the Greek city-states were “not one, but of necessity two; one consisting of the poor, and the other of the rich, dwelling in one place and always plotting against one another.” Plato, The Republic, trans. Harry Spens (New York: E. P. Dutton & Co., 1906), p. 263.

8 Figures are from François Bourguignon and Christian Morrison, “Inequality among World Citizens: 1820–1992,” American Economic Review, September 2002, pp. 731–32; and Rafael E. De Hoyos and Denis Medvedev, “Poverty Effects of Higher Food Prices: A Global Perspective,” Policy Research Working Paper 4887, World Bank, March 2009, p. 4.

9 Branko Milanovic, “Global Income Inequality: What It Is and Why It Matters,” Policy Research Working Paper 3865, World Bank, March 2006, p. 16.

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Chapter 2 The Dynamic Environment 27

Contrary to popular opinion, economic growth itself does not increase income inequality within modernizing nations. During industrialization the incomes of the poorest people rise in proportion to the rise in average income for the country as a whole. 10 The cause of most of the rise in world income inequality is a growing gap between the peoples of rich and poor nations, not a growing separation of rich and poor within nations.

Today about 2.6 billion people live in poverty, defined as an income of less than $2 a day. About 1.4 billion live in extreme poverty with incomes below $1.25 a day. 11 This is more poor than at any time in history, an enormous pool of misfor- tune constituting 38 percent of the world population. Yet in 1820, near the begin- ning of the Industrial Revolution, 94 percent of the world’s population lived in poverty. A great and steady retreat in the poverty percentage for almost two centuries, in the face of vaulting population growth, is testimony to the wealth- creating power of industrialization. Even as economic growth has widened the gap between rich and poor, it has dramatically reduced the proportion of the poor in the total population.

Although the Gini index trend line in Figure 2.3 seems to rise only modestly over the years, it in fact represents a striking confluence of progress and tragedy. If world distribution of income had not become more unequal after 1820, economic growth would have reduced the number of people living in poverty today by an estimated 80 percent. 12 Instead, as the wealth gap between nations widened with each passing year, the distribution of income grew more unequal. Yet even as ine- quality worsened, the drop in the poverty trend line shows how economic growth has led to a continuous, sharp reduction in privation.

Inequality is resilient. It is perpetuated by social institutions such as caste, mar- riage, land ownership, law, and market relationships. Arrangements and rules in these institutions are resilient, creating sinkholes of unequal opportunity. The vast majority of the world’s 2.6 billion poor people live in nations not yet transformed

10 David Dollar and Art Kraay, “Spreading the Wealth,” Foreign Affairs, January/February 2002, p. 128.

11 World Bank, World Development Indicators: 2010 (Washington, DC: World Bank, April 2010), table 2.1.

12 Bourguignon and Morrisson, “Inequality Among World Citizens,” p. 733. The $2-a-day figure represents what could be purchased in the United States for $2, not what could be purchased in local currency.

FIGURE 2.3 World Poverty and Income Inequality since 1820

Sources: François Bourguignon and Christian Morrison, “Inequality among World Citizens: 1820–1992,” Ameri- can Economic Review, September 2002, table 1; World Bank, World Development Indicators: 2010 (Washington, DC: World Bank, April 2010); and Rafael E. De Hoyos and Denis Medvedev, “Poverty Effects of Higher Food Prices: A Global Perspective, Policy Research Work Paper 4887, World Bank, March 2009, table 1.

1820 20071992198019701960195019291910189018701850


Gini index









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28 Chapter 2 The Dynamic Environment

by industrial growth where entrenched inequities persist over generations. This situation creates expectations that ethical duties of global corporations include helping the poor and equitably distributing the fruits of commerce. The historical lesson of almost two centuries is that if capitalism is harnessed to create economic growth, the poor will benefit.

Population Growth The basic population trend throughout human history is growth. As shown in Figure 2.4, world population inched ahead for centuries, then grew a little faster beginning about 1,000 years ago with the inception of large-scale crop cultivation. After eight more centuries, population growth began a rapid new acceleration in the late 1800s that turned into a skyrocketing rise through the twentieth century. It took until 1825 for the world population to reach 1 billion; then each billionth addi- tional person was added faster and faster—first in 100 years, then in 35, then in 15,

The Human Develop- ment Index (HDI) is a sta- tistical tool used by the United Nations for mea- suring the progress of hu- manity. It is based on the theory that income alone is not an adequate mea- sure of the standard of liv- ing, let alone a rich and fulfilling life. If this the- ory is correct, discussions of inequality based on in- come differences within and between nations do not give a complete pic- ture of differences in human welfare.

The HDI scale is a scale running from 0 to 1, with 1 representing the high- est human development and 0 the lowest. It mea- sures the development of nations as an average of

scores in three equally weighted categories.

• Longevity , or life expectancy at birth

• Knowledge , or the adult literacy rate plus the ratio of students enrolled in school as a

percentage of the population of official school age.

• Income , or gross domestic product per capita (in equivalent U.S. dollars).

Based on their scores, the 169 nations for which index values are calculated are ranked into quartiles as shown on the index scale at the left. Norway, with an index value of 0.938, is the high- est ranked. Zimbabwe is lowest at 0.140. The United States ranks fourth at 0.902. 13 Historical HDI index values show enormous increases in human welfare. In 1970 the global average was 0.480. By 2010 it had risen to 0.680. 14 Inequality in living standards around the world, as measured by the HDI, is declining even while income inequality, as measured by the per capita GDP, is rising. Thus inequality is greater if mea sured only by monetary income and less if longevity and education, two tradi- tional measures of a good life, are taken into consideration.

13 United Nations Development Programme, Human Development Report 2010 (New York: United Nations, 2010), table 1. 14 Ibid, p. 25.

The Human Development Index 1.00










Very high 43 nations

High 42 nations

Medium 42 nations

Low 42 nations

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Chapter 2 The Dynamic Environment 29

then in only 12. 15 This astonishing growth had two causes, both related to the Industrial Revolution. First, advances in water sanitation, hygiene, and scientific medicine reduced deaths from infectious disease, leading to rapid mortality decline. Second, mechanized farming expanded the food supply to feed record numbers.

World population reached 6.9 billion in 2011 and it continues to rise, but growth is predicted to slow and, for the first time in recorded history, end. Figure 2.4 shows United Nations projections that the world population will grow to a peak of 9.2 billion in 2075, then decline over a century to 8.3 billion in 2175 before slowly rising back to 9 billion in 2300. 16 This is an intriguing preview of the distant future, but for the near future, in the years up to 2050, rapid though slowing growth will characterize the business environment.

Growth will slow and eventually end as the world undergoes a transition from high to low fertility. In the initial stages of the Industrial Revolution economic progress encouraged population growth. Now this progress is a brake on fertility because having fewer children frees women to attend school, enter professions, and increase income. The world’s total fertility rate, or the number of births per woman, dropped from 4.92 in 1950 to 2.56 in 2010 and is expected to drop as low as 2.02 by 2050. This would be below the replacement fertility rate of 2.1 births per woman, calculated as the number of children a woman must have on average to ensure that one daughter survives to reproductive age.

In theory, this number is sufficient to maintain a stable population. Fertility is declining on every continent, but the world average of 2.56 disguises wide variation. It is lowest in a group of 44 developed nations averaging 1.64 and highest in a group of 148 less developed nations averaging 2.73. The extremes

replacement fertility rate The number of children a woman must have on aver- age to ensure that one daugh- ter survives to reproductive age.

FIGURE 2.4 Historical World Population Growth and Projections: 1 A.D. to 2300

Source: U.S. Bureau of the Census, “His- torical Estimates of World Population,” available at www. www/worldhis. html; and United Nations, World Population to 2300, table A1.

10 01

Peak population 2075

Year 2000

Industrial revolution Agricultural revolution











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15 Clive Ponting, A Green History of the World (New York: Penguin Books, 1991), p. 240.

16 United Nations, World Population to 2300 (New York: United Nations Department of Economic and Social Affairs, 2004), medium variant, p. 2. Other figures in this section are extracted from the medium variant of the United Nation’s “World Population Prospects: The 2008 Revision Population Database,” at, August 2010.

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30 Chapter 2 The Dynamic Environment

are illustrated by Hong Kong’s low fertility rate of 1.02 as opposed to Niger’s world high of 7.15.

The world population is also aging. Its median age rose from 24 years in 1950 to 28 years now and it will rise faster up to 2050 when it is projected to be 38. Aging will be most rapid in developed nations where mortality rates are lowest. As with fertility, global age averages mask extremes. In Japan, the world’s oldest popula- tion has a median age of 45 and a life expectancy at birth of 82, far higher than in African nations such as Zambia, where the median age is 17 and life expectancy is only 45 years.

Migration now plays a larger role in population dynamics than in the past. In the 1950s it was a negligible factor, leading to net population changes of no more than 5,000 a year in any nation. Today migrants constitute 3.1 percent of world population, about 214 million people. For the decade 2010 to 2020 the United States will take in more migrants than any other nation, about 11.6 million. Mexico and China will lose the most people, 3.7 million and 3.3 million, respectively.

Falling fertility, low mortality, and migration will drive future population changes. About 95 percent of all growth to 2050 will occur in developing and less developed countries, with only 5 percent in the developed world. Fertility will be lowest in Europe, and by 2050 its population will fall 6 percent or by 42 million people, reducing it from 11 percent of the world’s population to only 8 percent. In North America the population will grow by 27 percent, but due to declining fertil- ity rates in the United States (from 2.09 in 2010 to 1.85 in 2050) this growth will come from immigration. Africa, which contains many of the world’s poorest na- tions, will grow fastest. Despite elevated mortality from the HIV/AIDS epidemic, by 2050 it will add almost 1 billion people, an increase of 93 percent from 2010.

These population trends have many implications. First, although global popula- tion growth is slowing, it will be highest in the least developed regions, further widening the wealth gap between high- and low-income countries. Second, growth will continue to strain the earth’s ecosystems. Third, the West is in demographic decline compared with other peoples. Shrinking, aging populations may lead to slower GDP growth, putting more pressure on national welfare and pension poli- cies. In the future, non-Western populations will be stronger economically, militarily, and politically and will push to expand their influence. Although Western market values and business ideology seem ascendant now, they may be less dominant in the future as the numerical basis of Western civilization declines. In such ways will population trends alter the business environment and create new societal expecta- tions for corporate behavior.

Technology Throughout recorded history new technologies and devices have fueled com- merce and reshaped societies. In the 1450s the printing press was an immediate commercial success, but its impact went far beyond the publishing business. Over the next 100 years the affordable, printed word reshaped European culture by creating a free market for ideas that undermined the doctrinal monopoly of the Catholic Church. Printed pamphlets spread Martin Luther’s challenge to its scrip- tural dogma and brought on the Protestant Reformation. Galileo was placed

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Chapter 2 The Dynamic Environment 31

under house arrest in Florence for holding heretical views about astronomy, but his theories prevailed because they were published in Protestant Holland. A Europe opened to the exchange of new ideas based on experience and observation was primed for the scientific revolution.

The invention of the steam engine in the late 1700s and its widespread use beginning in the early 1800s, along with increased use of the waterwheel and new iron-making methods, triggered the Industrial Revolution. As Figure 2.5 shows, this was the first of five waves of technological revolution. With each wave inno- vations spread, stimulating economic booms of increased investment, rising pro- ductivity, and output growth. The shortening of successive waves reveals faster innovation.

New technologies foster the productivity gains that sustain long-term economic progress, and they promote human welfare. However, like the printing press, they also can agitate societies. For example, before the 1860s a trans-Atlantic voyage on a sailing ship took a month, cost a year’s wages for a European worker, and was risky. About 5 to 10 percent of passengers died due to sinkings and shipboard transmission of diseases. Then steamship technology cut the cost of passage by 90 percent and reduced travel time to one week, cutting mortality to less than 1 percent. As a result, European immigrants poured into the American East, creat- ing labor gluts that led to wage depressions and fueling political movements against big companies, financiers, and the gold standard. 17 In this way, steamship technology strained American political stability.

During the rise of industrial societies over more than two centuries, technology has altered human civilization by stimulating economic and population growth to sustained rises unimaginable in previous recorded history. New things have cre- ated many benefits, including higher living standards and longer life spans, but because technology changes faster than human beliefs and institutions, it also imposes strains.

Water power Textiles Iron

Steam Rail Steel

Electricity Chemicals Internal-combustion engine

Petrochemicals Electronics Aviation

Digital networks Software New media Biotechnology

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1785 1845 1900 1950 1990 2020

First Wave Second Wave Third Wave Fourth Wave

60 years 55 years 50 years 40 years 30 years

Fifth Wave

FIGURE 2.5 Waves of Innovation since the Beginning of the Industrial Revolution

Source: “A Survey of Innovation in Industry,” The Economist, February 20, 1999, p. 8. Copyright © 1999 The Economist Newspaper Ltd. All rights reserved. Further reproduction prohibited. Reprinted with permission.

17 Robert William Fogel, The Fourth Great Awakening & The Future of Egalitarianism (Chicago: University of Chicago Press, 2001), p. 54.

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32 Chapter 2 The Dynamic Environment

Globalization Globalization occurs when networks of economic, political, social, military, scien- tific, or environmental interdependence grow to span worldwide distances. 18 In the economic realm, globalization occurs when nations open themselves to foreign trade and investment, creating world markets for goods, services, and capital. The current rise of such a system began after World War II, when the victor nations lowered trade barriers and loosened capital controls. Over the next 50 years, inter- national negotiations led more nations to open themselves to global flows of goods, services, and investment until today no national economy of any signifi- cance remains isolated from world markets.

Today’s economic globalization is the leading edge of a long trend. For thou- sands of years the human community has, in fits and starts, become more tightly knit. According to historians J. R. McNeill and William H. McNeill, in prehistoric times humans interacted in a loose worldwide web through which genes and inventions such as language and the bow and arrow were slowly exchanged by migrations between relatively isolated bands. Beginning about 12,000 years ago with the growth of agricultural societies, stable and expanding populations formed the first cities. Over time, these cities grew into nodes that tied regions together. Still, there was little interaction between civilizations on different conti- nents. Then, about 500 years ago, China sponsored oceanic voyages to extend its power. 19

Soon Portugal and Spain followed and over the next 250 years mariners con- nected even the most remote places to the great centers of civilization. By the late 1700s the world was knit together with the exchange of trade goods, currencies, and ideas. The consequences of this initial globalization are similar to those arising from the current globalization. Economic activity rapidly increased. Mines in Bolivia exported such quantities of silver that nations around the world adopted silver currencies, smoothing international trade. Trade expansion increased ine- quality among nations. Cultures changed, as when, for example, Spanish conquis- tadors introduced horses to the Plains Indians. Infectious diseases spread. In little more than a century microbes endemic to Europe killed 50 to 90 percent of the population of the Americas from Cape Horn to the Arctic.

Since this initial tying together of societies in the late 1700s, the trend toward integration has continued. Globalization has been accelerated by new technolo- gies, particularly those based on electricity, but also sometimes slowed by national rivalries and wars.

Transnational corporations, especially a few hundred of the largest headquar- tered in developed nations, are the central forces of current economic globalization. Their rising levels of investment outside home countries make them the modern equivalents of the intrepid mariners who opened trade routes in the 1400s. How- ever, globalization complicates their management. By operating in many countries they multiply the number and kind of stakeholders to which they must respond. Their actions create strains and anxieties that lead to heightened expectations of

globalization The creation of networks of human interac- tion that span worldwide distances.

18 Joseph Nye, Jr., “Globalization’s Democratic Deficit,” Foreign Affairs, July–August 2001, p. 2.

19 J.R. McNeill and William H. McNeill, The Human Web (New York: Norton, 2003), intro. and chap. VI.

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Chapter 2 The Dynamic Environment 33

responsible behavior. Not surprisingly, there is a strong anticorporate movement supported mainly by groups in rich nations that see the growing velocity of trade with alarm because it clashes with their values on the environment, human rights, and democracy. These groups seek to restrain and regulate the activities of transna- tional corporations and they have had some success.

Nation-States In the international arena, the nation-state is an actor formed of three elements, a ruling authority, citizens, and a territory with fixed borders. The modern nation- state system arose in an unplanned way out of the wreckage of the Roman Empire. The institution of the nation-state was well-suited for Western Europe, where boundaries were contiguous with the extent of languages. However, the idea was subsequently transplanted to territories in Eastern Europe, Southwest Asia, and the Middle East, partly by force of colonial empires and partly by mimicry among non-Western political elites for whom the idea had attained high prestige. Where it was transplanted, nations were often irrationally defined and boundary lines split historic areas of culture, ethnicity, religion, and language.

The nation-state is the unit of human organization in which individuals and cultural groups can influence their circumstances and future. This is its paramount function and the reason it has survived over centuries. Today the world is a mosaic of independent countries, and the dynamics of this system are a powerful force in the international business environment. Conflict between nations seeking to aggrandize wealth and power is frequent, though because of economic globaliza- tion its nature has changed.

In the past, nations increased their power by seizing territory. With more terri- tory they acquired new natural resources, agriculture, and labor. Hence, in the 1930s Japan colonized South Asian countries to gain access to oil and bauxite. Now, however, the wealth of high-income nations is based on the operation of global corporations that use flows of capital and knowledge to provide goods and services in many nations. Seizing the headquarters or a few manufacturing facili- ties of one of these corporations would not enable the aggressor nation to take advantage of the value chain in the firm’s worldwide operations, particularly where wealth creation was based on brainpower. So nations today increasingly prefer to aggrandize themselves through trade, where they can build wealth more efficiently than through traditional warfare. 20

Even as world markets become new sources of national power, they also limit the power of regimes to control their economies. Freewheeling international com- petition penetrates borders. Nations have a choice. Either close borders to flows of goods, services, and capital, isolating their economies from the world, a move sure to stifle growth, or open borders, allowing free rein to disobedient market forces that quicken growth. No nation can choose isolation and still offer its citizens op- portunity and prosperity. So governments are now deeply concerned about how international markets will interpret their domestic actions and policies.

nation-state An interna- tional actor having a ruling authority, citizens, and a territory with fixed borders.

20 This thesis is elaborated in Richard Rosecrance, The Rise of the Virtual State (New York: Basic Books, 1999).

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34 Chapter 2 The Dynamic Environment

Market forces are just one force that penetrates nation-states and reduces their autonomy. Other forces are epidemics, climate change, terrorism, nuclear weap- ons, and potent ideas such as international norms of human rights. As intractable global forces, particularly market power, undercut the ability of national govern- ments to protect their citizens, corporations may be called on to assume more of the responsibility.

Dominant Ideologies Thought shapes history. An ideology is a set of reinforcing beliefs and values that constructs a worldview. The Industrial Revolution in the West was facilitated by a set of interlocking ideologies, including capitalism, but also constitutional democ- racy, which protected the rights that allowed individualism to flourish; progress, or the idea that humanity was in upward motion toward material betterment; Darwinism, or Charles Darwin’s finding that constant improvement characterized the biological world, which reinforced the idea of progress; social Darwinism, or Herbert Spencer’s idea that evolutionary competition in human society, as well as the natural world, weeded out the unfit and advanced humanity; and the Protes- tant ethic, or the belief that sacred authority called for hard work, saving, thrift, and honesty as necessary for salvation.

Ideologies are more than the sum of sensory perception and rational thought. They fulfill the human need for concepts and categories of meaning that explain daily life. Ideologies in accord with experience and current conditions often spread widely. Their belief systems lead adherents to feel a collective identity and to follow common norms that direct social behavior, thereby promoting cooperation and stability. And they give institutions that represent them, such as churches, governments, and corporations, the power to interpret events and resolve human problems. 21

Ideologies are highly competitive and locked in a constant Darwinian struggle. Vibrant pluralism of belief existed for most of recorded history, but many doc- trines have perished with globalization. As ideas diffuse through trade, travel, missionary work, and conquest, they often clash. A centuries-old culling process in the marketplace of ideas has eliminated and marginalized many historical belief systems and favored the ascendancy of a few. 22 Hundreds of local religions, una- ble to compete with the world salvation religions, have gone extinct. Cultural styles in entertainment, dress, sports, and food now converge in urban societies. In the political sphere, monarchy and dictatorship are fighting an endgame against democracy. After two centuries of contention, the economic ideology of capitalism has marginalized its rival socialism. This sifting of ideas accelerated in the twenti- eth century because of rising literacy and innovations that spread information, from magazines and radios in the early part of the century to jet aircraft and com- puters later.

ideology A set of rein- forcing beliefs and values that constructs a worldview.

21 Michael Mann, The Sources of Social Power, vol. 1 (Cambridge: Cambridge University Press), 1986, pp. 20–23.

22 McNeill and McNeill, The Human Web, pp. 269–76.

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Chapter 2 The Dynamic Environment 35

Great Leadership Leaders have brought both beneficial and disastrous changes to societies and businesses. Alexander imposed his rule over the ancient Mediterranean world, creating new trade routes on which Greek merchants flourished. Adolf Hitler of Germany and Joseph Stalin in the Soviet Union were strong leaders, but they unleashed evil that retarded industrial growth in their countries.

There are two views about the power of leaders as a historical force. One is that leaders simply ride the wave of history. “Great men,” writes Arnold Toynbee, “are precisely the points of intersection of great social forces.” 23 When oil was discov- ered in western Pennsylvania in 1859, John D. Rockefeller was a young man living in nearby Cleveland, where he had accumulated a little money selling produce. He saw an opportunity in the new industry. His remarkable traits enabled him to  domineer over a rising industry that reshaped the nation and the world. Yet is  there any doubt that the reshaping would have occurred nonetheless had Rockefeller decided to stick with selling lettuce and carrots?

A differing view is that leaders themselves change history rather than being pushed by its tide. “The history of the world,” wrote Thomas Carlyle, “is at bot- tom the History of the Great Men who have worked here.” 24 It was John Jacob Astor of the American Fur Company who established a presence in the wild lands of the American continent, exploring them, knitting them together, and thwarting the efforts of other nations to occupy them. The United States map might today be different absent the effects of Astor’s singular lust for fur riches. It was James B. Duke of the American Tobacco Company whose solitary marketing genius turned cigarette smoking from a local custom confined largely to the American South into a worldwide health disaster continuing now for more than a century.

Cases and stories in this text provide instances for debate about the role of busi- ness leaders in changing the world.

Chance Scholars are reluctant to use the notion of chance, accident, or random occurrence as a category of analysis. Yet some changes in the business environment may be best explained as the product of unknown and unpredictable causes. No less per- ceptive a student of history than Niccolò Machiavelli observed that fortune deter- mines about half the course of human events and human beings the other half. We cannot improve on this estimate, but we note it. Its significance is that managers must be prepared for the most unprecedented events and have faith in Machiavelli’s counsel that when such episodes arrive those who are ready will prevail, as fortune “directs her bolts where there have been no defenses or bulwarks prepared against her.” 25 No doubt Machiavelli would find Shell’s scenarios praiseworthy.

23 A Study of History, vol. XII, Reconsiderations (London: Oxford University Press, 1961), p. 125.

24 In “The Hero as Divinity,” reprinted in Carl Niemeyer, ed., Thomas Carlyle on Heroes, Hero-Worship and the Heroic in History (Lincoln: University of Nebraska Press, 1966), p. 1. This essay was originally written in 1840.

25 Niccoló Machiavelli, The Prince, trans. George Bull (New York: Penguin Books, 1961), chap. XXV, p. 73. Originally published in 1532.

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36 Chapter 2 The Dynamic Environment


Figure 2.6 adds a ring of six key external environments to the dynamic system that shapes the overall business environment. In each of these external environments, powerful forces create change in the relationships between business, governments, and societies. Here we give thumbnail sketches of each environment. We will dig more deeply into them throughout the book.

The Economic Environment The economic environment consists of forces that influence market operations, including overall economic activity, commodity prices, interest rates, currency fluctuations, wages, competitors’ actions, and government policies.

The global economy has recently experienced turbulence. Growth briefly slowed after 2001 from the economic repercussions of the September 11, 2001, terrorist attacks. However, after a contraction of several years, it picked up again, led by recovery in the United States and rapid expansion in China and India.

More recently, it has suffered a massive shock. The epicenter was the United States. By 2007 a bubble in U.S. housing prices fueled by easy credit had grown

FIGURE 2.6 Six Key External Environments





























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Chapter 2 The Dynamic Environment 37

large. When it burst, credit tightened and the economy slowed, causing deteriora- tion in asset prices. The default of Lehman Brothers, a large U.S. investment bank, brought a swift worsening of the situation. As demand for liquidity skyrocketed, credit markets froze and a severe economic contraction slowed the economies of every nation. It was the deepest global downturn in 75 years.

However, governments in developed economies acted decisively, using policy tools such as lower interest rates and stimulus spending to restore confidence. This led to a slow, uneven global recovery. Although risk is still present, it appears that the world economy will resume its long-term growth in output, consumption, and investment. This modern growth trend accelerated in the 1980s. World GDP increased 558 percent in the years between 1982 and its pre-crisis peak in 2008, ris- ing from $10.9 trillion to $60.8 trillion. 26 It then fell 10 percent in 2009, but began to rise again in 2010. Underlying such strong and relatively continuous overall economic growth are two basic subtrends.

The first is rising trade. In 1948, three years after the end of World War II, the global sum of all exports was $58 billion. In 2008 it reached a peak of $16.1 tril- lion, an increase of 28,000 percent. 27 This spectacular rise has been enabled by a trading system created at the end of World War II. Nations within the system have been encouraged to lower tariffs and other trade barriers because other member nations promise to reciprocate this openness. The system has evolved into an institution called the World Trade Organization (WTO) that embodies an ongoing process of negotiation and trade liberalization in which 153 nations now participate. In addition, several hundred regional trade agreements promote freer exchange among countries that are parties to them.

The second subtrend underlying continued economic growth is a major expan- sion of foreign direct investment (FDI) by multinational corporations. Foreign direct investment is capital invested by private firms outside their home countries. Between 1982 and 2007 global FDI inflows (that is corporate investments moving into foreign countries) rose from $59 billion a year to $1.8 trillion, a 3,002 percent increase. 28 Figure 2.7 shows the long rise of FDI and how it has been affected by dips in the global economy.

Rising trade and consumer demand have rapidly expanded markets. To re- main competitive, corporations have expanded with markets and restructured for efficiency. They invest to enter growing markets or to increase their power in established ones. Many multinationals have restructured by creating “global factories” in which production of goods or services occurs across geographi- cally dispersed networks. These networks seek to duplicate at a global level the efficiencies of specialization and outsourcing often seen at the national level. They are now so extensive that nearly two-thirds of the world’s exports move within them.

trade liberalization A philosophy in which na- tions promote trade by easing restrictions, including both tariff and non- tariff barriers. This philosophy, sometimes called simply liberalization , is the bedrock of economic globalization.

foreign direct investment Capital invest- ment by private firms outside their home countries.

26 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2010 (New York: United Nations, 2010), table I.5.

27 World Trade Organization Statistics Database, “Time Series on International Trade,” at

28 UNCTAD, World Investment Report 2010, table I.5.

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38 Chapter 2 The Dynamic Environment

Since World War II, and especially since the early 1980s, the international eco- nomic environment has been favorable to the expansion of corporations. Although the world economy recently experienced two recessions, long-term growth is likely to continue.

The Technological Environment Today new scientific discoveries create a business environment filled with mind- boggling technology. For example, nanotechnology allows manipulation of objects the size of atoms. New materials and tiny machines invisible to the naked eye can be engineered at the molecular level.

Semiconductor makers can now make microchips with components the size of a ten-millionth of a meter. When this ability is harnessed to practical manufactur- ing, it will create chips that operate on an atomic scale comparable to the photo- synthesis process in plants. Users with such circuits could store all information in the Library of Congress in the space of a sugar cube. 29 Human genome mapping promises new biogenetic products that will cure intractable diseases. Methods of harnessing renewable energy may dramatically reduce use of fossil fuels.

Digital telecommunications technology now creates a global network of com- puters, software, and electronic devices. This network has led to radical innova- tions such as open sourcing, which allows numbers of individuals to participate in the creation of complex knowledge products. Wikis, or Web sites open to collabo- rative editing by multiple or innumerable parties, have been used to create browsers, encyclopedias, dictionaries, and news sites.

The wiki principle is an example of how an innovation can be both an oppor- tunity and a threat. It releases an open, Darwinian process in which knowledge emerges from the common pool of humanity and survives the meticulous scrutiny

nanotech- nology Technology that is developed on the scale of a nanometer, which is one- billionth of a meter.

wiki A Web site open to collab- orative editing by multiple individuals.

FIGURE 2.7 Worldwide FDI Inflows: 1980–2009

Source: United Nations Commission on Trade and Devel- opment, World Investment Reports, various editions, annex table B.1 for 1980–2008, annex table 1 for 2010.

1980 2005 20092000199519901985

Less developed countries

World total

Developed countries

Developing countries







(b ill

io n

s o

f d o

lla rs


29 Philip Bond, quoted in Ronald Bailey, “The Smaller the Better,” Reason, December 2003, p. 47.

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Chapter 2 The Dynamic Environment 39

of collective expertise rather than emanating from a single individual or small group to a passive audience. It promotes equality, but undermines hierarchical authority and attacks old business models of software firms and publishers. In fact, novel technologies are minefields for established firms, which often focus on the immediate commercial possibilities of a technology and miss, or under- estimate, its ultimate defiance of their existing business model. An example is Western Union, the dominant communications company of the nineteenth cen- tury, which was so confident in the telegraph that it rejected the telephone.

When Alexander Graham Bell invented the telephone in 1876, it had only a three-mile range. Western Union considered hooking telephones into its lines, but decided such a short-range device was just a toy. So Bell formed his own company. When engineers lengthened the range of the phone by using wires made of copper instead of iron, Western Union saw its mistake and rushed into the business with a phone device of its own, but it lost a patent infringement suit brought by Bell’s company and had to drop the business. 30

The tiny Bell Telephone Company grew into AT&T, at one time in the twentieth century the world’s largest corporation in revenues, a firm so creative that it gave birth to the transistor and the laser, so dominant that the U.S. government broke it up in 1984, so satisfied with success that it repeatedly failed to adapt. Stubbornly, it defined its business as providing voice conversation over wires, thus abiding with indifference as future competitors articulated new digital communication technologies such as wireless and cable networks, computers, and the Internet. Although AT&T is still a large corporation, it now scrambles through mergers and strategies, seeking a formula to restore past glory.

New technologies have unforeseen consequences for society when they are put in wide use for commercial gain. The cigarette-rolling machine was invented be- fore the dangers of smoking were known. Manufacturing that mixed asbestos into hundreds of common materials came long before the morbid effects of asbestos fiber became clear. The World Wide Web is spreading into millions of lives before anyone has a full understanding of its implications for personal privacy. The les- son of the past is that corporations have an ethical duty to weigh carefully not only the strategic impact of technologies on their business models, but also the dangers they may impose on people.

The Cultural Environment A culture is a system of shared knowledge, values, norms, customs, and rituals acquired by social learning. No universal culture exists, so the environment of a transnational corporation includes a variety of cultures, each with differing peo- ples, languages, religions, and values.

On one level, this variation causes conflicts of business custom, and managers in foreign countries must absorb both subtle and striking differences in employee loyalty, group versus individual initiative, the place of women in organizations, ethical values, norms of gift giving, attitudes toward authority, the meaning of time, and clothing worn in business settings.

culture A system of shared knowl- edge, values, norms, cus- toms, and ritu- als acquired by social learning.

30 Page Smith, The Rise of Industrial America, vol. 6 (New York: Penguin Books, 1984), p. 115.

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40 Chapter 2 The Dynamic Environment

On a deeper level, although no uniform world culture exists, there is a funda- mental divide between the culture of Western economic development and some other national cultures. The culture of the advanced West promotes a core ideo- logy of markets, individualism, and democracy. It is sustained by Western nations that dominate international organizations, contain the most powerful corpora- tions, and have the strongest militaries. Although developing nations tend to adopt elements of Western culture, some are resistant. Nations such as Iran, Pakistan, and China see spreading Western values as a form of cultural aggression. They resist adopting them.

Over the last half of the twentieth century, some cultural values in developed nations began to shift, creating changes in the global business environment. In these societies, beginning in the 1960s, traditional values based on historical realities of economic scarcity were transformed. In their place came postmaterialist values , or values based on assumptions of security and affluence.

In older industrializing societies the drive for survival and material welfare dominated. People sacrificed other values such as leisure and environmental pu- rity to make money and buy necessities, then luxuries. However, the generations after World War II grew up surrounded by affluence and the protections of welfare states. Because they felt material security, these generations began to rank indi- vidual autonomy over deference to authority, quality of life over mere survival, self-expression over conformity, and tolerance over prejudice. 31

The World Values Surveys, a series of surveys in dozens of countries now span- ning more than 50 years, show that the rise of postmaterialist values has uniformly shifted the social, political, economic, and sexual norms of rich countries. Despite greater resistance in some non-Western cultures, surveys report the rise of these norms in all modernizing nations where new generations experience feelings of secure prosperity. One survey found a “surprisingly high” support for values linked to democracy among the Chinese public.” 32 In another support for demo- cratic ideals in five Islamic countries was higher than in Western Europe. 33

Postmaterialist values are a strong influence in the operating environments of multinational corporations. They support a powerful global movement to pro- mote fundamental human rights by stamping out racism, sexism, authoritarian- ism, intolerance, and xenophobia. This movement is energized by West-dominated coalitions of individuals, advocacy groups, governments, and international organ- izations. Similar and interrelated movements have risen to promote sustainable development and humanitarian assistance to poor regions. This global tide of mo- rality, based on postmaterialist values, elevates expectations about the behavior of multinational corporations. Increasingly, they must follow proliferating codes and rules developed by moral reformers and must define their strategies to promote both human welfare and net income.

postmaterial- ist values Values based on assumptions of security and affluence, for example, tolerance of diversity and concern for the environment.

31 Ronald F. Inglehart, “Changing Values among Western Publics from 1970 to 2006,” West European Politics, January–March 2008.

32 Ronald F. Inglehart, “Globalization and Postmodern Values,” Washington Quarterly, Winter 2000, p. 19.

33 Ronald F. Inglehart, “The Worldviews of Islamic Publics in Global Perspective,” in Mansoor Moaddel, ed., Worldviews of Islamic Publics (New York: Palgrave, 2005), fig. 14.

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Chapter 2 The Dynamic Environment 41

The Government Environment Governments have simultaneously stimulated and constrained business. In this regard, two long-term global trends in government are central.

First, government activity has greatly expanded. One way of measuring this is by comparing a government’s spending with the size of its economy. Around the world, the percentage of this spending has risen, from single digits in 1900 to an average of 28 percent in 2008. 34 In the United States, by 1930 spending was still only 3 percent of GDP, but by 2009 it had risen to 28 percent. 35 The percent- ages have risen highest, up to 40 percent and more, in European welfare states and are lower in developing countries, but broadly the trend is up because gov- ernments have taken on new functions. For one, they promote social welfare with a range of transfer payments to their citizens. This role grew in the twenti- eth century as many nations expanded their electorates. New voters included women and the less privileged, groups that voted to enlarge government assist- ance programs. Another source of government growth is expanded regulation. In the United States, for example, there is today practically no aspect of business that governments cannot and will not regulate if the occasion arises and popular support exists.

The second long-term trend is rising democratization. In 1900 no nation was a full democracy with multiparty elections and universal suffrage. The United States and Britain were close, but both lacked female suffrage, and the United States addi- tionally lacked black suffrage in practice. Yet by 1950 there were 22 democracies and by 2009 there were 89. 36 Figure 2.8 shows the dramatic rise—from 93 to 147—in the number of democratic and partially democratic regimes since 1975. Much of this rise came in the late 1980s and early 1990s after the breakup of the Soviet Union. When repressive socialist regimes no longer received external support from the Soviet bloc and the United States reduced its support for authoritarian regimes that were anticommunist, a wave of democratization swept over Southeast Asia, Latin America, and Africa.

However, a more fundamental cause of expanding democracy is the rise of postmaterialist values in countries that have undergone a socioeconomic rise. These values undermine hierarchical authority and create expectations for more political participation and autonomy. For business, the consequence of more openness to popular majorities is that governments increasingly respond to public demands for corporate social performance and these demands reflect postmaterialist values promoting human rights, the environment, aesthetics, and ethics.

democracy A form of government requiring three elements— popular sover- eignty, political liberty, and majority rule.

34 World Bank, World Development Indicators, table 4.10.

35 Census Bureau, “Federal Government-Receipts and Outlays: 1900–2003,” table HS-47 at www.census. gov/statab/hist/HS-47.pdf, accessed August 2010; and Census Bureau, Statistical Abstract of the United States: 2010, 129th ed. (Washington, DC: Census Bureau, 2009), table 457.

36 Figures are from Democracy’s Century: A Survey of Global Political Change in the 20th Century (Washington, DC: Freedom House, 2001), p. 2 and Figure 2.7; and Freedom House, Freedom in the World 2010: Erosion of Freedom Intensifies (Washington, DC: Freedom House, 2010), “Global Data, 1972–2009,” p. 6 at

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42 Chapter 2 The Dynamic Environment

The Legal Environment The legal environment consists of legislation, regulation, and litigation. Five enduring trends in this environment work to constrain business behavior.

First, laws and regulations steadily grow in number and complexity. As govern- ments become more active and more participatory they respond to citizens’ calls for restraining corporate power with new statutes and heightened regulatory activity.

Second, legal duties to protect the rights of stakeholders, such as employees, consumers, and the public, have expanded. These rights derive from the steady flow of laws and court decisions on, for example, discrimination, sexual harassment, advertising, antitrust, the environment, product liability, and intellectual property.

Third, globalization has increased the complexity of the legal environment by exposing corporations to international law and the laws of foreign nations. In addi- tion, advocacy groups promoting human rights, labor, and environmental causes push corporations to adopt so-called soft law , or guidelines for conduct based on emerging norms and standards in international codes, declarations, and conven- tions. These guidelines can exceed requirements in the laws of some nations.

Fourth, although requirements of ethical behavior and corporate social responsi- bility go beyond legal duty, they are continuously plucked from the voluntary realm and encoded into law. Actions that once elicited debate over the nature of corporate responsibility continuously move into regulatory regimes that reduce or eliminate managerial freedom. Until the early 1970s pollution control in the United States was largely a matter of corporate conscience. Now the Environmental Protection Agency, a corps of 17,000 regulators, including a staff of criminal investigators, enforces more than 1 million pages of laws, rules, and guideline documents that define, sometimes down to a few molecules, what managers can do.

Finally, the law is constantly evolving. Because of technological change, for example, corporations need to anticipate emerging causes of liability. In this re- spect, the old T. J. Hooper case is still good reading for corporate counsel. On a sunny day in March 1928 the tugboat T. J. Hooper hauled a coal barge out to sea. Two days

soft law Voluntarily adopted guide- lines for corpo- rate behavior derived from emerging norms and standards in international codes, declara- tions, and conventions.

FIGURE 2.8 The Rise of Democratic Regimes

Source: Freedom House. Data based on combined mea- sures for democracy and civil liberty.

1975 1985 1995 2005 2009



Partial democracies








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Chapter 2 The Dynamic Environment 43

later it hit stormy weather off New Jersey, and the barge sank with its load of coal. The owners of the cargo sued, claiming that the tug was unseaworthy because it had no receiving radio. Lacking a radio, the T. J. Hooper missed a weather broadcast that caused other ships to put into harbor before the gale hit. Although no law re- quired a radio and there was no industry custom of installing them, the eminent judge Learned Hand held that “there are precautions so imperative that even their universal disregard will not excuse their omission.” 37

The tug owners were found negligent and paid for the coal cargo because they had not adopted a cutting-edge technology. Moving ahead to the present, a paral- lel example is the existence of electrically charged table-saw blades that can detect contact with a human finger and stop rotation within thousandths of a second. No law or industry standard now requires manufacturers to use this technology, but its availability opens employers who do not use it to charges of negligence by workers who lose fingers and hands.

The Natural Environment Economic activity is a geophysical force with power to change the natural envi- ronment. Just as it has strained the ability of human institutions to adapt, so also has it sometimes overwhelmed the ability of ecosystems to cleanse and regenerate. Spectacular economic growth has come at a high cost to the planet. It has depleted mineral resources, reduced forest cover, killed species, released artificial mole- cules, and unbalanced the nitrogen and carbon cycles.

Two measures used by the World Wildlife Fund exhibit global trends for the overall burden of human activity on nature. The Living Planet Index , shown in Figure 2.9, combines in one measure thousands of population trends among terrestrial, freshwater, and marine vertebrate species. It fell 28 percent between 1970 and 2005. 38 This decline of biodiversity reflects deteriorating conditions in

37 In re the T. J. Hooper et al., 60 F.2d 737 (1932), at 740.

38 World Wide Fund for Nature, Living Planet Report 2008 (Gland, Switzerland: WWF International, 2008), table 2.

FIGURE 2.9 Measures of Human Impact on Nature

1970 200319901980

The Living Planet Index, 1970–2003 1.4 1.3 1.2 1.1

1 0.9

In d

ex (

19 70

= 1


0.8 0.7 0.6 0.5 0.4

1961 200319901970

One planet


The Ecological Footprint, 1961–2003 1.4 1.3 1.2 1.1

1 0.9

N u

m b

e r

o f P

la n

e ts

0.8 v

0.6 0.5

Source: From Living Planet Report 2006, World Wildlife Fund, Copyright © 2007 WWF. Some rights reserved.

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44 Chapter 2 The Dynamic Environment

the forests, grasslands, deserts, savannahs, and freshwater and marine ecosys- tems that provide habitat for the world’s species. A second indicator, the Eco- logical Footprint , also shown in Figure 2.9, measures human consumption of renewable natural resources. It is calculated as the total land area, in hectares, required to maintain worldwide human consumption of food, wood, fiber, energy, and water.

In the figure, the vertical axis shows the number of planets required to support ecological footprints of varying size. The horizontal line crosses at one planet, marking the earth’s current biological capacity to support life. The trend line shows that the human ecological footprint moved beyond the earth’s carrying capacity in the late 1980s and is now unsustainable. The overall human footprint is calculated to be 17.5 billion hectares, whereas the planet’s life-carrying capacity is estimated to be only 13.4 billion hectares. 39 The implication is that the extent of natural resource use encouraged by current forms of economic activity is unsustainable.

Attitudes about the human relationship with nature are now rapidly changing. When the twentieth century began, dominating and consuming nature was justi- fied by a variety of doctrines, not the least being capitalism, which values nature as a production input. At its end, thinking moved toward preservation of nature. Managers in the twenty-first century must adapt to this changed thinking. With growing frequency environmental criteria enter their decisions.

The Internal Environment Besides external environments, corporations also have internal environments that shape their actions. Figure 2.10 adds this internal environment to the dynamic environmental system developed throughout this chapter. The internal environ- ment consists of four groups: managers, owners or shareholders, employees, and boards of directors.

In the United States and other developed nations, the duties of these groups to one another are defined in bodies of laws and regulations. Each group has both separate and common objectives. Managers must harmonize them to achieve over- all company goals. The interplay of internal groups occurs in the atmosphere of a corporate culture, added as an element in Figure 2.10. These cultures, unique to each company, are bundles of assumptions, beliefs, and values that may be as sig- nificant in coordinating activity as formal policies and procedures.

Forces in external environments affect the power of these internal groups in com- plex ways. For example, growth of regulation has limited the power of managers over employees, who are entitled to a growing list of employment rights. On the other hand, technological change allows managers to globalize production of goods and services, exposing employees to competition with low-wage foreign labor mar- kets. In the United States, new financial regulations designed to protect sharehold- ers from dishonest managers have given boards of directors, which represent shareholders, more power and greater independence from top management. How- ever, there is also some erosion of shareholder power caused by the demands of ex- ternal groups for socially responsible actions that conflict with profit maximization.

39 A hectare is an area of 10,000 square meters, equivalent to 2.47 acres.

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Chapter 2 The Dynamic Environment 45


The environments of business, and the historical forces that shape them, have pro- found implications for managers. Figure 2.11 summarizes the chapter discussion by illustrating how these historical forces, forces in current environments, and forces in corporations form a dynamic system of mutual influence. The deep his- torical forces act to shape the six external environments, and both act to shape the internal environment. Simultaneously, the actions of companies and industries shape not only their external environments but also the deeper course of history.

Business is not simply a passive entity that reacts to historical and environmen- tal forces like a billiard ball pushed by the strike of a cue. On the contrary, although strongly constrained by its environment, business has a powerful capacity to shape society and change history in ways large and small.

For example, when Eastman Kodak wanted to display the speed of its fast film and Flashmatic shutter in 1940, it ran magazine ads showing pictures of “Kodak Moments” when people blew out candles on birthday cakes. The ads so popular- ized this charming rite that it became universal among Americans. 40 In contrast to











































FIGURE 2.10 The Internal Environment

40 James B. Twitchell, Lead Us Not into Temptation (New York: Columbia University Press, 1999), p. 26.

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FIGURE 2.11 The Dynamic Environment of Business



























































































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Chapter 2 The Dynamic Environment 47

such a slight cultural change, the story of the automobile illustrates how indus- tries can rearrange whole societies. No twentieth century industry created more intentional and unintentional change. It was a prime mover of the American econ- omy and once accounted directly or indirectly for one of every eight jobs. It en- couraged an expansive highway system, accelerated the decline of railroads, depleted oil reserves, created suburbs, fouled urban air, entrenched the idea that status was conferred by ownership of material objects, and changed patterns of courtship and crime. In the next chapter we will focus on how business power has shaped societies.

The American Fur Company The American Fur Company was a relentless mo- nopoly built in the climactic era of the fur trade. It was created in 1808 by John Jacob Astor, a striving German immigrant, in an environment so favorable that over vast North American territories it had more power than the fledgling American govern- ment. In its time, this company shaped the destiny of a young nation. It made Astor the richest American of his day. Yet by the 1830s its situation had so changed that it and the 300-year-old trade in furs collapsed.

ASTOR ARRIVES IN A YOUNG NATION In 1763 Astor was born to a butcher and his wife in the German village of Waldorf. In childhood he met hardship. The family was poor and often hungry, his mother died and a new step-mother was hostile. He spent much time alone but grew into a strong, diligent young man. Finding no joy in his father’s butchering work, at the age of 15 he left the village for London, working four years there to save money for an ocean voyage to the New World. In 1783, at the age of 20, with no education, little money, and speaking poor English, he set sail on a merchant ship. During the long voyage, a fur trader taught him how to appraise and handle skins. These lessons gave Astor knowledge he needed for an occupation. He would soon show himself an apt student.

At this time, the fur trade on the North American continent was almost 300 years old. It had begun early in the sixteenth century after Spanish and French explorers made contact with native forest

dwellers, and it soon included the British. The Euro- peans wanted beaver, martin, ermine, mink, otter, bear, deer, muskrat, wolf, raccoon, and other animal skins for fashionable hats and clothing. The Native Americans, who had not yet entered the age of metal, were eager to get even the simplest manufactured goods such as knives, mirrors, ornaments, and but- tons. This simple mutual advantage proved durable over time.

Indians were the fur industry’s production work- ers. Fur traders depended on them to trap animals. Indian women skinned and prepared the hides. Overhead costs for traders were low. Instead of col- lecting wages, Indians traded the pelts for goods worth a fraction of a fur’s ultimate value. Since furs were light, they could be transported economically by mules, barges, and ships to Eastern ports and thence to Europe. The fur companies’ profits were enormous.

Fur trading had transforming effects on society because it promoted settlement. Traders worked on the edges of Euro-American habitation. Over time, fur production in these frontier areas always declined. Populations of fur-bearing animals such as beaver, having slow breeding cycles, were steadily depleted. The reliability of Indian trappers fell as their tribal cultures buckled under the strains of new values and diseases. When produc- tivity in an area fell, fur traders pushed over the horizon. In their wake came settlers using fresh maps and trails. Farms and towns sprouted. Indians were killed or dislodged. This unsentimen- tal cycle of the fur trade, repeated over and over, generated waves of migration that settled much of the United States.

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48 Chapter 2 The Dynamic Environment

ASTOR ENTERS THE FUR BUSINESS Astor made his way to New York, then a city of 25,000, where he got a job selling bakery goods. He invested most of his $2-a-week pay in small trin- kets and in his spare time prowled the waterfront for Indians who might have a fur to trade. Within a year he picked up enough skins to take a ship back to London, where he established connections with fur-trading houses. This was a phenomenal achieve- ment for an immigrant lad of 21 who had been nearly penniless on his arrival in America, and it revealed Astor’s deadly serious and hard-driving personality.

Astor worked briefly with a fur dealer in New York City during which time he trekked into the for- ests of upstate New York to bargain for furs. He soon left his employer and by 1787 was working solely for himself. He demonstrated sharp negotiating skills in trading trinkets for furs and quickly built up an impressive business. One neighbor said:

Many times I have seen John Jacob Astor with his coat off, unpacking in a vacant yard near my residence a lot of furs he had bought dog- cheap off the Indians and beating them out, cleaning them, and repacking them in more elegant and salable form to be transported to England and Germany, where they would yield him 1,000 percent on the original costs. 1

Astor made great profits and expanded his busi- ness but, like other Americans, he was blocked from harvesting furs in the forests of the Northwest Terri- tory. The Northwest Territory was the huge unset- tled area between the Ohio River and the Mississippi River bounded on the north by the Great Lakes. After the Revolutionary War, Great Britain ceded this area to the United States but continued to main- tain forts and troops there because the American government was too weak to enforce its rights. British fur-trading companies exploited the area and incited Indians to attack American traders and set- tlers who dared enter.

This audacity pushed Congress near to declaring war. To avoid hostilities, England agreed to a treaty in 1794 that required removal of British troops and

gave both British and Americans trading rights in the Northwest Territory. 2 “Now,” said Astor on hearing this news, “I will make my fortune in the fur trade.” 3

But he was stunned when President George Washington proposed befriending the Indians by set- ting up government fur-trading posts to be run with benevolent policies. These posts would compete with Astor and other private traders. Congress approved the plan, which required that trade goods be sold at cost, prohibited the use of liquor, and ordered pay- ment of fair prices for furs.

The government trading posts infuriated Astor, who moved quickly to undercut them. He saturated the territory with his agents, instructing them to buy every fur they could get their hands on before com- petitors did. He bought trade goods in huge quanti- ties to lower the cost, and his agents paid for furs with these trinkets. And he allowed liquor to flow freely during trade negotiations, creating an advan- tage the government could not match.

Astor had great success with these tactics. The government lacked his nimbleness and commitment, and he outwitted other rivals. In less than 10 years he was the second-richest man in America (after only Stephen Girard, the shipping magnate and banker). Having accumulated deep resources, the Astor jug- gernaut turned toward the West.

THE LOUSIANA PURCHASE In 1803 the territory of the United States more than doubled with the Louisiana Purchase. President Thomas Jefferson agreed to purchase from France for $15 million approximately 800,000 square miles of land between the Mississippi River and the Rocky Mountains and running north from New Orleans to the 49th parallel, which is now the Canada–U.S. boundary. At the time, little was known about the area called the Louisiana Territory. No accurate or com- plete maps existed; even its exact boundaries were vague. But Louisiana was beautiful in its mystery.

Some geographers thought it was largely an arid desert. Others predicted a lush, fertile land. Rumors of geological wonders, horrific animals, and strange natives circulated, including the story of a tribe of

1 A “Gentleman of Schenectady,” quoted in John Upton Terrell, Furs by Astor (New York: Morrow, 1963), p. 55.

2 The treaty was negotiated for the United States by John Jay and is known as Jay’s Treaty. 3 Terrell, Furs by Astor, p. 93.

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Chapter 2 The Dynamic Environment 49

bow-hunting, man-hating female savages in which the archers had their right breasts removed to keep them from interfering with the bowstrings. 4

Jefferson himself had a clear vision of how to use the new territory. In his 1803 message to Congress, he proposed to relocate into Louisiana eastern tribes getting in the way of American settlers, and over the next 50 years this occurred many times. 5 He also ordered an Expedition of Discovery headed by Meriwether Lewis and William Clark to explore on foot the unknown territory.

A primary purpose of the Lewis and Clark expe- dition was to determine the suitability of Louisiana for the fur trade. The adventurers set out on a round- trip march between St. Louis and the Pacific Ocean, going where no white American had gone before, and on their return in 1806 reported a wondrous land “richer in beaver and otter than any country on earth.” 6 They also reported that most Indian tribes in the territory were friendly to Americans and the fur trade. These discoveries were not lost on fur traders, among them John Jacob Astor.

THE AMERICAN FUR COMPANY IS BORN The Lewis and Clark expedition was a catalyst for fur trading in the new territory. Beaver production in the Northwest Territory was already beginning to fall off. The North West Company, Astor’s main competi- tor, began to move down from Canada, intent on har- vesting the Louisiana Territory as rapidly as possible.

However, it would reckon with Astor, who wanted the prize himself. In his distant New York City study, Astor pored over maps of the fur-rich areas discovered by Lewis and Clark, hatching a vast and daring plan for a new company that would string trading posts over a 2,000-mile route.

In those days, state legislatures had exclusive power to create a company by issuing a charter that

listed the conditions of its existence. So he ap- proached the governor and legislature of New York seeking to charter a company to be known as the American Fur Company.

To sell the idea, he cloaked his mercenary scheme with a veil of patriotism. He argued that most of the furs taken from the Louisiana territory went to Canadians and British, thereby depriving America of trade revenue. His new company would drive the foreigners out. He would join with 10 or 12 other wealthy entrepreneurs to capitalize the new com- pany, which would then issue stock to others. The new company would enhance U.S. security by estab- lishing a strong presence of American citizens over unpopulated areas. And finally, Astor promised that his company would deal honestly with the Indians and drive out smaller, irresponsible traders. The legislators of New York, responding more to Astor’s open pocketbook than to the credibility of his argu- ments, passed a charter setting up the American Fur Company. Soon President Jefferson wrote a letter to Astor giving his blessing to the new company also.

Astor proceeded to take on four partners and es- tablish a board of directors as the charter required. However, he retained 99.9 percent of the stock, elected himself president, and subsequently declared dividends whenever he wanted to compensate him- self. The partnership was a fiction; Astor never in- tended to share either the proceeds of the company or any portion of the fur trade that he could control.

In 1810 he made his first move. His ship, the Tonquin, sailed to the mouth of the Columbia River on the Pacific Coast and set up a trading post named Astoria. At this time, Britain and the United States contested the wild area known as Oregon territory, consisting of present-day Oregon and Washington. Astor got diplomatic support for his trading post by arguing that its presence established an American claim to the territory. Secretly, however, he hoped to form a new nation called Astoria and make himself king.

Meanwhile, he would make Astoria one end of a  vise that would squeeze competitors out of the new  fur areas. Furs taken in the West would come to Astoria and then be shipped to China, which was a major fur market, or to New York. By this time, Astor owned a fleet of ships with which to do this. The other end of the vise would be St. Louis. Furs from Astor’s planned string of trading posts on the eastern slopes of the Rocky Mountains would come down

4 Ben Gilbert, The Trailblazers (New York: Time-Life Books, 1973), p. 18.

5 For a list of 24 relocations, see Cardinal Goodwin, The Trans- Mississippi West (1803–1853) (New York: Appleton, 1922), plate following p. 88.

6 Quoted in David J. Wishart, The Fur Trade of the American West (1807–1840): A Geographical Synthesis (Lincoln: University of Nebraska Press, 1979), p. 19, citing the original journals of the trip.

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50 Chapter 2 The Dynamic Environment

the Missouri River system to St. Louis and from there go overland to New York or on to the port of New Orleans to be shipped to Europe. It was a megaloma- niac scheme, and no one but Astor had both the nerve and the resources even to attempt it. But it was too grandiose. Only part of it was to work, and the rest worked only until the fur trade fell apart.

THE ROAD TO MONOPOLY In 1813 Astor’s plan suffered a great reversal when he was forced to sell Astoria to the British during the War of 1812. He sold out at a fraction of its value because British soldiers were in a position to seize it as a war prize. Without Astoria as a foothold in the Oregon territory, he was unable to compete with British and Canadian fur companies. And 61 of Astor’s employees died pursuing the settlement, along with hundreds of natives they came in conflict with. 7 Unbowed, Astor later commissioned Washington Irving, the best-selling author of the day, to write a book about the intrepid adventurers and himself as the great mind behind them. 8

Despite the loss of Astoria, Astor nonetheless pre- dominated. In 1816 his lobbying succeeded in getting Congress to pass a law forbidding foreigners from trading furs in U.S. territories. This prevented Canadian and British companies from operating in the Northwest Territory, and Astor immediately bought out their interests, giving him a monopoly in furs east of the Missouri River. Blocked from the Pacific Coast trade by the British presence, he turned his attention to the upper-Missouri fur trade.

Astor bided his time as other fur companies pio- neered trading in the northern Great Plains and then, after discovery of rich valleys of beaver, in the Rocky Mountains. By 1822 Astor had established a presence selling trade goods and buying furs in St. Louis, but he waited as other companies sent expensive expedi- tions of traders and mountain men up the Missouri, absorbing heavy losses of men and money. These pioneering companies found tremendous reserves of beaver in Rocky Mountain valleys, mapped new routes, and discovered advantageous locations for trading posts.

Then Astor crushed the competition. In 1826 he merged with Bernard Pratte & Company, an estab- lished firm, using it as an agent. He bought out and liquidated another competitor, Stone, Bostwick & Company. In 1827 he broke the Columbia Fur Company by building his own trading posts next to every one of theirs, engaging in cutthroat price com- petition for furs, and plying Indians liberally with whiskey. His trappers shadowed its trapping parties to learn where the beaver were, then muscled in. Using similar tactics, he bankrupted Menard & Valle. Now, according to Astor’s biographer Terrell:

Competition on the Missouri River was all but nonexistent. What remained was inconsequen- tial, and might have been likened to a terrier yapping at a bear. The bear lumbered on, ignor- ing the noise until it became aggravating. Then with the sudden swipe of a paw, the yapping was forever stilled. 9

Astor made astonishing profits. He would buy, for example, a 10-pound keg of gunpowder for $2, or 20  cents a pound, in London and transport it to his trading posts using his ships. He paid himself a

7 Axel Madsen, John Jacob Astor: America’s First Multimil- lionaire (New York: John Wiley & Sons, 2001), p. 163.

8 Astoria; or, Enterprise beyond the Rocky Mountains (New York: The Century Co., 1909); originally published in 1839.

Portrait of John Jacob Astor. Source: © Getty Images.

9 Terrell, Furs by Astor, p. 391.

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Chapter 2 The Dynamic Environment 51

2 percent commission for buying the trade goods, or $0.04 cents on the keg of gunpowder.

He paid himself a freight charge for carrying the gunpowder on his ship to New Orleans. From there the keg was transported up the Missouri using the inexpensive labor of his hired trappers and traders. The gunpowder was valued at $4 a pound to the Indians, who were not allowed to pay money for it but got it only by exchanging furs or on credit. In the 1820s Astor charged one 2-pound beaver skin for each pound of gunpowder, getting 10 skins weighing 20 pounds for the keg of gunpowder. These skins were transported back to London, where they were worth $7 a pound or $140. From the $140 Astor de- ducted a 5 percent commission, or $7, for brokering the sale of the furs. Astor also subtracted 25 percent, or $35 from the $140, for the estimated costs of trans- portation and wages.

All told, this left a net profit for the American Fur Company of $97.96, or 4,900 percent on the original $2 investment. 10 And Astor owned over 99 percent of the company’s shares. This profitable arithmetic was repeated on a wide range of trade goods.

The value of trade goods lay not in their utility but in Indian beliefs. Indians coveted them so much that they considered whites foolish to exchange even the smallest trinkets for beaver skins that were abun- dant in the forests. The idea of material acquisition beyond basic needs was foreign to Indian cultures. The Arikaras, for example, believed a person who had more possessions than needed to survive ought to give the excess to others. Offering money to Indi- ans did not motivate them to trap and process furs; they were indifferent to accumulating currency.

Trade goods such as rifles, knives, clothing, blan- kets, beads, and trinkets were useful, but native- made equivalents were often just as good. Trade goods, however, had mystical significance beyond their utility or monetary value. Their allure lay in magical, spiritual qualities.

Indians believed the future could be seen by look- ing in a reflection of the self. Because manufactured mirrors gave a clearer reflection than water they were a wondrous advance in prophecy. They thought guns had supernatural properties, because they created thunder, an event associated with the spirit world.

They thought pots and kettles were alive, because they rang or sang out when hit. Thus, Indians found in trade goods supernatural qualities that were lost on Europeans. 11

Astor encouraged Indians to take trade goods on credit. As a result, some tribes—the Winnebagos, Sacs, Foxes, Cherokees, Chickasaws, and Sioux— were hopelessly mired in debt, owing the American Fur Company as much as $50,000 each. Since trin- kets had sky-high markups, Astor could not lose much even if tribal debts grew, but indebtedness forced tribes to trade furs with him rather than with competitors.

His traders and trappers fared no better. He marked up trade goods heavily before selling them to traders. Often, traders were in debt to Astor or had mortgaged their trading posts to him and were forced to mark up goods heavily themselves before selling them to Indians and trappers.

Trappers employed by the American Fur Com- pany were ruthlessly exploited. They worked un- limited hours in hazardous conditions and extreme weather, but when Astor achieved dominance in an  area, he cut their salaries from $100 a year to $250 every three years. They had to buy trade goods and staples at markups that were higher than those charged Indians to get furs. Whiskey costing 30 cents a gallon in St. Louis was diluted with water and sold to them at $3 a pint. Coffee and sugar cost- ing 10 cents a pound was sold for $2 at trading posts up the Missouri. Clothing was marked up 300 to 400 percent.

Astor had contrived a lucrative, pitiless system that amplified his fortune by diminishing those caught in its workings. Though never venturing out West, he was in touch, working long hours, his shrewd mind obsessed with the most minor details and with squeezing out the smallest unnecessary ex- penses. In 1831 his son William estimated American Fur Company revenues of “not less than $500,000” yearly. 12 Astor was by now the richest man in America. He began to buy real estate in and around New York City.

10 These calculations are based on figures in Terrell, Furs by Astor, pp. 397–98.

11 Richard White, “Expansion and Exodus,” in Betty Ballantine and Ian Ballantine, eds., The Native Americans: An Illustrated History (Atlanta: Turner, 1993), chap. 14.

12 Gustavus Myers, History of the Great American Fortunes (New York: Modern Library, 1936), p. 102; originally pub- lished in 1909.

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52 Chapter 2 The Dynamic Environment

ASTOR RACES ON In the early 1830s it seemed nothing could slow Astor. Men who hated the American Fur Company started competing firms, but few lasted. Astor de- stroyed them by underbidding for furs and debauch- ing the Indians with alcohol.

In 1832 Congress prohibited bringing alcohol into Indian territories, but the law was mostly ignored. Astor never favored using alcohol. It raised costs. However, many competitors saw inebriation as their only hope of seducing Indians with furs away from him. Astor, obsessed with defeating his rivals, let the spirits flow despite sad consequences.

Alcohol was unknown in native cultures; Indians developed a craving for it only after European trad- ers introduced intoxication into fur price negotia- tions. Some thought that spirits occupied their bodies when they drank. Among Indians who took to whis- key, a new desire was created, a desire that motivated them to produce furs. A few tribes, notably the Pawnee, Crow, and Arikara, never imbibed. Most did, however, and some were so debilitated that their fur production fell and traders moved on.

Astor smuggled liquor as needed past Indian agents. He ordered construction of a still at the confluence of the Yellowstone and Missouri rivers, producing enough spirits to keep tribes in several states in a constant drunken state. Congress could not enforce its will be- cause the federal government had almost no presence in vast areas of the West. Statutes were meaningless where no authorities stood to enforce them. In Indian country, the only law was the will of leaders of trading companies and brigades of trappers who wore self- designed, military-style uniforms and could rob, cheat, and murder both Indians and whites with impunity. An 1831 report to Lewis Cass, secretary of War, stated:

The traders that occupy the largest and most important space in the Indian country are the agents and engagees of the American Fur Trade Company. They entertain, as I know to be the fact, no sort of respect for our citizens, agents, officers of the Government, or its laws or general policy. 13

Government officials such as Cass were disin- clined to thwart Astor in any case since they were

frequently in his pay. Cass, who was the federal offi- cial in charge of enforcing the prohibition law, was paid $35,000 by the American Fur Company between 1817 and 1834. 14 At one time, Astor even advanced a personal loan of $5,000 to President James Monroe. Over the years, the Astor lobby achieved most of its objectives in Washington, D.C., and state capitals, in- cluding heavy tariffs on imported furs and abolition of the government fur-trading posts so beloved to Washington and Jefferson. Under these circum- stances, it is not surprising that the government failed to regulate the fur trade.

In 1831 Astor introduced a new technological innovation, the steamboat Yellowstone, which could travel 50 to 100 miles a day up the Missouri, trans- porting supplies to his posts. Keelboats used by com- petitors made only 20 miles upriver on a good day and exposed men pulling them with ropes from the bank to hostile Indian fire. Upriver Indians were awestruck by the Yellowstone and traveled hundreds of miles to see the spirit that walked on water. Some tribes refused to trade with the Hudson Bay Com- pany any longer, believing that because of the Yellow- stone it could no longer compete with the American Fur Company.

THE ENVIRONMENT OF THE FUR TRADE CHANGES Although the American Fur Company was ascend- ant, unfavorable trends were building that would bring it down. Demand for beaver was falling as the fashion trends that made every European and American gentleman want a beaver hat waned. Silk hats became the new rage. Also, new ways of felting hats without using fibrous underhair from beaver pelts had developed, and nutria pelts from South America were entering the market.

These were not the only problems. In 1832 trade came to a near standstill during a worldwide cholera epidemic because many people thought the disease was spread on transported furs. Beaver populations were depleted by overtrapping. The fur companies made no conservation efforts; the incentive was rather to trap all beaver in an area, leaving none for competitors. In the 1820s the Hudson Bay Company tried to prevent Astor from moving into Oregon

13 Report of Andrew S. Hughes, quoted in Myers, History of the Great American Fortunes, p. 99. 14 Myers, History of the Great American Fortunes, p. 103.

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territory by exterminating beaver along a band of terrain to create a “fur desert” that would be unprof- itable for Astor’s trappers to cross.

Losses of human life rose as mountain men entered the shrinking areas where beaver were still  abundant, leaving behind somewhat friendly Indians such as the Snake and Crow to encounter more hostile tribes such as the Blackfeet, who poi- soned their arrows with rattlesnake venom and con- ducted open war against trappers. 15 One study of 446 mountain men actively trapping between 1805 and 1845 found that 182, or 41 percent, were killed in the occupation. 16

Astor knew that the fur industry was doomed. Beaver pelts that had fetched $6 a pound in 1830 brought only $3.50 a pound by 1833. In that year he liquidated all his fur-trading interests. He spent the rest of his life accumulating more money in New York real estate. For a time, the American Fur Com- pany carried on under new owners, but the industry environment continued to worsen. In 1837 the firm’s steamboat St. Peters carried smallpox up the Missouri, killing more than 17,000 natives, and an agent observed that “our most profitable Indians have died.” 17 By 1840 the firm had withdrawn from the Rocky Moun- tains and focused on buffalo robes, which remained profitable for some time.

ASTOR’S LAST YEARS Astor lived on in New York, wringing immense profits from rents and leases as the city grew around his real estate holdings. By 1847 he had built a for- tune of $20 million that towered above any other of that day. In 1998 this sum was estimated to be the equivalent of $78 billion, at the time more than the wealth of Microsoft’s Bill Gates. 18 In his last years he was weak and frail and exercised by having

attendants toss him up and down in a blanket. Yet despite his physical deterioration, he remained focused on getting every last penny from his tenants, poring over the rents for long hours behind the barred windows of his office.

Astor gave little to charity. An early biographer found “no trustworthy evidence of a single in- stance” in which he bestowed even a small sum of charity beyond his family and close friends and concluded:

To get all that he could and to keep nearly all that he got—those were the laws of his being. He had a vast genius for making money, and that was all that he had. 19

Social critics attacked him for his stinginess. When he died in 1848, his major gift to society was $460,000 in his will for building an Astor Library. In addition, he left $50,000 to the town of Waldorf, Germany, his birthplace; $30,000 for the German Society of New York; and $30,000 to the Home for Aged Ladies in New York City. This totaled, in the words of one com- mentator, less than “the proceeds of one year’s pil- lage of the Indians.” 20 The rest of his wealth went to his heirs. As to how America felt about him, one obit- uary minced no words.

No doubt he had many fine, noble qualities, but avarice seemed to hold an all-conquering sway. . . . [W]hat a vast amount of good he might have rendered the world! But how re- verse is the case—he dies and no one mourns! His soul was eaten up with avarice. Charity and benevolence found not a congenial home in his cold and frigid bosom! 21

THE LEGACY OF THE FUR TRADE For 300 years the fur trade shaped the economic, po- litical, and cultural life of both native and European inhabitants of the raw North American continent.

Its climactic era has often been depicted as a pro- gressive and romantic period when trading posts

15 Trappers also attacked Blackfeet without provocation. See Osborne Russell, Journal of a Trapper (Lincoln: University of Nebraska Press, 1955), pp. 52, 86.

16 William H. Goetzmann, “The Mountain Man as Jacksonian Man,” American Quarterly, Fall 1963, p. 409.

17 Jacob Halsey, a clerk at Fort Pierre, quoted in Wishart, The Fur Trade of the American West, p. 68.

18 This is the estimate of Michael Klepper and Robert Gunther in “The American Heritage 40,” American Heritage, October 1998, p. 56.

19 James Parton, Life of John Jacob Astor (New York: The American News Company, 1865), pp. 72 and 52.

20 Myers, History of the Great American Fortunes, p. 149.

21 “John Jacob Astor,” Appleton’s Journal of Literature, Science and Art, June 1, 1848, p. 116.

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represented “civilization which was slowly mastering the opposition of nature and barbarism.” 22 According to historian Dan Elbert Clark:

The fur traders, with all their faults and short- comings, were the pathfinders of civilization. They marked the trails that were followed by settlers. They built trading posts where later appeared thriving towns and cities. They knew the Indians better than any other class of white men who came among them. 23

The American Fur Company and its competitors greatly advanced geographical knowledge and blazed trails. The fur industry reinforced central American values such as rugged individualism, the frontier spirit, and optimism about the inevitability of progress. Yet there is also a dark side to the story. Traders undermined Indian cultures by introducing new economic motivations. Tribal societies were de- stroyed by alcohol, smallpox, and venereal disease. “The fur trade,” according to Professor David J. Wishart of the University of Nebraska, “was the van- guard of a massive wave of Euro-American colonisa- tion, which brought into contact two sets of cultures with disparate and irreconcilable ways of life.” 24

The industry also left extensive ecological damage in its wake. It slaughtered animal populations and denuded riverside forest areas to get steamboat fuel. Astor’s mentality of pillage set a destructive stand- ard. Argues Wishart: “The attitude of rapacious, short-term exploitation which was imprinted during the fur trade persisted after 1840 as the focus shifted from furs to minerals, timber, land, and water.” 25

The American Fur Company, now largely forgot- ten, was the main actor in a global industry with enormous geopolitical power. The firm’s operation was like a test-tube experiment on the social conse- quences of raw, unrestrained capitalism. It would be many years before the American nation gave thought to the lessons.

Questions 1. How would you evaluate Astor in terms of his

motive, his managerial ability, and his ethics? What lesson does his career teach about the rela- tionship between virtue and success?

2. How did the environment of the American Fur Company change in the 1830s? What deep histori- cal forces are implicated in these changes?

3. What were the impacts of the fur trade on society in major dimensions of the business environment, that is, economic, cultural, technological, natural, governmental, legal, and internal?

4. Who were the most important stakeholders of the nineteenth century fur industry? Were they treated responsibly by the standards of the day? By the standards of today?

5. On balance, is the legacy of the American Fur Company and of the fur trade itself a positive legacy? Or is the impact predominantly negative?

6. Does the story of the American Fur Company hint at how and why capitalism has changed and has been changed over the years?

7. Do one or more models of the business– government–society relationship discussed in Chapter 1 apply to the historical era set forth in this case? Which model or models have explana- tory power and why?

22 Arthur D. Howden Smith, John Jacob Astor: Landlord of New York (Philadelphia: Lippincott, 1929), p. 131.

23 Dan Elbert Clark, The West in American History (New York: Thomas Y. Crowell, 1937), p. 441.

24 Wishart, The Fur Trade of the American West, p. 215.

25 Ibid., p. 212.

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Chapter Three

Business Power James B. Duke and the American Tobacco Company

On December 23, 1856, cries of new life swelled from a North Carolina farmhouse, their source a baby boy named James Buchanan Duke. The lad would have far more impact on the world than the failed president his name honored.

Soon, the Civil War displaced the Duke family from its land. On returning home in 1865 little James’s father built a small factory to make a brand of chewing tobacco named Pro Bono Publico (a Latin phrase meaning “for the public good”). James helped. He was a precocious, energetic boy, diligent, gifted at sales and, at the age of 14, an overseer of 20 workers.

By his late teens, James had lost interest in attending college, his love of the busi- ness being so great. He had visions of grandeur for the little factory, but the presence of a rival firm, the Bull Durham Co., thwarted them. Its chewing tobacco was so dominant that head-on competition seemed hopeless. Taking a major gamble, he committed the company to a then-novel product—the cigarette. This was a venture- some move, because at the time few people smoked them. Most tobacco users were rural men who associated cigarettes with degenerate dudes and dandies in big cities.

Nonetheless, in 1881 Duke brought 10 Russian immigrant cigarette rollers to his North Carolina factory and set them to work. Each made about 2,000 per day. At first there was no demand. Tobacco shops refused to order his Duke of Durham brand since customers never asked for them. But Duke was a merchandising genius. In Atlanta, he took out a full-page newspaper ad of a famous actress holding Duke cigarettes in her outstretched hand. This use of a woman to advertise cigarettes created a sensation and, along with it, demand. In St. Louis, Duke confronted extreme prejudice against cigarettes. Tobacco shop proprietors simply would not place orders. He had his agents hire a young, redheaded widow to call on the tobacconists, and she got 19 orders on her first day.

By this time a Virginia engineer, James Bonsack, had invented a machine capable of rolling 200 cigarettes per minute. He offered it first to the largest tobacco compa- nies, but they turned him down, believing that smokers would reject newfangled, machine-rolled cigarettes. Duke saw the significance of the technology and jumped at it. 1 In 1883 he negotiated an exclusive agreement to operate the device, and his

1 Patrick G. Porter, “Origins of the American Tobacco Company,” Business History Review, Spring 1969, pp. 68–69.

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competitors never recovered. With the new Bonsack machines, Duke simultaneously cut manufacturing costs from $0.80 per thousand to $0.30 and multiplied factory production by many times. 2

To find new markets for this swollen output, Duke next went to New York City, where he rented a loft and set up a small cigarette factory. Then he moved to create demand. He was tireless, working 12 hours a day in the factory, then making the rounds of tobacco shops at night. He gave secret rebates and cash payments to friendly dealers. He hired people to visit tobacco shops and demand his new machine-rolled Cameo and Cross Cut brands. Immigrants were welcomed with free samples as they emerged from the New York Immigration Station to set foot in America for the first time. Ingeniously, he put numbered cards with glamour photos of actresses in his cigarette packs, encouraging men to complete a collection. Late at night he haunted the streets, picking up crumpled cigarette packs from sidewalks and trash cans, creating a crude sales count.

Overseas, Duke’s minions were also at work. One great conquest was China. At the time a few Chinese, mostly older men, smoked a bitter native tobacco in pipes. Cigarettes were unknown. Duke sent experts to Shantung Province with bright leaf

Duke lured men to try his new cigarette brands by putting picture cards in packs. The first cards were stage actresses in poses that were provocative for that day. Later card series included Indian chiefs, perilous occupations, ocean and river steamers, coins, musical instruments, flags, fish, ships, and prize fighters. Source: Tobacco Advertis- ing Collection—Database #D0047, D0059. Emergence of Advertising On-Line Project, John W. Hartman Center for Sales, Ad- vertising & Marketing History. Duke University Rare Book, Manuscript, and Special Collections Library. digitalcollections/eaa/

2 John K. Winkler, Tobacco Tycoon: The Story of James Buchanan Duke (New York: Random House, 1942), p. 56.

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from North Carolina to cultivate a milder tobacco. His sales force hired “teachers” to walk village streets showing curious Chinese how to light and hold cigarettes. He installed Bonsak machines in four new manufacturing plants that soon ran 24 hours a day. And he unleashed on the Chinese a full range of promotional activities. At one time his cigarette packs contained pictures of seminude American actresses, which were a big hit with Chinese men. In this way, Duke turned China into a nation of smokers.

Back home his tactics wore down competitors. He carefully observed John D. Rockefeller’s conquest of the oil industry and saw that Rockefeller’s methods could be applied to the tobacco industry. In 1884, at the age of 26, he engineered a combina- tion of his firm and other large firms into a holding company known as the American Tobacco trust. As president, Duke built the trust into a monopoly that controlled 98 percent of the domestic cigarette market by 1892, a year in which 2.9 billion cigarettes were sold. 3 Not content with domination alone, he worked tirelessly to ex- pand the tobacco market. By 1903, more than 10 billion cigarettes were sold in the United States. 4 Over two decades his combination ruthlessly swallowed or bankrupted 250 firms until it dominated the cigar, snuff, and smoking tobacco markets too.

Duke used a simple method to strangle competitors. Instead of selling its output at wholesale prices, Duke’s company “consigned” its products to dealers. The dealers had to pay full retail price for tobacco goods sent to them “on consignment” and do so within 10 days of receipt. Three months later, the company paid the dealer a “commission,” which was the dealer’s profit. Dealers who sold competitors’ brands were not eligible to receive this “commission,” so they could not make a profit on brands the vast majority of their customers wanted. Duke enforced the scheme using detectives to spy on dealers. Many dealers disliked this arrogant, coercive system, but they had to play along or wither away.

Duke’s monopoly lasted until 1911, when the Supreme Court ordered it broken up. 5 Duke himself figured out how to divide the giant firm into four independent companies: Liggett & Myers, P. Lorillard, R. J. Reynolds, and a new American Tobacco Company. After the breakup he retired from the tobacco industry to start an electric utility, Duke Power & Light. He also gave money to a small North Carolina college, which became Duke University. He died of complications from pernicious anemia in 1925.

Duke’s career illustrates the power of commerce to shape society. He made the cigarette an acceptable consumer product and spread it around the world. His monopoly destroyed rivals and defined the structure of the tobacco industry. His bribes to legislators blocked antismoking laws and checked the early efforts of antitobacco leagues to publicize health hazards. And, owing largely to Duke’s ingenuity, a surging tobacco trade revived the crippled post-Civil War Southern economy. Eventually, he ran into a hard check on power when the Supreme Court dismantled his colossus, but his work endures in the roll call of smokers across 120 years.

3 “Iron Heel of Monopoly,” The New York Times, December 28, 1892, p. 10.

4 “The Caesar of Tobacco,” The Wall Street Journal, June 27, 1903, p. 6.

5 United States v. American Tobacco Company, 221 U.S. 106 (1911).

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Business has tremendous power to change society, and the extent of this power is underappreciated. Companies in ascending industries change societies by altering all three of their primary elements—ideas, institutions, and material things. This effect is visible in the stories of dominant companies such as the American Tobacco Company, the American Fur Company, and the Standard Oil Trust. The cumulative power of all business is a massive, irrepressible shaping force. In this chapter we explain the underlying dynamics of this power to change society. We then discuss its limits.


Power is the force or strength to act or to compel another entity to act. In human society it is used to organize and control people and materials to achieve individ- ual or collective goals. It exists on a wide spectrum ranging from coercion at one extreme to weak influence at the other. Its use in human society creates change. Although power is sometimes exerted to prevent change, such resistance is itself a force that alters history. The many sources of power include wealth, position, knowledge, law, arms, status, and charisma. Power is unevenly distributed, and all societies have mechanisms to control and channel it for wide or narrow benefit. These mechanisms, which are imperfect, include governments, laws, police, cul- tural values, and public opinion. Also, multiple, competing formations of power may check and balance each other.

Business power is the force behind an act by a company, industry, or sector. The greater this force, the more the action creates change or influences the actions of other entities in society. Its basic origin is a grant of authority from society to con- vert resources efficiently into needed goods and services. In return for doing this, society gives corporations the authority to take necessary actions and permits a profit. This agreement derives from the social contract.

The social contract legitimizes business power by giving it a moral basis. Legiti- macy is the rightful use of power. The power of giant corporations is legitimate when it is exercised in keeping with the agreed-upon contract. The philosopher John Locke wrote that for governments the opposite of legitimacy is tyranny, defined as “the exercise of power beyond right.” 6 Corporations breach the social contract, exercising “power beyond right,” when they violate social values, endan- ger the public, or act illegally.

Business power is legitimate when it is used for the common good. The grounds of legitimacy vary between societies and over time. Child labor, once widespread in the United States, is no longer permitted, but it exists in other nations. As we will see in subsequent chapters, the definition of the common good that business must serve has expanded throughout American history and is now expanding globally.

power The force or strength to act or to compel another entity to act.

business power The force behind an act by a company, industry, or sector.

legitimacy The rightful use of power. Its opposite is tyranny, or the exercise of power beyond right.

6 John Locke, The Second Treatise of Government (New York: Bobbs-Merrill, 1952), p. 112; originally published in 1690.

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Business power, like any form of social power, is intangible, its exercise not subject to direct or exact calibrations. Having no physical state to be observed, it is known to be great or small solely by its effects on the world. In this respect, corporate ac- tions have an impact on society at two levels, and on each level they create change.

On the surface level, business power is the direct cause of visible, immediate changes, both great and small. Corporations expand and contract, hire and fire; they make and sell products. On a deep level, corporate power shapes society over time through the aggregate changes of industrial growth. At this level we en- counter an intangible realm of social networks, time, and physical space, a realm crossed by complex chains of cause and effect that converge and interact, shaping and reshaping society. Here the workings of corporate power are unplanned, un- predictable, indirect, and irregular, but they are constant and far more significant. Corporate power “is something more than men,” wrote John Steinbeck. “It’s the monster. Men made it, but they can’t control it.” 7 This is a poetic but accurate de- scription of business power at a deep level.

On both the surface and deep levels, business power is exercised in spheres corresponding to the seven business environments set forth in Chapter 2.

• Economic power is the ability of the corporation to infl uence events, activities, and people by virtue of control over resources, particularly property. At the sur- face level, the operation of a corporation may immediately and visibly affect its stakeholders, for example, by building or closing a factory. At a deeper level, the accumulating impact of corporate economic activity has sweeping effects. For example, over many years corporations have created enough wealth to raise living standards dramatically in industrialized nations.

• Technological power is the ability to infl uence the direction, rate, characteris- tics, and consequences of physical innovations as they develop. On a surface level, in 1914, assembly lines run by new electric motors allowed Henry Ford to introduce transportation based on the internal combustion engine. Using this method, he turned an expensive luxury of the rich into a mass consumer prod- uct. But at a deeper level, as the auto took hold in American society it created unanticipated consequences. One juvenile court judge in the 1920s called the automobile a “house of prostitution on wheels,” something that the puritanical Henry Ford doubtless never intended to create. 8

• Political power is the ability to infl uence governments. On the surface, corpo- rations give money to candidates and lobby legislatures. On a deeper level, around the world industrialization engenders values that radiate freedom and erode authoritarian regimes.

• Legal power is the ability to shape the laws of society. On the surface, big corpo- rations have formidable legal resources that intimidate opponents. On a deeper

7 The Grapes of Wrath (New York: Viking Press, 1939), p. 45.

8 Frederick Lewis Allen, Only Yesterday: An Informal History of the 1920s (New York: Harper & Brothers, 1931), p. 100.

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level, the laws of the United States—including constitutional, civil, and criminal laws—have been shaped by the consequences of industrial activity.

• Cultural power is the ability to infl uence cultural values, habits, and institutions such as the family. John Wanamaker, founder of a department store chain and a master of advertising, started Mother’s Day in the early 1900s. He ran full-page ads in the Philadelphia Inquirer about a woman mourning for her mother, creating the sentiment that gratitude for mothers should be expressed by a gift on a special

American Landscape, a 1930 oil painting, depicts Ford Motor Company’s mighty River Rouge plant, which took in raw materials such as sand and iron ore at one end and turned out finished autos at the other. In its day, the plant was regarded as a wonder and people traveled from around the world to see it. Here artist Charles Sheeler evokes the power of business to change and shape society. On the surface, this vista seems to beautify and ennoble the architecture of production, making it seem almost pastoral. Yet on a deeper level the painting provokes anxiety. Factory buildings run nature off the scene, dominating a landscape that is now, but for the sky, entirely artificial. A tiny human figure in the middle ground is overwhelmed and marginalized by the massive complex; its movement limited and regimented by the surrounding industrial structure. Here, then, art reveals emotions and insights about business power. Other Sheeler paintings and photographs are open to the same interpretation. He never revealed his intentions, leaving art critics to debate whether he was, in fact, sanguine or dispirited about how business power was shaping the “American landscape.” Source: Digital Image © The Museum of Modern Art/Licensed by SCALA/Art Resource, NY.

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day. 9 At a deeper level, the cumulative impact of ads has altered American society by reinforcing values selectively, for example, materialism over asceticism, indi- vidualism over community, or personal appearance over inner character.

• Environmental power is the impact of a company on nature. On the surface, a power plant may pollute the air; on a deeper level, since the seventeenth cen- tury, emission of gases in the burning of wood, coal, and oil to power industry has altered the chemistry of earth’s atmosphere. One study found that since 1882 the Standard Oil Trust and its successor companies have contributed be- tween 4.7 and 5.2 percent of worldwide carbon dioxide emissions. 10

• Power over individuals is exercised over employees, managers, stockholders, consumers, and citizens. On the surface, a corporation may determine the work life and buying habits of individuals. At a deeper level, industrialism sets the pattern of daily life. People are regimented, living by clocks, moving in routes fi xed by the model of an industrial city with its streets and sidewalks. Their occupation determines their status and fortune.

Activity in the economic sphere is the primary force for change. From this, change radiates into other spheres. The story of the railroad industry in the United States illustrates how an expanding industry with a radical new technology can change its environments.


When small railroads sprang up in the 1820s, most passengers and freight moved by horse and over canals. The railroad was a vastly superior conveyance and was bound to revolutionize transportation. Tracks cost less to build than canals and did not freeze in winter. Routes could be more direct. For the first time in history, people and cargo traveled overland faster than the speed of a horse. The trip from New York to Chicago was reduced from three weeks to just three days. And the cost of moving goods and passengers was less; in a day a train could go back and forth many times over the distance that a canal boat or wagon could traverse once.

The initial boom in railroading came at midcentury. In 1850 trains ran on only 9,021 miles of track, but by 1860 30,626 miles had been laid. During that decade, 30 railroad companies completed route systems, which had significant consequences for the financial system. Tracks were expensive, and each of these enterprises was a giant for its day. Many needed $10 million to $35 million in capital, and the smallest at least $2 million. Companies in other industries did not approach this size; only a handful of textile mills and steel plants required capitalization of more than $1 million. 11

9 Richard Wolkomir and Joyce Wolkomir, “You Are What You Buy,” Smithsonian, May 2000, p. 107.

10 Friends of the Earth International, Exxon’s Climate Footprint (London: FOEI, January 2004), p. 5. See also Richard Heede, Exxon Mobil Corporation Emissions Inventory: 1882–2002 (London: Friends of the Earth Trust Ltd., December 17, 2003).

11 Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Belknap Press, 1977), pp. 83, 86, and 90.

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The call for this much money transformed capital markets. The only place such huge sums could be raised was in large Northeastern cities. Since interest rates were a little higher in Boston at the time, New York became the center of financial activity and has remained so to this day. Railroads sold bonds and of- fered stocks to raise capital, and a new investment banking industry was cre- ated. The New York Stock Exchange went from a sleepy place, where only a few hundred shares might change hands each week, to a roaring market. Speculative techniques such as margin trading, short-selling, and options trading appeared for the first time. Later, the financial mechanisms inspired by railroad construc- tion were in place when other industries needed more capital to grow. This changed American history by accelerating the industrial transformation of the late 1800s. It also put New York bankers such as J. P. Morgan in a position to control access to capital.

At first the railroads ran between existing trade centers, but as time passed and track mileage increased, they linked ever more points. The 30,626 miles of track in 1860 increased to 93,267 miles by 1880 and 167,191 miles by 1890. 12 This required enormous amounts of wood, and whole forests were downed to make ties and stoke fires in early steam locomotives. A deeper consequence of extending the tracks was a society transformed.

Before tracks radiated everywhere, the United States was a nation of farmers and small towns held together by the traditional institutions of family, church, and local government. Since long-distance travel was time-consuming and arduous, these towns often were isolated. Populations were stable. People identified more with local areas than with the nation as a whole. Into this world came the train, a destabilizing technology powered by aggressive market capitalism.

Trains took away young people who might have stayed in rural society but for the lure of wealth in distant cities. In their place came a stream of outsiders who were less under the control of community values. Small-town intimacy declined, and a new phenomenon appeared in American life—the impersonal crowd of strangers. Trains violated established customs. Sunday was a day of rest and worship, so many churchgoers were angered when huffing and whistling trains intruded on services. But new capital accounting methods used by railroad com- panies dictated using equipment an extra day each week to increase return on investment. This imperative trumped devoutness. In early America, localities set their own time according to the sun’s overhead transit, but this resulted in a patch- work of time zones that made scheduling difficult. An editorial in Railroad Age argued, “Local time must go.” 13 For the convenience of the railroads, a General Time Convention met in 1882 and standardized the time of day, though not with- out resistence from holdouts who felt that “[s]urely the world ran by higher priorities than railroad scheduling.” 14

12 Bureau of the Census, Statistical Abstract of the United States, 77th ed. (Washington, DC: Government Printing Office, 1956), table 683.

13 Bill Kauffman, “Why Spring Ahead,” The American Enterprise, April–May 2001, p. 50.

14 Ibid., p. 50, quoting Michael O’Malley, Keeping Watch: A History of American Time (Washington, DC: Smithsonian Institution Press, 1996).

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As the railroads grew, they spread impersonality and an ethic of commerce. Towns reoriented themselves around their train stations. Shops and restaurants sprang up nearby so that strangers would spend money before moving on. The railroads gave more frequent service to cities with commercial possibilities and bypassed small towns or let them wither from less frequent service. This speeded urbanization and the centralization of corporate power in cities. Rural areas were redefined. Once the cultural heartland, they now were seen as backward and rustic—places best used for vacations from urban stress.

The railroads also changed American politics. On the surface, their lobbyists could dominate legislatures. On a deeper level, the changes were more profound. Congress had always selected nominees before presidential elections, but now trains brought delegates to national party nominating conventions, changing the way candidates were picked. Trains enabled all sorts of associations to have national meetings, and the rails spread issues that might in an earlier era have remained local. The movement to give women the vote, for example, succeeded after Susan B. Anthony took trains to all parts of the country, spreading her rhetoric and unifying the cause. 15

At first government encouraged and subsidized railroads. All told, federal and state governments gave them land grants of 164 million acres, an area equal to the size of California and Nevada combined. 16 But later the challenge was to control them. When Congress passed the Interstate Commerce Act in 1887 to regulate railroads, the design of the statute set the example for regulating other industries later.

Many other changes in American society are traceable to the railroads. They were the first businesses to require modern management structures. The need for precise coordination of speeding trains over vast reaches caused railroads to pio- neer professional management teams, division structures, and modern cost accounting—all innovations later adopted in other industries. 17 Railroads lay behind Indian wars. For the Plains Indians, tracks that divided old hunting grounds were the main barrier to peace. 18 Thousands of laborers came from China to lay rail, and their descendants live on in communities along the lines. Railroads changed the language. The word diner, meaning a place to eat, appeared after the introduction of the Pullman Palace Car Company’s first dining car in 1868. The expression “hell on wheels” originally described the raucous body of prostitutes, gambling cars, and saloons that rolled along with construction crews as tracks spread west. The phrase “off again, on again” derives from discussions about train derailments. 19 And social values changed. Big-city commercial values rumbled down the tracks, jolting traditions along rural byways.

15 These and other social and political changes are treated at length in Sarah H. Gordon, Passage to Union (Chicago: Ivan R. Dees, 1996).

16 Page Smith, The Rise of Industrial America, vol. 6 (New York: Viking Penguin, 1984), p. 99.

17 Chandler, The Visible Hand, chap. 3.

18 Smith, The Rise of Industrial America, p. 89.

19 Rudolph Daniels, Trains across the Continent: North American Railroad History, 2nd ed. (Bloomington: Indiana University Press, 2000), pp. 53 and 78.

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As the track system swelled so did the power of railroads to shape the sociopo- litical and the physical landscapes. Figure 3.1 shows how track mileage fell after 1916, reflecting a decline in the fortunes of the industry. Government regulation hardened, making rate hikes more difficult and strengthening the hand of unions. In addition, railroads came into competition with new transportation technolo- gies, first autos, buses, and trucks, then aircraft. As the importance of rails receded, these rising technologies hastened to reshape American life, converting the nation from one that ran on steam to one that ran on oil.


There is agreement that business has great power. But there is considerable dis- agreement about whether its power is adequately checked and balanced for the public good. Views about business power cover a wide spectrum, but there are two basic and opposing positions.

On one side is the dominance theory , which holds that business is preeminent in American society, primarily because of its control of wealth, and that its power is both excessive and inadequately checked. Corporations can alter their environments in self-interested ways that harm the general welfare. This was the thesis of Karl Marx, who wrote that a ruling capitalist class exploited workers and dominated other classes. The dominance theory is the basis of the dominance model of the business–government–society relationship set forth in Chapter 1.

dominance theory The view that business is the most powerful institution in so- ciety, because of its control of wealth. This power is inade- quately checked and, therefore, excessive.

Source: Statistical Abstract of the United States, various editions 1878–2010.

FIGURE 3.1 Railroad Track Miles in Operation: 1830–2010

Interstate Commerce Act (1887) Federal regulation begins.

Hepburn Act (1906) Strict rate regulation ends era of high profits.

Peak mileage(1916) 266,381 miles of track.

Disruptive competition By 1920 more than 8 million cars and 1 million trucks carry passengers and freight.

Railway Labor Act (1926) Protects rights of unions.

Airlines arrive In 1936 airlines carry more than 1 million passengers.

Falling mileage 120,000 track miles in 2010, a number last seen in 1883.

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On the other side the pluralist theory holds that business power is exercised in a society in which other institutions such as markets, government, labor unions, advocacy groups, and public opinion also have great power. Business power is counterbalanced, restricted, controlled, and subject to defeat. Adam Smith was convinced that largely through market forces, business power could be disciplined to benefit society. The pluralist theory is the basis of the countervailing forces model in Chapter 1.

The Dominance Theory In industrializing societies, business organizations grow in size and concentrate wealth. According to the dominance theory, business abuses the power its size and wealth confer in a number of ways. The rise of huge corporations creates a busi- ness elite that exercises inordinate power over public policy. Asset concentration creates monopoly or oligopoly in markets that reduces competition and harms consumers. Corporations wield financial and organizational resources unmatched by opposing interests. For example, they use campaign contributions to corrupt politicians, hire lobbyists to undermine the independence of elected officials, em- ploy accountants and lawyers to avoid taxes, and run public relations campaigns that shape opinion in their favor.

Moreover, large corporations achieve such importance in a nation’s economy that elected officials are forced to adopt probusiness measures or face public wrath. “If enterprises falter for lack of inducement to invest, hire, and produce,” writes one advocate of the dominance theory, “members of the political elite are more likely than those of the entrepreneurial elite to lose their positions.” 20 We will discuss further the growth in size and wealth of corporations and the presence of elites.

Corporate Asset Concentration The idea that concentration of economic power results in abuse arose, in part, as an intellectual reaction to the awesome economic growth of the late nineteenth century. Until then, the United States had been primarily an agricultural economy. But between 1860 and 1890, industrial progress transformed the country. Statistics illustrating this are striking. During these 30 years, the number of manufacturing plants more than doubled, growing from 140,433 to 355,415; the value of what they made rose more than 400 percent, from $1.8 billion to $9.3 billion; and the capital invested in them grew 650 percent, from $1 billion to $6.5 billion. 21

This growth did more than create wealth; it also concentrated it. At the end of the century, between 1895 and 1904, an unprecedented merger wave assembled dominant firms in industry after industry. Since then, there have been other great merger waves, but this was the first. It made a definitive impression on the American mind, and its legacy is an enduring fear of big companies.

20 Charles E. Lindblom, The Market System: What It Is, How It Works, and What to Make of It (New Haven: Yale University Press, 2001), p. 247.

21 Figures in this paragraph are from Arthur M. Schlesinger, Political and Social Growth of the United States: 1852–1933 (New York: Macmillan, 1935), pp. 132–44.

pluralist theory The view that business power is exercised in a society where other institu- tions also have great power. It is counter- balanced and restricted and, therefore, not excessive.

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Merger waves are caused by changes in the economic environment that create incentives to combine. The main stimulus for the 1895–1904 wave was growth of the transcontinental railroads, which reduced transportation costs, thereby creat- ing new national markets. Companies rushed to transform themselves from re- gional operations to national ones. Combinations such as James Duke’s American Tobacco Company gorged themselves, swallowing competitors, crowding into formerly isolated markets, and wiping out small family businesses. The story was repeated in roughly 300 commodities, including oil, copper, cattle, smelting, and such items as playing cards and tombstones. A 1904 study of the 92 largest firms found that 78 controlled 50 percent of their market, 57 controlled 60 percent or more, and 26 controlled 80 percent or more. 22

At the time, the public failed to see the growth of huge firms as a natural, inevitable, or desirable response to the new economic incentives. Instead, it saw them as colossal monuments to greed. Companies of this size were something new. They inspired a mixture of awe and fear. In 1904, when the United States Steel Corporation became the first company with more than $1 billion in assets, people were astounded. Previously, such numbers applied in the realm of astronomy, not business.

In the twentieth century, corporations continued to grow in size, but the marked rise in asset concentration slowed and leveled off. By 1929 the 200 largest nonfi- nancial corporations in the United States (less than 0.7 percent of all nonfinancials) controlled nearly 50 percent of all corporate wealth. But by 1947 the nation’s top 200 corporations had only 46 percent of corporate wealth, and this was reduced to 36 percent in 1996. 23 Although no continuing data series exists to provide a current figure, a recent study reveals that asset concentration in the top 200 firms on the Fortune 500 declined by 8 percent between 1995 and 2004. 24

With economic globalization, the number of multinational firms and the scale of their activity has grown. There are approximately 82,000 multinationals, up from only about 34,000 as recently as 1990. Asset s and sales of the largest of these firms are rising. Between 1990 and 2008, assets of the 100 biggest multinationals increased by 336 percent and sales by 269 percent. 25 Yet even with heightened global merger activity, the largest global firms show no signs of concentrating foreign assets the way that large American firms have concentrated domestic as- sets. In fact, the foreign assets of the largest 100 multinationals fell from 13 per- cent of estimated global assets in 1999 to 9 percent in 2008. 26 And these 100 firms are still only a small part of world economic activity. For the decade 1990–2000,

22 John Moody, The Truth about Trusts: A Description and Analysis of the American Trust Movement (New York: Greenwood Press, 1968), p. 487; originally published in 1904.

23 J. Fred Weston, Kwang S. Chung, and Juan A. Siu, Takeovers, Restructuring, and Corporate Governance, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998), p. 116. These figures allow rotation of new firms into the top 200 firms. If the same 200 firms had been followed over the years, asset concentration would have fallen even faster.

24 Edward Nissan, “Structure of American Business: Goods versus Services,” Southwestern Economic Review (online), Spring 2006, table 1. 25 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2010 (New York: United Nations, 2010), table I.11; and UNCTAD, World Investment Report 1993 (New York: United Nations, 1993), table I.11.

26 UNCTAD, World Investment Report 2009 (New York: United Nations, 2009), p. xxi.

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Chapter 3 Business Power 67

their output as a share of world GDP grew from 3.5 percent to only 4.3 percent, then fell back to 4 percent by 2008. 27

Despite this, adherents of the dominance theory believe that the increasing size and financial power of global corporations will be converted into the same old abuses. But the link between market power and abuse remains to be seen. Multi- nationals with growing assets and sales do not necessarily have increased market power. They face formidable competitors, emerging competition from new indus- tries, geographically enlarged market boundaries, and, in the European Union, more aggressive antitrust enforcement. In the social dimension, these firms face growing global pressures to act responsibly.

Also, no corporation, no matter how large, is assured of prospering. Over time competition, strategic errors, and, most important, technological changes have continuously winnowed the roster of America’s biggest companies. Looking back at lists of the top 200 industrial corporations by assets, one study found that of 543 corporations that appeared on the lists between 1900 and 2000 only 28 “persistent giants,” or 5 percent of the total number that drifted on and off the list, survived for 100 years. 28 The rest came and went, primarily due to the rise of disruptive technologies. Early in the century railroads and metal companies were dominant, but fell away as new entrants in electrical equipment and chemicals went to the top. By midcentury oil and auto companies appeared, then later, computer-related firms. For the largest companies in each era, economies of scale and oligopoly in markets led to high profits and may have prolonged their dominance, yet these advantages were no shield from the technological changes that dislodged them from the top. Based on this century of evidence, the authors predict that “[t]urbu- lence is the future, just as it is the past of these giant firms.” 29

Other studies confirm the low survival rate at the top of the asset roster. Of the 100 largest corporations in 1909, only 36 remained on the list until 1948. Between 1948 and 1958, only 65 of the top 100 held their place. Only 116 company names remained on the Fortune 500 list of industrial corporations from its inception in 1955 to 1994 when it was revised to included service industries. 30 Many firms dropped from the list were, of course, acquired by other firms. Among the 100 largest transnational corporations there were 28 American firms in 1990, but that number had declined to 18 by 2008. 31 The lesson in all these numbers is that, with very few exceptions, the power of technology-based market forces exceeds the power of even the largest corporations to maintain their dominance.

27 UNCTAD, World Investment Report 2002 (New York: United Nations, 2002), box table IV.1.2; and UNCTAD, World Investment Report 2009 (New York: United Nations, 2009), p. xxi. These figures are based on a value-added calculation (the sum of salaries, pretax profits, and depreciation and amortization) for transnational corporations.

28 Francisco Louçã and Sandro Mendonça, “Steady Change: The 200 Largest U.S. Manufacturing Firms Throughout the 20th Century,” Industrial and Corporate Change, August 2002, pp. 818 and 825.

29 Ibid., p. 840.

30 Figures in this paragraph are from Neil H. Jacoby, Corporate Power and Social Responsibility (New York: Macmillan, 1973), p. 32; John Paul Newport, Jr., “A New Era of Rapid Rise and Ruin,” Fortune, April 24, 1989, p. 77; and Carol J. Loomis, “Forty Years of the 500,” Fortune, May 15, 1995, p. 182.

31 UNCTAD, World Investment Report 2010, table I.8.

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When the New York Stock Exchange was young ordinary investors had trouble making sense of daily trading. Some stocks went up, others went down, and the gyrations hid trends. In 1896 jour- nalist Charles H. Dow created a list of 12 compa- nies as an index of stock market performance. Now investors could see the market’s direction by watching a daily sum of these company’s share prices. At the time a great merger wave was re- shaping the economy by creating giant firms, and Dow filled his index with them. Each was a leader in an important industry and represented its fortunes. As the years passed America’s economy changed, companies came and went; and the in- dex, today called the Dow Jones Industrial Aver- age, grew from 12 to 30 companies by 1928. The

The 2010 list registers the rise of new technologies and of economic sectors providing services and consumer products. General Electric is the only company that was on the 1896 list, and it was removed for nine years between 1898 and 1907. Of the other 11 original firms, 2 (American Tobacco and North American) were broken up by antitrust action, 1 (U.S. Leather) was dissolved, and

most recent additions and deletions were made in 2010. The leading firms in 1896 reflect a different world. Farming was much more prominent, and four firms dealt in agricultural products. They were James B. Duke’s American Tobacco Company, cotton and sugar producers, and a company that made livestock feeds. Two firms represented the centrality of technologies based on iron, lead, and coal. Another, U.S. Leather, made a product in the shadow of imminent obsolescence, leather belts used for power transmission in factories. General Electric, which built electric motors, was the high technology company of that era. Chicago Gas and Laclede Gas Light of St. Louis supplied natural gas for new streetlamps in booming cities. North American operated streetcars.

8 continue to operate as less important companies or as parts of other firms that acquired their assets. As a biography of American industry, the index dramatizes the rise and fall of powerful compa- nies and industries. Over more than a century, 100 different firms have been listed. The index teaches that dominance of even the largest firms is transient.

The Rise and Decline of Corporate Giants

1896 2010

American Cotton Oil 3M Intel American Sugar Refining Alcoa IBM American Tobacco American Express Johnson & Johnson Chicago Gas AT&T JPMorgan Chase Distilling & Cattle Feeding Bank of America Kraft Foods General Electric Boeing McDonald’s Laclede Gas Light Caterpillar Merck National Lead Chevron Microsoft North American Cisco Systems Pfizer Tennessee Coal & Iron Coca-Cola Procter & Gamble U.S. Leather DuPont Travelers U.S. Rubber Exxon Mobil United Technologies

General Electric Walmart Hewlett-Packard Walt Disney Home Depot

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Elite Dominance Another argument that supports the dominance theory is that there exists a small group of individuals who, by virtue of wealth and position, control the nation. Members of this elite are alleged to act in concert and in undemocratic ways. There is a long history of belief in an economic elite dominating American society. In de- bates preceding adoption of the Constitution in 1789, some opponents charged that the delegates were wealthy aristocrats designing a government favorable to their businesses. Later, farmers suspected the hand of an economic elite in the probusi- ness policies of Alexander Hamilton, George Washington’s secretary of the treasury, who had many ties to wealth and commercial power. Since the Colonial era, charges of elitism have surfaced repeatedly in popular movements opposed to big business.

The modern impetus for the theory of elite dominance comes from the sociolo- gist C. Wright Mills, who wrote a scholarly book in 1956 describing a “power elite” in American society. “Insofar as national events are decided,” wrote Mills, “the power elite are those who decide them.” 32 Mills saw American society as a pyra- mid of power and status. At the top was a tiny elite in command of the economic, political, and military domains. Mills was never specific about its numbers, but said it was small. Just below was a group of lieutenants who carried out the elite’s policies. They included professional managers of corporations, politicians be- holden to the elite for their election, and bureaucrats appointed by the politicians. The large base of the pyramid was composed of a mass of powerless citizens, including feeble groups and associations with little policy impact. This image of a pyramid corresponds to the dominance model in Chapter 1.

Mills did not see America as a democracy and thought the elite simply used government “as an umbrella under whose authority they do their work.” 33 Al- though he never stated that the economic segment of the elite was dominant over the political and military, he noted, “The key organizations, perhaps, are the major corporations.” 34

The Power Elite is a book in which there is more speculation than substantiation. It is based on cursory evidence and included none of the statistical research that would be required to support such sweeping generalizations in a similar work of sociology today. Yet it contained a powerful new explanation of economic power and came out just as many American leftists were becoming disenchanted with Marxism. Mills’s vision of a small ruling elite caught on and has been popular with the anticorporate left ever since. Mills would have been pleased. In corre- spondence, he once expressed indignation about the power of “the sons of bitches who run American Big Business.” 35

Scholars inspired by Mills continue to study elites and are less reluctant to suggest business dominance. One is G. William Domhoff, who, in a series of books extending over 40 years, argues the existence of a cohesive American upper class based on

power elite A small group of individuals in control of the economy, gov- ernment, and military. The theory of its existence is associated with the American sociologist C. Wright Mills.

32 C. Wright Mills, The Power Elite (New York: Oxford University Press, 1956), p. 18.

33 Ibid., p. 287.

34 Ibid., p. 283.

35 In a letter to his parents quoted by John B. Judis, “The Spiritual Wobbly,” The New York Times Book Review, July 9, 2000, p. 9.

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wealth, socialization in private schools, membership in exclusive clubs, and occu- pancy of high positions in business, government, and nonprofit institutions. Within this upper class lies a smaller leadership group, a controlling core of leaders in the corporate community. According to Domhoff, this core is a power elite.

The power elite is made up of those people who serve as directors or trustees in . . . institutions controlled by the corporate community through stock ownership, finan- cial support, involvement on the board of trustees, or some combination of these factors. [It has] . . . the power to shape the economic and political frameworks within which other groups and classes must operate. 36

Domhoff does not quantify the power elite. Its power can be measured by the maintenance of a pro-corporate environment. Using foundation money, think tanks, lobbying, and campaign contributions it is consistently able to defeat the policy preferences of liberals and progressives who favor income redistribution and greater equality of opportunities.

In an effort that extended over 25 years, political scientist Thomas R. Dye tried to identify precisely which individuals made up an American elite. Believing that power comes from leadership in organizations, he identified an “institutional elite” of individuals who occupied the top positions in 10 sectors–industrial, bank- ing, insurance, investments, mass media, law, education, foundations, civic and cultural organizations, and government. Applying this method, Dye identified an elite of 5,778 individuals. 37 This is a much larger elite than that suggested by Mills, but it is still only a speck of the population.

Another scholar, David Rothkopf, writes that with globalization, a transna- tional power elite or “superclass” has emerged, operating across borders through “networks of individuals and organizations.” 38 Rothkopf calculates a superclass membership of about 6,000, which is 0.0001 percent of the world population, or a member for each 1 million people. The largest group, 17 percent, is Americans and another third come from European nations. They resemble national power elites in their origins and acculturation. Members attend elite universities. Harvard, Stanford, and the University of Chicago have produced the most. They join exclusive groups such as the Council on Foreign Relations, have member- ships on overlapping boards of directors, and meet at events such as the World Economic Forum in Davos, Switzerland. Because multinational corporations, glo- bal banks, and hedge funds are “the largest and most significant transnational actors” their leaders dominate, working together “in clusters knit together by business deals, corporate boards, investment flows, old school ties, club member- ships, and countless other strands that transform . . . into groups that are proven masters at advancing their aligned self-interests.” 39 The new superclass eclipses the power of national elites. According to Rothkopf, it does not rule or conspire,

36 G. William Domhoff, Who Rules America? 6th ed. (New York: McGraw-Hill, 2010), p. 114.

37 Thomas R. Dye, Who’s Running America? The Bush Restoration, 7th ed. (Upper Saddle River, NJ: Prentice Hall, 2002), p. 205; emphasis in the original.

38 David Rothkopf, Superclass: The Global Power Elite and the World They are Making, (New York: Farrar, Straus and Giroux, 2008), p. 84.

39 Ibid., pp. 33 and xvii.

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but its dominant business subset, having “vastly more power than any other group on the planet,” abets an agenda of oil dependence, free markets, free trade, and military spending. 40

Elites formed from some combination of wealth, ability, position, and social status are timeless and inevitable. They challenge the logic of democratic ideology because a few citizens, acting in the shadows of electoral mechanisms, pilot a vast majority. Yet elites are not necessarily sinister, oppressive, or conspiratorial. They can be sources of talent, expert leadership, and cultural stability. American and global business elites spring from the pinnacles of corporate, government, reli- gious, and cultural institutions, having arrived at such positions based over- whelmingly on ability.

However, those who move into elites come from a thin range of backgrounds. Every study finds that disproportionately they are male, white, and Christian; come from upper-class families; and attend a short list of prestigious schools. The inclusion of blacks, Latinos, and women is based on their similarity in background and thinking to the existing elite. 41 Rothkopf finds that only 6.3 percent of the glo- bal superclass is women. 42 At least in the United States, the idea of a power elite, one perhaps dominated by business interests, troubles citizens with a deep com- mitment to equality. Yet some argue that its actions are adequately checked and balanced. This view is taken up in the next section.

Pluralist Theory A pluralistic society is one having multiple groups and institutions through which power is diffused. Within such a society no entity or interest has overriding power, and each may check and balance others. The countervailing forces model in Chap- ter 1 illustrates how, in such a society, business must interact with constraining forces in its environment. It may have considerable influence over some of them; but over most it has limited influence, and over a few none at all. Several features of American society support this thesis of pluralism.

First, it is infused with democratic values. Unlike many nations, America has no history of feudal or authoritarian rule, so there is no entrenched deference to an aristocracy of wealth. In Colonial days, Americans adopted the then-revolutionary doctrine of natural rights, which held that all persons were created equal and enti- tled to the same opportunities and protections. The French aristocrat Alexis de Tocqueville, who toured America and wrote an insightful book about American customs in the 1830s, was forcibly struck by the “prodigious influence” of the no- tion of equality. Belief in equality, he wrote, ran through American society, direct- ing public opinion, informing the law, and defining politics. It was, he wrote, “the fundamental fact from which all others seem to be derived.” 43 Thus, in America

pluralistic society A society with multiple groups and institutions through which power is diffused.

40 Ibid., p. xiii.

41 Richard L. Zweigenhaft and G. William Domhoff, Diversity in the Power Elite: Have Women and Minorities Reached the Top? (New Haven: Yale University Press, 1998).

42 Rothkopf, Superclass, p. 290.

43 Alexis de Tocqueville, Democracy in America (New York: New American Library, 1956), p. 26; originally published as two volumes in 1835 and 1850.

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In the first decade of the twentieth century, J. P. Morgan (1837–1913), head of J. P, Morgan & Co. in New York, was often called the most powerful man in the country. He specialized in buying competing companies in the same industry and merging them into a single, monopolistic firm. He joined separate railroads into large systems. He combined smaller electrical concerns into General Electric in 1892 and then pulled a collection of manufacturers into the International Harvester Company, which started with 85 percent of the farm machinery market. In 1901 he created the first billion-dollar company when he merged 785 separate firms to form the United States Steel Company with capitalization of 11.4 billion. Morgan and two of his close associates to- gether held 341 corporate directorships. His power was very independent of government controls since at the time antitrust laws were little en- forced, there was no national bank to regulate the money supply, and existing securities and banking laws were rudimentary. One awestruck biographer said that Morgan “was a God” who “ruled for a generation the pitiless, predatory world of cash .44 His critics were less kind. Senator Robert W. La Follette once called him “a beefy, red-faced, thick-necked financial bully, drunk with wealth and power.” 45 In October 1907 panic swept Wall Street and stocks plummeted as frantic investors sold shares. Soon banks suffered runs of withdrawals and were on the verge of failure. Liquidity, or the free flow of money, was fast vanishing from financial markets, and the nation’s banking system tee- tered on the verge of collapse. So influential was Morgan that he commanded the New York Stock Exchange to stay open all day on October 24 to maintain investor confidence. To support it, he raised $25 million of credit.

The federal government could do little to ease the crisis. President Theodore Roosevelt was off hunting bears in Louisiana, an ironic pursuit in light of the crashing stock market. Without a na- tional bank, the government had no capacity to increase the money supply and restore liquidity. Powerless, Secretary of the Treasury George B. Cortelyou traveled to New York to get Morgan’s advice On the evening of October 24, Morgan gath- ered members of the New York banking elite at his private library. He played solitaire while in an- other room the assembled bankers discussed methods for resolving the crisis. Periodically, someone came to him with a proposal, several of which he rejected. Finally, a plan was hatched in which $33 million would be raised to support the stock exchange and failing banks. Where would this money come from? The secretary of the treas- ury was to supply $10 million in government funds, John D. Rockefeller contributed $10 mil- lion, and Morgan the remaining $13 million. This action stabilized the economy. Perhaps it demonstrates that elite power may be exercised in the common good. It should be noted, however, that the panic of 1907—and other panics of that era—came after Morgan and other titans of finance repeatedly choked the stock exchange with the colossal stock offerings needed to finance their new combinations. Morgan was widely criticized for his role in ending the panic of 1907. Conspiracy theorists, suspicious of so much power resident in one man, attacked him. Upton Sinclair, for example, accused him of inciting the panic for self-gain, a wildly er- roneous accusation. In 1912 Morgan was the focus of congressional hearings which concluded that he led a “money trust” that controlled the nation’s finances and that this was bad for the nation. Death claimed him in 1913 just before Congress passed the Federal Reserve Act to set up a cen- tral  bank and ensure that no private banker would ever again be sole caretaker of the money supply.

J. P. Morgan and the Panic of 1907

44 John K. Winkler, Morgan the Magnificent (New York: Doubleday, 1950), p. 3; originally published in 1930.

45 Jean Strouse, Morgan: American Financier (New York: Random House, 2000), p. x.

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laws apply equally to all. All interests have the right to be heard. To be legitimate, power must be exercised for the common good.

Second, America encompasses a large population spread over a wide geogra- phy and engaged in diverse occupations. It has a great mixture of interests, more than some other countries. Economic interests, including labor, banking, manu- facturing, agriculture, and consumers, are a permanent fixture. A rainbow of voluntary associations (whose size, longevity, and influence vary) compete in governments at all levels.

Third, the Constitution encourages pluralism. Its guarantees of rights protect the freedom of individuals to form associations and freely to express and pursue interests. Thus, business is challenged by human rights, environmental, and other groups. The Constitution diffuses political power through the three branches of the federal government and between the federal and state governments and to the people. This creates a remarkably open political system.

In addition, business is exposed to constraining market pressures that force a stream of resource allocation decisions centered on cost reduction and consumer satisfaction, forces that can fell even the mighty. Henry J. Kaiser seemed unerring in business. The son of German immigrants, he worked his way up from store clerk to owner of 32 companies, including seven shipyards that launched one fin- ished ship a day during most of World War II. When he started an auto company in 1945, nobody thought he could fail. Eager customers put down thousands of deposits before a single car was built. 46 But his cars, the Kaiser and the Frazier, were underpowered and overpriced, and the market eventually rejected them. Kaiser never got costs under control; he had to negotiate the prices of many parts with competing auto companies that made them. Toward the end, he built a model that was sold at Sears as the Allstate. This was a terrible mistake because it gave the car a low-quality image with consumers. The venture failed.

In sum, predictable and strong forces in a pluralistic, free market society limit business power. Wise managers anticipate that, despite having considerable influ- ence on governments, markets, and public opinion, their power can be restricted, challenged, or shared by others. Overall, as illustrated in Figure 3.2, there are four major boundaries on managerial power.

1. Governments and laws in all countries regulate business activity. Governments are the ultimate arbiters of legitimate behavior and can act forcefully to blunt the exercise of corporate power that harms the public. Laws channel and regu- late operations.

2. Social interest groups represent every segment of global society and have many ways to restrict business, including boycotts, lawsuits, picket lines, media cam- paigns, and lobbying for more regulation. Historically, labor has been the great antagonist and counterweight to business power, but also prominent in recent years are environmental, human rights, religious, and consumer groups. In- creasingly, groups form coalitions with other groups, governments, and inter- national institutions.

46 Robert Sobel, “The $150 Million Lemon,” Audacity, Winter 1997, p. 11.

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3. Social values are transmitted across generations, reflected in public opinion, and embedded in the law. Managers internalize them in schools and churches. Social values include norms of duty, justice, truth, and piety that can direct a manager’s behavior as powerfully as laws. For example, in the 1960s shifting generational values gave film studios license to experiment with brazen nudity and violence, but Walt Disney never did. No financial incentive was enough to make him forsake his own values about the importance of morality, family life, and the small-town decency he saw in his Kansas boyhood. 47

4. Markets and economic stakeholders impose strong limits. Stockholders, employees, suppliers, creditors, and competitors influence corporate decisions. The market also registers the great waves of technological change that can sweep away even the largest corporations.

According to the theory of pluralism, these are the boundaries of managerial power. Just as in the solar system the planets move freely within but cannot escape

FIGURE 3.2 Boundaries of Managerial Power

Economic Stakeholders

So c

ia l I

n te

re st

G ro

u p


Governments and Laws

So c

ia l V

a lu

e s

Area of


Area of Illegitimacy

Behavior violates the social contract.

47 Richard Schickel, The Disney Version, 3rd ed. (Chicago: Ivan R. Dee, 1997), p. 39.

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their gravitational fields, so major corporations in American society move within orbits constrained by plural interests.


In a recent poll, 87 percent of Americans believed that “big companies . . . have too much . . . power and influence.” 48 Are they correct? The answer requires perspec- tive and judgment. In this chapter we break down the idea of corporate power into patterns, categories, and theories to allow critical thinking. We explain how corporate power is a strong force for change and how, at a deep level, economic growth shapes society in sweeping, unplanned ways.

We also set forth two opposing perspectives. The dominance theory holds that inadequately restrained economic power is concentrated in large corporations and in the hands of a wealthy elite. The pluralist theory holds that many restraints in an open society control corporate power. These theories are locked in perpetual conflict. Both are molds into which varieties of evidence must be fitted. Both con- tain insights, but neither has a lock on accuracy. And both attract adherents based on inner judgments about whether market capitalism moves society in the right direction.

If corporate power remains generally accountable to democratic controls, soci- ety will accord it legitimacy. If rule by law and a just economy exist, corporate power will broadly and ultimately be directed toward the public welfare, this de- spite the habitual breakouts of deviltry that inflame critics.

48 The Harris Poll, “Business Divides: Big Companies Have Too Much Power and Influence in DC, Small Business Has Too Little,” April 1, 2010, table 2, at

John D. Rockefeller and the Standard Oil Trust This is the story of John D. Rockefeller, founder of the Standard Oil Company. It is the story of a somber, small-town boy who dominated the oil industry with organizational genius, audacity, and ruthless, me- thodical execution. He became the richest man in America and, for a time, the most hated.

Rockefeller’s life spanned nearly 98 years. At his birth Martin Van Buren was president and settlers drove covered wagons over the Oregon Trail. He lived to see Franklin Roosevelt’s New Deal, watch the rise of the Nazi party in Germany, and hear Frank Sinatra and The Lone Ranger on radio.

The historical backdrop of this lifetime is an econ- omy gripped by the fever of industrial progress. Rockefeller built his fortune in an era that lacked many of today’s ethical norms and commercial laws,

an era in which the power of a corporation and its founder could be exercised with fewer restraints.

THE FORMATIVE YEARS John Davison Rockefeller was born July 8, 1839, in a small village in southern New York. He was the sec- ond of six children and the oldest boy. His father, William Rockefeller, was an itinerant quack doctor who sold worthless elixirs. He was jovial, slick, and cunning and made enough money to keep the family in handsome style until he had to flee and live away from home to avoid arrest for raping a local woman. After that, he visited only in the dark of night. But he taught young John D. and his brothers lessons of business conduct, especially that sentimentality

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any man of means to pay someone else to serve in his place, and this he did.

BEGINNINGS OF THE OIL BUSINESS Profits from the produce business were high, and John D. looked around for a promising new invest- ment. He soon found one—a Cleveland petroleum refinery in which he invested $4,000 in 1863. At the time, petroleum production and refining was an in- fant industry. A new drilling technology had led to an 1859 oil strike in nearby Pennsylvania, followed by a frenzied boom in drilling and refining.

Soon Rockefeller devoted himself to the oil busi- ness, and he began to apply his principles of parsi- mony. One basic principle was to avoid paying a profit to anyone. For example, instead of buying bar- rels and paying the cooper $2.50 each, Rockefeller set up his own barrel-making factory and made them for $.96. He purchased a forest to make staves from his own trees. Another basic principle was methodical cost cutting. Lumber for barrel staves was kiln-dried before shipment to the cooperage plant. Water evap- orated from the wood, making it lighter and lower- ing transportation costs.

Though obsessed with details and small econo- mies, Rockefeller also proved aggressive in larger plans. He borrowed heavily from banks to expand the refinery. The risk scared his partners, so he bought them out. In 1865 he borrowed more to build a second refinery. Soon he incorporated an export sales com- pany in New York, making the world his market.

DYNAMICS OF THE OIL INDUSTRY During this early period, the new industry was in a chaotic state. A basic cause was overproduction in the Pennsylvania oil regions, which were the only source of crude oil. The price of crude fluctuated wildly, but was in long-term decline. Each drop in the price of crude oil encouraged construction of new refineries and by the late 1860s refining capacity was three times greater than oil production. This caused vicious price wars. Some refiners tried to stay in business by selling products at a loss to raise cash for continued debt payments. In doing so, they dragged down profit margins for all refiners.

should not influence business transactions. “I cheat my boys every chance I get,” he once said. “I want to make ‘em sharp.” 1

John D.’s mother was a somber, religious woman who gave the children a strict upbringing, emphasiz- ing manners, church attendance, and the work ethic. She preached homilies such as “Willful waste makes woeful want.” And she taught charity to the children; from an early age John D. made regular contributions to worthy causes.

Young John D. was not precocious in school. In high school he was an uninspired student, little in- terested in books and ideas, but willing to work hard. He grew into a somber, intense lad nicknamed “the Deacon” by his classmates because he faithfully attended a Baptist church and memorized hymns. In the summer of 1855 he took a three-month course at a business college in Cleveland, Ohio, and then set out looking for a job. In addition to his formal schooling, he carried the contradictory tempera- ments of his parents—the wily, self-assured boldness of his father and the exacting, pietistic character of his mother. He internalized both, and the combina- tion was to prove formidable. Here was a man with the precision of an accountant and the cunning of Cesare Borgia.

EARLY BUSINESS CAREER Rockefeller’s first job was as a bookkeeper at a Cleveland firm where he meticulously examined each bill submitted and pounced on errors. He also re- corded every cent he earned and spent in a personal ledger. Its pages show that he was parsimonious and saved most of his $25-a-month salary, but that he still gave generously to the Baptist church and the poor.

In 1859 he formed a successful partnership with two others in the produce business in Cleveland and proved himself an intense negotiator, described by an acquaintance as a person “who can walk right up on a man’s shirt bosom and sit down.” 2 The business boomed from supplying food to the Union army dur- ing the Civil War. Although in his early 20s at the time, the steady, unemotional lad was never touched by patriotic fervor. In those days, the law permitted

1 David Freeman Hawke, John D.: The Founding Father of the Rockefellers (New York: Harper & Row, 1980), p. 13.

2 Jules Abels, The Rockefeller Billions (New York: Macmillan, 1965), p. 35.

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business. And he was still a pious churchgoer who read the Bible nightly before retiring.

Late in 1870 Rockefeller hatched a brazen plan for stabilizing the oil industry at the refining level. In clandestine meetings, he worked out a rebate scheme between a few major refiners and the three railroads going into the Pennsylvania oil regions. They gave this scheme an innocent-sounding name, the South Improvement Plan. In it, the railroads agreed to increase published rates for hauling oil. Then Rockefeller’s Cleveland refineries and a few others would get large rebates on each barrel shipped. For example, the regular rate between the oil regions and Cleveland would be $.80 a barrel and between Cleveland and New York $2.00 a barrel. It would cost a total of $2.80 per barrel for any other refinery in Cleveland to bring in a barrel of crude oil and ship a barrel of refined oil to New York for sale or export. Rockefeller and his accomplices, on the other hand, would be charged $2.80 but then get a rebate of $.90.

In addition, the refineries participating in the South Improvement Plan received drawbacks or pay- ments made on the shipment of oil by competitors! Thus, Rockefeller would be paid $.40 on every barrel of crude oil his competitors shipped into Cleveland and $.50 on every barrel of refined oil shipped to New York. Under this venal scheme, the more a com- petitor shipped, the more Rockefeller’s transpor- tation costs were lowered. While competitors were charged $2.80 on the critical route (Pennsylvania oil regions–Cleveland–New York), Rockefeller paid only $1.00. Moreover, the railroads agreed to give the con- spirators waybills detailing competitors’ shipments; a better espionage system would be hard to find.

Why did the railroads agree to this plot? There were several reasons. First, it removed the uncer- tainty of cutthroat competition. Oil traffic was guar- anteed in large volume. Second, the refiners provided services to the railroads including tank cars, loading facilities, and insurance. And third, railroad execu- tives received stock in the participating refineries, giving them a stake in their success.

The consequences of the South Improvement Plan were predictable. Nonparticipating refiners faced bloated transportation costs and would be uncom- petitive. They had two choices. Either they could sell to Rockefeller and his allies, or they could stand on principle and go bankrupt. When they sold, as they must, the flaw in industry structure would be cor- rected. Rockefeller intended to acquire them, then

Rockefeller had the insight to invest in large-scale refineries and, because he cut costs relentlessly, his refineries made money. Yet despite disciplined cost control, the market forces of a sick industry ate away at his net earnings. He believed it was time to “rationalize” the entire industry and stop destructive competition. 3 His method for doing this would be monopoly, his tactics hard-nosed.

ROCKEFELLER’S COMPETITIVE STRATEGIES Rockefeller used a range of competitive strategies. He was a low-cost, high-volume producer. He used debt financing to expand. He attempted to make his refined petroleum products of high and consistent quality, since fly-by-night refiners turned out inferior distillates. Cheap kerosene with a low ignition point had burned many a home down after exploding in a wick lamp. When he incorporated the Standard Oil Company of Ohio in 1870, the name suggested a “standard oil” of uniformly good quality. He en- gaged in vertical integration by making wooden barrels. As time when on, he also bought pipelines, storage tanks, and railroad tank cars.

Critical to his success, however, was the art of strong-arming the railroads. In this, Rockefeller was the master. Transportation costs paid to railroads were important to refiners, who shipped in crude oil and then shipped out products such as kerosene or lubricating oil. In the 1860s railroads were highly competitive and often altered shipping rates to attract business. No law prohibited this, and published rates were only the starting point of negotiations.

Railroads often granted rebates to shippers; that is, they returned part of the freight charge after ship- ment. These rebates were usually secret and given in return for the guarantee of future business. Large volume shippers, including oil refineries, got the big- gest rebates. Standard Oil was no exception.

At this time, Rockefeller has been described by biographers as a prepossessing man with penetrating eyes who drove a hard bargain. He would take the measure of a person with a withering stare, and few were his match. He was formidable in negotiations, being invariably informed in detail about the other’s

3 Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (New York: Random House, 1998), pp. 130 and 149–52.

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By the time the railroads reset their rates, Rockefel- ler had bought out 21 of his 26 Cleveland competitors. Some acquisitions were simply dismantled to reduce surplus capacity. He now dominated Cleveland, the country’s major refining center, and controlled more than a quarter of U.S. capacity. In secrecy, he negoti- ated a new rebate agreement with the Erie Railroad. Of these actions, Ida Tarbell noted sardonically: “He had a mind which, stopped by a wall, burrows under or creeps around.” 6

Regardless of methods, he had, indeed, corrected structural flaws in the oil industry. It would attract more capital. If any circumstance cast a shadow over this striking victory, it was that public opinion had turned against him. From then on, he was re- viled as an unfair competitor, hatred of him grow- ing apace with his burgeoning wealth. He never understood why.

ONWARD THE COURSE OF EMPIRE Rockefeller, now 33, was wealthy. Yet he drove on, compelled to finish a grand design, to spread his pattern over the industry landscape, to conform it to his vision.

He continued the strategy of horizontal integra- tion at the refinery level by absorbing more and more of his competitors. As the size of Standard Oil in- creased, Rockefeller gained added leverage over the railroads. Like an orchestra conductor he played them against each other, granting shares of the oil traffic in return for rebates that gave him a decisive advantage.

Some competitors stubbornly clung to their busi- nesses, partly out of hatred for Rockefeller. He made them “sweat” and “feel sick” until they sold. 7 The fleets of tank cars that he leased to railroads were often “unavailable” to ship feedstock and distillates to and from such refiners. Rockefeller concealed many of his acquisitions, disguising the full sweep of his drive to monopoly. These companies were the Trojan horses in his war against rival refiners. They seemed independent but secretly helped to under- mine Standard’s competitors. Often they were at the center of elaborate pricing conspiracies involving code words in telegrams such as “doubters” for

close them or limit their capacity. This would give him market power to stabilize the price of both crude oil and refined products. And the rebates would be a formidable barrier to new entrants.

THE CONSPIRACY PLAYS OUT In February 1872 the new freight rates were an- nounced. Quickly, the full design was revealed, caus- ing widespread, explosive rage in the oil regions. Although it broke no laws, it overstepped prevailing norms. People believed that since railroads got their right-of-ways from the public they had a duty to serve shippers fairly. Volume discounts might be justified, but this shakedown was extortionate. Pro- ducers and refiners in the oil regions boycotted the conspirators and the railroads.

Rockefeller, seen as the prime mover behind the South Improvement Plan, was vilified in the industry and the press. His wife feared for his life. Yet he never wavered. “It was right,” he said of the plan. “I knew it as a matter of conscience. It was right between me and my God.” 4 As journalist Ida Tarbell noted, Rockefeller was not squeamish about such business affairs.

Mr. Rockefeller was “good.” There was no more faithful Baptist in Cleveland than he. Every enter- prise of that church he had supported liberally from his youth. He gave to its poor. He visited its sick. He wept with its suffering. Moreover, he gave unosten- tatiously to many outside charities . . . Yet he was willing to strain every nerve to obtain himself spe- cial and unjust privileges from the railroads which were bound to ruin every man in the oil business not sharing them with him. 5

Within a month, the weight of negative public opinion and loss of revenue caused the railroads to cave in. They rescinded the discriminatory rate struc- ture. All appearances were of a Rockefeller defeat, but appearances deceived. Rockefeller had moved quickly, meeting one by one with rival refiners, ex- plaining the rebate scheme and its salutary effect on the industry, and asking to buy them out. He offered the exact value of the business in cash or, preferably, in Standard Oil Company stock.

4 Peter Collier and David Horowitz, The Rockefellers: An American Dynasty (New York: New American Library, 1976), p. 11.

5 Ida M. Tarbell, The History of the Standard Oil Company, vol. 1 (Gloucester, MA: Peter Smith, 1963), p. 43.

6 Ibid., p. 99.

7 Abels, The Rockefeller Billions, p. 35.

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environmental awards were they operating today. At night he prowled the headquarters turning down wicks in oil lamps.

His management style was one of formal polite- ness. He never spoke harshly to any employee. Once, when a manager leaked information to the press, Rockefeller said to his secretary: “Suggest to Mr. Blank that he would do admirably as a newspaper man, and that we shall not need his services after the close of this month.” 9 Compared with other moguls of that era, he lived simply. He had two large estates, in Cleveland and New York, but neither was too os- tentatious. He read the Bible daily, continued regular attendance at a Baptist church, and gave generously to charities.

Rockefeller’s organizing skills were critical to his success. Discussions often focus on his ethics, but the key to Standard Oil’s long-term domination lay else- where. The company was an immense, organized force opposed only by smaller, less united adversar- ies. Its success came from centralized, coordinated effort. Compromising methods, to the extent they were used, were of far less importance. 10

EXTENDING DOMINATION By the 1880s Standard Oil had overwhelming market power. Its embrace of refining activity was virtually complete, and it had moved into drilling, pipelines, storage tanks, transportation, and marketing of finished products. By now the entire world was addicted to kerosene and other petroleum products, and Standard’s international sales grew.

Rockefeller’s dominating competitive philosophy prevailed. His marketing agents were ordered to de- stroy independent suppliers. To suppress competi- tion, his employees pioneered fanatical customer service. The intelligence-gathering network paid competitors’ employees to pass information to Stand- ard Oil. Railroad agents were bribed to misroute shipments. Standard Oil workers climbed on com- petitors’ tank cars and measured the contents. Price warfare was relentless. A stubborn competitor often

refiners and “mixer” for railroad drawbacks. The phantoms bought some refiners who refused in prin- ciple to sell out to Standard Oil. Their existence con- fronted independents with a dark, mysterious force that could not be brought into the light and fought.

THE STANDARD OIL TRUST By 1882 Rockefeller’s company was capitalized at $70 million and produced 90 percent of the nation’s refining output. Its main product, illuminating oil, was changing the way people lived. Before the sale of affordable illuminating oil of good quality, most Americans went to bed with darkness. They could not afford expensive candles or whale oil and feared using the unstable kerosene made by early, small re- finers. With the rise of Rockefeller’s colossus, they had reliable, inexpensive light and stayed up. Their lives, and the life of the nation, changed.

Rockefeller reorganized Standard Oil as a trust. 8 His purpose was to make state regulation more diffi- cult. Soon other large companies followed his lead, adopting the trust form to avoid government restric- tions. Inside Standard Oil, Rockefeller’s organizing skills were extraordinary. Working with a loyal inner circle of managers, he directed his far-flung empire from headquarters at 26 Broadway in New York City. As he absorbed his competitors, so had he co-opted the best minds in the industry and much of Stand- ard’s success is attributable to this stellar supporting cast. Though dominant, Rockefeller delegated great responsibility to his managers.

High-level committees controlled business opera- tions. He circulated monthly cost statements for each refinery, causing fierce internal competition among their managers that led to high performance. He set up a network of informants around the globe. Critics called them spies, but they functioned as a well- organized information system.

A perfectionist, he insisted on having a statement of the exact net worth of Standard Oil on his desk every morning. Oil prices always were calculated to three decimals. He was so dogged about efficiency and recycling that his Standard Oil plants might win

8 A trust is a method of controlling a number of companies in which the voting stock of each company is transferred to a board of trustees. The trustees then have the power to coordinate the operations of all companies in the group. This organizing form is no longer legal in the United States.

9 Quoted in “A Great Monopoly’s Work: An Inner View of the Standard Oil Company,” The New York Times, February 27, 1883, p. 1.

10 David M. Chalmers, ed., “Introductory Essay,” in Ida M. Tarbell, The History of the Standard Oil Company, Briefer Version (Mineola, NY: Dover, 2003), pp. xvii–xviii.

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the personification of greed in political cartoons. Pol- iticians not suborned by his bribery lambasted him.

Rockefeller, by now the richest American, was shaken by public hatred. He hired bodyguards and slept with a revolver. Pinkerton detectives were present at church on Sundays to handle gawkers and shouters. He developed a digestive ailment so severe that he could eat only a few bland foods, and upon his doctor’s advice he stopped daily office work. By 1896 he appeared only rarely at 26 Broadway. Soon he was afflicted with a nervous disorder and lost all his hair.

As attacks on Rockefeller grew, the vise of gov- ernment regulation tightened on his company. A swarm of lawsuits and legislative hearings hung about it. Finally, in 1911, the Supreme Court ordered its breakup under the Sherman Antitrust Act, hold- ing that its monopoly position was an “undue” restraint on trade that violated the “standard of reason.” 14 The company was given six months to separate into 39 independent firms. The breakup consisted mainly of moving the desks of managers at 26 Broadway and was a financial windfall for Rockefeller, who received shares of stock in all the companies, the prices of which were driven up by frenzied public buying. Before the breakup kero- sene sales had buoyed the company. However, just as electric lightbulbs were replacing oil lamps, the automobile jolted demand for another petroleum distillate—gasoline. Rockefeller, who was 71 at the time of the breakup and would live another 26 years, earned new fortunes simply by maintain- ing his equity in the separate companies.

Rockefeller remained a source of fascination for the American public. As The Wall Street Journal noted, “The richest man in a world where money is power is necessarily a fascinating object of study.” 15 This being so, it was his enduring misfortune that muckraking journalist Ida Tarbell turned her gaze on him.

Tarbell wrote two unflattering character studies and a detailed, two-volume biography of Rockefeller, all serialized in the widely read McClure’s Magazine be- tween 1902 and 1905. Her unsentimental words were no less ruthless than the actions of the old man himself. Although admitting that Rockefeller and Standard Oil

found Standard selling kerosene to its customers at a price substantially below production cost.

Rockefeller himself was never proved to be di- rectly involved in flagrant misconduct. He blamed criminal and unethical actions on overzealous subor- dinates. His critics thought the strategy of suffocating small rivals and policies such as that requiring regu- lar written intelligence reports encouraged degenera- tive ethics among his minions.

Rockefeller saw Standard Oil as a stabilizing force in the industry and as a righteous crusade to illumi- nate the world. How, as a good Christian devoted to the moral injunctions of the Bible, was Rockefeller able to suborn such vicious behavior in commerce? One biographer, Allan Nevins, gives this explanation:

From a chaotic industry he was building an efficient industrial empire for what seemed to him the good not only of its heads but of the general public. If he relaxed his general methods of warfare . . . a multi- tude of small competitors would smash his empire and plunge the oil business back to chaos. He al- ways believed in what William McKinley called “benevolent assimilation”; he preferred to buy out rivals on decent terms, and to employ the ablest competitors as helpers. It was when his terms were refused that he ruthlessly crushed the “outsiders.” . . . It seemed to him better that a limited number of small businesses should die than that the whole in- dustry should go through a constant process of half- dying, reviving, and again half-dying. 11

THE STANDARD OIL TRUST UNDER ATTACK Standard Oil continued to grow, doubling in size be- fore the turn of the century and doubling again by 1905. 12 Eventually its very size brought a flood of criticism that complicated operations. Predatory mo- nopoly was at odds with prevailing beliefs about in- dividual rights and free competition. The states tried to regulate Standard Oil and filed antitrust suits against it. Overwrought muckrakers lashed out at Rockefeller. Because of him, wrote one, “hundreds and thousands of men have been ruined.” 13 He was

11 Allan Nevins, Study in Power: John D. Rockefeller, vol. 2 (New York: Scribner, 1953), p. 433.

12 Ibid., app. 3, p. 478.

13 Henry Demarest Lloyd, “Story of a Great Monopoly,” The Atlantic, March 1881, p. 320.

14 Standard Oil Company of New Jersey v. United States, 31 U.S. 221. It was an 8–1 decision.

15 “Incarnate Business,” The Wall Street Journal, June 26, 1905, p. 1.

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Over his lifetime, Rockefeller gave gifts of approx- imately $550 million. He gave, for example, $8.2 mil- lion for the construction of Peking Union Medical College in response to the need to educate doctors in China. He gave $50 million to the University of Chicago. He created charitable trusts and endowed them with millions. One such trust was the General Education Board, set up in 1902, which started 1,600 new high schools. Another, the Rockefeller Sanitary Commission, succeeded in eradicating hookworm in the South. The largest was the Rockefeller Founda- tion, established in 1913 and endowed with $200 mil- lion. Its purpose was “to promote the well-being of mankind throughout the world.” Rockefeller always said, however, that the greatest philanthropy of all was developing the earth’s natural resources and employing people. Critics greeted his gifts with skepticism, thinking them atonement for years of plundering American society.

In his later years, Rockefeller lived a secluded, placid existence on his great Pocantico estate in New York, which had 75 buildings and 70 miles of roads. As years passed, the public grew increasingly fond of him. Memories of his early business career dimmed, and a new generation viewed him in the glow of his

had some measure of “legitimate greatness,” she was obsessed with his flaws. In one essay she found “some- thing indefinably repulsive” in his appearance, writing that his mouth was “the cruelest feature of his face,” and that his nose “rose like a thorn.” 16 Such ad hom- inem attacks lacked merit but, in addition, Tarbell delved deeply into Rockefeller’s career, producing nar- ratives of exquisite detail. The thesis she conveyed to the public was that by his singular example, Rockefeller was responsible for debasing the moral tone of American business. She believed his story incited le- gions of the ambitious to use cold-blooded methods, teaching them that success justifies itself. Like the mas- ter, the junior scoundrels often cited biblical verse to support their actions.

Few public figures have a nemesis such as Ida Tar- bell. Her relentless pen, along with others, deprived him of some public adulation he may have craved and her scholarship permanently defined him. Her intricate period research cannot be duplicated and subsequent biographers, even more friendly ones, must go to it for insight. Rockefeller may or may not have deserved such a definitive hand. He called her a “poisonous woman.” 17

THE GREAT ALMONER Since childhood Rockefeller had made charitable donations and, as his fortune accumulated, he in- creased them. After 1884 the total was never less than $100,000 a year, and after 1892 it was usually over $1 million and sometimes far more. In his mind, these benefactions were linked to his duty as a good Christian to uplift humanity. To a reporter he once said:

I believe the power to make money is a gift from God—just as are the instincts for art, music, litera- ture, the doctor’s talent, yours—to be developed and used to the best of our ability for the good of man- kind. Having been endowed with the gift I possess, I believe it is my duty to make money and still more money and to use the money I make for the good of my fellow-man according to the dictates of my conscience. 18

16 Ida Tarbell, “John D. Rockefeller: A Character Study,” McClure’s, August 1905, p. 386.

17 Chernow, Titan: The Life of John D. Rockefeller, Sr., p. xxii.

18 Quoted in Abels, The Rockefeller Billions, p. 280.

John D. Rockefeller at age 65. This photograph was taken shortly after a disease, generalized alopecia, caused him to lose his hair. Source: The Library of Congress.

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2. How does the story of Standard Oil illustrate the limits of business power? Does it better illustrate the dominance theory or the pluralist theory dis- cussed in the chapter?

3. Did Rockefeller himself ever act unethically? By the standards of his day? By those of today? How could he simultaneously be a devout Christian and a ruthless monopolist? Is there any contradic- tion between his personal and business ethics?

4. In the utilitarian sense of accomplishing the great- est good for the greatest number in society, was the Standard Oil Company a net plus or a minus? On balance, did the company meet its responsi- bilities to society?

5. Did strategies of Standard Oil encourage unethi- cal behavior? Could Rockefeller’s vision have been fulfilled using “nicer” tactics?

huge charitable contributions. For many years, he carried shiny nickels and dimes in his pockets to give to children and well-wishers.

On his 86th birthday he wrote the following verse.

I was early taught to work as well as play, My life has been one long, happy holiday; Full of work and full of play— I dropped the worry on the way— And God was good to me every day.

He died in 1937 at the age of 97. His estate was valued at $26,410,837. He had given the rest away.

Questions 1. With reference to the levels and spheres of corpo-

rate power discussed in the chapter, how did the power of Standard Oil change society? Was this power exercised in keeping with the social con- tract of Rockefeller’s era?

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Chapter Four

Critics of Business Mary “Mother” Jones

In the early years of the twentieth century Mary Jones (1837–1930), known as Mother Jones, was one of the most notable women in America. Emerging from per- sonal tragedy, she created a singular persona and hurled herself against big corpora- tions and the capitalist system that sustained them. Hers was an era of great change, dissent, and conflict. It was the ideal stage for a defiant performance.

She was born in 1837 as Mary Harris in Cork, Ireland. When she was eight years old, a fungus blighted the nation’s potato crop, causing a terrible famine. She emi- grated with her family to Toronto and there grew up, graduated from a convent school, and became a schoolteacher. Eventually she moved to Memphis and mar- ried an iron molder named George Jones. Between 1862 and 1867 they had four children. She devoted herself to cooking, cleaning, and sewing for the family. Then yellow fever struck.

The deadly epidemic came in the fall of 1867. As mortality rose, rich families left town, leaving those who could not afford travel to become victims. The sounds of death carts taking bodies away filled neighborhoods. Mary Jones describes what hap- pened to her.

All about my house I could hear weeping and the cries of delirium. One by one, my four little children sickened and died. I washed their little bodies and got them ready for burial. My husband caught the fever and died. I sat alone through nights of grief. No one came to me. No one could. 1

She nursed the sick until the plague ended, then returned to Chicago to set up a dressmaking business. She often worked for wealthy society matrons.

I had ample opportunity to observe the luxury and extravagance of their lives. Often while sewing for the lords and barons who lived in magnificence on the Lake Shore Drive, I would look out of the plate glass windows and see the poor, shivering wretches, jobless and hungry, walking along the frozen lake front. The contrast of their condition with that of the tropical comfort of the people for whom I sewed was painful to me. My employers seemed neither to notice nor to care. 2  

1 Mary Field Parton, ed., The Autobiography of Mother Jones (Chicago: C. H. Kerr, 1925), p. 12.

2 Ibid., chap. 1, p. 13.

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Several years passed, then in 1871 the Great Chicago Fire burned her business and left her destitute. After the fire she attended evening meetings of the Knights of Labor, an early union, becoming absorbed in the fight of industrial workers for better wages and conditions. The perspective of class war began to dominate her view of society. She felt that workers were enslaved by corporate employers and by the corrupt politi- cians and judges who did their bidding. She believed that only by overthrowing capi- talism could the laboring class end its bondage and usher in a new day of socialism, so she joined a small socialist political party.

For almost two decades Mary Jones worked in obscurity for labor causes and dur- ing this time she created the persona that would make her powerful and famous. Mary Jones became Mother Jones. The loss of her own family had freed her to take on another, to adopt the downtrodden. In an era when women had no vote, held no leadership positions, and received no encouragement to speak up, she would use this metaphor of motherhood to give her power.

She rose to prominence as an organizer for the United Mine Workers. Horrible working conditions prevailed in coal mines. Miners worked 10- and 12-hour days in damp, dusty, cramped, dangerous tunnels. Wages were so low that mining families put their children to work to get by. Boys as young as eight years old toiled six or seven days a week, some spending so many hours in cramped shafts that their bones grew irregularly and they could not stand straight as adults. Textile mills were built near mining towns to employ the miners’ wives and daughters. The United Mine Workers wanted to unionize the miners, but the coal companies viciously resisted. Organizers were followed and observed. Miners who shook an organizer’s hand were fired. Hired thugs beat up troublemakers. Companies had friendly judges convene lunacy hearings and commit prounion employees to asylums. The miners wanted unions, but they were intimidated.

In the late 1890s Mother Jones arrived in Pennsylvania coal country. At 60 years old she looked like a grandmother. She stood five feet tall with silver hair and sharp blue eyes. With great energy she worked the coal towns. She was an explosive orator with a vocal range from shrill cries to a forceful, low pitch that mesmerized listeners. She knew the miners’ language and spoke in colorful terms, calling mine owners “a crew of pirates,” “a gang of thieves,” and “cowards.” She called the men her “boys” and as their “mother” told them to stand up to the companies.

During a bitter strike in 1900 when some miners were losing their nerve, she or- ganized marches of the miners’ wives. The women paraded to work sites wearing aprons, waving mops, and banging pans. Laughing company guards saw no danger from the comical processions and let them through, not realizing how Mother Jones had cleverly dramatized the role of aggrieved wives and mothers fighting for the welfare of their families. She scolded the men, telling them they were shamed if their wives stood up to the companies and they did not.

Mother Jones used ironic wit to puncture establishment pretensions. In 1902 she was arrested in West Virginia after the coal companies got an injunction against un- ion organizing. In court, the judge suspended her sentence, but advised her that as a woman it would be “better far for her to follow the lines and paths which the Allwise Being intended her sex should pursue.” She appreciated the advice, she said, adding that it was no surprise he was taking the company’s side, since

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experience had taught her that “robbers tend to like each other.” 3 When asked by a Princeton professor to address his class, she brought with her a stooped and pale 10-year-old boy. “Here’s a textbook on economics,” she said. “He gets three dollars a week . . . [working] in a carpet factory ten hours a day while the children of the rich are getting higher education.” 4 She had a favorite story for audiences: “I asked a man in prison once how he happened to get there. He had stolen a pair of shoes. I told him that if he had stolen a railroad he could be a United States Senator.” 5

Eventually, Mother Jones fell out with the United Mine Workers because she was more militant than its leadership. She became a lecturer for the Socialist Party, but in time she renounced socialism. She was a doer, not an ideologue, and she lacked pa- tience with hairsplitting doctrinal debates among intellectuals who led comfortable lives. However, in 1905 she helped launch the International Workers of the World (IWW), a radical union dedicated to overthrowing American capitalism. By 1911 she had returned to the front lines in mining regions. Later, she marched with striking

3 Gene R. Nichol, Jr., “Fighting Poverty with Virtue,” Michigan Law Review, May 2002, p. 1661.

4 Quoted in Marilyn Jurich, “The Female Trickster—Known as Trickstar—As Exemplified by Two American Legendary Women, ‘Billy’ Tipton and Mother Jones,” Journal of American Culture, Spring 1999, p. 69.

5 “Mother Jones Speaks to Coney Island Crowd,” The New York Times, July 27, 1903.

Mary “Mother” Jones. Source: Library of Congress.

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garment and streetcar workers in New York City. In 1916 she started a riot by 200 wives of streetcar workers with an inflammatory speech, telling them: “You ought to be out raising hell.” 6

By the 1920s Mother Jones had grown disillusioned with unions. She quit the IWW saying it was more interested in symbolic displays than in concrete victories. Other unions had grown comfortable with the corporate establishment. She had contempt for union leaders motivated by their own importance and called John L. Lewis, president of the United Mine Workers, a “pie counter hunter.” 7 She retired from pub- lic life, speaking out now and then, and died in 1930 at the age of 92.

Today Mother Jones is little remembered. Her time passed, and the specific labor abuses that enraged her are mostly ended. Perhaps her invective is unmatched today. She defined “monster capitalism,” as a “robber system” supported by the “national gang of burglars of Wall Street.” The corporations she attacked had “snake brains” and were run by “idiots” and “commercial pirates.” But her ideas live on. Although her life was unique in its tragedy and drama, her attacks were based on enduring values that recycle through time. We may forget Mother Jones, but we hear her in today’s business critics. In this chapter we explore the birth and life of these values.


There are two underlying sources of criticism of business, one ancient and the other modern. The first is the belief that people in business place profit before more worthy values such as honesty, truth, justice, love, piety, aesthetics, tranquility, and respect for nature. The second is the strain of economic development. During industrializa- tion and later, when market economies grow large and complex, business has a range of problematic impacts on societies. We will discuss both fundamental sources of criticism. We begin in the ancient Mediterranean world.

The Greeks and Romans The earliest societies were agrarian in nature. An agrarian society is a preindustrial society in which economic, political, and cultural values are based on agricultural experience. In these societies, most people worked the land for subsistence. No in- dustrial centers or mass markets existed, so business activity beyond barter and ex- change was a tiny part of the economy. The activities of merchants were often thought unprincipled because their sharp trading practices clashed with the traditional, more altruistic values of family and clan relations among farmers. Merchants typically had lower class status than officials, farmers, soldiers, artisans, and teachers.

The extraordinary civilizations of ancient Greece and Rome were based on sub- sistence agriculture. Economic activity by merchants, bankers, and manufacturers was limited. The largest factory in Athens, for example, employed 120 workers making shields. 8 Commercial activity was greater in Rome, but it was still mainly

agrarian society A society with a largely agricultural economy.

6 “Car Riot Started by ‘Mother’ Jones,” The New York Times, October 6, 1916, p. 1.

7 Quoted in Elliot J. Gorn, Mother Jones: The Most Dangerous Woman in America (New York: Hill and Wang, 2001), p. 249.

8 Will Durant, The Life of Greece (New York: Simon & Schuster, 1939), p. 272.

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an agrarian society. Perhaps because industry was so limited in both societies, in- accurate economic doctrines arose to explain commercial activity. 9 For example, the desire for riches was suspect due to the popular belief that the amount of wealth was fixed. If so, an individual accumulated wealth only by subtracting from the share of others. This is believable logic in an agrarian society because the land on which the economy is based is fixed in amount.

Philosophers moved into this realm of intellectual error, reasoning that profit seek- ing was an inferior motive and that commercial activity led to excess, corruption, and misery. Their views are of lasting significance because, as with many topics of dis- course in Western civilization, they first defined the terms of debate over the ranking of profit relative to other values. In particular, both Plato and Aristotle articulated the fundamental indictment that casts an everlasting shadow over business.

Plato believed that insatiable appetites existed in every person. These could be controlled only by inner virtues painstakingly acquired through character devel- opment. The pursuit of money was one such appetite, and Plato thought that when people engaged in trade they inevitably succumbed to the temptation of excess and became grasping. In a society, as with an individual, wealth spawned evils, including inequality, envy, class conflict, and war. “Virtue and wealth,” he argued, “are balanced against one another in the scales.” 10 Rulers of the utopian society he conceived in The Republic were prohibited from owning possessions for fear they would be corrupted and turn into tyrants. So troubled was he about this that they were forbidden even to touch gold or silver.

Aristotle believed there was a benign form of acquisition that consisted of get- ting the things needed for subsistence. This kind of acquisition was natural and moderate. However, after trading and monetary systems arose, the art of acquisi- tion was no longer practiced this simple way. Instead, merchants studied the tech- niques of commerce, figuring out how to make the greatest profit, seeking not the necessities, but unlimited pools of money. Aristotle thought this was a lower form of acquisition because it was activity that did not contribute to inner virtue.

For Aristotle, happiness is the ultimate goal of life. It comes to those who de- velop character virtues such as courage, temperance, justice, and wisdom. He called these virtues “goods of the soul” and held them superior to “external goods,” which he defined as possessions and money. Aristotle believed that the amount of happiness a person gained in life was equal to the amount of virtue ac- cumulated in the soul. Since material possessions beyond those needed for sub- sistence added nothing to the store of virtue in the soul, it followed that they contributed nothing to happiness; thus, it was a waste or “perversion” of any vir- tue to apply it toward the acquisition of excess. “The proper function of courage, for example, is not to produce money but to give confidence,” he wrote. 11

Thus, both Plato and Aristotle relegated the profit motive to the sphere of lower or base impulses, a place from which it would not escape for centuries and then

9 John Kenneth Galbraith, Economics in Perspective (Boston: Houghton Mifflin, 1987), pp. 9–10.

10 The Republic, trans. F. M. Cornford (New York: Oxford University Press, 1945), p. 274.

11 In Politics, trans. Ernest Barker (New York: Oxford University Press, 1962), book I, chap. X, sec. 17. See also book VII, chap. 1, secs. 1–10.

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only partially. Soon, Roman law would forbid the senatorial class from making business investments (and the law would be widely circumvented). Likewise, the Stoic philosophers of Rome, including Epictetus and Marcus Aurelius, taught that the truly rich person possessed inner peace rather than capital or property. “Asked, ‘Who is the rich man?’ Epictetus replied, ‘He who is content.’” 12 These sages looked down on merchants of their day as materialists who, in pursuit of wealth, sacrificed character development. Of course, this did not deter the merchants from accumulating fortunes and neglecting the study of ideals. The scornful ethos of the philosophers, though potent enough to endure and to beget perennial hostility, has never had enough power to suppress the tide of commerce.

The Medieval World During the Middle Ages, the prevailing theology of the Roman Catholic Church was intolerant of profit seeking. As the Christian religion arose, its early practi- tioners had been persecuted by the wealthy and corrupt ruling class of Rome. The church, then, rejected a focus on wealth and sought special status for the poor. Saint Augustine, the towering figure of early church doctrine, accepted the idea that material wealth was fixed in supply. To become rich, a person necessarily sinned by accumulation that violated the natural equality of creation. Moreover, the love of material things was a snare that pulled the soul away from God. 13

The Roman Catholic Church’s most definitive theologian, St. Thomas Aquinas, was greatly influenced by the ideas of Aristotle when he set forth church canon about the ethics of profit making and lending money. Merchants were exhorted to charge a just price for their wares, a price that incorporated a modest profit just adequate to maintain them in the social station to which they were born. The just price stands in contrast to the modern idea of a market price determined by supply and demand without any moral dimension. Today we hear echoes of medieval theology when consumers complain that high prices for a scarce product are un- just. Catholicism also condemned usury, or the lending of money for interest. By the twelfth and thirteenth centuries, however, the money supply and economic activity had greatly expanded and interest-bearing loans were common. “Com- mercial activity,” notes historian Will Durant, “proved stronger than fear of prison or hell.” 14 In time, the church backed away from the dogma of just price and usury. It was a slow process. Not until 1917 did the Catholic church officially renounce the teaching that lending money for interest was a sin.

The Modern World As business activity accelerated during the Renaissance, new theories arose to jus- tify previously condemned practices. Two are of great importance. First, is the rise of the Protestant ethic in the sixteenth century. The Protestant reformers Martin Luther

just price A price giving a moderate profit; one inspired by fairness, not greed.

market price A price deter- mined by the interaction of supply and demand.

usury The lending of money for interest.

Protestant ethic The belief that hard work and adherence to a set of virtues such as thrift, saving, and sobriety would bring wealth and God’s approval.

12 The Golden Sayings of Epictetus, trans. Hastings Crossley, in Charles W. Eliot, ed., Plato, Epictetus, Marcus Aurelius (Danbury, CT: Grolier, 1980), p. 179.

13 Saint Augustine, The City of God, trans. Gerald G. Walsh et al. (New York: Image Books, 1958), book XIX, chap. 17. This work was completed in A.D. 426.

14 The Age of Faith (New York: Simon & Schuster, 1950), p. 631.

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and John Calvin believed that work was a means of serving God and that if a person earned great wealth through hard work it was a sign of God’s approval. This con- fronted the church’s antagonism toward commerce with a new doctrine that re- moved moral suspicion of wealth. It contradicted the belief that pursuit of money corrupted the soul. Second, in 1776 Adam Smith published his theory of capitalism, writing that free markets harnessed greed for the public good and protected con- sumers from abuse. This defied the church’s insistence on the idea of a just price. Moreover, visible wealth creation in expanding economies forcefully countered the notion that only a more or less fixed amount of wealth existed in a society. These developments ended the domination of doctrines that made business activity seem faintly criminal and released new energies into commerce. But the broom of doctri- nal reform failed to make a clean sweep, and many business critics clung to the old approbations of the Greek philosophers and of the Roman Catholic Church.

In addition, just when old strictures were loosening, the Industrial Revolution created new tensions that reinforced critical attitudes about business. These new tensions arose as inventions and industries transformed agrarian societies and challenged traditional values with modern alternatives. During industrialization, rural, slow-paced, stable societies are swiftly and dramatically altered. They become urban and fast-paced. More emphasis is placed on material things and people’s values shift. Wealth creation overwhelms self-restraint. Consumption supplants thrift and saving. Conquest of nature replaces awe of nature.


As societies modernize, the antiquarian values of Greece live on in the charges of critics who are troubled by these changes. Always, the fundamental critique is altered to fit current circumstances. We will see how this happened in the United States.

The Colonial Era The American nation was colonized by corporations. The colonists who landed at Jamestown, Virginia, in 1606 were sponsored by investors in the London Company, who hoped to make a fortune by discovering gold in the New World. Instead, the colonists found a mild strain of native tobacco that caused a sensation in England (and became the basis for the plantation economy that would rise in the South). The Pilgrims who came in the Mayflower to Cape Cod, Massachusetts, in 1620 had fled persecution to set up a religious colony. But their voyage was financed by the Plymouth Company, whose backers sought to make a profit. To repay their debt and to buy manufactured goods they exported furs and forest products such as timber, tar, and turpentine. In this way the early colonists became lively traders.

As international trade in coastal regions expanded, settlers moved inland, creat- ing a broad agrarian base for the economy. These frontier farms seethed with profit- oriented activity. Unlike European peasants, American farmers owned their land and this turned them into little capitalists. Most tried to make money by raising crops for market. Some were land speculators. Others built and ran grain mills and in other ways employed their capital like the traders and merchants in towns.

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The popular theoretician of the rising capitalist spirit was Benjamin Franklin (1706–1790). Franklin began a business career at the age of 22 by opening a print- ing shop. He then bought several newspapers and retired rich at the age of 42. During travels in Europe he became acquainted with Adam Smith, who shared parts of the manuscript for Wealth of Nations with him. Franklin came to accept Smith’s then-radical views on the superiority of laissez-faire markets. Writing pro- lifically, he gave form to a new American business ethos.

In 1732 Franklin published the first annual Poor Richard’s Almanack, an eclectic book of facts, information, and self-help advice. Over many years the Almanack carried aphorisms and maxims about the road to success in business, a road open to all who practiced virtues such as hard work, thrift, and frugality. “The sleeping Fox catches no Poultry.” “Lost Time is never found again.” “Diligence is the Mother of Good Luck.” “The Art of getting Riches consists very much in Thrift.” 15

Unlike the Old World theologians who taught that commercial success was slightly sinful, Franklin taught that God would approve the pursuit of self-interest and wealth. “God gives all things to Industry.” 16 He made business activity syn- onymous with traditional virtues and released it from moral suspicion. His teach- ing resonated with the American condition, and he became the prophet of a vibrant economy. Not surprisingly, his Almanacks were best sellers.

The Young Nation The amalgam of a new land, a new people, and a new thinking generated an early emphasis on business activity and material progress. Yet not everyone felt this was either inevitable or proper and dissent soon emerged. After independence in 1783, business interests were important in the new nation but not to the extent that they would be in time. There were few large companies. The economy was 90 percent agricultural, so the interests of farmers and planters dominated those of infant industry. A major debate arose over the direction of the economy, one that would define subsequent debate between business and its critics in America. It was played out in a bitter rivalry between two members of President George Washington’s cabinet who differed both in temperament and ideas.

Alexander Hamilton (1755–1804), the first secretary of the treasury, was young, ambitious, brilliant, and inclined to action. He believed that industrial growth would increase national power and designed a grand scheme to promote manu- facturing and finance. He was an arrogant, aloof leader who mistrusted the wisdom of common citizens. Having once said “the people is a great beast,” he favored rule by an economic elite. 17 Hamilton got Congress to approve his plans for taxation, debt financing, tariffs to protect infant industry, and creation of a national bank, setting a policy of industrialization in motion.

15 Quotations are in Poor Richard’s Almanack, 1749, and “The Way to Wealth,” Preface to Poor Richard Improved, 1758, in Nathan G. Goodman, ed., The Autobiography of Benjamin Franklin and Selections from His Other Writings (New York: Carlton House, 1932), pp. 198, 206, 207.

16 Ibid., “The Way to Wealth,” p. 207.

17 Quoted in Vernon Louis Parrington, Main Currents in American Thought, vol. 1 (New York: Harcourt, Brace, 1958), p. 300; originally published in 1927.

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He was opposed by Secretary of State Thomas Jefferson (1743–1826), one of America’s most original and philosophical minds. Jefferson was a shy man who avoided conflict. His thinking achieved great depth, but he was less a man of action than Hamilton. His weakness as a manager is summed up in a revealing statement. “We can only be answerable for the orders we give, and not for their execution.” 18 He had grown up in sparsely populated frontier areas of Virginia, never having seen a village of more than 20 houses until he was 18 years old. Awed by the com- mon sense and resourcefulness of the settlers he knew, he formed the opinion that an agrarian economy of landowning farmers was the ideal social order.

Reading books as much as 15 hours a day, he gathered arguments to reinforce his convictions. According to Jefferson, America should aspire to spread farming over its immense, unsettled territory. He wrote that God placed “genuine virtue” in farmers, His chosen people. Manufacturing as an occupation “suffocates the germ of virtue,” leads to venality, and corrupts the “manners and principles” of those who work at it. 19 He believed that an agrarian economy would prevent the rise of subservience to the wealthy and bring a state of equality, basic justice, and concern for the common good. Jefferson was well-read in Greek philosophy, and it was no coincidence that he echoed the admonitions against commerce found in Plato and Aristotle. Even as he restated the Greeks, he laid the ground for more than two centuries of American business critics to follow.

Jefferson did not prevail. His agrarian ideal was fated to exist in the shadows of industrial growth. His theory of a nation of small farmers was somewhat nebulous and idealistic. As a policy it was no match for the more concrete design that Hamilton sold to Congress with great energy, a design that was surely more in tune with economic forces afoot in the young nation. With the support of business leaders, Hamilton carried out a bold, visionary program to stimulate the growth of manufacturing. His actions prepared the ground for the unexampled industrial growth that roared through the next century. He so angered Jefferson that the two rarely spoke even as they served together in George Washington’s cabinet. Each had many followers and the conflict between their positions created not only the basis for subsequent criticism of business, but the basic cleavage that has prevailed in the American two-party system to the present.

1800–1865 The first half of the nineteenth century saw steady industrial growth. This aroused critics who clung to the values and life of the agrarian society that was fading before their eyes. Early in the century banking and manufacturing expanded. Markets were opened by tens of thousands of miles of new turnpikes. Completion of the 350-mile-long Erie Canal in 1825 inspired another 4,400 miles of canals to transport goods over water. 20 Railroads started to run in the 1830s. Immigrants arrived and cities grew. Business boomed.

18 Letter to Baron F. W. von Stueben, March 10, 1781, quoted in Stanley Elkins and Eric McKitrick, The Age of Federalism (New York: Oxford University Press, 1993), p. 206.

19 Quotes are from Notes on Virginia, in Adrienne Koch and William Peden, The Life and Selected Writings of Thomas Jefferson (New York: Random House, 1944), p. 280; first published in 1784.

20 James Oliver Robertson, America’s Business (New York: Hill and Wang, 1985), p. 81.

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As the force of events put capitalism in control, agrarian romantics were pushed to the side, having only the power to object as cherished values were eroded. “Commerce,” complained Ralph Waldo Emerson in 1839, “threatens to upset the balance of man and establish a new, universal Monarchy more tyrannical than Babylon or Rome.” 21 Later, his friend Henry David Thoreau wrote to belittle a society in which this commerce smothered the poetry and grace of everyday life.

This world is a place of business. What an infinite bustle! I am awakened almost every night by the panting of the locomotive. It interrupts my dreams. There is no sabbath. It would be glorious to see mankind at leisure for once. It is nothing but work, work, work. I cannot easily buy a blank-book to write thoughts in; they are commonly ruled for dollars and cents . . . I think that there is nothing, not even crime, more opposed to poetry, to philosophy, ay, to life itself, than this incessant business. 22

Among those who rejected capitalism, some tried to create alternative worlds. Beginning in the 1820s there was a frenzy of utopia building. Small bands of people who disdained the values prized in industrial society—materialism, competition, individualism, and tireless labor—built model communities intended to act as beacons for a better way. The largest was New Harmony, Indiana, founded in 1825 by Robert Owen (1771–1858), an English industrialist. Owen ran a large cotton mill in Scotland that had become a model for fair treatment of workers. Yet he be- lieved that human values were corrupted by factory work and life in capitalist societies. He aspired to show that a society based on principles of equality, charity, cooperation, and moderation could flourish. At New Harmony, money was abol- ished and the residents shared the fruits of communal labor.

Owen called his creation a “socialist” system and in the 1820s the term socialism first came into widespread use as a reference to Owen’s philosophy. He started several other socialist communities and his ventures inspired others to form utopias based on socialist principles. More than 100 such communities appeared between 1820 and 1850. 23 A few were successful. The Oneida Community in New York lasted 31 years from 1848 to 1879. But most floundered, on average in less than two years. 24

New Harmony emptied after only four years. Like other utopias it required businesslike activities for subsistence, but it attracted more loafers than skilled farmers and artisans who, in any case, could command higher material rewards in the outside world. After their initial zeal wore off, the sojourners tired of spartan living, regimentation, and rules to enforce cooperation. Most communes had pro- grams to infuse socialist values into human natures tainted by capitalist schooling. Rarely did this work. One indication is that pilfering of supplies from common storehouses was common.

utopia A socially engi- neered model community de- signed to cor- rect faults in the world so its members can find happiness.

21 Quoted from Emerson’s Journals, vol. V, pp. 284–86, in Parrington, Main Currents in American Thought, vol. I, p. 386.

22 “Life without Principle,” The Atlantic Monthly, October 1863, pp. 484–85.

23 W. Fitzhugh Brundage, A Socialist Utopia in the New South (Urbana: University of Illinois Press, 1996), p. 6.

24 Joshua Muravchik, Heaven on Earth: The Rise and Fall of Socialism (San Francisco: Encounter Books, 2002), p. 51.

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The agrarian and socialist communes failed utterly as alternatives to the bus- tling capitalism beyond their margins. Although a few new ones appeared as late as the 1890s, by the 1850s the idea had run its course. It failed in practice because it was based on romantic thinking, not on sustaining social forces. A series of with- ered utopias and a growing consensus on capitalist values adjourned the experi- ments. Socialism would return, but it awaited a new day and new ideas.

Populists and Progressives At the end of the Civil War in 1865, America was still a predominantly rural, agrar- ian society of small, local businesses. But explosive industrial growth rapidly re- shaped it, creating severe social problems in the process. Cities grew as farmers left the land and immigrants swelled slum populations. Corrupt political ma- chines ran cities but failed to improve parlous conditions. Companies merged into huge national monopolies. These changes were the raw material of two move- ments critical of big business.

The first was the populist movement, a farmers’ protest movement that began in the 1870s and led to formation of a national political party, the Populist Party, which assailed business interests until its decisive defeat in the presidential elec- tion of 1896. The movement arose soon after the Civil War, when farmers experi- enced falling crop prices. The declines were due mainly to overproduction by mechanized farm machinery and to competition from foreign farmers exploiting new transport technologies. Farmers overlooked these factors and blamed their distress on railroad companies, the largest businesses of the day, which frequently overcharged for crop hauling, and on “plutocrats” such as J. P. Morgan and other Eastern bankers who controlled the loan companies that foreclosed on their farms.

In a typical tirade, Mary Lease, a populist orator who whipped up crowds of farmers at picnics and fairs, explained:

Wall Street owns the country. It is no longer a government of the people, by the peo- ple and for the people, but a government of Wall Street and for Wall Street. The great common people of this country are slaves, and monopoly is the master. The West and South are bound and prostrate before the manufacturing East. 25

To solve agrarian ills, the populists advocated government ownership of rail- roads, telegraph and telephone companies, and banks, a policy dagger that re- vealed their fundamental rejection of capitalism. They demanded direct election of U.S. senators, who at the time were picked by state legislatures corrupted with money from big business. And to ease credit they sought to abandon the gold standard and expand the money supply.

Historian Louis Galambos believes that despite the populist critique, there ex- isted a great reservoir of respect for and confidence in business until the late 1880s. 26 After that, analysis of newspaper and magazine editorials shows mounting hostility

populist movement A political reform move- ment that arose among farmers in the late 1800s. Populists blamed social problems on industry and sought radical reforms such as government ownership of railroads.

25 In John D. Hicks, The Populist Revolt (Minneapolis: University of Minnesota Press, 1931), p. 160.

26 Louis Galambos, The Public Image of Big Business in America, 1880–1940 (Baltimore: Johns Hopkins University Press, 1975), chap. 3. Galambos examined 8,976 items related to big business that were printed in newspapers and journals between 1879 and 1940, using content analysis to reconstruct rough measures of opinion among certain influential groups.

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The Wonderful Wizard of Oz is one of the all-time best-selling children’s books. 27 It was written by Lyman Frank Baum (1856–1919), an actor, sales- clerk, and small-town newspaper editor who loved creating stories for children. On the surface, the book is a magical adventure in a fairyland where children are as wise as adults. However, the book has a deeper dimension. It is a parable of populism. 28 The Wonderful Wizard of Oz satirizes the evils of an industrial society run by a moneyed elite of bankers and industrialists. “Oz” is the abbrevia- tion for ounce, a measure of gold. It and the Yel- low Brick Road allude to the hated gold standard. The main characters represent groups in society. Dorothy is the common person. The Scarecrow is the farmer. The Tin Woodsman is industrial labor. His rusted condition symbolizes factory closings in the depression years of the 1890s, and his lack of a heart hints that factories dehumanize workers. The Cowardly Lion is William Jennings Bryan, the defeated Populist Party candidate, whom Baum

27 L. Frank Baum (Chicago: Reilly & Britten, 1915), first published in 1900.

28 The classic interpretation of symbolism is by Henry W. Littlefield, “The Wizard of Oz: Parable on Populism,” American Quarterly, Spring 1964.

regarded as lacking sufficient courage. The Wicked Witch of the East is a parody of the capi- talist elite. She kept the munchkins, or “little peo- ple,” in servitude. At the end of the Yellow Brick Road lay the Emerald City, or Washington, D.C., where on arrival the group was met by the Wizard, representing the president of the United States. At the time Baum wrote the book, William McKinley was president, having defeated Bryan in 1896. Populists reviled McKinley because he had the backing of big trusts and he supported the hated gold standard. At the conclusion, Dorothy melted the Wicked Witch of the East, the Wizard flew off in a bal- loon, the Scarecrow became the ruler of Oz, and the Tin Woodsman took charge of the East. This ending is the unrealized populist dream. Baum’s first motive was to be a child’s story- teller, not to write political satire for adults. He never stated that the book contained populist themes, leading to debate over whether finding such symbolism is fair. Yet Baum lived in South Dakota while populism was emerging and he marched in Populist Party rallies. The Wonder- ful Wizard of Oz was written in 1898, at the height of ardor for reform. Therefore, it seems reasonable to think that Baum’s tale was inspired by the politics of the day.

Was President McKinley the Wizard of Oz?

toward large trusts. Soon the populists succeeded in electing many state and local officials, who enacted laws to regulate the railroads and provided the political groundswell behind creation of the Interstate Commerce Commission in 1887 to regulate railroads.

The populist movement was a diverse, unstable coalition of interests, including farmers, labor, prohibitionists, antimonopolists, silverites, and suffragists. These groups were held together for a time by a common, deep-seated hostility toward big companies. Ultimately, the populists failed to forge an effective political coalition and the movement was moribund after 1900 when William Jennings Bryan, the Populist Party’s presidential candidate, was decisively defeated for a second time.

However, the populists refined a logic and lexicon for attacking business. They blamed adverse consequences of industrialization on monopoly, trusts, Wall Street, “silk-hatted Easterners,” the soulless “loan sharks” and shameless “bloodhounds of money” who foreclosed on farms, and on corrupt politicians who worked as er- rand boys for the “moneybags” in a system of “plutocracy” (or rule by the wealthy).

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Their criticisms were harsh and colorful. “The James Brothers and the Daltons were limited in their methods,” thundered Mary Lease to a cheering crowd. “If they had operated on as large a scale as the millionaires of the country they could have built universities like Rockefeller. . . .” 29 In an essay on the virtues of farming as an occupation, Bryan wrote that for farmers “even the dumb animals are more wholesome companions than the bulls and bears of Wall Street.” 30 Thomas Jefferson would likely have applauded.

It was, of course, too late for America to be a nation of farmers. This did not diminish the appeal of the populist message to large segments of the population. On the contrary, continued industrial growth has caused this message to resurface time and again up to the present, each time its vocabulary recycled and its content refined to fit current circumstances.

The second critical movement was the progressive movement, a broader reform effort lasting from about 1900 until the end of World War I in 1918. Fueled by wide moral indignation about social problems caused by industry, it had strong support from the urban middle class and professionals. Although a short-lived Progressive Party was formed and unsuccessfully ran Theodore Roosevelt for president in 1912, both the Democratic and Republican parties had powerful progressive wings. Unlike populism, progressivism was a mainstream political doctrine. Like populism, it was at root an effort to cure social ills by using government to control perceived abuses of big business.

Because of broad popular support, Progressives were far more effective than populists in their reform efforts, and during their era a cleansing tide washed over business. “Turn the waters of pure public spirit into the corrupt pools of private interests,” wrote Ernest Crosby, editor of Cosmopolitan magazine, “and wash the offensive accumulations away.” 31 Progressives broke up trusts and monopolies, outlawed corporate campaign contributions, restricted child labor, passed a corpo- rate income tax, and regulated food and drug companies and public utilities. With the Seventeenth Amendment in 1913 requiring direct election of senators they completed part of the Populist agenda.

Socialists The full story of the Progressive movement’s success lies in the counterpoint it provided to the socialist movement of that era. Socialism is a classless social sys- tem in which property is collectively owned and income from labor is equally and indiscriminately divided among members. When wealth is shared, want and conflict are eliminated. Socialism poses a revolutionary challenge to capitalist society because it requires a change in property relationships that destroys bed- rock arrangements.

Although elements of socialist thinking are ageless, the originator of modern socialist doctrine is Francois-Noël Babeuf (1764–1797), a minor French official and writer who wanted to fulfill the promise of equality for all made during the French

progressive movement A turn-of-the- twentieth- century political movement that associated moderate social reform with progress. Pro- gressivism was less radical than populism and had wider appeal.

socialism The doctrine of a classless society in which property is col- lectively owned and income from labor is equally divided among mem- bers. It rejects the values of capitalism.

29 Quoted in “Furor over Mary Lease,” The New York Times, August 11, 1896, p. 3.

30 “Farming as an Occupation,” Cosmopolitan, January 1904, p. 371.

31 Ernest Crosby, “The Man with the Hose,” Cosmopolitan, August 1906, p. 341.

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Revolution of 1789. He advocated seizing the possessions of the wealthy and giv- ing them to the masses. Following this seizure, Babeuf envisioned a new commu- nal economy. Private property would be abolished. Citizens would be required to work based on their trade or skill. The government would receive their output and distribute to everyone the basic material necessities of life. To eliminate indi- vidual desire for wealth and power, schools would teach egalitarian principles. Babeuf pushed for a violent overthrow of the French regime to achieve his vision and for this he was imprisoned, then beheaded in 1797. But his ideas took hold and circulated throughout Europe. One convert was Robert Owen, who was in- spired to set up his tiny utopia in Indiana.

Art Young, a radical cartoonist of the Progressive era, had an impish ability to highlight the excesses of the industrial age. This cartoon, typical of many then drawn by Young and others, first appeared in 1912. Source: Art Young, The Best of Art Young, New York: Vanguard Press, 1936, p. 89).

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For a half century after Babeuf, socialist thought was splintered and muddied in a ferment of competing schools. Then, in 1848, Karl Marx (1818–1883) and his lifetime collaborator, Friedrich Engels (1820–1895), published The Communist Manifesto and put socialism on a new foundation. 32 Marx and Engels argued that the basis for socialism was an inevitable process of class struggle underlying and explaining the history of human society. Under capitalism the working class is exploited by the owners of capital, who pay low wages for dehumanizing work and then usurp for themselves the value of what workers toil to create. Marx often used metaphors in which capitalists became vampires and werewolves, sucking the lifeblood from labor.

Like Babeuf and others, Marx and Engels envisioned an equalitarian society that abolished private ownership of capital and instituted wealth-sharing among all members. Workers would no longer be alienated by miserable, meaningless labor. With class distinctions ended, people would live in harmony, their basic needs fulfilled. While Marx and Engels repeated many of the timeless criticisms of capitalism as characterized by barbaric competition, corruption of values by money, and meaningless work, they made socialism more compelling when they discovered a theory of history to explain it. Class warfare was the underlying dy- namic that changed society. Workers in all nations had the duty to rise and over- throw the capitalist class. The last sentence of the Manifesto reads: “WORKINGMEN OF ALL COUNTRIES UNITE!” 33

Meanwhile, in the United States of 1850 to 1900, rapid industrial growth was taking place within a coarse, little-regulated capitalist system that in many ways seemed to bear out the socialist’s nightmare of exploitation. Child labor was wide- spread; factories injured and wore down workers; wealth and power were concen- trated in great banks, trusts, and railway systems; inequality between rich and poor seemed obscene; and the masses suffered through financial panics and unemployment. Also, industrial growth was taking people away from agrarian occupations and creating a new class of employed Americans. In 1860 about 1.3 million people worked for the trusts, mines, and railroads, but by 1890 there were 4.3 million so occupied. 34 The rise of this new social class formed the soil in which labor unions could grow, and given widespread labor abuses, these unions might be attracted to socialism. As it turned out, this attraction would be limited.

As unions sprang up employers fought them. Most early unions were tied to single companies or locations. A few were radical and avowedly socialist, espe- cially those with many European immigrants who brought Marxist thinking with them. The first big national union was the Knights of Labor, set up in 1869. Its constitution recognized exploitation of labor by owners of capital, but it called for

32 According to Paul Sweezy, Marx chose to use the word communist rather than socialist because the meaning of the word socialist had become muddled. The term communist, in use for centuries to denote pooled property, more clearly conveyed his theory. See Socialism (New York: McGraw-Hill, 1949), pp. 8–9.

33 Karl Marx and Friedrich Engels, Manifesto of the Communist Party, in Lewis S. Feuer, ed., Marx & Engels: Basic Writings on Politics & Philosophy (New York: Anchor Books, 1959), p. 41.

34 Arthur M. Schlesinger, Political and Social Growth of the United States: 1852–1933 (New York: MacMillan, 1935), p. 203.

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reforms to protect labor rather than for overthrow of the capitalists. However, the union movement soon struck fear in the capitalist heart.

In the summer of 1877 a wave of violent strikes hit the railroads, then rolled on to other industries as it spread across the nation. Fighting and killing between strikers and the hired armies of employers was widespread. President Rutherford B. Hayes called his cabinet into a continuous session. He was so terrified that the country would fall to a workers’ revolution that, rather than using federal troops to restore order in major cities, he gathered them in Washington, D.C., to protect the government. The strikes eventually ran their course, and although there was never again such a violent cluster, from this time until the end of the century the number, size, and violence of strikes only increased.

In this climate of unrest, the socialist movement was surprisingly slow to blos- som. The largest union, the American Federation of Labor, formed in 1886, dis- dained Marxism and elected to work with employers for higher wages and better working conditions. As time passed and the union movement grew, many work- ers still wanted radical change. They eventually found a home when the Industrial Workers of the World (IWW) was formed in 1905. The IWW proposed to represent all workers of both sexes and all races and in every industry in the fight to over- throw the capitalist system. Its platform was clear.

We are here to confederate the workers of this country into a working-class movement that shall have for its purpose the emancipation of the working-class from the slave bondage of capitalism. . . . The aims and objects of this organization shall be to put the working-class in possession of the economic power, the means of life, in control of the machinery of production and distribution, without regard to the capitalist masters. 35

Although the IWW was not as large as other unions, its unmitigated rejection of the system scared mainstream America and it was severely repressed. Laws were passed to prevent IWW members from speaking or assembling and it defied them, sometimes violently.

Working alongside the IWW was a young Socialist Party with growing power. It had been formed in 1901 with the avowed purpose of overthrowing capitalism. At the peak of its popularity in 1912 it had 118,000 members and its presidential candidate, Eugene V. Debs, got 6 percent of the popular vote. More than 1,000 socialists had been elected to state and local office. 36 This moment was the high mark of socialism in the United States. From then on, its appeal rapidly declined and it never recovered meaningful power.

There were four immediate reasons. First, because of its electoral successes the Socialist Party chose to make itself less radical to appeal to more voters. This breached socialist unity by alienating firebrand IWW leaders. Second, moderate reforms of the Progressive movement stole much of the socialists’ thunder. Argu- ably, these reforms came only because the threat of growing socialist popularity put pressure on the capitalist elite. Third, socialist unions made a huge tactical

35 Quoted in Howard Zinn, A People’s History of the United States: 1492–Present, rev. ed. (New York: HarperCollins, 2003), p. 330.

36 Irving Howe, Socialism and America (New York: Harcourt, Brace, Jovanovich, 1985), p. 3.

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mistake (though not a doctrinal error) when they labeled World War I (1914–1918) an imperialist war and said that labor would refuse to shed its blood for wealthy capitalists. In 1917 the government put 101 leaders of the IWW on trial for violat- ing sedition laws and all were convicted. Almost half of them got prison sentences of from 10 to 20 years. Others got shorter terms. This decapitated the IWW and crippled the socialist labor movement going forward. Fourth, as time passed the lot of most workers simply improved. Between 1897 and 1914 real wages rose 37 percent and the average 60-hour workweek declined to 50 hours. 37 Again, the irony is that much of this improvement undoubtedly came out of fear of socialism.

The Great Depression and World War II With the decline of socialism, capitalism had pushed back its most radical critics. After the triumph of progressive reforms, there was a period of high public confi- dence in big business during the prosperous, expansive 1920s. This rosy era ended abruptly with the stock market crash of 1929, and business again came under sus- tained attack. During the 1920s, the idea that American capitalism would bring perpetual prosperity had been widely accepted. The catastrophic Depression of the 1930s disproved this and, in addition, brought to light much ineptness, crimi- nal negligence, and outright fraud by prominent executives. There was a popular feeling that the economic collapse would not have occurred if business leaders had been more honest.

As the Depression deepened, anger at business grew and the old rhetoric of populism reemerged. In the Senate, for example, Huey Long, a colorful populist Democrat from Louisiana who claimed to be the advocate of the poor against the rich, rose to condemn a “ruling plutocratic class.” 38

The 125 million people of America have seated themselves at the barbecue table to consume the products which have been guaranteed to them by their Lord and Creator. There is provided by the Almighty what it takes for them all to eat: yea, more. . . . But the financial masters of America have taken off the barbecue table 90 percent of the food placed thereon by God, through the labors of mankind, even before the feast begins, and there is left on that table to be eaten by 125 million people less than should be there for 10 million of them. What has become of the remainder of those things placed on the table by the Lord for the use of us all? They are in the hands of the Morgans, the Rockefellers, the Mellons, the Baruchs, the Bakers, the Astors, and the Vanderbilts—600 families at the most either possessing or controlling the entire 90 percent of all that is in America. . . . I hope none will be horror-stricken when they hear me say that we must limit the size of the big man’s fortune in order to guarantee a minimum of fortune, life and comfort to the little man. 39

These remarks echo the ancient Greek view that wealth in a society is limited and the accumulation of one person is a taking from all others—that great material

37 Louis B. Wright et al., The Democratic Experience: A Short American History (Chicago: Scott Foresman, 1963), p. 302.

38 Congressional Record, 73d Cong., 2d sess., 1934, p. 6081, speech of April 5.

39 Radio speech broadcast March 7, 1935, inserted in the Congressional Record, March 12, 1935.

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wealth reflects greed. Long used these views to gain moral authority for his radi- cal proposals. In 1934 he introduced a plan to redistribute wealth by collecting annual taxes on corporate assets and large fortunes and then giving every family a $5,000 initial gift followed with a guaranteed annual income of $2,500. In a col- lapsed economy, this populist-like plan had tremendous appeal, and Long at- tracted millions of followers. However, he was assassinated before it could be enacted, leaving the milder reforms of President Franklin D. Roosevelt’s New Deal to carry the day.

During World War II, support for business rebounded. Industry wrapped itself in patriotism, and its high output proved essential to Allied victory. For example, General Motors converted itself almost entirely to war production. The company made 3,600 war items, including ball bearings, bullets, rifles, torpedoes, trucks, tanks, bombers, and fighter airplanes. In a remarkable effort, it doubled its output of war material between 1942 and 1944. Figure 4.1 shows the production record for one item, machine guns.

Because of similar efforts by many corporations, the war years washed away the populist/socialist/depression era image of the corporation as a bloated plu- tocracy. It was instead the source of miraculous industrial production. In a radio address President Franklin Roosevelt labeled American business the “arsenal of democracy” that would turn the tide against evil dictatorships that sought to con- trol the world. 40 The wartime performance was spectacular and in a postwar poll, only 10 percent of the population believed that where “big business activity” was concerned “the bad effects outweighed the good.” 41 This renascence of respect lasted into the 1960s before the populist seed again sprouted.

The Collapse of Confidence Strong public support for business collapsed in the mid-1960s. The nation was growing more affluent, but four strong social movements—for civil rights, con- sumer rights, and the environment and against the Vietnam War—attacked business

1941 1942 1943 1944 0






1,200,000 FIGURE 4.1 Production of .30 and .50 Caliber Machine Guns by General Motors: 1941–1944

Source: Based on data in James Truslow Adams, Big Business in a Democracy (New York: Scribner’s Sons, 1945), p. 251.

40 Radio address, Washington, D.C., December 29, 1940. U.S. Department of State, Peace and War: United States Foreign Policy, 1931–1941 (Washington, DC: U.S. Government Printing Office, 1943), pp. 598–607.

41 Burton R. Fisher and Stephen B. Withey, Big Business as the People See It (Ann Arbor: University of Michigan Microfilms, December 1951), p. xiii.

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for contributing to a range of social ills including racism and sexism, consumer fraud, dangerous and alienating work, political corruption, and war profiteering. These attacks coincided with a negative trend in public opinion toward business. While in 1968, 70 percent of Americans agreed that business tried to strike a fair bal- ance between profits and the public interest, by 1970 the number had declined to 33 percent, and by 1976 to 15 percent. This astonishing drop of 55 points took only eight years. 42

Scholars who studied the polls theorized that turmoil in American society in the 1960s created a “confidence gap,” or a gap between public expectations about how corporations should act and public perceptions of how they actually did act. Such gaps are perennial. They widened during the populist and Progressive eras and during the Great Depression years. This new gap has now persisted for almost 40 years and continues to define the climate of public opinion.

Figure 4.2 shows the long-term trend for the percentage of Americans expressing “a great deal of confidence” in “people in charge of running major companies.” In 1966, 55 percent of the public expressed such confidence, but over the next decade the percentage fell to 16 percent. Since then the confidence trend has bumped along a low road for more than 40 years, recovering to 28 percent in 2000 near the peak of a great bull market, but sinking again to a low of 11 percent in 2009 after banks, insurers, and loan companies led the nation into a financial crisis. 43

1966 2002 2006 201019781974 1982 19901986 1994 19981970














Pe rc

e n


FIGURE 4.2 Percentage of American Public Expressing “A Great Deal of Confidence” in Leaders of Major Companies: 1966–2010

Source: Annual Harris Poll Confidence Index.

42 Seymour M. Lipset and William Schneider, “How’s Business: What the Public Thinks,” Public Opinion, July–August 1978.

43 Figures are based on Harris polls asking this question: “As far as people in charge of running . . . major companies . . . are concerned, would you say you have a great deal of confidence, only some confidence, or hardly any confidence in them?” See Harris Poll, “Virtually No Change in Annual Harris Poll Confidence Index from Last Year,” March 9, 2010, table 1, at

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The steep fall of public trust after 1966 opened the door for reformers to in- crease government regulation dramatically. During the late 1960s and early 1970s, liberals in Congress affected a spectacular run of new laws and agencies in de- fense of nature, consumers, and workers. However, by the mid-1970s business had organized to blunt reform.

Corporations funded conservative think tanks and used advertising to spread the message that excessive regulation imposed unnecessary costs and burdens on companies, reducing American competitiveness in the global economy. Although business was unsuccessful in restoring basic public trust, it did alter key attitudes. With the election of Ronald Reagan in 1980 a tide of Republican conservatism swept through the federal government, frustrating liberal reform- ers whose ideology of using government to control business was diminished— even discredited.

The New Progressives Out of this liberal defeat rose a new leftist movement with a new ideology. The new movement adopted the label “progressive” after the turn-of-the-twentieth- century movement that sought a broad range of social and political reforms. Both movements have in common the desire to restrain corporate power in the public interest, but major differences exist between them. The old Progressives had moder- ate wings in both the Democratic and Republican parties, so a wide span of politi- cians, from the left through the middle, often supported reforms. Support for the new Progressives’ agenda has moved to the left of both the old Progressives and the New Deal liberals.

Unlike the old Progressives and liberals, who wanted to enact reforms through government, the new Progressives have abandoned efforts to build majority coali- tions in the mainstream, instead seeking to carry out radical change through direct action. And while the old-timers applied new scientific, legal, and management theories of the day to smooth the harsh edges of capitalism, the obsession of the new Progressives has been attacks on big corporations and the values and laws that support them. Largely blocked from the avenue of reform legislation by con- servative, antiregulatory trends that they see as corporate dominance of govern- ment, activists confront corporations and industries directly, trying to alter their behavior, even in the absence of laws against what the corporations are doing. Their actions derive from three basic beliefs.

First, corporations have too much power. Free markets do not force them to serve the public interest. Governments cannot control them. They use their wealth to undermine democracy by corrupting politicians. Like entrenched oligarchs, they escape accountability for their self-interested exercise of power.

Second, corporations have inordinate legal rights. In the colonial era the state charters that authorized corporations carefully restricted them to ensure that they acted for the common welfare. For example, they defined the company’s business and limited its existence to a fixed number of years. Today, instead of restricting corporations, state charters are very permissive. They allow branching out to new lines of business and grant their creations perpetual life. Over the years legislatures,

old Progressive Members of a broad political and social re- form move- ment in the early years of the twentieth century.

new Progressive Members of contemporary left-leaning groups who advocate more radical corpo- rate reform than did old- time Progres- sives. New Progressives seek to avoid being branded as liberals and try to take advantage of favorable connotations in the word progressive .

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courts, and trade agreements have regularly added more rights, including the grant- ing of “personhood” to corporate entities, entitling them to many constitutional rights of flesh-and-blood citizens. 44

Third, corporations are inherently immoral. If often run or staffed by good peo- ple, their actions are perverted by an implacable master force, the very logic of the corporation itself. Corporations act to make money. They seek market expansion, sales growth, short-term financial results, and regulatory lenience. They value nature only as a production resource, workers only as costs, and human needs only as demand. Strong corporate cultures inculcate these values, pressuring and ultimately coercing the wills of even the most ethical employees, turning them into witting or unwitting agents of an antisocial institution.

The Progressive network has no single leader, but in the United States a promi- nent figure and senior diplomat is Ralph Nader. Nader began his activist career more than 30 years ago by writing Unsafe at Any Speed , a book that attacked the auto industry for putting styling ahead of safety. 45 The popularity of the book prodded Congress to pass auto safety legislation. Based on this success and his desire to seek change through government, Nader created more than 50 organiza- tions to articulate consumer issues and lobby for protective laws. Over time, his hostility toward corporations deepened and his desire to seek moderate reforms lessened.

Announcing his candidacy for president of the United States in 2000, Nader said he was running to challenge “rampaging corporate titans” and “global corpo- rations . . . astride our planet.” 46 He declined to seek nomination as either a Republican or a Democrat because, he explained, both parties “feed at the same corporate trough.” 47 Instead, he ran as a candidate for the progressive Green Party. Although he got only 2.7 percent of the popular vote, he prevented Democrat Al Gore from winning the electoral votes of key states, allowing Republican George W. Bush, the more probusiness candidate, to win. This angered many Progressive allies.


Corporate power grows in the world economy. And with it opposition, which is mostly found in an emerging global civic culture shaped by eruptive growth of nongovernmental organizations (NGOs), or voluntary, nonprofit organizations that are not part of governments. There are now more than 47,000 NGOs, almost 90 percent of them created since 1970. 48 The variety of NGOs that operate over

nongovern- mental organization A term for voluntary, nonprofit organizations that are not affiliated with governments.

44 For enumeration see Ted Nance, Gangs of America: The Rise of Corporate Power and the Disabling of Democracy (San Francisco: Berrett-Koehler, 2003), table 1.1.

45 Ralph Nader, Unsafe at Any Speed (New York: Grossman, 1965).

46 “Closing the Democracy Gap,” The Progressive Populist, October 15, 2000, pp. 13 and 14.

47 Ibid., p. 14.

48 Michael Edwards, Civil Society (Cambridge, England: Polity Press, 2004), p. 23; and World Association of Non-Governmental Organizations, “Worldwide NGO Directory,” at, accessed October 30, 2009, showing 47,535 listings.

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national boundaries encompasses business, cultural, educational, environmental, human rights, social service, health, and religious entities. They animate a global zone of ideas, discourse, and action that has come to be called civil society . Al- though civil society is a vast churning of interests, it is dominated by intellectuals, NGOs, grass roots movements, and institutions with progressive values critical of corporate capitalism. These actors, linked by electronic communications, engage in advocacy and struggle to advance a leftist design that includes global income redistribution, sustainable development, gender equity, and protection of human and labor rights.

In the 1990s a global justice movement evolved within civil society. It coalesced around resistance to a global economy directed by markets, corporations, trade agreements, and capitalist-dominated international organizations. It was espe- cially united in rejecting the economic ideology seen as inspiring it all, a doc- trine it labeled neoliberalism . 49 To understand neoliberalism, it is necessary to know the history of liberalism, an idea that has profoundly shaped Western civilization.

The Story of Liberalism Liberalism arose in Europe as a social philosophy in the 1500s. It promoted a free and open society in which the power of government to interfere with individual rights such as speech, association, conscience, and occupation was limited. Liberals 50 had great faith in human reason and believed this freedom would lead to social progress. For example, as freedom of speech allowed multiple opinions to be aired, truth would drive out falsehood, allowing progress toward enlightenment. Liberalism proved compelling. It spread over centuries until it came to define the essence of a good society in much of the West.

A natural extension of liberalism was a philosophy of economic liberalism that sanctified the pursuit of individual self-interest in markets free from state inter- ferences. According to economic liberals, the market was a natural, self-correcting mechanism. If left alone, free from state interference, forces of supply and demand would maintain a perpetual, automatic, self-correcting balance, continuously ele- vating material welfare. Adam Smith’s vision of laissez-faire capitalism defined the essence of economic liberalism.

Economic liberalism seized hold in the West. It was a critical ideology underly- ing the Industrial Revolution in England. Later, in the United States, it was used to justify the predatory capitalism of the 1800s and early 1900s that so aggravated Mary Lease, Mother Jones, and Huey Long. No matter the market was pitiless to

49 This movement is usually called the “antiglobalism movement” in the press, but its advocates reject that label because it is not opposed to global expansion of economic and political ties, only the current, corporate-dominated expansion suspected of putting profit before human welfare. Some in the movement prefer the name “alter-globalization.”

50 The word liberal is used here in its original, classical sense where it refers to freedom from government interference, a negative freedom. It should not be confused with the term liberal as it is applied in contemporary politics to those who want state power to restrain business, a situation of positive freedom, meaning that government acts positively to create a just, free society.

civil society A zone of ideas, discourse, and action, domi- nated by pro- gressive values, that transcends national socie- ties and focuses on global issues.

global justice movement A coalition of groups united by opposition to economic globalization dominated by corporate capitalism.

neoliberalism A word denot- ing both the ideology of using markets to organize society and a set of specific policies to free markets from state intrusion.

liberalism The philosophy of an open soci- ety in which the state does not interfere with rights of individuals.

economic liberalism The philosophy that social progress comes when indivi- duals freely pursue their self-interests in unregulated markets.

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children, miners, farmers, and debtors, it was an inviolate work of nature, a be- nevolent cosmic design best freed of human meddling.

But classical liberalism perished in the world depression of the 1930s. To end the Depression and make economies perform for the public good, governments began to intervene in markets. A British economist, John Maynard Keynes (1883–1946), argued the then-radical view that, far from being self-correcting, mar- kets could be managed to dampen business cycles and promote full employment. Keynes’ ideas, which became known as Keynesianism , spread and in the United States and Europe, states dropped the hands-off-the-market philosophy, embrac- ing forms of “mixed economy” to promote stability, full employment, and social welfare. Liberalism changed. Although economic freedoms were important, it was no longer assumed that free markets always produced moral outcomes. They re- quired state supervision. An era of growing market regulation followed.

The Rise of Neoliberalism Meanwhile, old beliefs about the virtues of laissez-faire hibernated. While Keynes’ ideas dominated around the world, in the late 1940s a small, elite group of intel- lectuals began composing a new free market ideology, readying it for a day when the world would call. They believed that government intrusion in markets men- aced human freedom. Left alone, competitive forces and price signals were the most effective way to coordinate individual efforts. And the power of free markets would offset political power. When government regulated markets, it infringed on free choice by individuals and, by intruding, fused economic and political power, removing a counterbalance essential to free society. Such interference was, in the words of the group’s founding leader, Austrian philosopher Friedrich Hayek (1899–1992), “the road to serfdom.” 51

Convening just after the end of World War II, the group had before it the terri- ble specters of fascism in Germany and Stalinism in Russia, both based on state control of the economy, both leading to human misery. What leaped out at them was the importance of the market as a counterbalance to government authority. They would work to promote individual liberty by keeping the state out of mar- kets. In practice, their theories would unchain corporate power.

Another member in the group was Milton Friedman (1912–2006), the leader of free market thinking in the Department of Economics at the University of Chicago. There, he and other like-thinking faculty used statistical models to test free market theories. Like Hayek, Friedman saw markets as bulwarks against tyranny. “Every act of government intervention,” he wrote, “limits the area of individual freedom directly.” 52 Friedman advocated policies to maximize the market’s role, even extending its reach into areas traditionally occupied by government. He wanted to abolish the minimum wage, end Social Security, eliminate tariffs, let for-profit companies compete with the post office, turn America’s national parks over to corporations, and end detailed regulation of industries. Friedman, his colleagues,

Keynesianism An economic philosophy of active state intervention to stabilize the economy and stimulate employment.

51 Friedrich A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944), see p. 37.

52 Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 32.

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and their free market ideas came to be called the Chicago School , a shorthand term for a doctrine of privatization, free trade, and deregulation.

In the lore of the global justice movement, the Chicago School, encouraged by funding from corporations, incubated neoliberalism. For decades the doc- trine abided within academia as, outside, global prosperity seemed to confirm Keynesian policies. Then, in 1973 it was put into practice in Chile. There, American corporations and the Central Intelligence Agency backed a coup against a democratically elected government with socialist leanings. The economic policies of the new government, which relied on terror to suppress its opponents, were created by graduates of the Chicago School, who opened the country to corporate exploitation by selling state-owned corporations, lowering protective trade barri- ers, and privatizing social security. Eventually, their efforts led to an economic boom, though it ended abruptly in a 1982 global currency crisis.

Meanwhile, economies in developed countries had become mired in “stagfla- tion,” a condition of high unemployment with weak growth. In England, Prime Minister Margaret Thatcher moved in the direction of privatization and deregula- tion to cure this, as did Ronald Reagan in the United States. The eventual prosper- ity of these nations led to the further spread of neoliberal ideas. Friedman and his colleagues traversed the globe advising leaders. Graduates of the Chicago School staffed economic ministries, agencies, and international institutions. As economic globalization accelerated in the 1990s neoliberalism was a major force behind it.

Agenda of the Global Justice Movement Critics in the global justice movement saw neoliberalism as a new doctrine of West- ern, particularly American, colonialism and imperialism, opening poor nations and

Chicago School The name given to a group of economists and to the free market doctrine they taught. It is syn- onymous with neoliberalism.

University of Chicago econo- mist Milton Friedman. Source: © Time & Life Pictures/ Getty Images

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indigenous peoples to plunder by corporations advancing on the laissez-faire tide. Exaggerating the movement’s anger at what came to pass is hard. One of its lead- ing reporters, Naomi Klein, saw “the rise of disaster capitalism” because neoliberal ideas were frequently imposed after “shocks” such as coups, wars, economic col- lapse, and natural disasters. 53 In Iraq, for example, the U.S.-dominated coalition in 2003 ordered the government to privatize national companies, allow foreign firms to own Iraqi companies and banks, and eliminate most trade barriers. 54 Another critic calls the process of neoliberal conquest “necrocapitalism,” or the creation of death zones that subjugate life to wealth creation, as when nations send their ar- mies to repress indigenous populations on lands being drilled or mined for profit or when poor farmers commit suicide after removal of protective tariffs lowers the price of their crops. 55

The movement is populated by progressive-leaning actors including labor unions, human rights groups, environmentalists, religious bodies, farmers, so- cialists, indigenous people’s movements, feminists, animal rights activists, Neo-Luddites, 56 and anarchists opposed to any overarching world order. It has little unity. Politely, it is called a movement of movements, more unerringly, “multitudes on the edge of chaos.” 57 It first achieved high visibility in 1999 when 50,000 activists gathered to protest World Trade Organization meetings in Seattle and street riots broke out. Two years later at a Group of Eight summit in Genoa, Italy, as many as 100,000 came to protest as heads of state from the wealthiest nations met to discuss the global economy. Rioting followed and police killed one activist.

Since then, the movement has created less visible turbulence. Concerns about terrorism made street protests more difficult and protests against trade became awkward after the September 11, 2001, attacks on the World Trade Center, a symbol of free trade. But outside the limelight it has proved durable, growing in numbers and connectivity. With the global economic crisis in 2008 it found vindication. In the words of one adherent, “While eyes were on the absurd charade of the ‘threat of Islamist terrorism to western civilization, the real doomsday scenario . . . was gathering pace right next to Ground Zero, in Wall Street.” 58

For now, debate and confrontation often center on the actions of multinational corporations seen as mechanisms of dominance by capital. The struggle against them excites many in the movement. Managers have come to fear clashes between market logic and the moral agenda of civil society. One estimate is that 6,000 of the

Group of Eight Formerly an annual meeting where eight leaders of large industrial de- mocracies met to discuss eco- nomic issues, since replaced by an expanded group of the wealthiest na- tions called the Group of 20, or G20.

53 Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (New York: Henry Holt, 2007), chap. 2.

54 David Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2005), p. 6.

55 Subhabrata Bobby Banerjee, “Necrocapitalism,” Organization Studies 29, no. 12 (2008), p. 1542.

56 The Luddites (1811–1816) were English textile workers who blamed unemployment and low wages on new steam-powered textile machines. The name comes from a mythical figure, Ned Ludd. They wrecked the machines and violently attacked their builders before being suppressed.

57 Graeme Chesters and Ian Welsh, Complexity and Social Movements: Multitudes on the Edge of Chaos (London: Routledge, 2006).

58 Madeleine Bunting, “Faith. Belief. Trust,” The Guardian, October 6, 2008, p. 31.

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world’s NGOs are of the variety that attack corporations. 59 A leading scholar within civil society issues the call to battle.

[We are in] . . . a struggle between two globalizations grounded in sharply contrasting visions of human possibility—one imperial and the other democratic. It pits an alliance of state and corporate power devoted to a vision of global Empire against an alliance of people power devoted to a vision of Earth Community. Empire holds the edge in institutional power; Earth Community holds the edge in the moral power of the authentic cultural values of a mature consciousness. 60

Today, the antiglobalism movement remains a cacophony of voices, so ascrib- ing to it a specific goal or platform is difficult. It is broadly against capitalism, corporate power, deregulation, privatization, sweatshops, child labor, trade agree- ments, consumerism, colonialism, imperialism, racism, sexism, and militarism. Again broadly, it favors inter alia popular democracy, horizontalism (the opposite of hierarchical power relationships), subsidiarity (local control of affairs as op- posed to control by a centralized power from afar), human rights, sustainability, equality, and, as expressed in one of the movement’s catchphrases, “a world in which many worlds fit.”

Global Activism Activists, by definition, take action. Progressive elements have spun unique webs of advocacy to correct perceived problems or abuses. A recent example is the Inter- national Campaign to Ban Landmines, composed at its height of 800 groups in 50 countries. Activists from groups such as Human Rights Watch attacked corpo- rations making antipersonnel mines. As a result, Raytheon stopped making the mines, and others, including Motorola, and General Electric, quit selling parts used to make them. 61 Similar advocacy networks have formed to fight sweatshop contracting by clothing makers and environmental abuses by energy and mining companies.

Such efforts are not new. In the early 1800s a remarkably similar advocacy net- work led the global antislavery campaign. 62 In the 1970s international campaigns forced Nestlé and other infant-formula makers to change the way formula was sold in developing countries. And in the 1980s a fierce human rights coalition pushed foreign corporations out of very profitable markets in apartheid-era South Africa. 63

59 George Lodge and Craig Wilson, A Corporate Solution to Global Poverty (Princeton, NJ: Princeton University Press, 2006), p. 46.

60 David C. Korten, The Great Turning: From Empire to Earth Community (Bloomfield, CT: Kumarian Press, 2006), p. 12.

61 Christina Del Valle and Monica Larner, “A New Front in the War on Land Mines,” BusinessWeek, April 28, 1997, p. 43.

62 Margaret E. Keck and Kathyrn Sikkink, Activists Beyond Borders (Ithaca, NY: Cornell University Press, 1998), pp. 8–22.

63 S. Prakash Sethi and Oliver F. Williams, Economic Imperatives and Ethical Values in Global Business: The South African Experience and International Codes Today (South Bend, IN: University of Notre Dame Press, 2001).

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Chapter 4 Critics of Business 109

Attacks on corporations marshal a range of devices that create pressure. Fol- lowing is a list, hardly exhaustive, of tactics.

• Consumer boycotts. A boycott is a call to pressure a company by not buying its products and services. Perhaps the fi rst global boycott, against white sugar, was called in 1792 by radical groups in England protesting brutal slavery in the Brit- ish East Indies. It halved sugar sales in England and may have been crucial in ending the slave trade within the British Empire. 64 In recent years, advocacy groups have called hundreds of boycotts. Here are some current examples. Animal Liberation Victoria, an Australian group, is leading a worldwide boycott of Adidas for using the skins of inhumanely killed kangaroos for soccer boots. War on Want, a British group that fi ghts global poverty, has called a boycott of Caterpillar, Volvo, and Daewoo for supplying Israel with the bulldozers used to demolish Palestinian homes. In the effort with perhaps the broadest interna- tional base and the most recent success, 115 groups in 20 countries have joined in the Burma Campaign UK boycott of a “Dirty List” of hundreds of companies that do business in Myanmar, thereby supporting a regime accused of fl agrant human rights violations.

• Shareholder attacks. In European nations and the United States rules permit shareholders of public companies to sponsor resolutions on which all share- holders may vote at annual meetings. Most are on governance issues such as procedures for electing directors, but many are attempts to impose progressive political and social values on corporate action. In this effort, religious organiza- tions take the lead, usually working through the Interfaith Center on Corpo- rate Responsibility in New York, a group that coordinates about 300 religious orders, denominations, and pension funds representing many faiths. Here are examples of some of the 390 resolutions planned through it in 2009. Two or- ders of nuns, a Catholic hospital, a social responsibility fund, and the United Methodist Church asked Nucor, the nation’s second-largest steel company, to stop buying pig iron made with charcoal produced by slaves in Brazil. It got 27 percent of the vote. And seven orders of nuns asked PepsiCo to report to shareholders about the dangers of using genetically engineered corn, rice, and sugar in its products. It got 8.4 percent. Each resolution was opposed by the company. Few such proposals get a majority vote, but they create bad publicity and may damage brand images.

• Harassment, ridicule, and shaming. Forms of harassment are limited only by the imagination. Activists bring lawsuits based on clever charges such as racketeer- ing. They disrupt the lives of executives and their families by picketing their homes, protesting at their children’s schools, and interrupting services at their churches. They climb corporate buildings to unfurl banners. Some groups hand out mock awards. Corporate Accountability International regularly inducts cor- porations into its Hall of Shame. Each year on the eve of the World Economic Forum in Davos, a meeting of global corporate and political elites, a progres- sive jury hands out Public Eye “awards” to corporations nominated by NGOs

64 “Sick with Excess of Sweetness,” The Economist, December 23, 2006, p. 93.

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110 Chapter 4 Critics of Business

around the world for exceptional irresponsibility. 65 Past “winners,” including Shell, Walt Disney, Walmart, and Dow Chemical, have declined to send anyone to pick up the statuette that goes with the recognition.

• Corporate campaigns. A corporate campaign is a broad, sustained attack, usually by a coalition of groups that mobilizes activists for coordinated warfare and employs a wide range of tactics. 66 The campaign depicts the fi rm as engaging in antisocial behavior to make a profi t while portraying the advocacy groups as moral cru- saders for truth and fairness. Multinational corporations have enormous fi nancial resources, strong infl uence in governments, and trusted brand names. Activists typically have slender fi nancing, little political power, and low name recognition. However, a key source of strength is the public’s willingness to see environmental, religious, or human rights groups as selfl ess and acting for justice. Using this per- ception, activists seize the ethical high ground and engage the corporation with an assault that might be likened to warfare because the action sometimes stretches or breaks the bonds of civility. A recent example is the campaign of ForestEthics to get Victoria’s Secret, a subsidiary of Limited Brands, to stop using pulp from virgin Canadian forests in its catalogs. The company agreed to use recycled paper after enduring two years of a “Victoria’s Dirty Secret” campaign that included store picketing by chain-saw-wielding women in lingerie, civil disobedience in shop- ping malls, and shareholder meetings picketed by hecklers in bear costumes.

The activism of global civil society challenges traditional notions of democracy. Advocacy groups have limited memberships. Unlike representative legislatures, they are not accountable to a broad base of voters even as they claim that their ideas about everything from sustainable forests to healthy diets represent the pub- lic interest. They are unwilling to accept corporate behavior guided merely by laws, trade agreements, or the choices of consumers in markets as responsible behavior. Instead, they argue that because corporations have corrupted governments and manipulated consumers, the groups are justified in taking action to impose stand- ards of “responsibility,” “justice,” “equity,” and “rights” as defined by the progres- sive vision. This vision is not uncontroversial. Once into a campaign, progressive advocates tap the deep cynicism in public opinion to build anger against the corpo- rate target. If the company capitulates and changes its policies, the activists have, in effect, appropriated its power and assets to further their policy agenda.


We have narrated a history in which basic criticisms of business are repeated over and over. Each era brings new personalities, new targets, and some new issues, but the fundamental substance endures. The story is one of endless debate between critics and defenders of capitalism. Figure 4.3 shows two timelines that

65 Gustavo Capdevila, “World Economic Forum: Davos Under Fire,” Inter Press Service, January 31, 2009, at

66 For an extended discussion, see Jarol B. Manheim, The Death of a Thousand Cuts: Corporate Campaigns and the Attack on Corporations (Mahwah, NJ: Lawrence Erlbaum, 2001).

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represent this exchange. Imagine a dinner party at which Aristotle, Saint Augustine, Thomas Jefferson, and Ralph Nader sit at one table, while Adam Smith, Benjamin Franklin, Alexander Hamilton, and Ronald Reagan sit at another. Now imagine the harmony among tablemates as contrasted with the gulf between the two groups.

Philosophically, the difference between the two groups is profound. Eco- nomic liberals believe that uncontrolled, laissez-faire markets give humans freedom to follow laws of nature leading to the rise of the Good Society. Pro- gressives have a different vision. They believe that people in society should be managed according to a human plan, based on their vision what will create the Good Society. For them, true human liberty is not freedom from government, but the freedom to fulfill human potential in a society unmarked by vices in- cluding sexism, racism, homophobia, colonialism, wars, obesity, smoking, and corporate manipulation.

In contrast, the conservative capitalist vision is one of material progress. It sees industrial capitalism as a historical force for continuous, turbulent social change; it is, as the economist Joseph Shumpeter wrote years ago, “a perennial gale of creative destruction” that strains institutions and challenges existing authority. 67 The defense of capitalism is that, for the most part, the changes it brings represent progress, a condition of improvement for humanity. All the while that critics have been objecting, it has steadily improved living standards for billions of people. As against promoting greed, it has promoted positive cultural values such as imagi- nation, innovation, cooperation, hard work, and the interpersonal trust necessary for numberless daily business transactions.

In the end, a broad spectrum of criticism is an important check on power. Le- gitimate criticism exists and demands attention. If criticism is properly channeled, it can preserve the best of the business institution and bring wide benefit.

67 Capitalism, Socialism and Democracy (New York: Harper & Row, 1976), p. 143; originally published in 1942.

1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 20101790

Capitalists Federalists

Antifederalists Democraticparty Populism Old

Progressives Radicals Liberals New


Thomas Jefferson

Robert Owen and

New Harmony

Emerson and

Thoreau Mary Lease

Huey Long FDR

Ralph Nader

Global Justice Movement

Mother Jones

Alexander Hamilton

Ronald Reagan

George W. Bush

John D. Rockefeller

J.P. Morgan

Henry Ford

Classical liberalism

Republican party Laissez-faire

Great Depression Neoliberalism


FIGURE 4.3 Timelines of Ideological Conflict in the United States

The two timelines show how a debate between business and its critics moves through American history. Each timeline represents the sweep of people and ideas associated with one side of this enduring debate.

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A Campaign against KFC Corporation Peyton Hull, a 12-year-old middle school student in Pittsburgh, loves animals and hopes to be a veteri- narian. One day while volunteering at a shelter she learned that People for the Ethical Treatment of Ani- mals (PETA) was boycotting KFC. Later, at her home computer, she watched actress Pamela Anderson nar- rate a “Kentucky Fried Cruelty” video showing man- gled, abused chickens at facilities supplying KFC.

Peyton organized a dozen friends. Helped by her mother, she stayed up all night with markers and poster paper making signs, and the next day, Satur- day, she and her friends stood vigil at a KFC restau- rant with their signs. People inside waved their chicken. Some teenagers in the parking lot yelled, “KFC is good. Get a life,” and threw chicken at them. However, one older woman approached the girls, talked to them, then decided not to go in. Peyton was pleased and told her mother: “Mom, we saved one person from going to KFC.” 1

The incident is just one skirmish in a larger battle between PETA and KFC. War was declared on Janu- ary 6, 2003. In a press release, People for the Ethical Treatment of Animals announced the start of a cam- paign against KFC Corporation, the world’s largest chicken restaurant chain. PETA held KFC responsible for “cruel treatment” of poultry raised and slaugh- tered for its restaurants. 2 It demanded that the com- pany force more humane practices on its suppliers. KFC responded with a statement dismissing such “allegations,” saying the birds in its meals were treated humanely.

KFC does not raise any chickens. In the United States it buys them from independent companies in the poultry processing industry, a $40 billion a year business that sells to supermarkets, restaurants, and institutions. Its pieces of fried chicken emerge from a supply chain of hatcheries, feed mills, “grow-out” farms, processing plants, and cold storage buildings. This industry is very competitive. With average net profit after tax a slim 0.8 percent, operations are

highly automated and focused on efficiencies that re- duce cost. 3

PETA is angry about how chickens are handled in this supply chain, but the maze of facilities, owned by more than 500 corporations, is out of public view, fragmented, and largely anonymous. In contrast, KFC is vulnerable to PETA’s basic strategy of tarnish- ing a brand by associating it with animal cruelty. By threatening the value of KFC’s brand, PETA hopes to make the company use its market power as the world’s largest buyer of chickens to force reform on growers and slaughter plants. If this occurs, PETA will have harnessed a reluctant giant to further its agenda.

Going into the chicken war, PETA had a record of success. Its initial effort was a campaign against McDonald’s in 1999. After less than a year of expo- sure to a boycott, restaurant demonstrations, and the group’s Web site the company suc- cumbed, imposing stricter animal welfare standards on its suppliers as a condition for ending the assault. It forced changes on reluctant growers, including roomier cages for hens and surprise slaughterhouse inspections. After McDonald’s capitulated, its smaller rivals followed. Burger King adopted animal welfare guidelines after a five-month campaign. Then Wendy’s buckled. Safeway lasted only three months. Albertsons and Kroger were subdued by campaigns of only one week each.

INITIAL SKIRMISHES KFC learned of PETA’s intentions in 2001, when Cheryl Bachelder, its president, received a letter from Bruce Friedrich, director of the group’s restaurant campaigns. The letter asked why KFC, knowing of PETA’s actions against its competitors, was doing “nothing at all” to improve the lives of chickens raised for its restaurants. Friedrich asked what KFC intended to do, offered to put the company in touch with animal welfare experts, and added, “We are looking ahead to our next target.” 4 1 Quotes in this paragraph are from Dev Meyers, “Seventh-

Grader Organizes Animal-Rights Protest,” Pittsburgh Post- Gazette, February 24, 2008, p. W1.

2 “Company Stonewalls on Animal Welfare Reforms,” press release, People for the Ethical Treatment of Animals, January 6, 2003, at

3 First Research, “Industry Profile: Poultry Processing, Quarterly Update,” October 12, 2009, pp. 2 and 9.

4 The letter is at

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Over the next several weeks Friedrich had a series of phone calls and meetings with Bachelder and David Novak, CEO of KFC’s parent corporation Yum! Brands. Yum! Brands was created in 1997 when PepsiCo spun off its KFC, Pizza Hut, and Taco Bell chains as a separate corporation. Subsequently, the new firm bought the Long John Silver’s and A&W chains. Today, Yum! is the world’s largest quick- service restaurant corporation with 36,500 restau- rants worldwide. The KFC brand traces its origins to the Kentucky Fried Chicken franchise started by the avuncular Colonel Harlan Sanders in 1952. It has 15,580 restaurants in 109 countries and serves about 12 million customers a day.

The dialogue revealed a wide gulf between the company and its interlocutor. KFC told Friedrich that it included humane treatment guidelines in its poultry supplier contracts. He accused the com- pany of using only inadequate industry standards permitting ghastly treatment of chickens and considering their welfare only at the point where deaths from abuse lowered profits. He stated that the suffering of chickens was an ethical issue going beyond financial considerations. 5 KFC said it would review its guidelines and promised to keep PETA informed.

In the months that followed, KFC took several actions. It convened an Animal Welfare Advisory Council composed of outside academic and industry experts. It began unannounced audits of growers and slaughterhouses. And it worked with industry asso- ciations to develop new poultry welfare guidelines. However, its efforts were unsatisfactory to PETA because they did not lead to specific, more radical changes including the following.

• Gas killing. KFC chickens are stunned by electrical shock before immersion in scalding water (to loosen feathers) and then exposed to mechanical blades that slit their throats. PETA believes that gas killing is preferable because it ensures that chickens are insensate before these painful proce- dures, whereas electrical stunning is less reliable.

• Cameras in slaughterhouses. Cameras would sup- plement audits and make oversight more reliable.

• Mechanized chicken-catching. Hand-catching crews gather KFC chickens from grower buildings. PETA believes that the crews treat the birds roughly and that mechanical catching systems are less likely to result in bruises and broken bones.

• New genetic strains of chickens. The chickens eaten in KFC restaurants, known as “broilers,” are bred to gain weight rapidly over their brief lives. However, the “broiler breeders” used to produce the flocks of chickens slaughtered for restaurant meals live longer. They exhibit the rapid weight gain characteristic of all broiler strains, but their skeletons and joints do not grow commensurate with their overall weight and they are prone to painful joint conditions as they age. PETA re- quested introduction of leaner genetic strains that did not exhibit skeletal deficiencies.

• Elimination of forced growth. Broiler strains bred for rapid weight gain under forced growth regimens suffer from metabolic pathologies and excess mor- tality. Slowing growth means longer upkeep of chickens before slaughter, but it reduces prema- ture deaths.

• More room for birds to move around. PETA requests that KFC give its chickens at least two to three times more space per bird and give them shel- tered areas and perches in the warehouselike buildings where they are raised.

• Allowance for instinctive behavior of chickens. PETA believes that birds raised in captivity suffer from chronic stress and boredom induced by suppres- sion of natural behaviors. Among other measures, it suggests that they get whole green cabbages to peck and eat. 6

Debate between the antagonists was dysfunctional. PETA addressed the corporation in the tone of a parent scolding an errant child. It was “extremely concerned” that the firm “has no interest in making real progress to stop animal cruelty,” adding that “we have pressed you to take action on this issue, yet you have done nothing.” 7 KFC, on the other hand, wrote to PETA “[i]n the spirit of open communications,” but kept it at arm’s length, giving only brief and general information about

5 Letter of May 14, 2001, from Bruce G. Friedrich to Jonathan D. Blum, senior vice president, Tricon Global Restaurants, at Yum! Brands was formerly named Tricon Global Restaurants.

6 Letter of August 6, 2002, from Bruce G. Friedrich to Jonathan D. Blum, at

7 Ibid.

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conducting audits, holding meetings, and working on animal welfare standards with industry groups. 8 PETA thought that KFC was dragging its feet.

A LOOK AT PETA PETA is dominated by its founder, Ingrid Newkirk, who became an animal rights activist after a forma- tive experience. Living in Maryland in 1972, she was training to be a stockbroker. A neighbor moved, abandoning cats that soon bred litters of kittens nearby. She gathered them up and took them to a nearby animal shelter to be cared for. Yet a short time later she learned they had been killed. The episode changed her. With no desire to become a stockbroker remaining, she talked her way into a job at the shel- ter. Observing brutal treatment of animals, she began to arrive early in the morning to kill them in a hu- mane way before others came. “I must have killed a thousand of them,” she says, “sometimes dozens every day.” 9

From the shelter Newkirk moved on to work as a deputy sheriff on animal cruelty investigations, then headed a commission to control animal disease. She was inspired to form PETA after reading a book, Ani- mal Liberation, by philosopher Peter Singer. 10

In the book, Singer argues that animals have moral rights. Moral rights are strong entitlements to dutiful treatment by others—in this case human be- ings. He asserts that the traditional, absolute domin- ion of humans over animals is an unfair exploitation. Because animals are living, sentient beings capable of suffering, their interests are entitled to equal consid- eration with human interests. In his words: “No matter what the nature of the being, the principle of equality requires that its suffering be counted equally with the like suffering . . . of any other being.” 11 Thus, he argues, animals have an unalienable right to have their needs accommodated by humans. Denial of this right is speciesism, or the prejudicial favoring of one species over another. Speciesism, according to Singer, is an evil akin to racism and sexism because it

restricts moral rights to one species just as racism and sexism have restricted them to one race or sex. The PETA Mission Statement, Exhibit 1, reflects the inspi- ration Newkirk found in this philosophy.

Newkirk has a combative attitude about animal rights. “The animals are defenseless,” she says. “They can’t talk back, and they can’t fight back. But we can. And no matter what it takes, we always will.” 12 After reading about a Palestinian bomb put on a donkey and detonated by remote control she wrote to Yasir Arafat requesting that innocent animals be left out of the Arab–Israeli conflict. Her will stipulates that when she dies the meat on her body is to be cooked for a human barbeque, her skin used to make leather products such as purses, and her feet made into um- brella stands. 13

PETA is creative. Since most people give no thought to animal rights, its actions are designed to attract attention, even at the cost of offending some. Perhaps the mildest attention-getting tactic is the use of theater. For example, PETA demonstrators have dragged themselves down streets with their feet in leg traps to publicize the evils of fur trapping. An- other tactic is that of the outrageous act. To protest pictures of women wearing fur in Vogue , activists went to the chic Manhattan restaurant where its edi- tor was having lunch and threw a dead raccoon on her plate. Young ladies at county fairs are crowned as pork queens only to have pies thrown in their faces by PETA activists. The group has asked Wisconsin, the “Dairy State,” to change its state beverage from cows’ milk to soy milk.

PETA freely uses sexuality to get attention. When the American Meat Institute puts on its Annual Hot Dog Lunches for government officials in Washington, D.C., former Playboy Playmates wearing bikinis made of lettuce hand out “veggie dogs” outside. It recruits celebrities to present its message. Fame and glamour attract. Their presence endows a view that might otherwise be disregarded with the celebrity’s aura of success and legitimacy. PETA also uses the Internet to get its message out. It has multiple Web sites for issues such as zoos, circuses, and animal testing. The network of sites is easy to navigate, informative in depth, and often entertaining. There are facts, games, pictures,

8 Letter of July 17, 2002, from Jonathan Blum to Bruce G. Friedrich, at

9 Quoted in Michael Specter, “The Extremist,” The New Yorker, April 14, 2003, p. 56.

10 Peter Singer, Animal Liberation (New York: Avon Books, 1975).

11 Ibid., p. 8.

12 Quoted in Specter, “The Extremist,” p. 54.

13 Ibid., pp. 57 and 58.

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video clips, humor, and celebrities. PETA makes a special effort to influence children. One comic brochure, “Your Mommy Kills Animals” shows a crazed woman wielding a bloody knife over a rab- bit. “Ask your mommy,” it suggests, “how many animals she killed to make her fur coat.” 14

All these tactics, and more, have been employed in the fight against KFC.

THE CHICKENS At the center of the conflict are the chickens. Chick- ens are a species of the order Galliformes, which in- cludes turkeys, pheasants, grouse, and partridges. Galliformes are heavy-bodied, short-duration fliers that feed on insects and seeds, nest on the ground, and hatch precocial (self-caring) young. They are social birds that communicate with each other and establish complex hierarchies in flocks.

The earliest wild chickens, members of the species Gallus gallus , inhabited jungles of Southeast Asia. About 4,000 years ago they were domesticated. From Asia the domesticated chicken, Gallus domesticus , spread across the globe. In ancient Greece they were valued for the sport of cockfighting, and in imperial Rome prophets read the future in their entrails. Chickens had such a hold on the superstitious Romans that generals kept special flocks in the belief that their behavior could foretell victory or defeat in battle. In the hours before combat, hardened legion- naires crowded around these flocks seeking portents. As the legions marched, they spread Gallus domesti- cus across the empire. Centuries later, the earliest European settlers brought chickens to North America.

In the United States, large-scale chicken produc- tion developed slowly. As late as the 1920s chicken

farms had flocks of only about 500 free-ranging birds. Today the industry is highly specialized, with some farms in egg production and others raising broilers (or chickens slaughtered for meat; literally, chickens for broiling—or baking or frying). Flocks are now raised in long, windowless, buildings with auto- mated equipment to maintain as many as 100,000 birds. Consumption of chicken has risen. In 1955 only a little more than 1 billion broilers were raised, or 6.5 chickens for each American; by 2009 there were 9 billion raised, or 30 per American. 15

Chickens, like other animal species, adapted for survival in an ecological niche. In doing so, certain behaviors became instinctive. They live in flocks of approximately 10 and establish dominance hierar- chies called pecking orders. The dominant bird in a flock can peck any other bird, and that bird will yield. Status in the pecking order is conveyed by sounds such as crowing or cackling, aggressive or passive postures, spacing, use of more or less desira- ble nesting sites, and running at or away from rivals. In mixed-sex flocks there are two pecking orders, one for cocks and one for hens, but the hen hierarchy is subordinate. All hens yield to even the lowest cock. This is a genetically predisposed trait essential for species survival because a cock will not mate with a dominating hen. Pecking orders have survival value. Once dominance is established, fighting ceases and energy is used in socially productive ways.

In nature, chickens are omnivorous, eating plants, insects, and small animals such as lizards. Hens are secretive and build hidden nests, preferably on the ground. During the day chickens spread out to

14 At

15 Bureau of the Census, Statistical Abstract of the United States 1956, 77th ed., tables 1 and 857; and Bureau of the Census, Statistical Abstract of the United States 2010, 129th ed., tables 2 and 846.

EXHIBIT 1 PETA’s Mission Statement

Source: Courtesy of People for the Ethical Treatment of Animals (PETA).

People for the Ethical Treatment of Animals (PETA), with more than 1.2 million members and supporters, is the largest animal rights organization in the world.

PETA focuses its attention on the four areas in which the largest numbers of animals suf- fer the most intensely for the longest periods of time: on factory farms, in laboratories, in the clothing trade, and in the entertainment industry. We also work on a variety of other issues, including the cruel killing of beavers, birds and other “pests,” and the abuse of backyard dogs.

PETA works through public education, cruelty investigations, research, animal rescue, leg- islation, special events, celebrity involvement, and protest campaigns.

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forage, but at dusk they reduce the spaces between them. At night they often roost in trees. According to PETA, chickens are “inquisitive and interesting ani- mals” and “as intelligent as mammals like cats, dogs, and even primates.” 16 In nature, they are individuals with “distinct personalities” that “form friendships and social hierarchies, recognize one another, love their young, and enjoy a full life, dust-bathing, mak- ing nests, roosting in trees, and more.” 17

Life in high-density growing environments frus- trates these natural behaviors. Cages or crowding prevent division into flocks with established pecking orders. Without a complete pecking order, individu- als may not yield to threat displays, and physical at- tacks occur as birds compete over space, food, and water. 18 Weaker animals have no place to hide and may be assaulted repeatedly until they die. In addi- tion, crowded chickens are unable to engage in a range of ordinary foraging, grooming, nesting, brooding, and roosting behaviors. Critics claim that such deprivation violates the right of an animal to satisfy its needs through natural behaviors.

THE CAMPAIGN At the start of the campaign, PETA activists de- scended on KFC outlets worldwide, conducting hundreds of demonstrations in the first months. Members handed out “Buckets of Blood” contain- ing “Psycho Col. Sanders” figures and toy chickens with slit throats. When Yum! Brands CEO David Novak appeared at the opening of a restau- rant in Germany, two activists doused him with fake blood and feathers. According to campaign leader Friedrich: “There is so much blood on this chicken-killer’s hands, a little more on his business suit won’t hurt.” 19

KFC issued a statement calling the attacks “corpo- rate terrorism” that “crossed the line from simply ex- pressing their views to corporate attacks and personal

violence.” 20 In Paris, Ingrid Newkirk and celebrity musician Chrissie Hynde led activists who stormed into a busy KFC restaurant at the noon hour, smear- ing the front window with red paint symbolic of chicken blood and lecturing diners until guards threw them out. Outside, the protest blocked traffic on a boulevard for two hours. Back in the United States, PETA put up roadside billboards depicting Col. Sand- ers hacking a chicken with a bloody knife under the words “Kentucky Fried Cruelty. We do chickens wrong.” 21

Although the main effort was directed toward publicly associating the KFC brand with cruelty to chickens, another focus was on pressuring KFC and Yum! Brands executives at a personal level. Several months into the campaign KFC President Cheryl Bachelder failed to keep what Ingrid Newkirk thought was a commitment to call her. So Newkirk phoned Bachelder at home on a Saturday evening.

16 “Chickens,” at

17 “PETA Reveals Shocking Cruelty to Animals at KFC Factory Chicken Farm,” press release, October 2, 2003, at

18 T. R. O’Keefe et al., “Social Organization in Caged Layers: The Peck Order Revisited,” Poultry Science, July 1988, p. 1013.

19 Quoted in Jay Nordlinger, “PETA vs. KFC,” National Review, December 22, 2003, p. 28.

Yum! Brands CEO David Novak after being splattered with fake blood at a PETA demonstration in Hanover, Germany, on June 23, 2003. Source: © AP Photo.

20 Cited in “Animal Rights Activists Spray KFC Chief with Fake Blood and Chicken Feathers,” The Associated Press State & Local Wire, June 23, 2003.

21 “Finger-Lickin’ Foul,” Houston Press, December 18, 2003, p. 2.

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When Bachelder objected to being called at home, Newkirk responded with a letter that read, in part:

Of course you would rather not be disturbed in the privacy of your own home, but the animals you torture and slaughter pay for that home with their misery and their very lives yet have nothing remotely like a life or even a nest of any kind. . . . It is merely an accident of birth that you are not one of them. 22

Newkirk wrote to both Bachelder and CEO Novak at their homes in Louisville, Kentucky, post- ing the letters with their home addresses on PETA’s Web site. It enlisted former Beatle Paul McCartney to write to Novak. His letter, which requested an end to “the egregious forms of abuse endured by chickens,” ran as a full-page ad in the Louisville Courier-Journal . A KFC spokesperson responded that “PETA should follow one of Sir Paul’s songs and just ‘Let It Be.’” 23 Other celebrities were recruited. The Rev. Al Sharpton asked the black com- munity to boycott KFC. His Holiness the Dalai Lama asked KFC to stop its plans for a restaurant in Tibet.

Taking advantage of Securities and Exchange Commission rules, PETA gained entry to the Yum! Brands 2003 annual shareholders’ meeting in Louisville. After activists spoke, CEO Novak called for an end to the campaign saying, “We don’t want to be abused, just like you don’t want the chickens to be abused.” In 2004 PETA qualified a shareholder resolution asking for a company report on actions to reduce cruelty toward chickens. Only 7.6 percent of shareholders voted for it. PETA would go on to intro- duce similar resolutions each year, getting only single-digit support each time.

A MUTED CORPORATE DEFENSE Throughout the PETA campaign, KFC and Yum! Brands have maintained a low media profile while working to elevate animal welfare standards. When contacted by reporters a typical response is: “We don’t comment on PETA’s activities and publicity stunts, which speak for themselves.” 24 This reticence

is characteristic of the animal agriculture, food, and restaurant industries generally when animal welfare becomes an issue. In mass growing and slaughter, some pain is inevitable. Altering production to address chicken discomfort, injury, and behavior deprivation raises costs.

Most consumers are ignorant of factory farming methods and fail to entertain the link between a KFC meal and the life experience of the creature in it. Despite PETA’s efforts, there is no groundswell of demand for more humane treatment of chickens. Reacting to a protest going on outside a restaurant in Israel, a KFC customer said: “There’s nothing to do. This is life and it is all part of the food chain. I have to eat.” 25

This vacuum of interest and concern sustains in- dustry calculations balancing poultry welfare against costs. For example, industry guidelines that KFC helped develop and now follows stipulate that corrective action be taken if the number of “DOA” [dead-on-arrival] chickens at a plant exceeds 0.5 per- cent, if the number of broken or dislocated wings from handling to place chickens on the stun line exceeds 5 percent, and if less than 98 percent of chickens are effectively stunned before having their throats cut by automatic knife. 26 These standards may be defined as humane, but for every 500 chickens they are met if 3 arrive dead, 25 get their wings broken by handlers, and 10 are conscious when plunged into a tank of scalding water to loosen their feathers before further “processing.” Magnified to the scale of KFC opera- tions, assuming each of its claimed 720 million annual diners consumes the equivalent of only one-tenth of a chicken, the standard could allow 360,000 dead-on- arrival chickens, 3.6 million broken wings, and 1.4 mil- lion live throat cuttings.

Such compromises in chicken welfare to avoid higher costs are tacitly accepted by KFC diners, but difficult to defend in a media debate. PETA’s greatest source of power is the desire of average people to see themselves as humane and decent. 27 The impossibility of defending a standard that lets chickens be boiled

22 Letter of March 24, 2003, from Ingrid E. Newkirk to Cheryl Bachelder, at

23 Mark Naegele, “McCartney Accuses KFC of Fowl Play,” Columbus Dispatch, July 25, 2003, p. 2C.

24 Rick Maynard, manager of public relations at KFC, quoted in Keith Edwards, “These Protesters Aren’t Chicken,” Portland Press Herald, December 17, 2008, p. B1.

25 Yitchak Mokitada, quoted in Jenny Merkin and Yael Wolynetz, “KFC Diners Remain Unflappable in Face of Chicken Cruelty Protest,” The Jerusalem Post, July 4, 2006, p. 5.

26 National Chicken Council, National Chicken Council Animal Welfare Guidelines and Audit Checklist, (Washington, DC: National Chicken Council, January 28, 2010), pp. 7–8.

27 Eric Dezenhall, Nail ‘Em (Amherst, NY: Prometheus Books, 2003), p. 80.

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alive makes cautious nonconfrontation a better policy than frontal assault on PETA.

Therefore, in response to attacks, the company sidesteps discussing welfare to cost trade-offs and regularly makes four other points. First, it is justified in selling chickens by the morality of the market in which meeting customer demand is a positive duty. Hence, it says, “We support our customers’ prefer- ence to eat meat—a preference that represents the viewpoint of the majority of Americans.” 28 Second, it is the target of false claims by PETA, a “radical or- ganization” that deceptively hides its real goal, the advent of a vegetarian world. Third, it complies with

and usually goes beyond all laws in countries where it has restaurants. And fourth, it is only a purchaser and does not own chicken production facilities where abuses may occur; nevertheless, it accepts that its size as a chicken buyer gives it responsibility and the power to lead in humane treatment of chickens and it is taking a range of actions.

Since 2000 KFC has followed the Yum! Brands set of principles for animal welfare shown in Exhibit 2 and since 2004 it has carried out a more comprehen- sive set of KFC Poultry Welfare Guidelines covering breeding, growing houses, catching, transport, holding, stunning, and slaughter. KFC calls these guidelines “industry leading” because they exceed standards set by industry groups such as the National Chicken Council, but PETA rejects them because they do not require the changes it demands.

Yum! Brands set up an Animal Welfare Advisory Council of outside experts. When it was set up, PETA recommended people acceptable to it as

EXHIBIT 2 Yum! Brands Animal Welfare Guiding Principles

Source: www.yum. com (2004).

Food Safety: Above all else, we are committed to providing our customers with safe, de- licious meals and ensuring that our restaurants are maintained and operated under the highest food safety standards. This commitment is at the heart of our entire operations and supply chain management, and is evident in every aspect of our business—from raw material procurement to our restaurant food preparation and delivery.

Animal Treatment: Yum! Brands believes treating animals humanely and with care is a key part of our quality assurance efforts. This means animals should be free from mis- treatment at all possible times from how they are raised and cared for to how they are transported and processed. Our goal is to only deal with suppliers who provide an envi- ronment that is free from cruelty, abuse and neglect.

Partnership: Yum! Brands partners with experts on our Animal Welfare Advisory Council and our suppliers to implement humane procedures/guidelines and to audit our suppliers to determine whether the adopted guidelines are being met.

Ongoing Training and Education: Yum! Brands recognizes that maintaining high standards of animal welfare is an ongoing process. Training and education has and will continue to play a key role in our efforts. Yum! Brands will continue to work with experts to ensure our quality assurance employees and suppliers have the training and knowl- edge necessary to further the humane treatment of animals.

Performance Quantification & Follow-up: Yum! Brands’ animal welfare guidelines are specific and quantifiable. Yum! Brands measures performance against these guidelines through audits of our suppliers on a consistent basis.

Communication: Yum! Brands will communicate our best practices to counterparts within the industry and work with industry associations such as the National Council of Chain Restaurants and the Food Marketing Institute to implement continuous improve- ment of industry standards and operations.

28 KFC, “Animal Welfare Program: Facts,” 2009, at A 2007 survey found that 91 percent of respondents had eaten chicken in the past two weeks, averaging 4.5 times combined. Paul Prekopa, “2007 Consumer Chicken Survey,” WATT Poultry USA, at

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members and the company appointed four of them. In 2005 three of these panel members submitted a set of recommendations for the welfare of chickens, calling for actions that would have satisfied all of PETA’s demands. 29 KFC refused these recommen- dations and two of the panel members resigned. Currently the advisory group has six members, four academics and two managers from major sup- pliers, and meets twice a year to “align practices with the latest research and thinking in the field of animal welfare.” 30

KFC ABIDES, PETA IS UNRELENTING As the campaign moved into its seventh year, KFC stood firm. Although surely it has lost some custom- ers and its executives have been harassed, it has not, on the whole, suffered much from PETA’s boycott. Between 2003 and 2010 KFC added more than 4,600 new outlets, an increase of 37 percent, and sales per outlet grew 7 percent despite a severe recession. 31 The performance of its parent, Yum! Brands, has also been strong. Anyone who bought its stock at the be- ginning of the boycott saw its share price outperform the Dow, the Standard & Poor’s 500, and McDonald’s since then.

PETA, now joined by more than a dozen other groups, including the Humane Society of the United States, continued its assertive campaign. Demonstra- tions, of which there have been more than 10,000, re- mained a staple. A favorite stunt is planting young women in yellow bikinis at KFC outlets where, espe- cially in cold weather, they attract attention. During the winter of 2008–2009 PETA’s bikini maidens held signs in below-freezing weather at KFCs in Michigan, Wisconsin, New York, and Maine. News- papers described scenes where the women trembled uncontrollably as distracted drivers ran their cars

over curbs. “It’s a little bit chilly,” said a protester in 20 degree Kalamazoo weather, “but it’s really nothing compared to what the animals go through.” 32

In Louisville PETA set up its KFCruelty cam- paign headquarters across the street from KFC’s flagship restaurant. It continues to visit the neigh- bors of KFC executives, handing out “bloody” chicken figures, asking them to prevail on their friends to end the cruelty. When Yum! Brands un- knowingly tried to buy a building owned by PETA in Norfolk, Virginia, the group offered to give it the property for nothing in return for meeting the cam- paign’s demands.

When KFC gave $3,000 grants of asphalt for cities to fix potholes, PETA offered to double them if it could put chalk marks on the patches reading “KFC Tortures Animals.” 33 The offers were rejected. When KFC sponsored an effort at the Talladega Super- speedway to get in the Guinness Book of World Records for the most people simultaneously doing the chicken dance, Ingrid Newkirk wrote to Guinness officials, pointing out that records for killing animals are against its rules and asking them to “go a step fur- ther” and reject records from companies that subject animals to “needless suffering.” 34 The attempt went on, but no record was set.

A PHILOSOPHICAL IMPASSE Although the campaign against KFC could end if the company adopted specific practices, the plain issue between PETA and the corporation would remain. What is the proper relationship between humans and food animal species? The sides are polarized.

Richard Martin, editor of the industry magazine Nation’s Restaurant News, says PETA errs in its “rejec- tion of the animal kingdom’s remorseless food chain paradigm” and in its “repudiation of the world-wide

29 “Animal Welfare Recommendations and Proposed Plan of Action for Implementation at KFC Suppliers,” memo from Dr. Iam Duncan, Dr. Temple Grandin, and Dr. Mohan Raj to Harvey Brownlee, chief operating officer, KFC, March 11, 2005, at March11document.pdf.

30 KFC, “Animal Welfare Program: Latest News,” 2009, at

31 Sources of figures are Yum! Brands, Inc., annual reports and Form 10-Ks, various years.

32 Quoted in “Protester Doesn’t Chicken Out,” Kalamazoo Gazette, January 27, 2009. See also Erin Richards, “PETA Protesters Give Milwaukee KFC the Cold Shoulder,” The Milwaukee Journal Sentinel, January 24, 2009.

33 See John Horton, “PETA Asks Cities to Reject KFC Pothole Fix,” Plain Dealer, April 4, 2009, p. B2; and Cliff Hightower, “PETA Doubles Ante on Pothole Patches,” Chattanooga Times Free Press, May 1, 2009, p. A9.

34 Quoted in Dustin Long, “NASCAR, PETA Officials Playing a Game of Chicken,” News & Record, April 22, 2009, p. C3.

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acceptance of meat eating as a proper option for de- scendants of hunters. . . . ” 35

This position is entirely at odds with the values of animal rights activists, including one who writes, “if we cannot imagine how chickens must feel . . . per- haps we should try to imagine ourselves placed help- lessly in the hands of an overpowering extraterrestrial species, to whom our pleas for mercy sound like nothing more than bleats and squeals and clucks— mere ‘noise’ to the master race in whose ‘superior’ minds we are ‘only animals.’” 36


1. Do you support KFC Corporation or People for the Ethical Treatment of Animals in this contro- versy? Why?

35 Richard Martin, “Game of Chicken: Critics Say Capitulation to PETA Will Worsen Animal Rights Reprisals,” Nation’s Restaurant News, July 28, 2003, p. 31.

36 Karen Davis, “Animal Suffering Similar to Human Slaves,” Chicago Sun-Times, September 6, 2005, p. 50.

2. What are the basic criticisms that PETA makes of KFC? Are they convincing? Are its criticisms simi- lar to timeless criticisms of business mentioned in the chapter?

3. What methods and arguments has KFC used to support its actions? Is it conducting the best defense?

4. Is the range of PETA’s actions acceptable? Why does the group use controversial tactics? What are its sources of power in corporate campaigns?

5. Is it proper for PETA to pressure KFC for change when the company is following the law and pub- lic custom? Does PETA represent so compelling a truth or enough people to justify attacks on, and perhaps damage to, major corporations supported by and supporting millions of customers, employ- ees, and stockholders?

6. Do animals have rights? If so, what are they? What duties do human beings have toward animals? Does KFC protect animal welfare at an acceptable level?

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Chapter Five

Corporate Social Responsibility Merck & Co., Inc.

Corporate social responsibility takes many forms. The following story stands out as extraordinary.

For ages, river blindness, or onchocerciasis (on-ko-sir-KYE-a-sis), has tortured hu- manity in tropical regions. Its cause is a parasitic worm that, in its adult form, lives only in humans. People are infected with the worm’s tiny, immature larvae when bitten by black flies that swarm near fast-moving rivers and streams. These larvae settle in tissue near the bite and form colonies, often visible lumps, where adults grow up to two feet long. Mature worms live for 7 to 18 years coiled in these internal nodes, mating, and releasing tens of thousands of microscopic new larvae that migrate back to the skin’s surface, causing welts, lumps, and discoloration along with a persistent itch that drives some sufferers to suicide. Eventually, the parasites move to the eyes, causing blindness. The cycle of infection is renewed when black flies take a blood meal from an infected person, ingesting tiny larvae, then bite an uninfected person, passing on the parasite.

People suffer in many ways. For Amarech Bitena of Ethiopia, the cost of river blind- ness is a broken heart. The parasites came in childhood. Now, at 25, her skin is hard and dark, her vision blurred. She has not married. “When I think about the future,” she says, “I feel completely hopeless. . . . My vision can’t be restored. My skin is de- stroyed. I would have liked to be a doctor.” 1 Almost 18 million people suffer from onchocerciasis in tropical areas of Africa, South America, and Yemen. 2 About 500,000 have impaired vision and 270,000 are blind. It saps economies by enervating workers and driving farmers from fertile, riverside land.

Until recently, no treatment for river blindness existed, and little was done. It is only one of many tropical diseases affecting millions in developing nations. Critics said that big drug companies ignored these epidemics to focus on pills for the dis- eases of people in rich nations. Years ago the World Health Organization began pes- ticide spraying to kill the black fly, but it was a frustrating job. Winds carry flies up to

1 Claudia Feldman, “River Blindness: A Forgotten Disease,” The Houston Chronicle, October 9, 2005, p. 5.

2 “Fighting River Blindness and Other Ills,” The Lancet 374, no. 9684 (2009), p. 91.

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100 miles from breeding grounds. And scientists estimate that the breeding cycle must be suppressed for at least 14 years to stop reinfections.

In 1975 scientists at Merck & Co. dis- covered a compound that killed animal parasites. By 1981 they had synthesized it and marketed it for deworming dogs, cattle, sheep, and pigs. Ivermectin, as it was called, was a blockbuster hit and would be the best-selling veterinary drug worldwide for two decades. Merck’s researchers had a strong hunch it also would be effective in humans against Onchocerca volvulus , the river blindness parasite. 3

Merck faced a decision. It would be very expensive to bring a new drug to market and manufacture it. Yet people with the disease were among the world’s poorest. Their villages had no doctors to prescribe it, no drugstores to sell it. Should Merck develop a drug that might never be profitable?

George W. Merck, son of the firm’s founder and its leader for 32 years, once said: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear.” 4 This advice was still respected at Merck; it lived in the corporate culture. Merck’s sci- entists were motivated by humanitarian goals and restraining them was awkward. The decision to go ahead was made. The cost would be $200 million.

Clinical trials of ivermectin confirmed its effectiveness. A single yearly dose of 150 micrograms per kilogram of body weight reduced the burden of tiny worms mi- grating through the body to near zero and impaired reproduction by adult parasites, alleviating symptoms and preventing blindness. 5

Eventually, it became clear that neither those in need nor their governments could afford to buy ivermectin. So in 1987 Merck committed itself to manufacture and ship it at no cost to where it was needed for as long as it was needed to control river blindness. The company asked governments and private organizations to help set up distribution.

Since then, Merck has given away more than 2.5 billion tablets in 37 countries at a cost of $3.9 billion. Estimates are that treatment has prevented 40,000 cases of blindness each year; returned to use 62 million acres of farmland, an area the size of Michigan; and added 7.5 million years of adult labor in national workforces. 6 A study

3 David Bollier, Merck & Company (Stanford, CA: Business Enterprise Trust, 1991), p. 5.

4 Roy Vagelos and Louis Galambos, The Moral Corporation (New York: Cambridge University Press, 2006), p. 171.

5 Mohammed A. Aziz, et al., “Efficacy and Tolerance of Ivermectin in Human Onchocerciasis,” The Lancet, July 24, 1982.

6 “Merck MECTIZAN® Donation Program: Priorities and Goals,” at, accessed December 8, 2009.

In countries ravaged by river blindness, the blind some- times hold sticks and fol- low the lead of children. Merck commissioned this bronze sculpture for the lobby of its New Jersey headquarters, where top ex- ecutives pass by each day. It symbolizes Merck’s com- mitment to make medicine for the good of humanity. Be cause of Merck’s unprec- edented dona- tion of a river blindness drug, such scenes are no longer com- mon. Source: Photo courtesy of Merck & Co., Inc.

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of economic effects for two areas in Africa estimated $573 million in net benefits over 40 years. 7

By 2012 the transmission of onchocerciasis in six Latin American countries is pre- dicted to end. No end is in sight for Africa, but infection rates are falling in the most afflicted areas. In Benin, for example, infection rates in 51 areas ranged from 25 per- cent to 98 percent in the mid-1990s. Now the highest rate anywhere in the country is 3 percent. 8

For a drug company to go through the new drug development process and then give the drug away is unprecedented. Merck’s management believes that although developing and donating ivermectin has been expensive, humanitarianism and en- lightened self-interest vindicate the decision. Few corporations have such singular opportunities to fight evil as did Merck, but every corporation must fulfill a range of obligations to society and many can apply unique commercial competencies to global problems. In this chapter we define the idea of social responsibility and explain how it has expanded in meaning and practice over time. The next chapter explains more about the management methods corporations use to execute social actions.


Corporate social responsibility is the duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets. The term is a modern one. It did not enter common use until the 1960s, when it appeared in academic litera- ture. It often goes by other names, including its abbreviation CSR, corporate citi- zenship, stakeholder management, sustainability, and, in Japan, kyosei , a word that translates as “living and working together for the common good.” Whatever it is called, there is no precise, operational meaning. It is primarily a political ideology, because its central purposes are to control and legitimize the exercise of corporate power. As an ideology, it is a worldview of how a corporate should act. In addi- tion, it can be defined more narrowly as a management practice, specifically as the use of special tools and procedures to make a corporation responsible. This practi- cal aspect is the subject of the next chapter.

The fundamental idea is that corporations have duties that go beyond lawful execution of their economic function. Here is the reasoning. The overall perform- ance of a firm must benefit society. Because of market imperfections, the firm will not fulfill all its duties, and may breach some, if it responds only to market forces. Laws and regulations correct some shortcomings, more in developed countries, fewer in less developed. Beyond the law, firms must voluntarily take additional actions to meet their full obligations to society. What additional actions must they take? These have to be defined in practice by negotiation with stakeholders and they change over time.

Advocates of social responsibility, who occupy a very broad middle band of the political spectrum, justify it with three basic arguments. First, it is an ethical duty

corporate social responsibility The duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets.

7 H. R. Waters, et al., “Economic Evaluation of Mectizan Distribution,” Tropical Medicine and International Health, April 2004, p. A16.

8 “Benin: The End of River Blindness,” Africa News, May 8, 2008.

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to promote social justice. A timeless principle is that power should be used fairly. If it harms or fails society, it is badly used. Second, social responsibility is practical. It has concrete benefits. It motivates employees and creates loyal customers. It leads to innovative products and strategies. It strengthens surrounding communi- ties. It protects reputations and avoids regulation. In short, there is a “business case” beyond ethical duty. Third, it is necessary because other forces do not force full responsibility on corporations, particularly multinational corporations that operate across borders in a global arena of weak governance.

Opponents of corporate social responsibility are found toward the left and right edges of the political spectrum shown in Figure 5.1. On the far left, it is seen by radical Progressives as an insufficient doctrine, one that substitutes only poorly for tougher laws and regulations, allowing corporations to form a smoke screen of virtue behind which their “inviolable core” of profit seeking behavior is un- touched. 9 On the far right, it is seen as a pernicious doctrine, draining and enervat- ing the strength of the corporate institution. Conservative economists see it as an unwarranted cost. It creates administrative expenses, distracts executives, con- fuses economic goals with other goals, and subtracts from social welfare when the corporation is less efficient. 10 Corporations are owned by shareholders and the primary responsibility of managers is acting lawfully to maximize profits for them, thereby producing maximum value and surplus wealth for society.

Conservatives see capitalism as a natural, venerable, practical, and beneficent in- stitution that has developed over centuries and led to rising global prosperity. They dislike CSR for thwarting natural market dynamics. They reject the agenda of corpo- rate social responsibility, seeing it as centered in progressive ideology and based, therefore, on the goals of a movement at heart dubious of capitalism. Markets, not politics, should direct corporations. When markets fail, they should be corrected by the policies of representative government, not by unelected executives or activists.

Between these fringes there is wide acceptance of CSR. More moderate progres- sives are willing to work with responsible corporations. And corporate managers occupy a middle ground. Most now accept the idea as a practical necessity even as they often harbor doctrinal reservations. Years ago, most managers were on the

9 Marjorie Kelly and Allen L. White, “From Corporate Responsibility to Corporate Design,” Journal of Corporate Citizenship, spring 2009, p. 25. See also Subhabrata Bobby Banerjee, Corporate Social Responsibility: the Good, the Bad and the Ugly (Cheltenham: Edward Elgar Publishing, 2007).

10 See, for example, “The Good Company: A Survey of Corporate Social Responsibility,” The Economist, January 22, 2005.




Zones of Rejection

Radical Progressives

Progressive Civil Society

Mainstream Corporate Managers Free MarketConservatives

Zone of Acceptance

FIGURE 5.1 The CSR Spectrum

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right side of this spectrum. Why did they move left? As we will explain, the doc- trine of corporate responsibility has evolved over time to require more expansive action by companies largely because stakeholder groups gained more power to impose their agendas, but also because the ethical and legal philosophies underly- ing it matured to support broader action by managers. In fact, corporate social re- sponsibility is a profoundly durable and successful ideology. All through an era when free market principles were ascendant, it coiled more and more tightly around the corporation to restrain excesses and direct behavior to the public good. The story of corporate social responsibility begins with Adam Smith.

Social Responsibility in Classical Economic Theory Throughout American history, classical capitalism, which is the basis for the mar- ket capitalism model in Chapter 1, has been the basic inspiration for business. In the classical view, a business is socially responsible if it maximizes profits while operating within the law, because an “invisible hand” will direct economic activity to serve the good of the whole.

This ideology, derived from Adam Smith’s Wealth of Nations, is compelling in its simplicity and its resonance with self-interest. In nineteenth century America, it was elevated to the status of a commandment. However, the idea that markets harness low motives and work them into social progress has always attracted skeptics. Smith himself had a surprising number of reservations about the mar- ket’s ability to protect human welfare. 11 Today the classical ideology still com- mands the economic landscape, but, as we will see, ethical theories of broader responsibility have worn down its prominences.

The Early Charitable Impulse The idea that corporations had social responsibilities awaited the rise of corpora- tions themselves. Meanwhile, the most prominent expression of duty to society was the good deed of charity by business owners.

Most colonial era businesses were very small. Merchants practiced thrift and frugality, which were dominant virtues then, to an extreme. Benjamin Franklin’s advice to a business acquaintance reflects the penny-pinching nature of the time: “He that kills a breeding sow, destroys all her offspring to the thousandth genera- tion. He that murders a crown, destroys all that it might have produced, even scores of pounds.” 12 Yet charity was a coexisting virtue, and business owners sought respectability by giving to churches, orphanages, and poorhouses. Their ac- tions first illustrate that although American business history can be pictured as a jungle of profit maximization, people in it have always been concerned citizens. 13

Charity by owners continued in the early nineteenth century and grew as great fortunes were made. Mostly, the new millionaires endowed social causes as

11 Jacob Viner, “Adam Smith and Laissez-Faire,” Journal of Political Economy, April 1927. 12 In “Advice to a Young Tradesman [1748],” in The Autobiography of Benjamin Franklin and Selections from His Other Writings, ed. Nathan G. Goodman (New York: Carlton House, 1932), p. 210. A crown was a British coin on which appeared the figure of a royal crown. 13 Mark Sharfman, “The Evolution of Corporate Philanthropy, 1883–1952,” Business & Society, December 1994.

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individuals, not through the companies that were the fountainheads of their wealth.

One of the earliest was Steven Girard, a shipping and banking tycoon. When he died in 1831, the richest person in the nation, he made generous charitable be- quests in his will, the largest of which was $6 million for a school to educate or- phaned boys from the first grade through high school. 14 This single act changed the climate of education in the United States because it came before free public school- ing, when a high school education was still only for children of the wealthy.

Following Girard, others donated generously and did so while still living. John D. Rockefeller systematically gave away $550 million over his lifetime. Andrew Carnegie gave $350 million during his life to social causes, built 2,811 public libraries, and donated

7,689 organs to churches. He wrote a famous article titled “The Disgrace of Dying Rich” and argued that it was the duty of a man of wealth “to consider all surplus revenues . . . as trust funds which he is called upon to administer.” 15

However, Carnegie’s philosophy of giving was highly paternalistic. He believed that big fortunes should be used for grand purposes such as endowing universities and building concert halls such as Carnegie Hall. They should not be wasted by paying higher wages to workers or giving gifts to poor people; that would dissipate riches on small indulgences and would not, in the end, elevate the culture of a society. Thus, one day when a friend of Carnegie’s encountered a beggar and gave him a quarter, Carnegie admonished the friend that it was one of “the very worst actions of his life.” 16

In this remark, Carnegie echoed the doctrine of social Darwinism , which held that charity interfered with the natural evolutionary process in which society shed its less fit to make way for the better adapted. Well-meaning people who gave to charity interfered with the natural law of progress by propping up failed examples of the human race. The leading advocate of this astringent doctrine, the English philosopher Herbert Spencer, wrote the following heartless passage in a best-selling 1850 book.

social Darwinism A philosophy of the late 1800s and early 1900s that used evolu- tion to explain the dynamics of human society and institutions. The idea of “survival of the fittest” in the social realm implied that rich people and dominant companies were morally superior.

Andrew Carnegie (1835–1919). Source: The Library of Congress.

14 The school became known as Girard College, which one of the authors of this book, George Steiner, attended. It still exists in Philadelphia. 15 Andrew Carnegie, The Gospel of Wealth (Cambridge, MA: Harvard University Press, 1962), p. 25; originally published in 1901. 16 Quoted in Page Smith, The Rise of Industrial America, vol. 6 (New York: Penguin Books, 1984), p. 136.

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It seems hard that a laborer incapacitated by sickness from competing with his stronger fellows should have to bear the resulting privations. It seems hard that widows and orphans should be left to struggle for life or death. Nevertheless, when regarded not separately, but in connection with the interests of universal humanity, these harsh fatalities are seen to be full of the highest beneficence—the same beneficence which brings to early graves the children of diseased parents and singles out the low-spirited, the intemperate, and the debilitated as the victims of an epidemic. 17

Spencer approved of some charity, though only when it raised the character and superiority of the giver. Still, the

overall effect of Spencer’s arguments was to moderate charity by business leaders and retard the growth of a modern social conscience.

More than just faith in markets and social Darwinism constrained business from undertaking voluntary social action. Charters granted by states when corpo- rations were formed required that profits be disbursed to shareholders. Courts consistently held charitable gifts to be ultra vires, that is, “beyond the law,” because charters did not expressly permit them. To use company funds for charity or social works took money from the pockets of shareholders and invited lawsuits. Thus, when Rockefeller had the humanitarian impulse to build the first medical school in China, he paid for it out of his own pocket; not a penny came from Standard Oil. Although most companies took a negative view of philanthropy, by the 1880s the railroads were an exception. They sponsored the Young Men’s Christian As- sociation (YMCA) movement, which provided rooming and religious indoctrina- tion for rail construction crews. Yet such actions were exceptional.

As the twentieth century approached, classical ideology was still a mountain of resistance to expanding the idea of business social responsibility. A poet of that era, James Russell Lowell, captured the spirit of the day.

Not a deed would he do, Nor a word would he utter Till he’d weighed its relations To plain bread and butter. 18

Social Responsibility in the Late Nineteenth and Early Twentieth Centuries Giving, no matter how generous, was a narrow kind of social responsibility often unrelated to a company’s impacts on society. By the late 1800s it was growing ap- parent to the business elite that prevailing doctrines used to legitimize business defined its responsibilities too narrowly. Industrialization had fostered social

Herbert Spencer (1820–1903). Spencer at- tempted a synthesis of human knowl- edge based on the unifying idea of evolu- tion. When he visited the United States in 1882 a grand dinner attended by 200 leading Americans was held for him at Delmonico’s in New York. Source: © Hulton- Deutsch Collec- tion/CORBIS.

17 Herbert Spencer, Social Statics (New York: D. Appleton and Company, 1890), p. 354; first published in 1850. 18 “A Fable for Critics,” The Complete Poetical Works of James Russell Lowell, Cabinet Edition (Boston: Houghton, Mifflin and Company, 1899), p. 122.

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problems and political corruption. Farmers were in revolt. Labor was increasingly violent. Socialism was at high tide. Average Americans began to question unfet- tered laissez-faire economics and the doctrine of social Darwinism.

As Rockefeller, Carnegie, and other barons of wealth gave away large sums, public doubt about their motives grew. They were accused of cloaking their greed with gifts that confused the eye, diverting it from the coarse origins of their money. As one of Carnegie’s workers asked, “What use has a man who works twelve hours a day for a library, anyway?” 19 Thus the criticism that corporate responsibil- ity is a smoke screen first emerged in this bygone era. It has never lost a following.

By now, business feared a growing clamor for more regulation. It was terrified of socialist calls for appropriation of assets. So it sought to blunt the urgency of these appeals by voluntary action.

During the Progressive era, three interrelated themes of broader responsibility emerged. First, managers were trustees, that is, agents whose corporate roles put them in positions of power over the fate of not just stockholders, but also of others such as workers, customers, and communities. This power implied a duty to pro- mote the welfare of each group. Second, managers had an obligation to balance these multiple interests. They were, in effect, coordinators who settled competing claims. Third, many managers subscribed to the service principle, a near-spiritual belief that individual managers served society by making each business success- ful; if they all prospered, the aggregate effect would eradicate social injustice, pov- erty, and other ills. This belief was only a fancy reincarnation of classical ideology. However, many of its adherents conceded that companies were still obligated to undertake social projects that helped, or “served,” the public. 20 These three inter- related ideas—trusteeship, balance, and service—expanded the idea of business responsibility beyond simple charity. But the type of responsibility envisioned was still paternalistic, and the actions of big company leaders often showed an underlying Scroogelike mentality.

One such leader was Henry Ford, who had an aptitude for covering meanness with a shining veneer of citizenship. In the winter of 1914 Ford thrilled the public by announcing the “Five-Dollar Day” for Ford Motor Co. workers. Five dollars was about double the daily pay for manufacturing workers at the time and seemed very generous. In fact, although Ford took credit for being big-hearted, the $5 wage was intended to cool unionizing and was not what it appeared on the sur- face. The offer attracted hordes of job seekers from around the country to High- land Park, Michigan. One subzero morning in January, there were 2,000 lined up outside the Ford plant by 5:00 a.m.; by dawn there were 10,000. Disorder broke out, and the fire department turned hoses on the freezing men.

The few who were hired had to serve a six-month apprenticeship and comply with the puritanical Ford Motor Co. code of conduct (no drinking, marital discord, or otherwise immoral living) to qualify for the $5 day. Many were fired on pretexts

trustee An agent of a company whose corpo- rate role puts him or her in a position of power over the fate of not just stockholders, but also of others such as customers, employees, and communities.

service principle A belief that managers served society by making companies profitable and that aggregate success by many managers would resolve major social problems.

19 Quoted in Margaret F. Byington, Homestead: The Households of a Mill Town (Philadelphia: William F. Fell Co., 1910), p. 178. 20 Rolf Lunden, Business and Religion in the American 1920s (New York: Greenwood Press, 1988), pp. 147–50.

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before the six months passed. Thousands of replace- ments waited outside each day hoping to fill a new va- cancy. Inside, Ford speeded up the assembly line. Insecure employees worked faster under the threat of being purged for a younger, stronger, lower-paid new hire. Those who hung on to qualify for the $5 wage had to face greedy merchants and landlords in the sur- rounding area who raised prices and rents.

Ford was a master of image. In 1926 he announced the first five-day, 40-hour week for workers, but with public accolades still echoing for this “humanitarian” gesture, he speeded up the line still more, cut wages, and announced a program to weed out less-efficient employ-

ees. These actions were necessary, he said, to compensate for Saturdays off. Later that year, Ford told the adulatory public that he had started a program to fight juve- nile delinquency. He proposed to employ 5,000 boys 16 to 20 years old and pay them “independence wages.” 21   This was trumpeted as citizenship, but as the “boys” were hired, older workers were pitted against younger, lower-paid replacements.

A few business leaders, however, acted more consistently with the emerging themes of business responsibility. One was General Robert E. Wood, who led Sears, Roebuck and Company from 1924 to 1954. He believed that a large corporation was more than an economic institution; it was a social and political force as well. In the Sears Annual Report for 1936, he outlined the ways in which Sears was discharging its responsibilities to what he said were the chief constituencies of the company— customers, the public, employees, suppliers, and stockholders. 22 Stockholders came last because, according to General Wood, they could not attain their “full measure of reward” unless the other groups were satisfied first. In thought and action, General Wood was far ahead of his time. Nevertheless, in the 1920s and after that, corpora- tions found various ways to support communities. Organized charities were formed, such as the Community Chest, the Red Cross, and the Boy Scouts, to which they con- tributed. In many cities, companies gave money and expertise to improve schools and public health. In the 1940s corporations began to give cash and stock to tax- exempt foundations set up for philanthropic giving.

1950 to the Present The contemporary understanding of corporate social responsibility was formed during this period. An early and influential statement of the idea was made in 1954 by Howard R. Bowen in his book Social Responsibilities of the Businessman. 23 Bowen said that managers felt strong public expectations to act in ways that went beyond profit-maximizing and were, in fact, meeting those expectations. Then he laid out the basic arguments for social responsibility: (1) managers have an ethical

Inventor and industrialist Henry Ford (1863–1947). The public made him a folk hero and saw him as a generous employer. But he manipulated workers to lower costs. Source: The Library of Congress.

21 Keith Sward, The Legend of Henry Ford (New York: Rinehart & Company, 1948), p. 176. 22 James C. Worthy, Shaping an American Institution: Robert E. Wood and Sears, Roebuck (Urbana: University of Illinois Press, 1984), p. 173. 23 Howard Bowen, Social Responsibilities of the Businessman (New York: Harper, 1954).

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duty to consider the broad social impacts of their decisions; (2) businesses are res- ervoirs of skill and energy for improving civic life; (3) corporations must use power in keeping with a broad social contract, or lose their legitimacy; (4) it is in the enlightened self-interest of business to improve society; and (5) voluntary ac- tion may head off negative public attitudes and unwanted regulations. This book, despite being almost 60 years old, remains an excellent encapsulation of the cur- rent ideology of corporate responsibility. 24

Not everyone accepted Bowen’s arguments. The primary dissenters were con- servative economists who claimed that business is most responsible when it makes money efficiently, not when it misapplies its energy on social projects. The best- known advocate of this view, then and now, is Nobel laureate Milton Friedman.

There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without decep- tion or fraud. . . . Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of social responsibility other than to make as much money for their stockholders as possible. This is a fun- damentally subversive doctrine. 25

Friedman argues that managers are the employees of a corporation’s owners and are directly responsible to them. Stockholders want to maximize profits, so the manager’s sole objective is to accommodate them. If a manager spends cor- porate funds on social projects, he or she is diverting shareholders’ dollars to programs they may not even favor. Similarly, if the cost of social projects is passed on to consumers in higher prices, the manager is spending their money. This “taxation without representation,” says Friedman, is wrong. 26 Further- more, if the market price of a product does not reflect the true costs of produc- ing it, but includes costs for social programs, then the market’s allocation mechanism is distorted.

The opposition of Friedman and other adherents of classical economic doctrine proved to be a principled, rearguard action. In theory the arguments were unerr- ing, but in practice they were inexpedient. When the great tides of consumerism, environmentalism, civil rights, and feminism rose in the 1960s, leftist critics wanted to control rip-offs, pollution, employment discrimination, and other perceived excesses of capitalism with new regulations. In this power struggle Friedman’s position seemed cold and indifferent, an abstract calculus aloof from costs in flesh and blood. It incited critics and invited retaliation and more regula- tion should the business community openly agree. Moreover, the idea that corpo- rations could undertake expanded social responsibility was useful for business. If corporations volunteered to do more it would calm critics, forestall regulation,

24 See, for example, Rosabeth Moss Kanter, Supercorp (New York: Crown Business, 2009), the result of three years of research and 350 interviews in 20 countries by the author and her team, leading to the discovery that “vanguard,” or socially progressive, companies accept Bowen’s basic arguments. 25 Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 133. 26 “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970, p. 33.

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and preserve their legitimacy. Not surprisingly, Friedman’s view was decisively rejected by business leaders, who soon articulated a new vision.

In 1971 the Committee for Economic Development, a prestigious voice of busi- ness, published a bold statement of the case for expansive social responsibility. Society, it said, has broadened its expectations outward over “three concentric circles of responsibilities.” 27

• An inner circle of clear-cut responsibility for effi cient execution of the economic function resulting in products, jobs, and economic growth.

• An intermediate circle encompassing responsibility to exercise this economic function with a sensitive awareness of changing values and priorities.

• An outer circle that outlines newly emerging and still amorphous responsi- bilities that business should assume to improve the social environment, even if they are not directly related to specifi c business processes.

Classical ideology focused solely on the first circle. Now business leaders argued that management responsibilities went further. The report was followed in 1981 by a Statement on Corporate Responsibility from the Business Roundtable, a group of 200 CEOs of the largest corporations. It said:

Economic responsibility is by no means incompatible with other corporate responsi- bilities in society . . . A corporation’s responsibilities include how the whole business is conducted every day. It must be a thoughtful institution which rises above the bottom line to consider the impact of its actions on all, from shareholders to the society at large. Its business activities must make social sense. 28

After these statements from top executives appeared, the range of social pro- grams assumed by business expanded rapidly in education, the arts, public health, housing, the environment, literacy, employee relations, and other areas. However, although the business elite formally rejected Friedmanism, corporate cultures, which change only at glacial rates, still promoted a single-minded obsession with effi- ciency and financial results. The belief that a trade-off existed between profits and social responsibility was (and still is) widespread and visible in corporate actions.


The three elements of social responsibility are market actions, externally mandated actions, and voluntary actions. Figure 5.2 illustrates the relative magnitude of each, how that magnitude has changed over historical eras, and how change will progress if the trend toward expansion of the idea of corporate responsibility continues. To be socially responsible, a corporation must fulfill its duties in each area of action.

Market actions are responses to competitive forces in markets. Such actions have always dominated and this will continue. When a corporation responds to

Friedmanism The theory that the sole respon- sibility of a cor- poration is to optimize profits while obeying the law.

27 Committee for Economic Development, Social Responsibilities of Business Corporations (New York: CED, 1971), p. 11. 28 Statement on Corporate Responsibility (New York: Business Roundtable, October 1981), pp. 12 and 14.

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markets, it fulfills its first and most important social responsibility. All else pales before its economic impact. Recently the giant Unilever Group cooperated with Oxfam International, a confederation of progressive NGOs fighting world pov- erty, to study the overall impact of its branch company in Indonesia. Oxfam is suspicious of corporations and had “ruthlessly challenged” Unilever’s profit- seeking actions. 29 Yet the final report detailed a wondrous economic effect in a country where half the population lives below $2 a day.

Unilever Indonesia (UI) is the 13th-largest company in the country. Like its glo- bal parent, it sells personal and home products such as Kleenex, Pepsodent, and Lux soap, along with a variety of foods. Over five years ending in 2006, UI made a net profit of $212 million. But the surprise was that its operations created total monetary value of $633 million along its value chain . A value chain is the sequence of coordinated actions that add value to a product or service. For Unilever it in- cludes economic actors outside the corporation in both its backward supply chain and forward distribution channels.

Of the $633 million total, only 34 percent was captured by UI; the rest went to others: 4 percent to farmers for their crops, 12 percent to several hundred suppli- ers, 6 percent to product distributors, and 18 percent to as many as 1.8 million re- tailers, among them tiny shops and street vendors selling “sachets,” or small packets of Unilever products made especially for low-income consumers who could not afford regular sizes. From its share, UI put the majority back into the Indonesian economy, reinvesting 25 percent in its local business, giving 30 percent to the government in taxes, and paying 7 percent in dividends to Indonesian shareholders. 30 Unilever Indonesia employed about 5,000 workers, but the study found that the entire value chain created 300,764 full-time jobs, an important con- tribution in a nation with more than 9 percent unemployment.

value chain The sequence of coordinated actions that add value to a pro- duct or service.

29 Jason Caly, Exploring the Links Between International Business and Poverty Reduction: A Case Study of Unilever in Indonesia (Eynsham, UK: Oxfam GB and Unilever PLC, 2005), p. 10. 30 The other 38 percent was paid as dividends to overseas shareholders. Figures in this paragraph are from ibid., pp. 14, 82, and 83.

FIGURE 5.2 Motives for Social Responsibility and Their Evolving Magnitudes

1800 1900 2000 2050




Externally Mandated


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Chapter 5 Corporate Social Responsibility 133

Figures such as these illustrate how the greatest positive impact of a corporation on society is economic and why maximizing that impact is a corporation’s greatest social responsibility. From the study, Oxfam concluded that tremendous potential for poverty alleviation existed in UI’s routine profit-seeking actions. It absolved Unilever of draining Indonesian society by profiting on the backs of poor people.

Mandated actions are those required either by government regulation or civil regulation. Government, or public, regulation is rooted in the authority of the state and its mandates are enforceable by law. Government mandates have multiplied rapidly in developed countries. Civil regulation is regulation by nonstate actors based on social norms or standards enforced by social or market sanctions. Civil regulation, sometimes called private regulation, has many faces. It is imposed when activists, consumers, investors, lenders, shareholders, or employees make demands on a company and failure to comply will lead to reputational or financial damage. Such mandates are enforced by the power of the market, not the power of law. 31 As we will see later in this chapter, mandates based on civil regulation are now expanding rapidly in the global economy.

The third element is voluntary actions that go beyond those compelled by law or regulation. Some voluntary actions can be called “legal plus” because they exceed required mandates. After the deadly Bhopal, India, gas leak in 1984, the subject of a case study in Chapter 11, the chemical industry introduced plant safety stand- ards that went beyond the requirements of any nation. Other actions are unrelated to mandates, but respond to public consensus. Charitable giving, which is ex- pected of every corporation though not legally required, is an example. Still other actions may be strategic initiatives where the firm seeks to profit from solving a social problem as does GE when it sells energy-saving hybrid locomotives.


What must a corporation do to be socially responsible? Many actions are possible. One meticulous study classified CSR into seven main areas with 31 categories containing 147 specific CSR activities. 32 Each company must choose a range of appropriate economic, mandated, and voluntary actions to fulfill its total obliga- tions to society. No precise formula determines these choices. However, the following broad principles are widely accepted.

• Corporations are economic institutions run for profi t. Their greatest responsibility is to create economic benefi ts. They should be judged primarily on economic criteria and cannot be expected to meet purely social objectives without fi nancial incen- tives. Corporations may incur short-run costs on social initiatives that promise long-term benefi ts. And they should seek ways to solve social problems at a profi t.

civil regulation Regulation by nonstate actors based on social norms or stand- ards enforced by social or market sanctions.

31 See David Vogel, “The Private Regulation of Global Corporate Conduct,” in Walter Mattli and Ngaire Woods, eds. The Politics of Global Regulation (Princeton, NJ: Princeton University Press, 2009). 32 Ashridge Centre for Business and Society, A Catalogue of CSR Activities (Berkhamsted: Ashridge Centre for Business and Society, 2005). The areas are (1) leadership, vision, and values, (2) the marketplace, (3) the workforce, (4) supply chain activities, (5) stakeholder engagement, (6) the community, and (7) the environment.

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134 Chapter 5 Corporate Social Responsibility

• All fi rms must follow multiple bodies of law , including (1) corporation laws and chartering provisions, (2) the civil and criminal laws of nations, (3) legislated regulations that protect stakeholders, and (4) international laws, including trea- ties and trade agreements.

• Managers must act ethically . They must respect the law and, in addition, conform their behavior to ethical principles; model ethical values such as integrity, hon- esty, and justice; and set up codes, policies, and procedures to elevate behavior within the fi rm.

• Corporations have a duty to correct adverse social impacts they cause . They should try to internalize negative external costs , or adverse costs of production borne by society. A factory dumping toxic effl uent into a stream creates costs such as human and animal disease imposed on innocents, not on the company or its customers. Increasingly, this duty to correct radiates outward to include taking responsibility for adverse impacts along global supply chains.

• Social responsibility varies with company characteristics such as size, industry, prod- ucts, strategies, marketing methods, locations, internal cultures, and external demands. Thus, a global pharmaceutical company such as Merck has a far dif- ferent impact on society than a local insurance company, so its responsibilities are different and greater.

• Managers should try to meet legitimate needs of multiple stakeholders . Although corpo- rations have a fi duciary duty to shareholders, it is not legally required, desirable, or possible, to manage solely in their interest. Consumers, employees, govern- ments, communities, and other groups also have important claims on the fi rm.

• Corporate behavior must comply with an underlying social contract. To understand this contract and how it changes, managers can study the direction of national policies and global norms as evidenced in legislation, regulations, treaties, con- ventions, trade agreements, and public opinion.

• Corporations should be transparent and accountable. They should publicly report on their social performance in addition to their fi nancial performance. This social reporting should cover major social impacts and, like fi nancial reporting, be verifi able; that is, audited and checked by independent parties.


Scholars have done at least 127 studies to see if companies that are more socially responsible are also more profitable. 33 Most report a positive correlation between responsibility and profitability. Yet many have mixed, inconclusive, or negative findings. A review of 95 such studies over 30 years found that a majority (53 per- cent) showed that socially responsible behavior was related to higher profits. However, 24 percent found no relationship, 19 percent a mixed relationship, and 5 percent a negative relationship. 34

external cost A production cost not paid by a firm or its customers, but by members of society.

33 Joshua Daniel Margolis and James Patrick Walsh, People and Profits: The Search for a Link between a Company’s Social and Financial Performance (Mahwah, NJ: Lawrence Erlbaum, 2001), p. 394. 34 Ibid., p. 10.

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Chapter 5 Corporate Social Responsibility 135

Inconsistent results from study to study are not surprising given the difficult problems of method that researchers face. To begin, if social performance is de- fined as including economic performance, then any effort to separate the two elements to assess their relationship is doomed. Even if social performance is not defined to include economic performance, profit or loss does not solely depend on virtue, being also determined by market forces oblivious to the grade in a CSR re- port card. Also, no fixed, neutral definition of social responsibility exists, making it impossible objectively to rank corporations as more or less responsible. Many studies have used corporate responsibility ratings done by progressive analysts who evaluate companies based on whether they fulfill the left’s social agenda. Others rely on rankings of reputation made by executives of Fortune 500 com- panies, who have a more conservative perspective.

As opposed to the subjectivity of a corporation’s social performance it might seem that financial performance can be gauged more objectively, but there are many ways to measure profitability. Should researchers use accounting measures such as net income or market measures such as stock price appreciation?

In the above review of 95 studies, the authors report that researchers drew on 27 information sources to rate social performance and used 70 methods to calculate financial performance. This makes it difficult to compare the findings of one study to the findings of others. However, a fresh analysis of 52 studies took advantage of a statistical technique that allows correlations in individual studies to be compared. The authors found that the overall correlation between social and financial per- formance was “moderately positive,” rising to “highly positive” for some combina- tions of performance measures. 35 Still, confounding results persist. A more recent study looked at companies that made Business Ethics magazine’s annual list of 100 top corporate citizens four years in a row. It found that most were less profitable than direct competitors in their industries, suggesting to the authors that “higher profitability is associated with less corporate social responsibility.” 36

Overall, the majority of academic studies find that companies rated as notably responsible are at least as profitable, and often more so, than companies rated as less responsible. However, the results are mixed and there are such significant methodological questions that reservations are warranted. The best conclusion is that socially responsible behavior contributes to better financial performance for some companies, but evidence that it does so broadly for most companies is weak. If the evidence were stronger, there would be little need for activists and NGOs to force a CSR agenda on hesitant corporations.


In the early twenty-first century the doctrine of corporate responsibility is widely accepted in industrialized nations. Although its early development was strongest in the United States, sometime in the 1990s leadership passed to Europe, where

35 Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes, “Corporate Social and Financial Performance: A Meta-Analysis,” Organization Studies 24, no. 3 (2003). 36 Arthur B. Laffer, Andrew Coors, and Wayne Winegarden, Does Corporate Social Responsibility Enhance Business Profitability? (San Diego: Laffer Associates, 2005), p. 5.

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136 Chapter 5 Corporate Social Responsibility

welfare state systems have nurtured some of the most powerful social justice NGOs and consumers are more inclined to purchase goods from companies they see as responsible. Until this time American corporations took the lead in evolving voluntary responses to societal demands because, relative to Europe, American markets were more laissez-faire and government regulation was looser, leaving more of the company’s total responsibility in the voluntary category.

In Europe, social welfare states intervened more in markets and mandated extensive protections for workers, consumers, and the natural environment. While American companies volunteered to give health benefits to workers and make re- cyclable products, for example, their counterparts in the European Union were legally required to do so. So European companies never needed the spectrum of voluntary social actions that American companies did. Then, in the 1990s, Europe reacted to the rise of global competition, engaging with neoliberal ideas, deregu- lating markets, grinding away protections for workers, and shrinking other legal mandates on companies. In response, leading activist groups pressured firms to engage in more voluntary CSR activity and the stronger social welfare expecta- tions in European nations gave birth to a robust, creative, and expansive design of corporate responsibility that now dominates and defines Western practice.

Corporate responsibility has strong roots elsewhere in both the developed and developing world and, as in Europe, its practice often diverges from the U.S. expe- rience. In Japan, for example, it means paternalism toward workers and there is little tradition of philanthropy. In Australia voluntary CSR is actively encouraged by the government. In India it has risen on the teaching of Mohandas Gandhi that those who accumulate wealth hold it in trust for society.

Global CSR is now defined and dominated by the progressive ideology of Western civil society and the practices of Western multinationals. It has little foun- dation in some rapidly growing non-Western nations and as their businesses gain power in the world economy the consequences for CSR practice are unknown. The primary mystery is China, where a communist regime plans economic growth as it smothers dissent. Chinese corporations respond to social interests as directed by this unrepresentative, one-party government, and they adopt voluntary codes, standards, and social programs mainly to ease access into Western export markets. Although Confucian ethics teach harmony and reciprocity as central virtues and the basis of Buddhism is the interdependence of a person with the larger commu- nity and with nature, the Western idea of stakeholder engagement is lifeless in a Stalinist world. 37


While there is no consensus on the meaning and extent of CSR from nation to nation, the idea has taken on new and novel international dimensions in response to economic globalization. As governments deregulated markets and lowered

37 See, for example, Po Keung Ip, “Is Confucianism Good for Business Ethics in China,” Journal of Business Ethics 82 (2008); and “From CSR in Asia to Asian CSR,” in Jem Bendell, Chew Ng, and Niaz Alam, “World Review,” Journal of Corporate Citizenship, Spring 2009, pp. 19–22.

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Chapter 5 Corporate Social Responsibility 137

trade barriers in the 1980s, cross-border trade and investment began a steep rise. Dominant corporations grew larger and more active. As they did, critics and observers perceived the exercise of too much power and too little restraint, particularly of Western corporations in developing nations.

The perception that transnational corporations elude proper controls is rooted in a group of observations. First, international law, as found in treaties, conven- tions, and trade agreements, is weak in addressing social impacts of business. It strongly protects commercial rights, but norms protecting labor, human rights, nature, indigenous cultures, and other social resources are far less codified. Sec- ond, transnational corporations are subject to uneven regulation in developing nations, where institutions may be rudimentary and enforcement feeble. Some governments have overly bureaucratic agencies riddled with corruption. And some are undemocratic, run by elites that siphon off the economic benefits of foreign investment and neglect public needs. Third, in adapting to global eco- nomic growth, corporations use strategies of joint venture, outsourcing, and supply chain extension that create efficiencies, but sometimes also distance them from direct accountability for social harms. And fourth, significantly more gov- ernment regulation of transnational firms is unlikely. No global government exists and no nation-state has the power (or the wish) to regulate international commerce. Developing nations fear, correctly, that stricter rules will deter foreign investment.

In a world where regulation is uneven, some corporations, such as Merck, have operated with high standards across nations. But others have compromised their standards in permissive host country environments. By the early 1990s, critics of multinational corporations began calling for new standards of responsibility. One by-product of globalization was the growing number, international reach, and networking of nongovernmental organizations (NGOs). Many of these groups developed a close association with the United Nations (UN), which, besides its peacekeeping function, promotes international human rights and interests of poorer, developing nations in the global South. During the 1990s, coalitions of NGOs pushed for a series of conferences sponsored by the UN for member nations. Conferences were held on environmental sustainability (Rio de Janeiro, 1992), population (Cairo, 1993), human rights (Vienna, 1994), social development (Copenhagen, 1995), and gender (Beijing, 1995).


A defining moment came at the Rio conference on sustainability in 1992, when NGOs arrived demanding regulation of corporations. Their agenda failed, in part because the philosophy of economic liberalization driving the world economy was inhospitable to restrictions on business and in part because corporations and business groups that lobbied against regulation promoted an expanded, interna- tional doctrine of voluntary corporate responsibility. NGOs, unable to secure the hard regulations they wanted, were forced to work with business groups in devel- oping new, innovative CSR mechanisms.

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In hindsight, these conferences led to several important changes in the oper- ating environments of multinational corporations. First, they generated a series of declarations, resolutions, statements of principle, guidelines, and frame- works under UN auspices that shaped international norms for the conduct of both nations and corporations. These documents created what international legal scholars call soft law. In the realm of international law, hard law, found mainly in treaties, creates binding rights, prohibitions, and duties. While soft law creates no binding obligations or duties for corporations, if its contents are widely accepted as expressing international norms it can, over time, become the basis for interpreting treaties. Second, the conferences provided occasions for NGOs to interact and develop influence strategies for confronting corporations. And third, they set the stage for further, this time global, expansion of the CSR ideology.


The new, global dimension of CSR makes it the duty of a multinational corpora- tion voluntarily to compensate for international and developing country regula- tory deficits. It should do this, first, by extending its home country standards outward to its foreign operations and to its supply chain, and, second, by follow- ing a growing body of international norms enforced by various mechanisms of civil regulation. This new dimension of CSR flourishes because it has value across much of the CSR political spectrum. It appeals to activists as a substitute for the new laws they would prefer but cannot get and as a way to overcome the failure of weak governments to fight human rights abuses, corruption, ecological insult, and poverty. It also appeals to enlightened corporations as a way to forestall more traditional and formal regulation and to placate belligerent NGOs. As a result, the world seethes with activity pushing the idea along.

Figure 5.3 shows the range of entities and elements in an evolving system of global CSR. This system, solidifying now out of a less mature patchwork, orga- nizes values, principles, rules, institutions, and management tools in support of voluntary corporate actions. Simultaneously, it has grown into a framework of civil regulation that can often command corporate behavior. We illuminate its structure by discussing the elements set forth in Figure 5.3, moving clockwise from the top right. In subsequent chapters we discuss some of them at greater length.

Development of Norms and Principles A norm is a standard that arises over time and, as agreement on it becomes wide- spread, is enforced by social sanction or law. It is similar to a principle , which is a rule, natural law, or truth used as a standard to guide conduct. The norms and principles that direct global CSR are derived in part from timeless accretions of civilization, but international conventions to codify and interpret them are increas- ingly influential. The United Nations is a ringleader. An early codification of norms is the Universal Declaration of Human Rights, adopted by the UN in 1948,

soft law Statements of philosophy, policy, and principle found in nonbinding international conventions that, over time, gain legitimacy as guidelines for interpreting the hard law in legally binding agreements.

norm A standard that arises over time and is enforced by social sanc- tion or law.

principle A rule, natural law, or truth used as a stand- ard to guide conduct.

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which spells out a “common standard” of “inalienable rights,” that are specified in 30 articles. 38 The rights in this document are now widely accepted and it is the foundation for many of the human rights standards in corporate and NGO con- duct codes. It requires, for example, equal rights for men and women, and corpo- rations following such codes must meet this standard, often by imposing it on suppliers in less developed nations where no legislation requires it.

A second milestone in the development of norms is the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, adopted by an agency of the UN in 1977. The Tripartite Declaration, so-called because unions, governments, and industry collaborated in its creation, came in response to the rising power of multinational corporations in the 1960s. It sets forth a long list of “guidelines” related to worker rights, for example, that multinational corporations should not offer wages and benefits less than those offered for comparable work elsewhere in a country. 39 Over the years, the Tripartite Declaration has been accepted

FIGURE 5.3 A Global System of CSR Activity














38 Universal Declaration of Human Rights, G.A. res. 217 A (III), UN Doc. A/810, December 10, 1948, Preamble. 39 Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, 3rd ed. (Geneva: International Labour Office, 2001), p. v and p. 7, para. 33. First edition published in 1977.

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140 Chapter 5 Corporate Social Responsibility

as a foundational statement and it now is the basis for most international labor codes. As new norms solidify, additions are made, most recently a new entry in 2006 suggesting that multinational corporations had a duty to abolish child labor.

At the leading edge of emerging norms is a draft compilation of Norms on the Responsibilities of Transnational Corporations, advanced by the UN Human Rights Commission in 2004 and discussed for several years before dying in what has been called a “train wreck” of polarized arguments. 40 The Norms would obligate multinational corporations to protect a lengthy list of “universal” rights of peo- ples, consumers, workers, and the environment. The corporation “shall not use forced or compulsory labour,” nor “shall [it] . . . advertise harmful or potentially harmful products” and it “shall generally conduct [its] activities in a manner con- tributing to the wider goal of sustainable development.” 41 It requires transnational corporations to adopt internal rules for compliance, submit to monitoring by the UN in which NGOs would participate, and make “prompt reparation” for injuries due to lack of compliance. Nations would be asked to pass laws to legalize enforcement of the Norms.

The draft is an exceptionally aggressive document that advances past the edge of international consensus on corporate responsibility. Nations were skeptical of giving corporations the legal authority to enforce “universal,” meaning Western, human rights standards in countries with diverging values. Corporations, with some exceptions, were bitterly hostile to the imposition of new duties and expo- sure to new liabilities. For now the Norms are moribund, but time is their ally.

Landmark statements of norms and principles such as these arise from the steady accretion of innumerable international charters, declarations, conven- tions, multilateral agency policies, and treaties on labor, human rights, corrup- tion, migratory birds, and other issues that, by their sheer numbers, promote broad acceptance of progressive, developed-country values as universal norms. These norms are the basis for proliferating codes of conduct that target corporate behavior.

Codes of Conduct Codes of conduct are formal statements of aspirations, principles, guidelines, and rules for corporate behavior. They arise from many sources. Corporations write them. In addition, there are hundreds of codes created by industry associations, NGOs, governments, and international organizations such as the UN. Many codes result from collaborative processes by multiple parties; these are called multistakeholder initiatives. Any large multinational corporation will follow more than one code. It will have its own code or codes and, in addition, will be a signa- tory of  multiple codes developed by other actors, likely including an industry code and specialized codes focused on labor, human rights, environmental

codes of conduct Formal state- ments of aspirations, principles, guidelines, and rules for corpo- rate behavior.

multistake- holder initiative A code-based form of civil regulation cre- ated by some combination of corporate, gov- ernment, NGO, or international organization actors.

40 Spoken remarks of J. Ruggie, the Secretary General’s Special Representative on Business and Human Rights, quoted in David Kinley, Justine Nolan, and Natalie Zerial, “The Politics of Corporate Social Responsibility: Reflections on the UN Human Rights Norms for Corporations,” Company and Securities Law Journal 25, no. 1 (2007), p. 31. 41 Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, U.N. Doc. E/CN.4/Sub.2/2003/12/Rev.2 (2003), secs. D(5), F.(13), and G.(14).

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Chapter 5 Corporate Social Responsibility 141

protection, corruption, and other matters. Here are examples of codes from differ- ent sources.

• Samsung Electronics Company has a Global Code of Conduct based on fi ve as- pirational principles: legal and ethical behavior, a “clean organization culture” (which means a culture free of discrimination, sexual harassment, insider trad- ing, and similar misbehaviors), respect for stakeholders, care for the environ- ment, and social responsibility. Brief, descriptive statements in each category give more specifi c guidance to employees. 42

• The Electronic Industry Code of Conduct is intended to protect the safety and rights of workers in overseas plants that do computer assembly and compo- nent manufacturing. The 11-page code requires participants, who sign on vol- untarily, to “go beyond legal compliance” in enforcing its standards for labor, health and safety, environmental protection, and ethical behavior. 43 It explicitly incorporates standards in the Universal Declaration of Human Rights and other codifi cations of international norms.

• In the 1990s a small band of activists within Amnesty International UK, a human rights NGO, began to work with companies, resulting in a checklist of human rights principles that evolved into a code titled Human Rights Guide- lines for Companies . Although no companies adopted the Guidelines in their entirety, their appearance altered a widespread belief of executives at that time that only governments, not corporations, had responsibility for human rights. They were the template for a wave of changes written into corporate codes and policies. 44

• The Ethical Trading Initiative is an alliance of companies, unions, and NGOs based in the United Kingdom. It has a Base Code setting standards for work- ing conditions in overseas supplier fi rms. Its 50 member companies agree to conform their own codes to the Base Code , apply the standards across their international supply chains to almost 40,000 contractors with 8.6 million workers, and allow independent monitoring for compliance. Although the entity can discipline and even expel member companies for noncompliance, it does not publicly report such actions or any information about individual companies.

No matter what the source of a code, the target is the corporation. A code’s effectiveness depends on how the corporation carries it out. Codes written by corporations themselves often lack rigor. Codes created by other parties usually require companies to sign compliance agreements that require some form of monitoring, and these are more effective, if uneven in result, leading to a grow- ing focus on ways of monitoring corporations to verify code compliance.

42 Samsung Electronics Co., Global Code of Conduct (Seoul, Korea: Samsung, 2006). 43 Electronic Industry Citizenship Coalition, Electronic Industry Code of Conduct, v3.0 (2009), p. 1, at 44 Sir Geoffrey Chandler, “The Amnesty International UK Business Group,” The Journal of Corporate Citizenship, Spring 2009, p. 33.

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Reporting and Verification Standards There is growing demand for accurate information about CSR performance. This has led more companies to issue public reports that describe and measure their actions, a practice often called sustainability reporting . The reports take many forms. Information may be part of the annual report or appear in separate publications. It is costly to collect data and compile such reports, but they have benefits. They protect corporate reputation and they are a management tool for measuring performance and progress.

Two problems with sustainability reporting are, first, that defining and measur- ing social performance is difficult and, second, that the reports are not comparable from company to company. But uniformity is growing. In 2000, an organization in the Netherlands, the Global Reporting Initiative (GRI), released a model reporting framework that lists specific performance indicators and methods for doing the reports. Adoption of the GRI format has been so rapid that now 77 percent of the 250 largest global corporations are using it. 45

Because of deep cynicism about corporate candor, institutions that independ- ently verify reports have arisen. A nonprofit group, AccountAbility, has created a widely used “assurance standard” for independent parties that audit corporate reports for reliability. Reporting is further discussed in Chapter 6.

Certification and Labeling Schemes Labels are symbols displayed on or with a product to certify that it, or its produc- tion process, meets a set of social or environmental criteria. Such schemes try to create a market for social responsibility by influencing consumers to prefer marked products. Criteria for labels are set by the labeling body, which is often a coopera- tive project of industry, NGOs, unions, and governments. Certified companies must usually allow independent auditors to inspect and monitor their activities. Typically the process is funded with licensing fees paid by producers, importers, and retailers. Here are several examples from dozens of such schemes.

• The Kimberley Process Certifi cation Scheme is a device to stop the fl ow of so-called “blood” diamonds, which are rough diamonds from parts of Africa where sales to exporters fund civil wars and rebellions. Its governing body consists of 74 member nations, including all major diamond producing and importing nations, representatives from the diamond industry, and human rights groups. Each participating country is required to enforce trade rules. Companies ex- port diamonds only in sealed, tamper-proof containers tagged with compli- ance certifi cates. Smuggling around the scheme persists, but after its inception in 2003 the share of “blood diamonds” in world markets dropped from 15 per- cent to 0.1 percent. 46

• The Forest Stewardship Council sets standards to certify that forests are man- aged sustainably and certifi es to mills, wholesalers, and retailers that wood

sustainability reporting The practice of a corporation publishing in- formation about its economic, social, and environmental performance.

45 KPMG, International Survey of Corporate Responsibility Reporting 2008 (Amstelveen, the Netherlands: KPMG, 2008), p. 35. 46 These percentages are in Vivienne Walt, “Diamonds Aren’t Forever,” Fortune, December 11, 2006, p. 89; and “Kimberley Process: Frequently Asked Questions,” at index_en.html, accessed December 5, 2009.

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Chapter 5 Corporate Social Responsibility 143

they buy is responsibly grown and harvested. It is an international body with 800 members, including timber companies, foresters, and NGOs ranging from Greenpeace Russia to the East Sepik Council of Women in Papua New Guinea. Members make decisions in a fastidiously democratic assembly where weight- ed counting gives the global North and South each 50 percent of votes. Because the Council’s standards are high, it must compete with rival and less costly forest certifi cation schemes created by industry that confuse consumers who are largely ignorant of differences between standards. The Council certifi es only 5 percent of the world’s timber harvest. 47

• Many certifi cations promote fair trade , or the idea that small, marginal produc- ers in Africa, Asia, and Latin America should be paid a “fair,” that is, a stable, guaranteed, and sometimes above-market price for crops so they can make a living and engage in sustainable farming practices. Transfair USA , a coalition of religious, human rights, labor, and consumer groups, offers the trademarked Fair Trade Certifi ed term and logo on agricultural products such as coffee, tea, cocoa, honey, rice, and fl owers exported to the United States. With coffee, for example, it audits sales of beans by farmers to companies. Its black-and-white logo depicting a farmer in front of a globe certifi es that coffee farmers were paid a guaranteed minimum price.

Management Standards A management standard is a model of the methods an organization can use to achieve certain goals. The use of quality standards is widespread. Now, actors in the global CSR network have established standards for social responsibility or elements of social responsibility such as health and safety or environmental protection.

• The EcoManagement and Audit Scheme (EMAS) is a standard that rises above legal requirements for environmental performance in European nations that already have some of the world’s strictest regulations. 48 Companies that join this voluntary initiative must reduce emissions, energy use, and waste beyond legal requirements. They also agree to publish regular statements of their envi- ronmental performance and have them checked for accuracy by outside audi- tors. More than 4,000 fi rms participate. They are allowed to use the EMAS logo in ads that make green claims for their products. EMAS is run by representa- tives of governments, industries, unions, and NGOs.

• The International Organization for Standardization (ISO), which has already cre- ated widely used standards in other areas, for example, ISO 9000 on quality and ISO 14000 on the environment, is developing a broad new social responsibility standard named ISO 2600 intended to set forth underlying principles, core sub- jects, and methods for integrating social performance in the plans, systems, and processes of organizations. The standard is now in draft form. 49

fair trade The idea that ethical consum- ers will pay a premium for commodities from producers in developing nations who use sustainable methods.

management standard A model of the methods an or- ganization can use to achieve certain goals.

47 Tom Arup, “Timber Standard Pleases Union but Fails to Impress Greens,” Sydney Morning Herald, November 30, 2009, p. 2. 48 The standard is set forth in “Regulation (ED) No. 761/2001 of the European Parliament and of the Council of 19 March 2001,” Official Journal of the European Communities, April 24, 2001, p. L114/1. 49 International Organization for Standardization, Draft International Standard ISO/DIS 2600: Guidance on Social Responsibility (Geneva: ISO, 2009).

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Social Investment and Lending Equity capital and borrowing are critical to corporate financial strategies. Know- ing this, actors in the international CSR movement have tried to introduce social criteria into capital markets. Initiatives such as these threaten to raise the cost of capital for corporations that dodge evolving norms.

• Under the auspices of the United Nations, a coalition of institutional inves- tors and civil society groups created a set of voluntary Principles for Respon- sible Investment . Its signatories, about 560 banks, pension funds, hedge funds, and insurers with, collectively, $18 trillion in assets, must consider a company’s environmental, social, and governance performance when they evaluate invest- ments. 50 They also must accept a duty to pressure corporations in the direction of responsible behavior.

• The FTSE4Good Global Index is intended to set the world standard for those wanting to invest in companies following “good standards of corporate respon- sibility.” The index was started by a British company in 2001. Scanning a uni- verse of about 2,000 companies on 23 world stock exchanges, it fi rst excludes companies producing tobacco, nuclear weapons, nuclear power, and major weapons systems. From what remains, it includes approximately 650 companies that meet somewhat stringent criteria for the practice of CSR. Since its inception it has delisted more than 200 companies for lapses in meeting its standards.

Government Actions Governments advance corporate responsibility mainly with binding national regulation. Some also promote voluntary actions. European nations lead. The European Commission and European Parliament generate a stream of communi- cations and reports encouraging codes, labels, and forums. The Belgium govern- ment set up the Belgium Social Label , a brown-and-blue cartoon of a person with arms uplifted in exultation, presumably because the company that made the prod- uct saw to it that its entire production chain followed basic International Labor Organization standards. Sweden requires its 55 state-owned companies to pro- duce a yearly sustainability report based on Global Reporting Initiative guide- lines. Denmark requires several thousand companies to report annually on their efforts to reduce environmental impacts.

Elsewhere there is also encouragement. The United States does far less than most European governments, but one study found 50 federal activities that could be classified as promoting CSR. 51 However, most were awards or programs with tiny budgets. In Australia the legislature published a study of global CSR initia- tives and recommended “greater uptake” of the idea by Australian companies. 52

50 PRI, “New Data Signals Growing ‘Culture Change’ Amongst Significant Portion of Global Investors,” media release, July 16, 2009, p. 1. 51 General Accountability Office, Globalization: Numerous Federal Activities Complement U.S. Business’s Global Corporate Social Responsibility Efforts, GAO-05-744, August 2005. 52 Parliamentary Joint Committee on Corporations and Financial Sectors, Corporate Responsibility: Managing Risk and Creating Value (Canberra: Senate Printing Unit, Parliament House, June 2006).

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Chapter 5 Corporate Social Responsibility 145

Although the governments of developing nations where human rights abuses, corruption, and ecosystem destruction are targeted sometimes resist or ignore efforts to impose Western-based schemes of civil regulation, the Chinese commis- sion that manages state-owned firms for the central government recently issued a set of CSR guidelines for the companies it oversees. Calling CSR “an unavoidable pathway” that “has become a key criteria worldwide,” these guidelines call on the firms to “develop in a people-centered, scientific way and make profits,” and em- phasize energy conservation, philanthropy, and jobs creation as core CSR duties. 53 Since the commission appoints, removes, disciplines, and sets the salaries of man- agers at state-owned firms, the guidelines are unlikely to be ignored. Some compa- nies have already set up internal “CSR work commissions” to implement them.

Civil Society Vigilance NGOs watch multinational corporations and police actions they see as departing from emerging global norms. A direct action campaign by experienced activists is unpleasant and, if it carries any element of validity, very dangerous to brand repu- tation. The abiding threat of attack inspires entry into various code, labeling, re- porting, and standards schemes.

• The force behind the Electronic Industry Code of Conduct noted earlier is the Catholic Agency for Overseas Development. When the group issued a report on “computer factory sweatshops” and began a “Clean Up Your Computer” campaign, it galvanized Hewlett-Packard, IBM, Dell, and others in the industry to create a protective code of conduct. 54

• In 2000, the Rainforest Action Network (RAN) began a campaign against Citigroup, alleging that the bank’s loans funded socially and environmentally disruptive pipelines, mines, dams, and other projects in developing countries. RAN was the sharp edge of a coalition of more than 100 NGOs opposed to bank lending that failed to take deforestation, pollution, and disruption of in- digenous peoples into account. Three years of artful attack on the bank’s repu- tation and harassment of its executives went by until Citigroup tired. Working with other banks it adopted industry lending guidelines based on sustainability guidelines then in use by the World Bank. Today, largely due to pressure by RAN, 69 of the world’s largest banks, making 95 percent of the world’s private development loans, subscribe to these “voluntary” principles, now called the Equator Principles . 55 The Principles divide projects into high, medium, and low social and environmental risk and compel borrowers to meet standards for eco- logical protection and to consult with native peoples. In effect, this is a global environmental regulatory scheme for the banking, mining, forestry, and energy industries.

53 State-Owned Assets Supervision and Administration Commission, CSR Guideline for State-Owned Enterprises (SOE), January 4, 2008, trans. Guo Peiyuan, 1(a) and 1(d). 54 CAFOD, Clean Up Your Computer: Working Conditions in the Electronics Sector (London: CAFOD, January 2004); and Peter Burrows, “Stalking High-Tech Sweatshops,” BusinessWeek, June 19, 2006, p. 62. 55 International Finance Corporation, Treasury Department, Funding Operations (Washington, DC: World Bank Group, July 2009), slide 5.

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In sum, a perceived shortage of regulation over multinational corporations has been countered mainly by action within civil society to create private regulatory schemes. Elements of civil society, often working through the United Nations, came together on statements and conventions that congealed global norms, rais- ing expectations of corporate behavior and opening miscreants to the reputation risks of activist “name and shame” campaigns. As this dynamic unfolded over 20 years, regulatory leadership flowed from nations to other actors, particularly to multiparty alliances combining NGOs, UN agencies, unions, and corporations. These bodies, novel at first, but now duplicating endlessly, direct corporate adher- ence to the CSR standards they create using tools such as codes, labels, audits, and certifications. So prolific is the device that one or more standards are now estab- lished for almost every industry and commodity.

The growth of civil regulation invites reflection. First, it reveals that for much of civil society constructive engagement with corporations has become more impor- tant than hostility and attack. There is a realization that business has unique organizational and financial capacities that can be brought to bear on global prob- lems. Second, the multinational corporation is slowly and reluctantly being rede- fined as a stakeholder entity. In the new world of international civil regulation it has duties toward the environment, human rights, and social development as real as its duties to shareowners. Third, civil regulation is a pragmatic solution to the regulatory vacuum. It has partially, but not fully, compensated for lack of binding global regulation. Though piecemeal, experimental, partial, and subject to enforce- ment failures it is a forceful presence.

Finally, because it is an extra-state phenomenon, civil regulation raises issues of representation. Conservatives find the new system undemocratic because it relies heavily for monitoring and compliance on progressive NGOs that are self- constituted communities of belief, unelected and not clearly or formally repre- sentative even of their membership rolls, let alone of the people in developing countries affected by transnational corporations. 56 Goals are dominated by the muses/anxieties of Western activists.


In this chapter we focused on defining and explaining the idea of corporate social responsibility and its evolution. Figure 5.4 summarizes this evolution.

Historically, corporations have been motivated primarily by profit. However, as they have grown in size and power they have been exhorted and pressured to alter this single-minded focus. This is because (1) the ideology of corporate social responsibility has gradually evolved an expanded ethical duty and (2) the power of stakeholders to enforce this duty has increased.

56 Larry Cata Backer, ‘Multinational Corporations, Transnational Law: The United Nations’ Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility in International Law,” Columbia Human Rights Law Review, Winter 2006, pp. 386–88.

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Chapter 5 Corporate Social Responsibility 147

Doubts about CSR remain. In the progressive community there is cynicism about its limits. On the conservative side, elaborate CSR schemes might just be abandoned, replaced by nothing, allowing the natural grace of laissez-faire room to work. Debates over its proper nature will continue. Yet no radical changes are likely; the evolved CSR ideology that now exists is entrenched. No corporation of any size can afford to ignore the range of social obligations beyond market activ- ity. In the next chapter, we will discuss specific management practices used to carry out corporate responsibility.

FIGURE 5.4 The Evolution of Corporate Social Responsibility Although the term corporate social responsibility is of relatively recent use, the idea it represents has been under construction for more than two centuries. These timelines show how its elements have evolved.

1800 1900 1950 2000 Civil War


Protective regulation

Laissez- faire

Social Darwinism

Trusteeship, balance, service

Corporate social responsibility

Global CSR

Populist reforms

Progressive reforms

Economic regulation

Social regulation

Civil regulation

Carnegie, Rockefeller

Corporate foundations

Great Depression

Profit Maximization



Theories of Responsibility

Jack Welch at General Electric In April 1981 John Francis “Jack” Welch, Jr., became chief executive officer of General Electric. He held the position for 20 years until retiring in September 2001. During that time, he transformed GE, turning a solidly profitable manufacturing company into an exceptionally profitable conglomerate dominated by service businesses. If you had invested $100 in GE stock when Welch took the reins and held it for 20 years, it would have been worth $6,749.

Welch is lauded for his creative management style and became a national business hero. A fawn- ing BusinessWeek article called him “America’s #1

Manager.” 1   Fortune magazine gushed that GE under Welch was “the best-managed, best-regarded com- pany in America.” 2 Yet the intense, aggressive Welch made fortunes for GE shareholders using methods that had mixed impacts on employees, unions, com- munities, other companies, and governments. As a result, not everyone sees the GE performance as a

1 John A. Byrne, “Jack: A Close-Up Look at How America’s #1 Manager Runs GE,” BusinessWeek, June 8, 1998, p. 91. 2 Jerry Useem, “It’s All Yours, Jeff. Now What?” Fortune, September 17, 2001, p. 64.

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model for corporate social responsibility. Upon Welch’s retirement, the Multinational Monitor, a pro- gressive magazine founded by Ralph Nader, devoted an entire issue to making “The Case Against GE.” The lead editorial branded Welch as a corporate titan opposed to rules of society and said his actions were “disastrous” for workers and communities. 3

Did General Electric under Jack Welch carry out the full range of its duties to society? Did it fall short? Readers are invited to decide.

JACK WELCH RISES Most top executives come from backgrounds of wealth and privilege. Jack Welch is an exception. He was born in 1935 to working-class Irish parents in a small Massachusetts town. His father was a quiet, passive man who endured as a railroad conductor punching tickets on commuter trains. Welch’s mother was a dominating woman who caused her husband to wilt but instilled a powerful drive in her son. Welch was an outstanding student at the University of Massachusetts at Amherst and went on to get a doctor- ate in chemical engineering at the University of Illinois.

After graduating, he started working at a GE plas- tics factory in 1960. His tremendous energy and am- bition were very apparent. He was so competitive in weekend softball games that his aggressive play al- ienated co-workers and he stopped going. After one year, he threatened to quit when he got the same $1,000 raise as everyone else. His boss cajoled him into staying and as the years and promotions flashed by he never again wavered.

As he rose, Welch exhibited a fiery temperament and expected those around him to share his intensity. He was blunt, impatient with subordinates, and emo- tionally volatile. He loved no-holds-barred discus- sions in meetings but frequently put people on the spot, saying, “My six-year-old kid could do better than that.” 4 With every promotion, he sized up his new staff with a cold eye and purged those who failed to impress him. “I’m the first to admit,” he says, “I could be impulsive in removing people dur- ing those early days.” 5

3 “You Don’t Know Jack,” Multinational Monitor, July–August 2001, p. 5. 4 Jack Welch, Jack: Straight from the Gut (New York: Warner Books, 2001), p. 43. 5 Ibid., p. 43.

This was just preparation for the big leagues to come. GE had a polished corporate culture reflecting the Eastern establishment values of its leadership over many decades. Welch did not fit. He was impatient, frustrated by the company’s bureaucracy, and lacking in deference. With this mismatch GE might have re- pulsed Welch at some point, but his performance was outstanding. Several times he got mixed reviews for a promotion, but because of exemplary financial results he was never blocked. In 1981 he took over as CEO of one of America’s singular companies.

THE STORY OF GENERAL ELECTRIC The lineage of General Electric goes back to 1879 when Thomas Alva Edison (1847–1931), with the backing of banker J. P. Morgan, started the Edison Electric Light Company to make lightbulbs and elec- trical equipment. Although Edison was a great in- ventor, he was a poor manager and the company lost ground. So in 1892 Morgan took charge, engineering a merger with a competitor and plotting to reduce Edison to a figurehead in the new company.

Morgan disposed of Edison’s top managers and dropped the word Edison from its name so that the firm became simply General Electric Company. Morgan sat as a commanding figure on the new company’s board. Although Edison was also a di- rector, he attended only the first meeting and never returned. 6

After the merger, GE built a near-monopoly in the incandescent bulb market. Over the years, great things emerged from the company. Early in the twentieth century, its motors worked the Panama Canal locks, powered battleships, and ran locomotives. 7 GE’s re- search labs bred a profusion of new electrical appli- ances, including fans, toasters, refrigerators, vacuum cleaners, ranges, garbage disposals, air conditioners, and irons. At first these new inventions were very ex- pensive, but as more people purchased them, produc- tion costs fell and they became commodities within the reach of every family. By 1960 GE was credited with a remarkable list of other inventions, including

6 Thomas F. O’Boyle, At Any Cost: Jack Welch, General Electric, and the Pursuit of Profit (New York: Knopf, 1998), p. 55. 7 For more on the early history of GE see John Winthrop Hammond, Men and Volts: The Story of General Electric (Philadelphia: J. B. Lippincott, 1948).

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the X-ray machine, the motion picture with sound, fluorescent lighting, the diesel-electric locomotive, the jet engine, synthetic diamonds, the hard plastic Lexan, and Silly Putty. 8

As it added manufacturing capacity to build these inventions, GE grew. By 1981, when Jack Welch took the reins, the company had $27 billion in revenues and 404,000 employees. It was organized into 50 separate businesses reporting to a layer of six sector executives at corporate headquarters in Fairfield, Connecticut, who in turn reported to the CEO. To make it run, a large, almost imperial staff of researchers and planners created detailed annual plans setting forth revenue goals and other objectives for each business.

THE WELCH ERA BEGINS Welch believes that managers must confront reality and adapt to the world as it is, not as they wish it to be. As he studied GE’s situation in the early 1980s, he saw a corporation that needed to change. GE’s manufactur- ing businesses were still profitable, but margins were shrinking. The wages of American workers were rising even as their productivity was declining. International competition was growing, particularly from the Japanese, who had cost advantages because of a weak yen. Although GE seemed healthy at the moment, omi- nous forces were gathering. In addition, Welch saw GE bloated with layers of bureaucracy that infuriated him by slowing decisions and frustrating change. The com- pany, as currently operated, could not weather the competitive storms ahead. It would have to change.

Welch articulated a simple guiding vision. Every GE business would be the number one or number two player in its industry. If it failed this test it would be fixed, closed, or sold. In addition, Welch said all GE businesses would have to fit into one of three areas— core manufacturing, technology, or services. Any busi- ness that fell outside these three hubs was a candidate for sale or closure. This included manufacturing busi- nesses that could not sustain high profit margins.

In the next five years, Welch executed his strategy by closing 73 plants, selling 232 businesses, and elimi- nating 132,000 workers from GE payrolls. 9 As he con- formed GE to his vision, he also bought hundreds of

other businesses large and small. Within GE businesses he eliminated jobs through attrition, layoffs, and out- sourcing. In the largest acquisition of that period, Welch acquired RCA in 1985. RCA was a giant elec- tronics and broadcasting conglomerate with a storied history as the company that had developed radio tech- nology. After paying $6.7 billion for RCA, Welch chopped it up, keeping NBC and selling other busi- nesses one by one, in effect, destroying the giant com- pany as an organizational entity. As jobs vanished, Welch got the nickname “Neutron Jack,” comparing him with a neutron bomb that left buildings standing but killed everyone inside.

Welch also attacked the GE bureaucracy. One prob- lem was its size. There were too many vice presidents, too many layers, and too many staffs with authority to review and approve decisions. A second problem was the bureaucratic mentality in which headquarters staff practiced a “superficial congeniality” that Welch inter- preted as smiling to your face and getting you behind your back. 10 He demolished the hierarchy by laying

Jack Welch (1935–). Source: © Bob Daemmrich/CORBIS.

8 Thomas F. O’Boyle, “‘At Any Cost’ Is Too High,” Multinational Monitor, July–August 2001, p. 41. 9 Frank Swoboda, “GE Picks Welch’s Successor,” Washington Post, November 28, 2000, p. E1. 10 Welch, Jack, p. 96.

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off thousands of central staff in strategic planning, personnel, and other areas. Then he set out to change GE’s culture by promoting the notion of a “boundary- less” organization, or one in which ideas were freely exchanged so that organizational learning could rap- idly occur. Welch compared GE to an old house:

Floors represent layers and the walls functional bar- riers. To get the best out of an organization, these floors and walls must be blown away, creating an open space where ideas flow freely, independent of rank or function. 11

Later, Welch introduced the practice of “workout” sessions in which employees in every GE business had an opportunity to confront their bosses to ex- press frustration with bureaucratic practices and sug- gest more efficient alternatives. Managers in these sessions sat in front of a room filled with subordi- nates and had to agree or disagree on the spot to carry out suggestions. Thousands of such sessions were held to drive out the bureaucratic mentality.

Welch also used Crotonville, the company’s train- ing center on the Hudson River, to meet with manag- ers and instill his vision. He invited candid discussions, and gradually the company culture be- came more informal and open.

DIFFERENTIATION Welch is convinced that having the right people in management positions is the single most important cause of success in a business. Early in his career, he developed a colorful vocabulary to differentiate

between players. Inept managers were “turkeys” and “dinks,” standouts were called “all-stars.” As CEO he reinforced strategic initiatives with a system of “differentiation” that generously rewarded managers who achieved performance goals and got rid of those who missed them. In this system, every year each GE business was forced to evaluate its managers and rank them on a “vitality curve” that differentiated among As, Bs, and Cs. The As were committed peo- ple, filled with passion for their jobs, who took initia- tive and exceeded performance goals. They had what Welch called “the four Es of GE leadership”:

very high energy levels, the ability to energize others around common goals, the edge to make tough yes- and-no decisions, and finally, the ability to consist- ently execute and deliver on their promises. 12

The vitality curve was Darwinian. The As were the top 20 percent, Bs were the middle 70 percent, and Cs were the bottom 10 percent (see Exhibit 1). The As received salary increases, promotions, and stock options. Welch followed their careers closely. He kept large loose-leaf notebooks containing evalu- ations of the top 750 of GE’s 4,000 managers. Bs were considered vital to the success of the company and were coached so that some would become As. Cs were not worth wasting time on and were dismissed. The process was repeated annually, and each time the bottom 10 percent had to go. The curve applied to every GE business. No business leader could claim that his or her group was an exception, though some tried. Filling the A, B, and C categories forced diffi- cult decisions. If 20 managers were evaluated, 2 had


Top 20% Middle 70% Bottom 10%

Bs Cs

EXHIBIT 1 The Vitality Curve

Source: Jack: Straight from the Gut by Jack Welch with John A. Byrne. Copyright © 2001 by John F. Welch, Jr. Foundation. By permission of Grand Central Publishing. All rights reserved.

11 Welch, Jack, p. 162. 12 Welch, Jack, p. 158.

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to be placed at the bottom and their careers at GE ended. After several years of getting rid of low per- formers, the leaders of GE businesses resisted classi- fying anyone as a C, but Welch was relentless. If they didn’t identify the bottom 10 percent, he refused to carry out stock option and salary recommendations for the entire group until they did. In this way, the bar of performance was continually raised.

Welch compared people to plants. “If they grow, you have a beautiful garden,” he said. “If they don’t, you cut them out.” 13 He disagreed with those who found the system heartless:

Some think it’s cruel or brutal to remove the bottom 10 percent of our people. It isn’t. It’s just the oppo- site. What I think is brutal and “false kindness” is keeping people around who aren’t going to grow and prosper . . . The characterization of a vitality curve as cruel stems from false logic and is an out- growth of a culture that practices false kindness. 14

AN ASSESSMENT OF THE WELCH YEARS With Jack Welch at the helm GE sustained exception- ally high rates of profitability, and shareholders were enriched. Even with five stock splits, earnings per share rose from $0.46 in 1981 to $1.07 in 2000, his last full year as CEO, and total return on GE shares aver- aged 21.5 percent. 15 In 2000 GE reported a net operat- ing margin of 19 percent and earned 27 percent on invested capital. 16 These are high figures for a large multinational corporation.

Welch also reshaped GE. He continuously bought and sold businesses both large and small. During his last four years alone he made more than 400 acquisi- tions. One underlying reason for the increasing profit- ability of GE is that through this churning of businesses GE’s center of gravity shifted from manufacturing to services. The GE he inherited earned 85 percent of its

revenues from manufacturing; the GE he created got 70 percent of its revenues from services. 17

Welch wrung profits from GE by creating a per- formance culture. Managers were energized. Plants grew more efficient. For instance, when Welch be- came CEO, GE’s locomotive plant in Erie, Pennsylva- nia, needed 7,500 hourly employees to make 350 locomotives a year. By 2000 productivity had im- proved so much that only 4,000 workers could make 900 locomotives a year. 18

The story of the Welch years has the elements of legend. An ambitious son of working-class parents rises through hard work to command a mighty com- pany, inspire managers everywhere, and become rich along with other company shareholders. To reward Welch for the shower of wealth he created, in his last year the GE board awarded him a special bonus bringing his yearly compensation to $174 million. 19 At this time he held more than 22 million shares of GE stock and options worth almost $1 billion, as shown in Exhibit 2. This is astronomical compensa- tion for one person, but his $972 million in stock is only four-hundredths of 1 percent of the $460 billion in equity value created during his tenure.

Exhibit 2 shows how directors shared in the GE eq- uity windfall. When they joined the board, each out- side (nonemployee) director was given 5,000 shares of GE stock and a $150,000 life insurance policy. Thereaf- ter, each year directors were given $75,000, $2,000 for each of the 10 meetings they were required to attend, and options on 18,000 more shares of GE stock. If they retired at age 65 with five years of service, they were eligible to receive the $75,000 annual retainer for life. There were other rewards. One GE business sold dia- monds and directors could buy them at cost for their personal use or for spouses. The year that Welch re- tired, the group purchased $975,595 worth of dia- monds and must have looked very good at the kinds of parties to which laid-off workers were not invited. 20

While the board feted Welch, not everyone saw his leadership as something to admire or emulate. Early in his career, he was compared to a speedboat

13 Quoted in Carol Hymowitz and Matt Murray, “Raises and Praise or Out the Door—How GE’s Chief Rates and Spurs His Employees,” The Wall Street Journal, June 21, 1999, p. B1. 14 Welch, Jack, p. 162. See also Jack and Suzy Welch, “The Case for 20-70-10,” BusinessWeek, October 2, 2006, p. 108. 15 Swoboda, “GE Picks Welch’s Successor,” p. E1; Julie Schlosser, “Jack? Jack Who?” Fortune, September 17, 2001, p. 52. 16 General Electric Company, GE Annual Report 2000 (Fairfield, CT: General Electric Company, 2001), p. 42.

17 James Flanigan, “New Boss’s Challenge: To Keep GE Together,” Los Angeles Times, August 26, 2001, p. C1. 18 “Dignity and Defiance: An Interview with John Hovis,” Multinational Monitor, July–August 2001, p. 35. 19 General Electric Company, Notice of 2001 Annual Meeting and Proxy Statement, March 9, 2001, pp. 22 and 27. 20 Ibid., p. 14.

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going down a narrow canal, leaving considerable turbulence in its wake. 21 His detractors say that once Welch was at the master controls of GE he piloted the mammoth organization through global straits the same way. There is no denying that he created wealth. But what were the costs to people, communities, and society? The flaws in the Welch performance, according to critics, include the following.

Loss of Jobs Early on, Welch was caricatured as a ruthless job cut- ter. When he became CEO in 1981, the corporate cul- ture reinforced loyalty. People went to work at GE

directly out of college, stayed for 40 years, retired in communities of GE people, and attended GE alumni clubs until rigor mortis set in.

As Welch remodeled GE there were mass layoffs. Within a few years, one of every four employees was gone. Welch believed that the idea of loyalty in GE’s culture retarded change, so he rooted it out. At meetings he told employees it was out of fashion. He instructed staff never to use the word loyalty in any company handbook or other document. He wanted all GE managers to prove their value every day and said people who knew they could be fired worked harder.

In the Welch years there was tumultuous change in the workforce. No total number exists for workers who lost jobs. When he took over there were 404,000 GE employees; when he left there were 313,000. In 21 O’Boyle, At Any Cost, p. 59.

EXHIBIT 2 The 2001 GE Board of Directors: Market Value of Total Holdings in GE Stock (shaded entries are inside directors)

Source: General Electric Company, Proxy Statement, March 9, 2001, p. 12. Total holdings include common stock, option holdings, deferred compensation, restricted stock units, and stock appreciation rights.

Director Value

James I. Cash $3,719,059 Professor, Harvard Business School

Silas S. Cathcart $34,601,060 CEO, Illinois Tool Works(ret.)

Paolo Fresco $111,700,043 Chairman, Fiat

Ann M Fudge $1,667,828 Vice President, Kraft Foods

Claudio X. Gonzalez $9,871,797 CEO, Kimberly-Clark de Mexico

Andrea Jung $2,733,352 CEO, Avon Products

Kenneth G. Langone $14,805,848 CEO, Invamed Associates

Rochelle B. Lazarus $877,690 CEO, Ogilvy & Mather Worldwide

Scott G. McNealy $2,089,684 CEO, Sun Microsystems

Gertrude Michelson $14,381,950 Former Senior V.P., Macy’s

Director Value

Sam Nunn $4,516,975 Former U.S. Senator from Georgia

Roger S. Penske $6,844,896 Chairman, Penske Corp.

Frank H. T. Rhodes $10,931,672 President Emeritus, Cornell University

Andrew C. Sigler $5,820,301 CEO, Champion International (ret.)

Douglas A. Warner $8,323,021 Chairman, J. P. Morgan Chase & Co.

Dennis. D. Dammerman $187,238,259 Chairman, GE Capital

Jeffrey R. Immelt $130,853,846 President, General Electric

John F. Welch, Jr. $972,022,731 Chairman and CEO, General Electric

Robert Wright $229,777,982 Vice Chairman of GE, President, NBC

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between, tens of thousands came and went. Union leaders estimate that in his last 15 years GE elimi- nated 150,000 jobs in the United States through lay- offs, subcontracting, and outsourcing to foreign countries. 22 Welch expressed his feelings about these layoffs in his memoirs:

Removing people will always be the hardest deci- sion a leader faces. Anyone who “enjoys doing it” shouldn’t be on the payroll and neither should any- one who “can’t do it.” I never underestimated the human cost of those layoffs or the hardship they might cause people and communities. 23

Welch stressed globalization of production to lower costs. Many jobs still existed, but they left the United States. In 1985 the electrical worker’s union had 46,000 members working at GE, but by 2001 the number had declined to 16,000. Ed Fire, the union’s president, estimates that two-thirds of the 30,000 lost jobs were simply transferred to low-wage coun- tries. 24 GE eliminated additional jobs in the United States by pressuring suppliers to migrate along with it. After moving production to Mexico, for example, GE Aircraft Engines held a conference for supplier companies and told them to cut costs by moving their facilities (and jobs) to Mexico’s low-wage labor market or face inevitable loss of their GE business. 25 Says Fire:

GE is the quintessential American corporation that has engaged in what has been referred to as the “race to the bottom”—finding the lowest wages, the lowest benefit levels and most intolerant working conditions . . . I don’t think they have given enough consideration to the consequences, particularly the human consequences, of the decisions they make. In my opinion, the decisions are designed too much to increase the company’s profitability at the expense of the employees. 26

A Flawed Evaluation System The vitality curve rating method is controversial. Critics argue that forced ranking hurts the morale of employees who are not placed on top. At first, GE ranked employees in five categories instead of three, but it was soon discovered that everyone who failed to land in the top category was demoralized. Hence, three categories were combined into one to create the “vital” 70 percent of Bs in the middle. Disheartening classifications as 2s, 3s, and 4s were abolished.

The system can also hurt teamwork by pitting people against each other. It may encourage back- stabbing behavior. Its inflexibility produces unfair results when high-performing and low-performing units must classify managers the same way. The bot- tom 10 percent in an outstanding business may be better than middle- or top-ranked managers on a weaker team. If the axing of the bottom 10 percent goes on for many years, people who were once in the middle range may find themselves lopped off. Of course, the curve calls the recruiting system into question if recent hires are lost.

Forced ranking was just one source of pressure on GE managers, who were expected to meet high profit goals and knew that if there were too many mistakes or misjudgments Welch would get rid of them. His confrontational style reduced some to tears. He reportedly believed that overweight peo- ple were undisciplined. Some GE businesses hid these people when he visited for fear they would catch Welch’s eye and lose their jobs. One large manager trying to save his career had surgery to staple his colon. 27 Working at GE was also hard on marriages because of the long hours required to be a player. Welch himself divorced in 1987 and remar- ried in 1990.

Because of Welch’s status as a management icon, his approach to forced ranking has spread widely, imposing the practice on many managers at other corporations. Even small businesses have picked up the idea. The manager of a Fifth Avenue clothing store once took Welch aside and explained that he had 20 sales workers. “Mr. Welch,” he asked, “do I really have to let two go?” “You probably do,” re- plied Welch, “if you want the best sales staff on Fifth Avenue.” 28

22 “GE Fast Facts,” GE Workers United, May 7, 2001, at 23 Welch, Jack, p. 128. 24 Ed Fire, president of the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers– Communications Workers of America, the Industrial Division of CWA, “Resisting the Goliath,” Multinational Monitor, July–August 2001, p. 31. 25 Robert Weissman, “Global Management by Stress,” Multinational Monitor, July–August 2001, p. 20. 26 Fire, “Resisting the Goliath,” pp. 31 and 33.

27 O’Boyle, At Any Cost, p. 76. 28 Welch, Jack, p. 434.

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No Diversity at the Top Using the vitality curve Welch created a high- performance management team, but failed to create diversity. The year before Welch retired The New York Times reported that although women and mi- norities were 40 percent of GE’s domestic work- force, white men dominated its top leadership. The paper ran a photo collage of the top 31 executives, including heads of the 20 businesses responsible for 90 percent of corporate earnings. All were male and all but one were white. 29

Diversity was never a priority for Welch. Later, he would explain why not. “Winning companies are mer- itocracies . . . [that] practice differentiation” and “this is the most effective way for an organization to field the best team.” He argued, “Quotas artificially push some people ahead, independent of qualifications” and that slows the rise of star performers, puts “un- prepared people” into important jobs, and “doesn’t do much for results.” 30 In the subhead for its story The New York Times challenged Welch with this question: “Can Only White Men Run a Model Company?”

Pollution in the Hudson River For 35 years several GE manufacturing plants in New York released polychlorinated biphenyls (PCBs) into the Hudson River. They followed permits that set release levels and stopped in 1977 when PCBs were outlawed because of evidence they were toxic to humans and animals. PCBs cause cancer in test animals and probably cause cancer and other ill- nesses in humans.

More than 100,000 pounds of PCBs released by GE still lay on the riverbed. Although the biggest depos- its were covered by new sediments, slowing their re- lease into the river, the fishing industry had been destroyed, fish were unsafe for children or women of childbearing age to eat, and the chemicals gradually spread downstream from hot spots of contamination, flowing down 200 miles of river to the ocean, from there migrating around the planet.

The Environmental Protection Agency (EPA) studied the river, concluding that dredging the

bottom was necessary to remove the dangerous de- posits. This would be expensive, and GE was liable for the cost. Welch objected. During his last year as CEO he ordered an extensive campaign of radio and print ads in the Hudson River region to convince residents that dredging would be an ineffective nui- sance. It succeeded in dividing them to such an ex- tent that people began to shop only at stores where the owners supported their position and children teased classmates over their parents’ views. 31 GE hired 17 lobbyists, including a former senator and six former House members, to fight an extended po- litical battle against the cleanup. 32 Eventually, the company agreed on a cleanup plan, but only after Welch retired. 33

The GE Pension Fund During Welch’s tenure the GE pension fund covered approximately 485,000 people, including 195,000 who were retired. As the stock market rose in the 1990s, the fund also rose, and by 2001 it totaled $50 billion. Its liabilities, the future payments it must make to retirees, were only $29 billion, leaving a sur- plus of $21 billion. GE’s retirees and their unions re- quested increased benefits and cost-of-living increases for pensioners, but the company rejected their demands. By law, it did not have to meet more than the original obligations.

Welch understood that there were several bene- fits in leaving the pension plan overfunded. First, it generated bottom-line profits. Under accounting rules, a company can put interest earned by the pen- sion fund on the balance sheet as revenue, and dur- ing the Welch years these earnings increased GE’s net by as much as 13.7 percent. 34 Second, these “vapor profits” increased the income of top GE exec- utives, whose bonuses were tied to corporate profits. And third, the excess funding made it easier for GE

29 Mary Williams Walsh, “Where G.E. Falls Short: Diversity at the Top,” The New York Times, September 3, 2000, sec. 3, pp. 1 and 13. 30 Jack Welch with Suzy Welch, Winning (New York: HarperCollins, 2005), p. 346.

31 John Glionna, “Dredging Up Ill Will on the Hudson,” Los Angeles Times, October 1, 2001, p. A17. 32 Charlie Cray, “Toxins on the Hudson,” Multinational Monitor, July–August 2001. 33 “GE’s New Image: The Company Offers to Cooperate in Dredging the Hudson of PCBs,” The Times Union, April 11, 2002, p. A12. 34 Rob Walker, “Overvalued: Why Jack Welch Isn’t God,” The New Republic, June 18, 2001, p. 22. See GE Annual Report 2000, Notes to Consolidated Financial Statements, 6, “Pension Benefits.”

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to acquire companies with underfunded pension plans. This eased deal making, but involved sharing funds set aside for GE workers and retirees with people who got a windfall coming in after careers in other companies.

After being pressured by unions and pensioners, GE announced increases of 15 to 35 percent in 2000. But since 1965 prices had risen by 60 percent, so reti- rees were still losing ground. 35 Helen Quirini, 81, was part of a group protesting GE’s failure to be more generous. After working 39 years at a GE factory, one year less than Welch’s 40-year tenure, she retired in 1980 and was receiving $737 a month, or $8,844 a year. She believed that GE management was “out all the time trying to figure out how to screw us” using “accounting gimmicks.” 36

Welch’s GE pension is $357,128 a month. Court documents filed in proceedings when Welch di- vorced his second wife in 2002 revealed that he spent an average of $8,982 a month on food and beverages, slightly more than Helen Quirini’s yearly pension income. 37 A 1996 retention agreement be- tween Welch and the GE board also granted him nonmonetary perquisites in retirement. He got life- time use of a spacious apartment owned by GE at the Trump International Hotel and Tower on Cen- tral Park West in New York, including a cook, a housekeeper, and a wait staff plus flowers, laundry, dry cleaning, newspaper and magazine subscrip- tions, and front-row seats at sporting and entertain- ment events. 38 He was allowed unlimited use of GE’s corporate jets. Criticism of these arrangements arose when they were detailed during the divorce. Although he felt there was nothing improper, he elected to pay GE “between $2 and $2.5 million a year” for continued use of the apartment and the planes. 39

Criminality at GE Pressure for performance tempts employees to cut corners. Welch knew this and tried to fuse high per- formance and integrity in the GE culture. 40 In his own words:

If there was one thing I preached every day at GE, it was integrity. It was our No. 1 value. Nothing came before it. We never had a corporate meeting where I didn’t emphasize integrity in my closing remarks. 41

Yet during his tenure, GE committed a long string of civil and criminal transgressions. The Multinational Monitor compiled a “GE Rap Sheet,” listing 39 law violations, court-ordered remedies, and fines in the 1990s alone. 42 Many are for pollution hazards from GE facilities. Others are for consumer fraud, includ- ing a $165,000 fine for deceptive advertising of light- bulbs and a $100 million fine on GE Capital for unfair debt-collection practices. Still others are for defense contracting fraud, including a $69 million fine for di- verting fighter contract funds to other purposes and other fines for overcharging on contracts.

Since GE is such a large company, technical viola- tions of complex regulations and incidents of wrong- doing by individual managers are inevitable. The Multinational Monitor sees “a consistent pattern of violating criminal and civil laws over many years.” 43 The key question is whether GE’s malfeasance in- creased because of relentless performance pressure on its managers.

THE WELCH ERA AND WHAT FOLLOWED General Electric in the Welch era fulfilled its primary economic responsibilities to society. It was remarka- bly profitable. It paid taxes. Shareholders, including pension and mutual funds, were enriched. Many of its directors and managers became multimillionaires 35 “GE Pension Fund Story: Workers Pay, GE Benefits,” GE

Workers United, April 1, 2001, at pensions/index.asp?ID_61. 36 Vincent Lloyd, “Penny Pinching the Retirees at GE,” Multinational Monitor, July–August 2001, p. 23. 37 “Here’s the Retirement Jack Welch Built: $1.4 Million a Month,” The Wall Street Journal, October 31, 2002, p. A1. 38 Geraldine Fabrikant, “G.E. Expenses for Ex-Chief Cited in Filing,” The New York Times, September 6, 2002, p. C1. 39 Jack Welch, “My Dilemma and How I Resolved It,” The New York Times, September 16, 2002, p. A14.

40 For a description of his efforts see a book by GE’s senior vice president for public affairs during the Welch years, Ben W. Heineman, Jr., High Performance with High Integrity (Boston: Harvard Business Press, 2008). 41 Welch, Jack, pp. 279-80. 42 “GE: Decades of Misdeeds and Wrongdoing,” Multinational Monitor, July–August 2001, p. 26. 43 Ibid., p. 30.

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in GE stock. Welch believed he was acting for the greater good.

I believe social responsibility begins with a strong, competitive company, only a healthy enterprise can improve and enrich the lives of people and their communities . . . That’s why a CEO’s primary social responsibility is to assure the financial success of the company. Only a healthy, winning company has the resources and the capability to do the right thing. 44

In September 2001 Welch was succeeded by a new CEO, Jeffrey Immelt, a carefully groomed Harvard MBA drawn from GE’s stable of stars. The new leader proved to have different values. Shortly after taking over he reversed Welch’s two decades of opposition to cleaning up the Hudson River and agreed to a cleanup that would cost GE more than $1 billion. 45 He retained the ranking process for managers, but loos- ened rigid Welch-era guidelines. Now the bottom 10 percent could be 5 percent or 15 percent, but did not have to be exactly 10 percent. He joined the board of directors of Catalyst, a New York organization that promotes progress of women in management through research about sexism. And he appointed a new vice president for corporate citizenship.

But his real love was the environment. In 2002 a Catholic group filed a shareholder’s proposal asking the company to measure its global warming gas emissions. It got only 20 percent of the vote at the an- nual meeting, but Immelt ordered an inventory any- way, then, over objections by subordinates who doubted global warming, pledged to cut GE’s emis- sions. In 2005 Immelt launched GE’s “eco-imagination” initiative based on a strategy of profiting from efforts to stop climate change. It focused the corporation on energy-saving, less polluting technologies, moving it into solar panels, wind turbines, coal gasification, re- cyclable plastics, and hybrid locomotives. Again, some hard-bitten, profit-focused managers resisted, but Immelt pushed on.

Immelt was more visibly alert to GE’s social and environmental impacts than Welch. By 2008 the com- pany was the second most socially responsible com- pany among the largest 100 global corporations in one

prominent ranking by NGOs. 46 Yet for shareholders, his leadership was bad news.

If you had invested $10,000 in GE on the day Welch retired in 2001, counting dividends your investment shrank to $4,648 at the end of 2010, a loss of 54 percent. It was, of course, a difficult period. Four days after Im- melt took over terrorists in jets with GE engines de- stroyed World Trade Center buildings insured by GE, leading to a global recession. Late in 2008 a global financial crisis caused the stock market to plummet. Nevertheless, over Immelt’s tenure, GE underper- formed the Dow Jones Industrial Index, a benchmark of large peer corporations. If you had put $10,000 into the Dow the day Welch retired you would have had $11,578 at the end of 2010, even with GE weighing down the index, a meager return for nine years, but 82 percent better than GE’s return alone.

Questions 1. Corporate social responsibility is defined in

Chapter 5 as the corporate duty to create wealth by using means that avoid harm to, protect, or en- hance societal assets. Did GE in the Welch era ful- fill this duty? Could it have done better? What should it have done?

2. Does GE under Welch illustrate a narrower view of corporate social responsibility closer to Friedman’s view that the only social responsibil- ity is to increase profits while obeying the law?

3. How well did GE conform with the “General Principles of Corporate Social Responsibility” set forth in the section of that title in the chapter?

4. What are the pros and cons of ranking sharehold- ers over employees and other stakeholders? Is it wrong to see employees as costs of production? Should GE have rebalanced its priorities?

5. Was GE a more socially responsible corporation in the Welch era or the Immelt aftermath? In which era did it give the most benefit to society? What lesson(s) can be learned from the differences?

44 Welch, Jack, pp. 381–82. 45 See the story of “The Majestic Hudson River,” in Chapter 13.

46 This was the “Accountability Rating 2008: Full G100 Ranking,” by the AccountAbility and Two Tomorrows networks, at overview.asp. Vodafone was ranked first.

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Chapter Six

Implementing Corporate Social Responsibility The Bill & Melinda Gates Foundation

Growing up in Seattle, William H. Gates III was a slender, intense boy with a messy room and a dazzling mind. At age seven or eight he read the entire World Book Encyclopedia. At his family’s church the minister challenged young congregants to earn a free dinner by memorizing the Sermon on the Mount, a passage covering Chapters 5, 6, and 7 in the Book of Matthew. At age 11 young Bill became the only one, in 25 years of the minister’s experience, ever to recite every word perfectly, never stumbling, never erring. 1 Yet Christianity itself never attracted Gates. Years later he would remark, “There’s a lot more I could be doing on a Sunday morning,” an incongruous conviction for one who would become devoted to serving the poor. 2 His brilliance, however, was lasting.

At private Lakeside prep school he was a prodigy, often challenging his teachers in class. Obsessed with computers in their then-primitive form, he stayed up all night writing code, a routine that would stay with him. He also read biographies of great historical figures to enter their minds and understand how they succeeded. After high school he attended Harvard University hoping to find an atmosphere of exciting eru- dition. Instead, he grew bored and left to pursue a fascination with computers. At age 19, Gates founded Microsoft Corporation with his Lakeside School friend Paul Allen. As its leader he was energetic, independent, and confrontational. He devel- oped the reputation of a fanatical competitor willing to appropriate any technology and crush market rivals. He built a dominant business and by 1987, at age 31, he was a billionaire.

Microsoft’s stock took flight, making more billions for Gates. However, even as he became the world’s richest man he remained absorbed in running the corporation.

1 James Wallace and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York: HarperBusiness, 1992), pp. 6–7. 2 Garrison Keillor, “Faith at the Speed of Light,” Time, July 14, 1999, p. 25.

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He put little energy into charity, thinking it could wait until he grew old. But the world expected more. Requests for good deeds and contributions poured in. Gates responded with the help of his fa- ther, who worked in a home basement office han- dling his son’s donations.

In 1994, Gates formalized his giving by creating the William H. Gates Foundation and endowing it with $94 million. His father agreed to manage it from the basement. Eventually, this arrangement evolved into the Bill & Melinda Gates Foundation, which included the name of his wife and was run by a professional staff from its new headquarters in Seattle. A foundation is essentially an organization with a pool of money for giving to nonprofit and charitable causes. It is not taxed if it gives out at

least 5 percent of its funds each year. Bill Gates gave his foundation $16 billion in Microsoft stock in 2000. Since then he has given more.

Today the Foundation is endowed with $37 billion, making it the world’s largest. It has two parts. One part decides what projects to fund. So far, more than $25 billion has been given out. The other part manages the endowment by investing the money to make it grow. The Gateses are deeply involved in the foundation’s work, which is based on a pair of “simple values” that inspire them. One is that “all lives—no matter where they are being led—have equal value,” and the other is that “to whom much is given, much is expected.” Giving is tightly focused on three areas—global health, poverty in developing nations, and U.S. public education.

Because the foundation’s endowment is unprecedentedly large, more than the gross domestic products (GDPs) of 107 countries, its goals are ambitious. One is to correct market signals that cause modern medicine to neglect diseases of the poor, thus failing to value all lives equally. Pursuing this goal, the foundation has spent more than $3.8 billion on basic vaccinations for newborns in countries with low GDPs, preventing so far an estimated 3.4 million deaths. 3 It purchases such massive amounts of vaccines that prices fall, allowing doses for millions more children. It spends billions more to create new vaccines for tropical parasitic diseases and to fight a resurgence of polio in Africa.

Bill Gates is characteristically intense, impatient, and direct in the quest to save lives. Learning that the global health staff was paying big travel grants for people to fly to meetings, he issued a curt memo about “rich people flying around to talk to other rich people.” He lectured the staff: “Our net effect should be to save years of life for well under $100, so, if we waste even $500,000, we are wasting 5,000 years of life.” 4

Bill Gates at 31, already a billionaire. Source: © Ed Kashi/CORBIS.

3 Statement of Helen Evans, “State of the World’s Vaccines and Immunization Report 2009,” GAVI Alliance, October 31, 2009, at 4 Quoted in Andrew Jack, “Gates Foundation: Smaller Funds, Hard Decisions,”, September 30, 2009, at

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In 2006 Bill Gates’ friend Warren Buffett, chairman of Berkshire Hathaway and, at the time, the world’s second-richest man, decided to give most of his wealth away and made a bequest of 10 million shares of Berkshire Hathaway to the Gates Founda- tion. He believed Bill and Melinda Gates were doing such a superior job he could do no better and, rather than manage billions of dollars of giving on his own, he left his legacy in their hands. At the time, his gift was worth $31 billion, a sum that roughly doubled the Gates endowment. It arrives in annual installments of between $1 billion and $2 billion.

The Gates Foundation confronts enormous social problems. Poverty and disease defy solution. Spending large sums in poor nations is a challenge. Corruption diverts funds. Agencies lack capacity. When infant lives are saved by vaccination, more people live to seek ordinary care. Some nations struggle to provide even the most basic care due to shortages of doctors and nurses. Thus, children are saved from diphtheria only to die in large numbers from common diarrhea. 5 Improving education is another nightmare. After spending $1 billion over six years to make small high schools better, an analysis showed that attendance, graduation rates, and test scores on basic subjects were lower than at similar schools not funded by the Gates Foundation. 6

Despite its magnificence, the Gates Foundation attracts critics. It is directed by only three trustees–Bill and Melinda Gates and Warren Buffet–putting its multibillion- dollar expenditures in the hands of just two families. 7 It has been called an elitist, antidemocratic institution subsidized by taxpayers (through its tax exemptions) but having no accountability to society. 8 Suspicions are raised that its grants, being so big, shape the world’s health agenda and distort research priorities, for example, by over- emphasizing vaccines for tropical diseases as opposed to other forms of treatment. 9

However, the Gateses and Warren Buffet want to extend the example set by their philanthropy. In 2009 they arranged a series of small, confidential dinners attended by fellow billionaires. Guests were asked to pledge the majority of their wealth to charity, either during their lifetime or at death, each one determining which causes to fund. Over the next year this initiative was formalized in a “Giving Pledge” joined by 40 billionaires. 10 Their pledges are moral commitments; they are not monitored or enforced as legal contracts. The Gateses and Buffet hope to spread the initiative to other nations. Their goal is to divert wealth from the very rich to enlarge the scope of global philanthropy for generations to come.

5 Laurie Garrett, “The Challenge of Global Health,” Foreign Affairs, January/February 2007. 6 The National Institutes of High School Transformation, Evaluation of the Bill & Melinda Gates Foundation’s High School Grants Initiative: 2001–2005 Final Report (Washington, DC: American Institutes for Research, 2006), pp. 9–10. 7 Pablo Eisenberg, “The Gates-Buffett Merger Isn’t Good for Philanthropy,” Chronicle of Philanthropy, July 20, 2006, p. 33. 8 “Philanthropic World Voices Mixed Reaction on Buffett’s Gift to Gates Fund,” Chronicle of Philanthropy, July 20, 2006, p. 12, comment of Rick Cohen. 9 David McCoy, et al., “The Bill & Melinda Gates Foundation’s Grant-Making Programme for Global Health,” The Lancet, May 9, 2009, p. 1652. 10 Carol J. Loomis, “The $600 Billion Challenge,” Fortune, July 5, 2010.

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160 Chapter 6 Implementing Corporate Social Responsibility

Philanthropy is one method for converting wealth to social value. Bill Gates and Warren Buffet follow a long tradition of rich capitalists who make fortunes, then later in life spend their wealth on works of kindness. In this chapter we will expand on the subject of philanthropy. First, however, we look at how managers implement social responsibility efforts within their firms. Social responsibility, like any other corporate goal, must be systematically planned, organized, and carried out. We will set forth a model of how this can be done.


Corporations must and do undertake a range of social initiatives. Whatever man- agement’s opinion about corporate social responsibility (CSR)—its desirability and its affect on profits—companies must respond to multiple sources of pressure for social actions. There is no alternative. Figure 6.1 shows sources of these pres- sures on corporations. Each source can generate many demands, some conflicting. We begin here a discussion about how CSR actions may be defined and imple- mented. First, we look at two elements that can determine the CSR orientation of a firm—its business model and its leadership.


Founders and top managers set the tone for a company’s social response. Their perspective on corporate responsibility is reflected throughout the organization. A business model is the underlying idea or theory of how a business will create value by making and selling something in the market. The theory is validated if the busi- ness makes a profit. In the universe of business models, there are two distinct types as they relate to corporate responsibility, the progressive model and the tra- ditional model.

A traditional business model is one in which the central strategy for creating value is based on meeting market demands while complying with the law. A progressive business model differs. It creates value by meeting market demands

Communities Competitors

Advocacy Groups

Philanthropic Requests


Events/Crises Employees


Multilateral Organizations

Stockholders/ Investors

FIGURE 6.1 Sources of Pressure for Social Responsibility

business model The underlying idea or theory that explains how a business will create value by making and selling prod- ucts or services in the market.

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Chapter 6 Implementing Corporate Social Responsibility 161

and, in the process, mitigating social problems or improving society in some way. The value proposition is based on actions that would be considered volun- tary responsibilities in more traditional companies. Anita Roddick devised The Body Shop to be a beacon of ethical and social activism in a world darkened with capitalist greed. She saw cosmetics as “an industry dominated by men try- ing to create needs that don’t exist” by selling false, unattainable notions of fe- male beauty. So she devoted herself to “harnessing commercial success to altruistic ideals.” 11 Her business model predicted that women would buy from an honest company that used natural ingredients, made realistic product claims, and supported feminist causes. The company’s ads encouraged women to accept their natural appearance. One read: “There are 3 billion women who don’t look like supermodels and only 8 who do.”

Progressive business models are rare, the basis of only a few companies. Other examples include Ben & Jerry’s, the ice cream company founded to support Ver- mont farmers and promote world peace; Patagonia, Inc., a clothing firm that built protection of nature into its strategy; Stonyfield Farm, an organic yogurt maker; and Seventh Generation, which makes nontoxic household cleaning products. 12 The validity of a business model is determined by profit or loss. Each of these businesses has succeeded, at least for an extended time, though each has faced tensions between social visions and market realities. Some have suffered financial difficulties and been absorbed by larger firms run on more traditional business models.

The Body Shop was acquired by L’Oreal, Stonyfield Farm by Groupe Danone, and Ben & Jerry’s by Unilever. In each case absorption of the mouse by the ele- phant has been hard, as the progressive culture clashed with the traditional one. At Unilever, for example, Ben & Jerry’s business was subjected to cost-cutting pressures and the social code in its brand was very hard for the big company to decipher, as when it failed to see a problem with using eggs from factory-farmed chickens even as activists were protesting their use. 13

A rare variant of the progressive model is the large corporation where a founder with noble impulses left a culture inclined to corporate responsibility. The German media conglomerate Bertelsmann was founded in 1835 to publish hymnals by Carl Bertelsmann, a Protestant inspired by the Great Awakening. He believed the primary goal of his company should be to make society better. He shared half the firm’s profits with the workers and gave them pensions and other benefits long before other German companies. Bertelsmann has grown into the third-largest global media conglomerate owning, among other brands, BMG Music, Random House, and RCA, but it is still controlled by descendants of the founder. A revealing flash of the old corporate virtue showed when the family fired Bertelsmann’s chief

11 Anita Roddick, Business as Unusual (London: Thorsons, 2000), pp. 97 and 172. 12 For other examples see David Y. Choi and Edmund R. Gray, Values-Centered Entrepreneurs and Their Companies (New York: Routledge, 2011). 13 Philip H. Mirvis, “Can You Buy CSR?” California Management Review, Fall 2008, p. 114. See also James E. Austin and Herman B. “Dutch” Leonard, “Can the Virtuous Mouse and the Wealthy Elephant Live Happily Ever After?” California Management Review, Fall 2008.

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executive, in part because he bought Napster, a business they believed was unethi- cal. 14 Another example is Johnson & Johnson, where Robert Wood Johnson, a member of the founding family, wrote “Our Credo” in 1943, just before the com- pany sold stock to the public. Over the years this credo, which required Johnson & Johnson to model a stakeholder firm, became central to the company’s culture and helped make major decisions. 15

Most companies, however, including nearly all of the largest multinationals, begin with no founding impulse for truth, justice, and the stakeholder way. Their social performance is based on responses of their management teams to pressures in the operating environment. Such companies vary in their reaction to these pres- sures across a spectrum from reluctance to enthusiasm. At the left of this spectrum (see Figure 6.2), companies focus on making a profit and resist demands to go beyond the minimum duty of obeying the law. For them, the extent of citizenship is determined by the power of stakeholders over their behavior. In the middle, companies accept social obligations and may work to mitigate adverse impacts on society before regulations can be passed. And at the right, companies seek to be proactive by anticipating demands and resolving problems before they arise. Companies today are moving to the right, becoming more responsive.


Companies can manage their corporate responsibility efforts by creating an imple- mentation process. Figure 6.3 illustrates a model sequence or method for assessing the societal environment, defining responsibilities, creating a CSR strategy, and

Obey the law, deny further obligations,

make a profit.

Obey the law, respond to pressures, accept some added duties.

Anticipate new demands, alter behavior before any

pressure, embed management systems and processes

to implement CSR.



FIGURE 6.2 A Spectrum of Responses to Social Demands

14 Matthew Karnitschnig and Neal E. Boudette, “History Lesson: Battle for the Soul of Bertelsmann Led to CEO Ouster,” The Wall Street Journal, July 30, 2002, p. A1. 15 Read “Our Credo” at

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Chapter 6 Implementing Corporate Social Responsibility 163

taking action. The sequence implied in this basic model is an ideal. 16 It depicts a more systematic approach than likely exists in practice. Beginning at the left with CSR assessment, we discuss each stage and illustrate related company actions.

CSR Review To begin, a corporation should assess its current situation and activities. No single responsibility formula fits all. Each business must be systematically reviewed to discover its range of societal impacts and the societal expectations that bear on it. Finding these requires looking at factors such as its size, financial structure, products, production processes, employees, culture, geographic location(s), sup- ply chain, and leader’s views. The review should be expansive. It can begin with a definition of CSR to focus thinking. Then it might explore legal or regulatory standards, inventory existing CSR projects, and examine competitor’s actions. Two other important steps are discovery of core values and engagement of stakeholders.

Discovering Core Values Core values, the central beliefs that guide decisions, reside deep in the company’s culture. Once formed they are very persistent. There are many ways to find them. In 1995 Fujitsu Group, a Japanese information technology corporation, created its “Fujitsu Way,” a philosophy of corporate purpose and responsibility, by finding its “corporate DNA” in the speeches of past presidents going back to its origins in the 1930s. Similarly, the origin of a statement of “purpose, values, and principles” that guides social missions at Procter & Gamble was a project by top managers to write down basic beliefs in the company’s culture. 17 At other companies, core values are found in existing mission, vision, and values statements, charters, credos, and codes of governance or conduct. Responsibility initiatives taken by a firm should harmonize with core goals and values. If these basic documents do not reference goals and values that facilitate CSR, support for action may be weak.

CSR Strategy Implementation

Reporting and


CSR Review

Revision, Adjustment, Continuous Improvement

FIGURE 6.3 A Model Process of CSR Implementation

16 The model is inspired by models and process standards elsewhere, including Business Leaders Initiative on Human Rights, et al., A Guide for Integrating Human Rights into Business Management (New York: Global Compact Office, February 2007); International Organization for Standardization, Draft International Standard ISO/DIS 26000: Guidance on Social Responsibility (Geneva: ISO, 2009), chap. 7; and Government of Canada, Corporate Social Responsibility: An Implementation Guide for Canadian Business (Ottawa: Public Works and Government Services Canada, March 2006). 17 Rosabeth Moss Kanter, Supercorp (New York: Crown Business, 2009), p. 73.

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For any corporation a key source of values is the mission statement, a document setting forth, with brevity, its basic purpose. The best ones define the business, dif- ferentiate it from competitors, explain relationships with stakeholders, and focus energy on critical activities and goals. If social responsibility is central to the com- pany’s mission, that should be reflected in its wording. The Ben & Jerry’s mission statement sets forth a “social mission,” which is “[t]o operate the company in a way that actively recognizes the central role that business plays in society by initi- ating innovative ways to improve the quality of life locally, nationally & interna- tionally.” The idea of “initiating innovative ways” led over the years to specific actions such as planting trees to replace the wood used in popsicle sticks and do- nating a percentage of Peace Pops sales to fund research on world peace.

In the past, most mission statements centered on profits and products. Many still limit themselves to this narrow focus. AutoNation aspires “[t]o be America’s best run, most profitable automotive retailer.” AGCO Corporation, a tractor man- ufacturer, aims for “[p]rofitable growth through superior customer service, inno- vation, quality, and commitment.” National City Corp., a Cleveland bank, plans to “achieve superior levels of financial performance as compared to our peers and provide stockholders with an attractive return on their investment over time.” These are firms with traditional business models.

However, many formerly traditional companies have revised their missions to include a social purpose. PepsiCo seeks “to provide financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate.” And Pfizer says: “We will become the world’s most valued company to patients, customers, colleagues, investors, business partners and the communities where we work and live.”

Engaging Stakeholders Many companies now engage in formal or informal dialogue with a range of stakeholders, those entities that can affect or are affected by their activities. They are driven less by an ethical duty to be open than by a desire to avoid disruption of operations. In the process, they protect their “social license to operate” and can get new ideas. A simple way to identify stakeholders is a stakeholder map, a dia- gram that sketches stakeholders in basic categories and depicts their relationship to the firm. Figure 6.4 shows the basic map of stakeholders used by ArcelorMittal, a global steel manufacturer. Such a map is only the beginning. Figure 6.5 shows how just one category, government and regulators, might be articulated into a more complete picture.

Choosing which stakeholder to engage is an art. In stakeholder theory the cor- poration has an ethical duty of fairness toward all of them, including, perhaps es- pecially, those it imposes burdens on though they may be powerless. In practice, corporations seriously engage only stakeholders with power to affect operations.

With stakeholders identified, a plan of engagement is constructed. Each com- pany must decide what closeness of engagement, from very structured and fre- quent to informal and infrequent, is appropriate. Stakeholders can be categorized in many ways, for example, by orientation to the firm (confrontational, neutral, or supportive), by power to affect its business (high, medium, or low influence), or

mission statement A brief statement of the basic purpose of a corporation.

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Trade Association

Regulatory Agency A

Regulatory Agency B



Federal Politician

Lobbying Firm

Political Party

FIGURE 6.5 Stakeholder Map Articulated to Show Government Stakeholders

FIGURE 6.4 Basic Stakeholder Map for ArcelorMittal

Adapted from Corporate Responsi- bility Report 2009: Our Progress towards Safe Sustainable Steel (Luxembourg: ArcelorMittal, 2010), p. 8.












This basic map is used by ArcelorMittal to classify global stakeholders, beginning the company’s process of engagement.

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by area of claims (feminists, environmentalists, or investors). 18 These classifica- tions help decide which methods of engagement are best, for example, surveys, private meetings, public hearings, roundtables, advisory panels, focus groups, workshops, or Web-based dialogues.

Here is one story of stakeholder engagement. Newmont Mining Corporation digs for gold around the world. It has large mines in remote parts of Ghana, Indonesia, and Peru that alter life for local villagers, peasants, and indigenous peoples. For every ounce of gold produced, Newmont’s mines excavate tons of ore-bearing earth and irrigate it with a cyanide solution, using large volumes of water from local streams and rivers. Natives, as stakeholders, were consulted by Newmont and got relocation allowances, job training, and other assistance, yet enormous tensions lingered. Protests, violence, strikes, and lawsuits hung over the company’s most profitable sites. When Indonesian villagers complained of birth defects caused by mining waste, the government arrested Newmont’s local man- ager and held a trial on criminal pollution charges. One of Newmont’s lawyers called the villagers “liars” who just wanted money. 19

By this time an activist coalition of environmental and human rights groups had targeted Newmont with a “No Dirty Gold” campaign and a New York Times reporter began a series of critical stories about how its mines hurt remote commu- nities. Some religious investors came to its 2007 annual meeting with a resolution calling for a study of the “pattern of community resistance to the company’s operations.” 20 Surprisingly, the company endorsed the proposal and began the study and, showing it was learning some lessons, it set up an advisory panel of “independent experts” with a broad mandate to assess the study.

This was a stakeholder panel, but with a very narrow range of stakeholders. Of the seven members, all had roots in progressive activism, and two were former heads of groups in the anti-Newmont advocacy campaign. In the end, this panel, in its own words, “encountered a degree of institutional resistance and defensive- ness” in the company as it tried to do its work and suggested that the “root causes” of unrest at the mines lay in “Newmont’s corporate culture.” But it generally approved of the company’s final report, which recommended more active, better managed engagement with villagers. 21 There are innumerable ways to engage stakeholders; this is one example. In its unique way, Newmont co-opted critical stakeholders and made itself a more open, responsible corporation.

18 For some suggested classifications see John F. Preble, “Toward a Comprehensive Model of Stakeholder Engagement,” Business and Society Review 110, no. 4 (2005); and Patrick Hughes and Kristin Demetrious, “Engaging with Stakeholders or Constructing Them?” The Journal of Corporate Citizenship, Autumn 2006. 19 Palmer Situmorang, quoted in Jane Perlez and Evelyn Rusli, “Spurred by Illness, Indonesians Lash Out at U.S. Mining Giant,” The New York Times, September 8, 2004, p. 1. 20 “Proposal No. 4–Stockholder Proposal Requesting a Report Regarding Newmont’s Community Policies and Practices,” Newmont Mining Corporation, Notices of 2007 Annual Meeting of Stockholders, March 5, 2007, pp. 53–54. 21 Advisory Panel, Newmont Community Relationships Review, Building Effective Community Relationships: Final Report of the Advisory Panel to Newmont’s Community Relationships Review, February 8, 2009, p. 35.

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CSR Strategy The next stage in Figure 6.3 is the development of an overall strategy for corporate responsibility. A strategy is a basic approach, method, or plan for achieving an ob- jective. A company with a strategy is like a traveler with a map showing the city of destination and a plan to reach it by taking the morning train. Like this traveler, a company defining its CSR strategy must first find an objective, or a vision of what it will achieve, then create a method for reaching it.

To establish its CSR objective a company can consider the profile it constructed in the CSR review stage, analyzing it to find strengths and weaknesses in its social response and threats and opportunities in its environment. Then the com- pany can list a range of possible social initiatives. At a minimum, these actions must meet legal requirements. Beyond that, voluntary actions can be listed. Then, a few actions should be given priority. These become the firm’s strategic CSR objectives.

For large firms the task of setting priorities is complex. Multiple, even conflict- ing, stakeholder demands exist. Along the value chain there are potential adverse impacts to correct. More broadly, difficult social problems in the firm’s environ- ment may demand attention. To which tasks should the firm assign priority? Com- panies must respond to some stakeholder demands or risk damage to their reputations and businesses. Ethical duty requires that where the firm has influence it should seek to mitigate value chain activities that damage society. Yet beyond such imperatives there are many options.

Michael Porter and Mark Kramer suggest an “essential test” for the worthiness of any additional social initiative, that is, “whether it presents an opportunity to create shared value—that is, a meaningful benefit for society that is also valuable to the business.” 22 According to them, companies should distinguish between a wide range of generic social issues and a much narrower range of social issues that affect their competitive advantage. Generic social issues, such as the need to re- duce crime, poverty, and disease, are important in society, but are not affected by and do not affect the company’s business. Competitive social issues are those related to factors that influence success in the marketplace. The importance of spe- cific issues to each firm will vary. Greenhouse gas emissions are a generic social issue for Tiffany’s, but a competitive factor for General Motors and Toyota, which sell low-emission vehicles. Poverty may be a generic social issue for Lockheed, but a competitive issue for Unilever and Nestlé, which market small, inexpensive, single-use product packages.

An example of how a company can prioritize a social issue to competitive advantage is General Electric’s “ecomagination” strategy. Ecomagination is a neologism created to denote concern for the environment and the imagination re- siding in GE’s research labs. As a strategy, it is simultaneously a plan for revenue growth and a social program.

So far, GE has marketed 80 ecomagination products including wind turbines, generators powered by landfill gas, and filters that recycle wastewater without

strategy A basic approach, method, or plan for achieving an objective.

22 Michael E. Porter and Mark R. Kramer, “Strategy and Society,” Harvard Business Review, December 2006, p. 84.

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chemicals. To fulfill strategic intent each product must meet a dual test. It has to improve the customer’s operating performance measurably. It has to be better for the environment. One example is the Trip Optimizer, a throttle control for freight locomotives. It reads train weight and length, track conditions, elevation, temperature, and engine power, then calculates the most efficient route and throttle movements for on-time arrival with least fuel used, eliminating human variation between locomotive engineers. Depending on terrain, it cuts diesel fuel consumption by 6 to 10 percent and raises the ton-miles-per-gallon ratio railroads use to measure productivity. It also eliminates several hundred tons of polluting emissions per locomotive each year. 23

Implementation of CSR Strategy To be carried out, a strategy must be translated into specific goals and performance objectives, embedded in policies and procedures, reinforced with processes, and supported by both the formal structure and the corporate culture. If the structure, culture, and processes of a company are misaligned with its strategic goals, those goals will be slighted. A range of actions that facilitate implementation is discussed.

Organization Structure An initial step in implementation is to create an effective CSR decision-making structure. Many companies create elements of formal structure at top levels to en- sure leadership and overall coordination. Examples of companies with corporate responsibility committees on their boards of directors are Altria, Hasbro, H. J. Heinz, Kellogg, McDonald’s, Lockheed Martin, and Occidental Petroleum. Below the board, many companies assign an executive to oversee the action. Companies with staff vice presidents of corporate responsibility include British Petroleum, Chiquita Brands, Campbell Soup, General Electric, Hershey, Nike, Walmart, and Walt Disney.

However, the growing number of board committees and vice presidents im- plies more centralization than usually exists in practice. At most companies CSR is still supplemental, and largely incidental, to core business strategies. Elements of CSR are isolated in parts of the organization. Charitable giving is in the founda- tion. Human rights and diversity are managed by the human resources staff. The code of conduct is in the legal department. Environmental impacts are left to operations managers. The CSR agenda is fragmented. To wit:

Citizenship has many rooms but no home. Rarely is corporate citizenship organized across the business. Many organizational functions touch some piece of the elephant but each unit is generally responsible . . . to a particular part of citizenship. . . . [O]rganizational silos are created and frustrate any overall organization strategy where all units are pulling together around a common vision. . . . 24

23 “GE’s Fuel Autopilot Software Set for 200 Locomotives,” GE Reports, December 19, 2009, at 24 Bradley K. Googins and Steven Rochlin, “Corporate Citizenship Top to Bottom: Vision, Strategy, and Execution,” in Marc J. Epstein and Kirk O. Hanson, eds. The Accountable Corporation: Corporate Social Responsibility, vol. 3 (Westport, CT: Praeger, 2006), p. 117.

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To centralize oversight, some companies, for example, Coca-Cola, Pfizer, Time Warner, and Vodafone have cross-functional CSR committees made up of manag- ers from different departments or business units. Such organizational forms are still the minority.

Action Planning When a strategy and decision-making structure are in place, transforming intent into action is still necessary. An action plan sets forth the multitude of tasks that, together, will bring the strategy to fruition. Such tasks include revising or creating policies, budgeting resources, and assigning work.

An illustration of the effectiveness of an action plan is found within Denmark’s Novo Nordisk, a pharmaceutical corporation with 24,000 employees in 81 coun- tries. After a CSR review in the late 1990s it decided to focus its corporate respon- sibility strategy on fighting all forms of discrimination. The strategy turned into three actions. First, employees were trained in national regulations against dis- crimination. Second, informal barriers to advancement within Novo Nordisk were found and removed. Third, managers were encouraged to turn employee diversity into a business advantage.

Each Novo Nordisk business unit set up its own action plan. In South Africa, where physicians are predominantly white, the company sales representatives were white also, but after a new action plan most of the sales force became black and mixed-race. A strict policy excluded as customers doctors who disliked visits from nonwhite salespersons.

Performance Goals and Timelines A strong action plan sets performance goals and timelines for their accomplish- ment. To be effective, goals must be specific and progress toward them should be measurable. Such goals and measures create a common language and focus efforts across organizational units. Examples of time-based, quantitative objectives, desir- able for their clarity, are those set by General Electric in 2005 for its ecomagination strategy. By 2008 it would reduce its ratio of greenhouse gas emissions per dollar of revenue by 30 percent. By 2010 it would invest $1.5 billion in ecomagination product research and raise revenues to $25 billion. And by 2012 it would reduce its water use by 20 percent and reduce its absolute emissions of greenhouse gases by 1 percent. It exceeded all but one of its goals by 2009, the exception being revenues from ecomagination products, which were only $18 billion, and set new, more ambitious goals for 2015.25 Its new revenue goal is to grow ecomagination sales at a rate two times that of sales for the overall company.

One of Procter & Gamble’s social strategies is “to improve children’s lives.” In 2007 it set a goal for 2015 of preventing “160 million days of disease and saving 20,000 lives by delivering 4 billion liters of clean water” to children in areas where diarrheal illness is common. It acts by donating sachets of a product that treats contaminated water, making it drinkable. By 2009 it had delivered 930 million

25 General Electric Company, 2009 Ecomagination Annual Report (Fairfield, CT: General Electric Company, 2010), pp. 3–9.

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liters of clean water, preventing an estimated 39 million days of disease and 5,200 deaths. 26

The design of metrics is limited only by the imagination. Many companies use sustainability indicators recommended by an international standard-setting body called the Global Reporting Initiative. We will discuss these later in the chapter. Others design their own. Software vendors sell sustainability software to adapt a company’s information system so it collects data on sustainability from dispersed units and even from independent firms in the supply chain. 27 Precise measure- ment of actions toward goals can be a challenge, but even approximations are helpful since, in the words of one consultant, “ignoring those impacts that are difficult to measure implicitly assigns a value of zero.” 28

Incentives and Accountability Job descriptions that include sustainability duties encourage accountability. Incen- tives further encourage meeting goals. Performance evaluations, pay, and promo- tions are linked to targeted actions. Executive pay is linked to environmental performance at British Petroleum and Dow Chemical. At Alcoa 10 percent of the incentive pay for managers at each business unit is based on achieving diversity. 29 When the board of directors at Johnson & Johnson sets compensation for its top executives, it evaluates whether they modeled core values of responsibility and citizenship in its guiding Credo. 30 But this is exceptional. Formulas for CEO com- pensation are almost universally focused on attaining specific financial goals.

Business units and facilities can also be rewarded or punished based on sustainable performance. For example, Dow Chemical built a waste landfill in Michigan for its plants to use, but instead of allowing each plant to dump freely, it charged a fee based on how much material was brought for disposal. The fee penalized more polluting plants by, in effect, charging an internal tax on them. To avoid the fee, facilities changed their production processes to reduce waste. Dow now estimates the landfill will last until 2034, instead of filling by 2007 as origi- nally estimated. 31

Alignment of Strategy and Culture Corporate culture must be aligned with strategic intent. Where the culture con- tains deep-seated, informal values that conflict with official CSR policies, those policies are likely to be ignored. If managers who meet financial goals but neglect “soft” sustainability goals are promoted, it indicates that formal policy is inconsistent with underlying beliefs about requirements for career advance- ment. For example, Timberland Co. executives backed a program allowing

26 Procter & Gamble, Designed to Matter: 2009 Sustainability Report, Procter & Gamble 2009, at 27 Chris McClean, “CSR Management Needs Drive Application Revolution,” CRO, July/August 2008. 28 Marc J. Epstein, Making Sustainability Work (San Francisco: Berrett-Koehler, 2008), p. 256. 29 Alcoa, Notice of 2009 Annual Meeting and Proxy Statement, March 16, 2009, p. 26. 30 Johnson & Johnson, Notice of Annual Meeting and Proxy Statement, March 11, 2009, p. 23. 31 Epstein, Making Sustainability Work, p. 135.

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employees to take one week a year at full pay to work at local charities. How- ever, line managers felt pressured to meet production goals and resisted giving workers time off. 32

Reporting and Verification To complete the cycle of CSR implementation, as shown in Figure 6.3, companies can assess and report information about their social performance. Publishing such reports serves two main purposes. First, by informing stakeholders they create transparency; that is, they lift the veil, revealing the internal strategies, structures, and processes that explain social performance. The opposite of transparency is opacity, or an inability to see inside the organization to know how it works and acts. Openness is increasingly necessary to protect a firm’s reputation and to es- tablish trust with stakeholders. Second, aggregating data in a report allows both managers and outsiders to appraise the firm’s social performance.

A pioneering fad of social reporting appeared during the 1960s and 1970s in the United States, when a few large firms produced reports called social audits, a term that differentiated them from traditional financial audits. Bank of America, Exxon, and Philip Morris assessed their social impacts, and for a few years in the 1970s Atlantic Richfield Company published an annual social balance sheet that can- didly weighed the multiple pluses and minuses of its social performance, an ec- centric act of corporate candor that stopped when the company was acquired by British Petroleum. A 1974 survey found that 76 percent of 284 large companies did some form of social auditing. 33

Early interest in social audits waned in the 1970s after American companies were hit by a massive increase in environmental and social regulation. The new regulations had strong reporting requirements that were, in effect, government- mandated social reports. However, as time passed and large corporations became more globalized, these requirements were less and less adequate. An information gap between companies and stakeholders opened wide.

To fill this gap, the international progressive community created a new report- ing format called the Global Reporting Initiative (GRI). The GRI is a set of uniform standards for sustainability reporting, or the measurement and disclosure of corpo- rate impacts to inform stakeholders how closely operations conform to the goal of sustainable development. Sustainable development is an ideal of economic growth that can “meet the needs of the present without compromising the ability of future generations to meet their own needs.” 34 Using GRI guidelines, companies show how closely they conform to this ideal by explaining their performance on a triple bottom line of economic, social, and environmental results (see Figure 6.6).

32 Joseph Pereira, “Doing Good and Doing Well at Timberland,” The Wall Street Journal, September 9, 2003, p. B1. 33 John J. Corson and George A. Steiner, Measuring Business’s Social Performance: The Corporate Social Audit (New York: Committee for Economic Development, 1974), pp. 24–25. 34 Global Reporting Initiative, Sustainability Reporting Guidelines, version 3.0 (Amsterdam: GRI, 2000–2006), p. 2, citing World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1987), p. 43.

transparency The state in which com- pany social strategies, structures, and processes are visible to exter- nal observers.

sustainability reporting Documentation and disclosure of how closely corporate oper- ations conform to the goal of sustainable development.

sustainable development Economic growth that meets current needs without social and environmental impacts that harm future generations.

triple bottom line An accounting of a firm’s economic, social, and environmental performance.

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The triple bottom line is an idea attributed to John Elkington, a progressive scholar/activist who first wrote of it in the late 1990s. 35 Its essence is to appraise the total impact of a firm’s operations, accounting for the full range of costs and value, by combining nonfinancial measures—social and environmental—with financial ones. It is now the consensus approach to sustainability reporting, not because it is an elegant calculation, but because it indulges a range of demanding stakeholders.

According to GRI guidelines, a good social report also meets certain format criteria. Its content is useful to stakeholders—clear, timely, comparable to past re- ports, reliable, and verifiable. It should include a statement of management’s CSR vision and strategy, an extensive factual profile of the company, a description of its governance structure, policies for matters such as executive pay and stakeholder engagement, and data on a series of 71 performance indicators spanning the triple bottom lines (see the box for a sample). Forty-nine of these are called core indica- tors because they generally apply to all companies. Another 30 are additional indi- cators that may or may not be material to every reporter. For instance, additional indicator HR9 (the ninth human rights indicator) requires reporting the “[t]otal number of incidents of violations involving rights of indigenous people,” and is only for companies having contacts with such peoples. The indicators span a range of complexity. Many require reporting of multiple measures, so a full report requires expensive data collection.

Additional indicators are set forth in more than a dozen “sector supplements” for specific industries. One of these, for food processing companies, adds eight industry-specific core indicators, for example FPSS4 (the fourth food processing sector supplement indicator) requires reporting the “[p]ercentage of consumer products sold, by product category, that are lowered in saturated fat, trans fats, sodium and added sugars.” 36 This is justified, the Guidelines state, because the World Health Organization says a global epidemic of obesity exists and companies have a

FIGURE 6.6 The Prism of the Triple Bottom Line Value of Business





35 See John Elkington in Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Oxford: Oxford University Press, 1997), chap. 3. 36 Global Reporting Initiative, Sustainability Reporting Guidelines & Food Sector Supplement, version August 24, 2009, p. 46.

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duty to report whether their products contribute to it. New indicators are frequently added to the Guidelines.

Finally, the GRI strongly suggests providing assurance, that is, verification for readers, that a report is reliable. The most effective assurance is provided by inde- pendent, outside auditors who assess the reporting process and verify accuracy of information. Only a minority of companies that issue a social report also choose to provide assurance. Of those that do, most hire one of the Big Four accounting and auditing firms that apply a professional assurance standard. 37

Many of the rest use a standard created by AccountAbility, a civil society entity that provides a free, open-source assurance standard, licensing and training smaller consulting services to evaluate reports based on their inclusiveness, com- pleteness, and transparency. 38 In either case, assurance requires certain steps,

assurance Verification by audit that information in a corporate sustainability report is reliable.

Here is a random, illustrative sample of 15 of the total of 49 core performance indicators in the Glo- bal Reporting Guidelines, five from each of the three “bottom lines.”

ENVIRONMENTAL • Materials used by weight or volume.

• Total water withdrawn by source.

• Description of significant impacts of activities, products, and services on biodiversity in pro- tected areas and areas of high biodiversity value outside protected areas.

• Total direct and indirect greenhouse gas emis- sions by weight.

• Percentage of products sold and their packag- ing materials that are reclaimed by category.

SOCIAL • Total number of incidents of discrimination and

actions taken.

• Percentage of employees covered by collective bargaining agreements.

• Ratio of basic salary of men to women by em- ployee category.

• Percentage and total number of business units analyzed for risks of corruption.

• Public policy position and participation in public policy development and lobbying.

ECONOMIC • Direct economic value generated and distrib-

uted, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and government.

• Financial implications and other risks and op- portunities for the organization’s activities due to climate change.

• Coverage of the organization’s defined bene- fits plan obligations.

• Significant financial assistance received from government.

• Policy, practices, and proportion of spending on locally-based suppliers of significant loca- tions of operation.

Source: Global Reporting Initiative, Sustainability Report- ing Guidelines, Version 3.0 (Amsterdam: GRI, 2000–2006).

A Sample of GRI Core Performance Indicators

37 This standard is ISAE (for International Standard on Assurance Engagements) 3000, International Federation of Accountants, Assurance Engagements Other than Audits or Reviews of Historical Financial Information (New York: IFA, 2004). 38 This standard is AA1000AS, AccountAbility, AA1000 Assurance Standard 2008 (London: AccountAbility, 2008).

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including interviews with managers and reviews of policies, processes, docu- ments, and data samples. These audits are expensive, costing $1 million to $2 mil- lion for companies in single industries and much more for conglomerates, so some companies provide a more limited assurance by inviting stakeholder panels or academic experts to review their reports and make public statements. Around the world, sustainability reporting is now a mainstream activity.


In this section we have set forth model process for implementing CSR. If a com- pany navigates this process, it can embed CSR as a countervailing force to the risks of bad behavior in its pursuit of profit. There is a trend, especially among the world’s largest corporations, to adopt the elements of this model. A recent survey found that 62 percent of the 250 largest firms in the Fortune Global 500 formally engage stakeholders, 73 percent have created a sustainability strategy, 66 percent link performance indicators to strategic objectives, and 60 percent report data for these indicators. Also, 79 percent produce a corporate responsibility report, with 77 percent of these reporters following the Global Reporting Initiative guidelines and 40 percent including third-party assurance statements. 39 These numbers reflect the civil society pressures on the largest, most exposed global firms. Smaller and less-international firms reported far less adoption of model CSR actions in the survey.

A question is whether corporations, especially the largest and most exposed, use mostly ritual, bare compliance with the codes, certifications, and reporting requirements in the new civil regulation to innoculate against activism and more stringent forms of legislated regulation. John Elkington, the early cham- pion of triple-bottom-line reporting, now believes corporations show an “almost willful avoidance of the social dimension.” 40 Whatever its advances, social responsibility is still frequently seen as a superfluous activity only indi- rectly, if that, related to the bottom line, one that costs money, takes time, and reduces efficiency. Within many companies it is still bolted onto, not integrated with, core business strategies, its pieces fragmented in separate departments with no central oversight, and its spirit smothered by cultures of revenue. As one manager notes: “While I may be encouraged to participate in [a CSR event] on the weekend to support the company’s CSR initiative, on Monday morning, it is business as usual, and all that really matters is how many cases I’ve pushed out the door.” 41

39 Survey figures are from KPMG, KPMG International Survey of Corporate Responsibility Reporting 2008 (Amstelveen: The Netherlands: KPMG Sustainability Services, 2008). 40 Quoted in Adam Werbach, Strategy for Sustainability: A Business Manifesto (Boston: Harvard Business Press, 2009), p. 112. 41 An anonymous interview subject quoted in Ida P. Berger, Peggy H. Cunningham, and Minette E. Drumwright, “Mainstreaming Corporate Social Responsibility: Developing Markets for Virtue,” California Management Review, Summer 2007, p. 142. Brackets in the original.

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Philanthropy, meaning literally love of mankind, is charity carried out by business with gifts of money, property, or work given to the needy or for social welfare activities. Large philanthropic contributions by American corporations are rela- tively recent. Until about 50 years ago courts held that corporate funds belonged to shareholders; therefore, managers had no right to give money away, even for noble motives. This restrictive doctrine made sense in the distant past when busi- nesses were small and charity came mainly from their owners. However, as businesses grew and professional managers took control from their rich founders, the public started to expect giving from corporations, too.

The first major break from legal restrictions on corporate philanthropy was the Revenue Act of 1935, which allowed charitable contributions to be deducted from taxable earnings up to 5 percent of net profits before taxes (raised to 10 per- cent in 1981). Still, the legality of corporate giving remained doubtful, and man- agers were tight with charity dollars because they feared stockholder lawsuits. Eventually, the A. P. Smith case in 1953 (see the box) cleared away outdated rigidities in the law, freeing companies to be more generous. Now, corporations give $14 billion to $15 billion a year to worthy causes ranging from disaster relief to support for local orchestras. Conservative opponents of corporate social responsibility still argue that such giving is theft, like Robin Hood stealing from stockholders and giving to the poor. However, they no longer receive support from the law.

Patterns of Corporate Giving Charitable giving is now a traditional dimension of corporate responsibility. Even so, most firms do not give a significant amount compared with their potential. In 2008, for example, corporations gave $14.5 billion, a large sum, but only 0.12 percent of worldwide sales and 1 percent of pretax income. Since the 1950s, overall cor- porate contributions have been remarkably consistent, hovering around 1 percent of pretax income. This is far less than the 10 percent that is tax deductible. Con- tributions rise as firms get larger, with the largest firms in one study giving

philanthropy Charitable giv- ing of money, property, or work for the welfare of society.

In practice, most companies fall short of the model process for CSR action set forth in this section be- cause they make one of these errors.

1. They give no coherent, systematic thought to CSR.

2. They allow CSR strategy to be reactive by not aligning it with major social impacts, core com- petencies, or business strategies.

3. They fragment responsibility for CSR initiatives by assigning them to separate areas without central oversight.

4. They do not issue credible reports of CSR actions for stakeholders and fail the test of transparency.

Four Costly Errors of CSR Implementation

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2.38 percent of pretax income. Large drug companies were the most generous, aver- aging 5.77 percent; aerospace and defense firms gave the least, only 0.45 percent. 42

Corporate philanthropy is a small part of overall philanthropy in the United States; in 2009 it was only 4.6 percent. Figure 6.7 displays the 10-year trend in giv- ing and segments sources into their relative proportions. During this time total giving rose from $203 billion to a high of $314 billion in 2007, then fell to $304 bil- lion in 2009. As the segmented bars show, individuals gave by far the largest pro- portion, followed by foundations, charitable bequests, and, finally, corporations (including corporate foundations). In the years shown, corporate giving rose from $10.7 billion to a high of $15.2 billion in 2007, then fell to $14.1 billion in 2009. Corporate giving was consistently about 5 percent of total giving.

Corporations that contribute do so in many ways, including cash, products, services, volunteered employee time, and use of facilities. Cash giving is only about half of all giving. Among the largest corporations, about 42 percent of giv- ing goes to United Way campaigns and grants to health and human service agen- cies such as the Red Cross and the American Cancer Society. Another 23 percent

A. P. Smith was a New Jersey corporation set up in 1896. It made valves and hydrants. In 1951 the firm gave $1,500 to Princeton University’s annual fund-raising drive. This was not its first charitable contribution. It gave to a local community chest fund and had donated to other nearby colleges. These contributions were made in a legal envi- ronment clouded by inconsistency. On the one hand was the law of corporate charters. These charters were issued by states, and corporations were not allowed to act beyond the powers expressly granted in them. The assumption in the charters was that the corporation’s duty was to maximize profits for shareholders. A. P. Smith’s incorporation papers, like those of most firms at the time, did not grant spe- cific authority to make charity gifts. On the other hand was a statute. New Jersey passed a law in 1930 giving its corporations the right to make such dona- tions if they did not exceed 1 percent of capital. Ruth Barlow and four other angry owners of common and preferred stock thought the com- pany had no right to give away any amount of money, because it was rightfully theirs as share-

holders. They sued and in due course a trial was held. Luminaries from the business community appeared as witnesses for A. P. Smith to assert the merits of corporate charity. A Standard Oil of New Jersey executive argued that it was “good busi- ness” to show the kind of citizenship the public demanded. A U.S. Steel executive said that main- taining universities was essential to preserving capitalism. Nevertheless, the judge ruled against A. P. Smith, saying that the company had acted be- yond its legitimate power. A. P. Smith appealed. In 1953 the Supreme Court of New Jersey overturned the lower court, holding that rigid interpretation of charters to re- strict charitable giving was no longer fitting since, unlike the old days when corporations were small and had limited assets relative to individuals, they now had enormous assets and it was reasonable for the public to expect generosity from them. The Smith case settled the legal question of whether corporations could give to charity. After it, the legal cloud of acting ultra vires dissipated, clearing the way for greater corporate giving.

A. P. Smith Manufacturing Company v. Barlow et al., 13 N.J. 145 (1953)

42 Figures in this paragraph are from Carolyn Cavicchio and Judit Torik, The 2009 Corporate Contributions Report (New York: The Conference Board, December 2009), pp. 4–10.

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flows to education, about 13 percent goes to civic groups such as YMCA/YWCAs and to local governments, about 6 percent to culture and arts causes, and a tiny amount, less than 3 percent, to environmental groups. 43

Strategic Philanthropy With historical roots in religious teachings, the act of philanthropy presumes a selfless motive of giving out of moral duty to benefit the needy or to advance soci- ety. Traditionally, corporate philanthropy conformed to such ideals of altruism and magnanimity. Companies and their foundations gave to help the destitute while funding social goods such as education and the arts. Some self-benefit resided in these donations since the elevating deed often raised corporate reputa- tions, created goodwill, or improved the economy by strengthening society.

As corporations gained experience with philanthropy, some concluded that the traditional approach of diffuse giving to myriad worthy causes was noble but flawed. Over time, the number of causes grew. As charity recipients proliferated, the shrinking sums given to each had less and less impact. Executives and their spouses diverted funds into pet artistic and cultural projects unimportant to the firm’s main stakeholders. In Detroit, a city hollowed out by race riots and loss of its tax base as whites ran to the suburbs, Ford Motor gave millions of dollars to the Michigan Opera Theater because Jennifer Nasser, the wife of its CEO, was a patron. 44 As vacant downtown buildings sat with broken windows she had Ford employees refurbish the theater. Such an impulsive approach to philanthropy, often called checkbook philanthropy, leads to awards, plaques, and honors for execu- tives but lacks an underlying business logic.

Most large corporations still engage in some checkbook philanthropy. How- ever, more and more convert their philosophy of giving from one of pure, if

checkbook philanthropy A traditional form of corpo- rate giving in which dona- tions go to mul- tiple worthy causes without any link to busi- ness strategy.



Bequests Corporations









1999 2000 20022001 20042003 2006 20072005 20092008

(i n

b ill

io n

s o

f d o

lla rs


FIGURE 6.7 The Trend in Private Philanthropy: 1999–2009

Source: U.S. Census Bureau, Statistical Abstract of the United States: 2009, 129th ed. (Washington, DC: U.S. Census Bureau, 2009), table 561; and Giving USA Foun- dation, “U.S. Chari- table Giving Falls 3.6 Percent in 2009,” news release, June 9, 2010, pp. 2–3.

43 These figures are from Cavicchio and Torik, The 2009 Corporate Contributions Report, p. 49. The 13 percent remainder goes to miscellaneous recipients outside these main categories of giving. 44 Keith Bradsher, “A Horn of Plenty for Opera in Detroit,” The New York Times, October 28, 1999, p. E1.

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George F. Feeney, 79, is one of the greatest living philanthropists. He has given away billions of dol- lars, much of it anonymously in a style reminiscent of the old television program, The Millionaire, where a mysterious benefactor changed the lives of worthy people with anonymous cashier’s checks. Feeney was raised in a working-class New Jer- sey neighborhood. With partners, he founded the Duty Free Shoppers stores located in airports around the world. He became rich selling ciga- rettes and luxury goods to travelers and moved among six splendid homes from the French Riviera to Park Avenue in New York. In 1984 he experi- enced a revelation. “I simply decided I had enough money,” he told a reporter.45

Without even informing his three partners he set up a foundation in Bermuda. Then he irrevoca- bly transferred his ownership interest in Duty Free Shoppers to it. At the time, this was worth about $500 million. More followed. Over the years, the foundation has given away more than $5 billion. If Feeney had kept the money he could now be worth as much as $10 billion, but his personal as- sets may be only about $5 million. He does not own a house and lives in a one-bedroom San Francisco rental. He has no car, preferring to get around by bus. He has no briefcase and brings pa- pers to meetings in a plastic bag. He wears a $15 watch, prefers casual clothes, and doubts the need for more than one pair of shoes.46 He also has a passion for secrecy coming from a desire to live

life without constant importuning from suppli- cants and from his belief in the teachings of Maimonides, a twelfth century philosopher who counseled that the highest form of giving is anon- ymous and selfless. Unsolicited requests for money from the foun- dation are always rejected. Feeney located his foundation in Bermuda to avoid U.S. disclosure laws and for years forbade its employees to tell anyone where they worked, even their families. Those who got anonymous funding were told that if they revealed the source the funds would stop. Feeney sometimes attends staff meetings with po- tential recipients, who are not told the identity of the quiet observer. The existence of the foundation, called Atlantic Philanthropies, became public when Duty Free Shops was sold in 1997. Since then, it has become much more open. It lists its mission as “fostering lasting changes in the lives of disadvantaged and vulnerable people” and to that end it funds projects large and small, from building hospitals in Vietnam to repairing broken windows in South African schools. Most foundations give away only limited sums each year, allowing them indefinitely to maintain large endowments. But Feeney has instructed Atlantic Philanthropies to exhaust its remaining funds by 2016. He believes his money should start doing good as soon as possible, not in some dis- tant future.

The Secretive Billionaire

45 Quoted in Judith Miller, “He Gave Away $600 Million, and No One Knew,” The New York Times, January 23, 1997, p. A1. 46 Conor O’Clery, The Billionaire Who Wasn’t (New York: Perseus Books, 2007), pp. 321–22.

scattered and unplanned generosity to one that aligns giving with commercial objectives. This is known as strategic philanthropy, or the alignment of charity with business strategy.

General Mills was a pioneer. It has always been a generous company, giving an unusually high 5 percent of its pretax domestic profits to charity. For years it em- phasized funding of prestigious cultural and arts programs in its Minneapolis headquarters area. In the late 1990s it began to redirect giving to projects on youth nutrition, schools, and social services in 20 cities where it had facilities. Then it

strategic philanthropy A form of cor- porate philan- thropy in which charitable activities rein- force strategic business goals.

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moved to align its brands with philanthropic causes. In its Spoonfuls of Stories campaign it gave millions of dollars to buy new books for children in low-income families and it put children’s books in millions of Cheerios boxes. These efforts better matched charity giving with the concerns of average grocery shoppers who buy Cheerios. There are many similar examples.

• Mattel donated $25 million to put its name on the children’s hospital at UCLA, now called Mattel Children’s Hospital. The company has no role in running the facility, although it gives toys to patients. Adding the company name to the hos- pital increases brand recognition and contributes to a compassionate corporate image among toy buyers. These benefi ts reinforce the commercial goals of a toy company while also helping sick children. 47

• Since 1995 Home Depot has partnered with a nonprofi t named KaBOOM! to build playgrounds. The KaBOOM! vision is “a great place to play within walking distance of every child.” In 2005 Home Depot gave it $25 million and pledged more support in materials and employee time to build 1,000 play- grounds in 1,000 days. That goal was met and playgrounds are still forthcom- ing. Home Depot faces strong competitors, including Lowe’s and Walmart. It believes that its work on playgrounds, while helping children, differentiates its brand, creates appreciation in local store markets, and underlines the expertise of its staff with building materials. 48

Cause Marketing Cause marketing is a variant of strategic philanthropy in which charitable contribu- tions are based on purchases of a product. It links a brand to a social cause so both benefit. Marketers use branding to differentiate products, especially mass- produced products that consumers might see as interchangeable commodities if they lack brand attributes. Companies spend heavily to endow brands with these attributes so they can charge a price premium. Traditional branding creates attributes in two dimensions to influence buying decisions. One is an impression of the product’s positive qualities directed to the logical mind. The other is an emotional association with the product that allows consumers to fulfill emotional needs by using it. Marketers have learned that if their brand is connected to a charitable cause a third attribute is created, one that appeals to the consumer’s conscience. In cause-related marketing the corporation calculates it will add this benevolent dimension to its brand while also doing a philanthropic good deed.

Cause marketing is a powerful sales tool. In a recent survey 75 percent of con- sumers said they would try a new brand if it supported a cause and 64 percent said they would be willing to pay more for it if the cause were important to them. 49 In the United Kingdom, for example, Mars Inc. made a donation to animal rescue

cause marketing A form of stra- tegic philan- thropy in which charita- ble contribu- tions are based on purchases of a product.

47 Julie Edelson Halpert, “Dr. Pepper Hospital? Perhaps, for a Price,” The New York Times, February 18, 2001, sec. 3, p. 1. 48 Sandra O’Loughlin, “Tools for Tots,” Brandweek, July 10–17, 2006, p. 18. 49 “Struggling Consumers Say Companies Connect,” Marketing Weekly News, November 21, 2009, p. 62, citing a 2009 PR Week/Barkley Public Relations Cause Survey.

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charities for each of its Pedigree brand dog food products sold. In just three months the campaign raised $778,000 for homeless dogs, increased sales by 6 per- cent, and led to an 8 percent rise in consumers who identified the brand as having “dogs at its heart.” 50 Here are two other examples:

• In the early 1990s restaurant owners felt that American Express card fees were too high. Enough restaurants refused the cards that, rather than face rejection, many cardholders used a competing card instead. To counteract this, American Express started a cause marketing campaign called “Charge Against Hunger” in which it donated 3 cents per transaction to nonprofi t anti-hunger groups dur- ing the holiday months of November and December each year. The campaign created a clear link between using the card to pay for restaurant meals and fi ghting hunger. It raised $21 million in four years for donations to 600 anti- hunger groups. It also increased the charge volume by 12 percent and raised the opinion of restaurant owners about the card. 51

• Avon Products sells more beauty products than any other company. Most of its revenues come from direct sales through 5.4 million part-time, predomi- nantly female sales representatives in 100 countries. In the early 1990s Avon’s brand image was deteriorating because its direct-selling strategy carried an old- fashioned, down-market connotation. The company decided to burnish its name using cause-related marketing. The vast majority of Avon’s sales are to women. Research showed that fi ghting breast cancer was important to them, so Avon developed a line of affordable “pink ribbon” products and donated a specifi ed amount from the purchase price to breast cancer research. Its brand has benefi ted so much that the cause-related “crusade” continues uninter- rupted. Since 1992 Avon has collected more than $640 million for breast cancer research, detection, and treatment. 52

Cause-related marketing raises big sums for worthy causes but, like other forms of strategic philanthropy, its mixture of altruism and self-interest attracts criticism. Skeptics call it “consumption philanthropy” that promotes wasteful materialism and suggest that people simply give directly to causes. 53 They note that companies pick causes based on research into what consumers care about, instead of trying to find the most acute needs. Heart disease is the leading killer of women and the leading fatal cancer in women is lung cancer. However, because the fight against breast cancer resonates more with high-spending female consumers ages 30 to 55, more than 300 companies have copied Avon’s marketing innovation. Other causes languish from this convergence.

There is plenty of cynicism about corporate motives. One woman who has had breast cancer complains that “companies are making money off my disease—even

50 “Golden Jubilee Awards 2009: Cause-related Marketing,” Marketing, June 10, 2009, p. 28. 51 Shirley Sagawa and Eli Segal, Common Interest, Common Good (Boston: Harvard Business School Press, 2000), p. 15. 52 “Avon Breast Cancer Crusade,” at 53 Angela M. Eikenberry, “The Hidden Costs of Cause Marketing,” Stanford Social Innovation Review, Summer 2009, p. 51.

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if they’re giving an amount to charity, they’re making so much more in profit. . . . [I]t’s like getting hit in the face.” 54 In current breast cancer campaigns Avon do- nates $6.24 of the $10 price of its Crusade Tote Bag, and Coach gives $60 for each “awareness watch” it sells. Others are less generous. Duraflame gives 10 cents for each pink color log sold, only 2 percent of the $4.99 price. Yoplait donates 10 cents per yogurt container, but makes customers put their container lids in an envelope and return them by mail before it makes a contribution, imposing the cost of a stamp that exceeds the donation amount on people with fewer than five lids. Corporations, however, do not see commercial interest as an ethically inferior motive and believe that concrete benefits to both companies and causes far out- weigh the importance of abstract arguments about base motives.

New Forms of Philanthropy In traditional philanthropy, foundations and corporations give grants to nonprofit organizations that then spend the money to meet stated goals, for example, in- creasing literacy or buying medicines for the poor. The donor expects no financial return, in effect losing 100 percent of the capital invested, and may follow up at intervals or at the end of a project to see if objectives were met. Much good has come from this model, including such triumphs as the “green revolution,” led by the Rockefeller Foundation’s support for research in agriculture that led to new varieties of wheat, maize, and rice, increasing crop yields and saving an estimated 1 billion lives since the 1960s. 55 Nevertheless, it has shortcomings. Large founda- tion offices and staffs create administrative expenses. Committees slow decisions. Grant officers become conservative, rejecting innovation for fear a mistake will hurt their career. Grant recipients spend much of what they get on overhead, espe- cially the costs of fund-raising necessary to continue their work. Some do not achieve what they promise, and monitoring their performance burdens donors.

Now, another model of philanthropy is emerging based largely, but not entirely, on the philosophies and examples of new billionaires from technology industries. In distinctive ways, new philanthropists such as Bill Gates of Microsoft, Pierre Omidyar and Jeffrey Skoll of eBay, Larry Page and Sergey Brin of Google, and Steve Case of AOL, either themselves or through their companies, apply the business methods that made them rich to the field of philanthropy, blurring the line between charity and business, seeking to harness market forces. This new philanthropy, or philanthrocapitalism as it is often called, covers a range of actors and approaches but it is bold, entrepreneurial, results-oriented, closely engaged, and impatient.

Here are some examples of philanthrocapitalism at work, all different, but hav- ing in common the use of market incentives.

• Before the initial public offering of Google, its founders, Larry Page and Sergey Brin, told investors that 1 percent of equity, 1 percent of annual profi ts, and 1 percent of employee time would be set aside for “active philanthropy.” This

philanthro- capitalism An emerging form of philan- thropy that relies on market forces to achieve results.

54 Jeanne Sather, quoted in Kris Frieswick, “Sick of Pink,” The Boston Globe, October 4, 2009, magazine section. 55 “A Scholar’s Analysis of Grant-Making Successes–and Failures,” Chronicle of Philanthropy, December 7, 2006, p. 3.

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work is done within an entity named, which is a business unit of the parent company. Within the company’s technologists attack three priority threats—climate change, emerging pandemics, and energy shortages. They bring to bear the engineering skills and information-gathering expertise that are core strengths of Google. One project is an online technology to mea- sure spacial changes in the world’s forests. Projects are developed as businesses and any profi ts accrue to Google.

• Around the world 3 billion of the world’s poor cook with wood, dung, and coal, fi lling their dwellings with dangerous smoke causing 1.5 million deaths a year, most of women and children. In the past, aid groups gave away small stoves that reduced indoor pollution, but often they were not used. Many peo- ple thought smoke was harmless. Others put no value on what they got free. Some stoves were unsuited for local fuels. The charity model was failing. But this problem fi t the mission of the Shell Foundation, set up by the oil company to apply market principles in solving problems of poverty and the environ- ment. It committed $25 million in grants to a small, nonprofi t corporation in Colorado named Envirofi t that would design, manufacture, and sell stoves in the developing world using a business model. The foundation injected “busi- ness DNA” into the company by giving it advice on how to operate as a busi- ness. So far, Envirofi t has sold more than 120,000 of the small stoves in India. 56 Its vans travel dirt roads in rural areas selling stoves for the equivalent of $17.50 to $55.60 in local currency. They reduce particle emissions by 80 percent, but customers like them because they reduce fuel use by 60 percent and can pay for themselves in months. Envirofi t sells stoves as a business, not as a subsidized charity. It reinvests net income to expand the business.

• The Robin Hood Foundation was started by billionaire hedge fund manager Paul Tudor to better the lives of the poor in New York City. It funds programs that attack poverty. Of hundreds of such programs offered by agencies and nonprofi ts in the city, which should it fund to get the most poverty reduction per dollar spent? In a corporation, managers would compare return on capital invested to allocate funds between various business units. Robin Hood uses the same approach, modifi ed to its charitable goals. It calculates a benefi t-cost ratio for each grant program by monetizing the results of its work and comparing these with the cost of the grant. If a program has a benefi t-cost ratio of 6:1, it creates $6 of benefi ts to the poor for every $1 of Robin Hood’s funds. Measuring benefi ts requires estimates, for example, that an adolescent’s future earnings in- crease $5,000 a year by avoiding a fi rst arrest. 57 By using this benefi t-cost metric Robin Hood disciplines its investment, cutting support for programs with low ratios to move dollars where they purchase more poverty reduction.

The new philanthropy is now small in relation to total philanthropy. Some are skeptical of any impact. Market solutions may be too superficial for bottomless

56 Shell Foundation, Annual Report and Accounts, 2008, at; and Jeffrey Ball, “Small Energy-Saving Steps Can Make Big Strides,” The Wall Street Journal, November 27, 2009, p. A16. 57 Michael M. Weinstein, Measuring Success: How Robin Hood Estimates the Impact of Grants (New York: Robin Hood Foundation, 2009), p. 34.

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social problems such as violence, corruption, bad government, and inequality. Success stories may be limited to initiatives such as indoor stoves, with dimen- sions that lend themselves to the application of market forces. Also, the pitfall of greed is there. Muhammad Yunus, who won a Nobel Prize for his creative work with micro-finance, or small loans to the poor, once criticized Banco Compartamos, a Mexican bank that makes micro-loans, for giving priority to profit over social good. The bank made a 23 percent profit, a fine return for a normal business but, it seems, a questionable one for a social enterprise. 58 According to Yunus, “Social businesses should not make a profit off the poor.” 59


Good intentions are worth little if not reflected in actions. If a corporation hopes to be socially responsible, it must do the hard work of building its aspirations into its operations. To implement CSR strategies it must use the same methods it uses to implement business strategies. No CSR initiative of any significance will succeed without their application.

Corporate philanthropy is a basic, widely accepted dimension of social responsibil- ity. Traditionally, it was practiced as a form of charity, but today that is changing. Often, corporations align their giving with their profit goals. And both corporations and new billionaires with corporate fortunes are now using business methods to at- tack social problems. Optimism that capitalist tools can solve social problems as easily as they made people rich is natural, but not yet verified. Still, the new philanthropy in all its variations already shows promise of increasing the power of charity to do good.

micro-finance Small loans given to poor people.

58 Gregory M. Lamb, “Charities Borrow For-Profit Strategies To Do Good,” Christian Science Monitor, January 5, 2009, p. 14. 59 Quoted in Steve Hamm, “Capitalism with a Human Face,” BusinessWeek, December 8, 2008, p. 50.

Marc Kasky versus Nike Marc Kasky of San Francisco sees his world as a com- munity and has a long history of caring about the others in it. He got early lessons in business ethics from his father, who ran a car repair business.

The customer would bring his car in and say there’s something horribly wrong in my car: I think I need a new transmission. . . . My father would call them back an hour later and say, “Come get your car, there was a loose screw here and there; I fixed it. What does it cost? Nothing.” I saw how that affected our family. It impressed me a great deal. 1

After graduating from Yale University in 1969, he volunteered to work in poor Cleveland neighbor-

hoods. Moving to San Francisco, he headed a non- profit center for foundations that funded schools. He involved himself in civic and environmental causes. He also became an avid jogger and ran marathons.

Over the years Kasky wore many pairs of Nike shoes and considered them a “good product.” 2 But he stopped buying them in the mid-1990s after reading

2 Steve Rubenstein, “S. F. Man Changes from Customer to Nike Adversary,” San Francisco Chronicle, May 3, 2002, p. A6. Kasky stated his ownership of Nike shoes in the interview for this article. However, his lawyer told the Supreme Court that he had “never bought any Nikes.” Nike v. Kasky, No. 02–575, Oral Argument, April 23, 2003 (Washington, DC: Alderson Reporting Company, 2003), p. 30, lines 21 and 22. We give priority to Kasky’s story, but this is a remarkable contradiction.

1 Quoted in Jim Edwards, “Taking It to the Big Guys,” Brandweek, August 12, 2002, p. 1.

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stories about working conditions in overseas factories where they were made. By then Nike, Inc., had be- come the main focus of the anti-sweatshop cause, ac- cused of exploiting low-wage workers who made its shoes and clothing. The more Kasky read about Nike, the more convinced he was that it was not only vic- timizing workers, but lying about it too. Kasky sought the help of an old friend, Alan Caplan, an at- torney who had achieved fame in progressive circles by bringing the suit that forced R. J. Reynolds to stop using Joe Camel in its ads.

With Caplan’s help, Kasky sued Nike in 1998 for false advertising, alleging it had made untrue state- ments about its labor practices. This was not Kasky’s first lawsuit. Previously, he had sued Perrier over its claim to be “spring water” and Pillsbury Co. for labeling Mexican vegetables with the words “San Francisco style.” Both suits were settled. 3 Nike sought dismissal of Kasky’s suit, arguing that the statements he questioned were part of a public de- bate about sweatshops and protected by the First Amendment.

NIKE Nike, Inc., is the world’s largest producer of athletic shoes and sports apparel. It grew out of a handshake in 1962 between Bill Bowerman, the track coach at the University of Oregon, and Phil Knight, a runner he had coached in the 1950s. Knight had just received an MBA from Stanford University, where in a term paper he had written about competing against estab- lished athletic shoe companies by importing shoes made in low-wage Asian factories. Now he was ready to try it. He and Bowerman each put up $550 and Knight flew to Japan, arranging to import 300 pairs of Onitsuka Tiger shoes.

After seven years, Knight and Bowerman decided to stop selling the Japanese company’s brand and create their own. So they designed a shoe and sub- contracted its production to a factory in Japan. By now Bowerman and Knight had incorporated, and an employee suggested naming the company Nike, for the Greek goddess of victory. Knight paid a design student at Portland State University $35 to create a logo. She drew a “swoosh.” The elements of future market conquest were now in place and the company rapidly grew.

Nike succeeded using two basic strategies. First, its product strategy is to design innovative, fashion- able footwear and apparel for affluent markets, then have contractors in low-wage countries manufacture it. This way Nike avoids the cost of building and managing factories. At first, it made most of its shoes in Japan (some were made in the United States until 1980), but as wages rose there it moved contracts to plants in South Korea and Taiwan. When wages rose in these countries, Nike again shifted production, this time to China, Indonesia, and Thailand, and later to Vietnam.

Second, its marketing strategy is to create care- fully calculated brand images. Advertising associates the Nike brand with a range of ideas. Prominent among them is the idea of sport. Endorsements by professional athletes and college teams endow the swoosh with a high-performance image. Campaigns with the “just do it” slogan add connotations of com- petition, courage, strength, and winning. Other ad- vertising associates the brand with urban culture to make it “street cool.” In this way Nike transforms shoes and T-shirts that would otherwise be low-cost commodities into high-priced, high-fashion items that generate positive emotions when they are worn.

Marc Kasky. Source: © AP Photo/Denis Poroy.

3 Roger Parloff, “Can We Talk?” Fortune, September 2, 2002, p. 108.

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THE SWEATSHOP LABOR ISSUE By 1980 when the company went public, it had seized half the world’s athletic shoe market. But the out- sourcing and advertising strategies that propelled it to the top put it on a collision course with a force in its social environment. This force, the sweatshop issue, would gain power and cause considerable damage.

In 1988 an Indonesian union newspaper pub- lished a study of bad working conditions in a plant making Nike footwear. 4 Soon other critical articles appeared in the Indonesian press. The AFL-CIO decided to investigate how workers were being treated in plants that manufactured for American firms and sent an investigator named Jeffrey Ballinger to Indonesia. Ballinger focused on Nike contractors, gathering detailed information.

In 1992 he published a clever indictment of Nike in Harper’s Magazine by exhibiting the monthly pay stub of an Indonesian woman named Sadisah who made Nike running shoes. Sadisah worked on an as- sembly line 10-and-a-half hours a day, six days a week, making $1.03 per day or about $0.14 an hour, less than the Indonesian minimum wage. She was paid only $0.02 an hour for 63 hours of overtime during the pay period. Her home was all she could afford, a rented shanty lacking electricity and plumb- ing. The Nikes she made sold for $80 in the United States, yet the cost of her labor per shoe was only $0.12. If anyone missed the point, Ballinger noted that the year before Nike had made a profit of $287 mil- lion and signed Michael Jordan to a $20 million ad- vertising contract, a sum that Sadisah would have had to work 44,492 years to earn. 5

Ballinger’s article appeared with a flurry of other negative stories, but the issue did not immediately heat up. Nevertheless, Nike elected to show more responsi- bility for the welfare of foreign workers. In 1992 it adopted a “Code of Conduct” requiring its contractors to certify compliance with local minimum wage, child labor, health, safety, workers’ compensation, forced labor, environmental, and discrimination laws. In 1994, it hired the accounting firm Ernst & Young to audit code compliance by making spot checks at factories.

These developments suggest that at some point CEO Philip Knight came to believe that even if Nike did not directly employ foreign workers, it benefited from their labor and so had an ethical duty toward their welfare. But Nike would not escape damage from the issue. The code and spot checks were not enough. Negative stories about its contract factories grew more numerous.

Finally, the issue exploded after April 1996 congres- sional testimony by the leader of a human rights group, who said clothing for Walmart’s Kathie Lee ap- parel line was made at a Honduran factory where chil- dren worked 14 hours a day. Daytime television viewers saw talk show host Kathie Lee Gifford reduced to tears as she responded, “You can say I’m ugly, you can say I’m not talented, but when you say that I don’t care about children . . . How dare you?” 6 Now the issue had emotional content for American consumers.

Soon after the Gifford spectacle anti-sweatshop activists decided to focus on Nike, and attacks heated up. Nike was an industry leader. If it could be re- formed, other clothing companies and retailers would fall into line. It was also vulnerable to a brand name attack. Advocacy groups joined forces to in- form the public of what they saw as a gap between the inspiring images in Nike’s advertising and the grim reality of its labor practices. This alarmed Nike because bad publicity could rub away the image magic that made its brand cool.

NIKE AT WAR WITH ITS CRITICS The war over Nike’s image would be fought in the media. An early skirmish came when Bob Herbert at The New York Times wrote the first of what became a yearlong series of columns berating Nike. After de- scribing a climate of atrocities in Indonesia, including government-condoned killings and torture, he ac- cused Nike of using “the magnificent image of Michael Jordan soaring, twisting, driving, flying” to divert attention from its exploitation of Indonesian workers. “Nike executives know exactly what is go- ing on in Indonesia. They are not bothered by the cries of the oppressed. It suits them. Each cry is a sig- nal that their investment is paying off.” 7

4 Cited in Jeffrey Hollender and Stephen Fenichell, What Matters Most (New York: Basic Books, 2004), p. 190. 5 Jeffrey Ballinger, “The New Free-Trade Heel,” Harper’s, August 1992, pp. 46–47.

6 Rob Howe et al., “Labor Pains,” People Magazine, June 10, 1996, p. 58. 7 Bob Herbert, “Nike’s Bad Neighborhood,” The New York Times, June 14, 1996, p. A29.

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CEO Philip Knight quickly responded with a letter to the editor, citing ways that Nike tried to help work- ers, and noting that it paid “double the minimum wage” and “had an oversight system that works.” He accused Herbert of trying to “sacrifice enlightenment for hype.” 8 Herbert’s response was a second column rebuking Nike for running theme ads about women’s empowerment while most of its shoes were produced “by grossly underpaid women stuck in utterly pow- erless and often abusive circumstances.” 9

Over the next two years, negative stories about Nike appeared with increasing frequency (see Ex- hibit 1). An inspection report by the human rights group Vietnam Labor Watch reported that young women working in a Nike factory were paid submin- imum wages. A supervisor had forced 56 women to run twice around the 1.2-mile factory boundary un- der a hot sun for failing to wear regulation shoes. Twelve of them fainted and required hospitaliza- tion. 10 Gary Trudeau drew a series of Doonesbury cartoons based on these allegations.

Activists urged people to return Nike sneakers during “shoe-ins” at Niketown outlets. A disgruntled Ernst & Young employee leaked a confidential spot inspection report on a Vietnamese shoe factory. It showed violations of Vietnamese labor law and said

that 77 percent of the employees suffered respiratory problems from breathing toxic vapors at levels that violated both Vietnamese and U.S. standards. 11 Another group, the Hong Kong Christian Industrial Committee, released a study of Nike factories in China documenting long workdays, forced overtime, pay below minimum wages, and unsafe levels of airborne dust and toxic chemicals. 12   The Oregonian, the paper in Portland where Nike is headquartered, called Nike “an international human rights incident.” 13

Now Nike found itself at the center of a world- wide debate over sweatshops. The company expanded efforts to stop workplace abuses and started a public relations campaign. At great expense it became the only shoe company in the world to eliminate the use of polyvinyl chloride in shoe con- struction, ending worker exposure to chlorine com- pounds. It revised its conduct code, expanding protections for workers. It set up a compliance department of more than 50 employees. Its staff members were assigned to specific Asian plants or to a region, where they trained local managers and did audits assessing code compliance. 14

Working with Kathie Lee Gifford, other apparel companies, human rights and labor groups, and uni- versities that buy school clothing, Nike helped to

EXHIBIT 1 Rise of Negative News Stories about Nike’s Labor Practices, 1988–1999

Source: From S. Prakash Sethi, Setting Global Stand- ards, 2003. Table 9.2. Reprinted with permission of John Wiley & Sons, Inc.

1988 19991998199719961995199419931992199119901989







8 “Nike Pays Good Wages to Foreign Workers,” The New York Times, June 21, 1996, p. A26. 9 “From Sweatshops to Aerobics,” The New York Times, June 24, 1996, p. A15. 10 Vietnam Labor Watch, “Nike Labor Practices in Vietnam,” March 20, 1997, available at report1.html#summary; and Ellen Neuborne, “Nike to Take a Hit in Labor Report,” USA Today, March 27, 1997, p. 1A.

11 Steven Greenhouse, “Nike Shoe Plant in Vietnam Is Called Unsafe for Workers,” The New York Times, November 8, 1997, p. A1. 12 Kasky v. Nike, 93 Cal. Rptr. 2d 856. 13 Jeff Manning, “Nike’s Global Machine Goes on Trial,” The Oregonian, November 9, 1997, p. A1. 14 S. Prakash Sethi, Setting Global Standards (New York: John Wiley & Sons, 2003), p. 167.

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start a voluntary CSR initiative called the Fair Labor Association to enforce a code of conduct and monitor- ing scheme to end sweatshop labor. It hired Andrew Young, a former U.S. ambassador to the United Nations, to visit Asian plants and write an inspection report. Young toured 12 factories over 15 days and found that conditions “certainly did not appear to be what most Americans would call sweatshops.” 15

Nike purchased full-page editorial advertisements in newspapers to broadcast his generally favorable findings, saying the report showed it was “operating morally” and promising to act on his recommenda- tions for improvement.

Finally, Nike ran a public relations counteroffen- sive. Unlike some rival firms that lay low, it chose to confront critics. It hired an experienced strategist to manage the campaign. Nike responded to every charge, no matter how small or what the source. Al- legations were countered with press releases, letters

EXHIBIT 2 The Nike Code of Conduct


The Code of Conduct has been revised and articulated since its introduction in 1992. Listed below are its seven “core standards.” Another document, the Code Leadership Standards, elaborates 51 specific labor, safety, health, and environmental standards. The Code is translated into local languages and today is posted in more than 900 contract factories making Nike products.

1. Forced Labor. The contractor does not use forced labor in any form—prison, inden- tured, bonded, or otherwise.

2. Child Labor. The contractor does not employ any person below the age of 18 to pro- duce footwear. The contractor does not employ any person below the age of 16 to produce apparel, accessories or equipment. If at the time Nike production begins, the contractor employs people of the legal working age who are at least 15, that employ- ment may continue, but the contractor will not hire any person going forward who is younger than the Nike or legal age limit, whichever is higher. To further ensure these age standards are complied with, the contractor does not use any form of homework for Nike production.

3. Compensation. The contractor provides each employee at least the minimum wage, or the prevailing industry wage, whichever is higher; provides each employee a clear, written accounting for every pay period; and does not deduct from employee pay for disciplinary infractions.

4. Benefits. The contractor provides each employee all legally mandated benefits. 5. Hours of Work/Overtime. The contractor complies with legally mandated work

hours; uses overtime only when each employee is fully compensated according to local law; informs each employee at the time of hiring if mandatory overtime is a condition of employment; and on a regularly scheduled basis provides one day off in seven, and requires no more than 60 hours of work per week on a regularly scheduled basis, or complies with local limits if they are lower.

6. Environment, Safety and Health (ES&H). From suppliers to factories to distributors and to retailers, Nike considers every member of our supply chain as partners in our business. As such, we’ve worked with our Asian partners to achieve specific environ- mental, health and safety goals, beginning with a program called MESH (Management of Environment, Safety and Health).

7. Documentation and Inspection. The contractor maintains on file all documentation needed to demonstrate compliance with this Code of Conduct and required laws; agrees to make these documents available for Nike or its designated monitor; and agrees to submit to inspections with or without prior notice.

15 Dana Canedy, “Nike’s Asian Factories Pass Young’s Muster,” The New York Times, June 25, 1997, p. D2.

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to the editor, and letters to presidents and athletic directors of universities using Nike products. In these communications Nike sought to portray itself as a responsible employer creating opportunity for thousands of workers in emerging economies. CEO Knight expressed the Nike philosophy, saying, “This is going to be a long fight, but I’m confident the truth will win in the end.” 16

THE KASKY LAWSUIT While Knight thought he was fighting for truth, Marc Kasky perceived something less noble—a fraud conducted to sell shoes and T-shirts. He be- lieved that Nike knowingly deceived consumers, who relied on the company’s statements for reassur- ance that their purchases did not sustain sweat- shops. Under an unusual state law, any California citizen can sue a corporation on behalf of the public for an unlawful business practice. Kasky took advantage of this provision, alleging that Nike had engaged in negligent misrepresentation, fraud and deceit, and misleading advertising in violation of the state’s commercial code. The code prohibits “any

unlawful, unfair, deceptive, untrue or misleading advertising.” 17

In his complaint, Kasky accused Nike of using a “promotional scheme,” including its code of con- duct, to create a “carefully cultured image” that was “intended . . . to entice consumers who do not want to purchase products made in sweatshop . . . condi- tions.” 18 He set forth six classes of misleading claims.

• In its Code of Conduct (see Exhibit 2) and in a “Nike Production Primer” pamphlet given to the media, Nike stated that its contracts prevent corporal punishment and sexual harassment at factories making Nike products. But the Vietnam Labor Watch report told of workers forced to kneel in the hot sun and described frequent complaints by female employees against their supervisors.

At work in a Vietnam plant making Nike footwear. Source: © Steve Raymer/CORBIS.

16 Quoted in Tony Emerson, “Swoosh Wars,” Newsweek, March 12, 2001, p. 35.

17 The law is California’s Unfair Competition Law, which is codified as §17200 (source of the quotation) and §17500 of the California Business & Professions Code. Kasky also alleged violations of California Civil Code §1572 (which defines fraud) and §1709 and §1710 (which define deceit). 18 First Amended Complaint of Milberg, Weiss et al., Kasky v. Nike, Superior Court, San Francisco County, No. 994446, July 2, 1998, pp. 5, 6, and 10.

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• In a range of promotional materials Nike asserted that its products were manufactured in compliance with laws and regulations on wages and over- time. But evidence from a report by the Hong Kong Christian Industrial Committee and the leaked Ernst & Young audit showed that plants in China and Vietnam violated such laws.

• At the Nike annual shareholder meeting in 1997 CEO Knight said that the air in Nike’s newest Vietnam shoe factory was less polluted than the air in Los Angeles. But the Ernst & Young report documented exposures to excessive levels of hazardous air pollutants.

• In his letter to the editor of The New York Times, Knight stated that Nike paid, on average, double the minimum wage to workers worldwide. But this was contradicted by data from pay stubs in the Vietnam Labor Watch report. He also said that Nike gave workers free meals, but an article in the Youth Newspaper of Ho Chi Minh City reported that workers paid for lunches.

• In its paid editorial ads discussing Andrew Young’s report on its factories, Nike made the claim that it was “doing a good job” and “operating morally.” But the report was deficient because it failed to address central issues such as minimum wage violations.

• In a press release Nike made the claim that it guaranteed a “living wage for all workers.” But the director of its own Labor Practices Depart- ment had written a letter defining a “living wage” as income sufficient to support a family of four, then stated that the company did not ask contrac- tors to raise wages that high. 19

Kasky sought no monetary gain for himself. Instead, he asked for an injunction against further deception, a court-approved public information cam- paign forcing the company to correct misrepresenta- tions, disgorgement of Nike profits from California sales, and payment of his legal expenses.

However, Superior Court Judge David A. Garcia threw the case out. There was no trial to decide whether any of the statements made by Nike were misleading. The judge simply accepted Nike’s claim that the statements in question were part of an ongo- ing public debate and, therefore, entitled to broad protection.

COMMERCIAL SPEECH OR PROTECTED EXPRESSION? Freedom of speech is a central value in American culture. It derives from a long philosophical tradi- tion, exemplified in John Stuart Mill’s classic essay On Liberty. Mill believed that freedom of opinion and expression were necessary to maintain a free society, the kind of society that could protect liberty and pro- mote happiness. He wrote that a natural tendency existed to silence discomfiting, doubtful, or unortho- dox views. But this is wrong, because no person is in possession of unerring truth.

Restricting debate deprives society of the oppor- tunity to find new ideas that are more valid than prevailing ones. Even bizarre or incorrect com- ments should be valued. The former may contain partial truth and the latter make the truth more compelling because of its contrast to the falsehood. Censorship of any kind is wrong because no per- son, society, or generation is infallible. It is better to leave open many avenues for expression of views so that error and pretention can be opposed. Truth, said Mill, needs to be “fully, frequently, and fear- lessly discussed.” 20

The First Amendment was intended to protect public debate that is critical to the functioning of de- mocracy. It prohibits government from “abridging the freedom of speech, or of the press.” 21 A compli- cating factor is the efforts of courts over many years to distinguish between commercial speech and other speech. Commercial speech, or advertising, receives less protection from restriction by government than speech in the broad marketplace of ideas. Ordinary speech, including political, scientific, and artistic expression, is entitled to strong protection. Laws restricting expression of opinion are regarded as invalid on their face and justified only in extreme circumstances. Commercial speech, however, is often restricted by federal and state laws to prevent con- sumer deception and fraud.

19 Ibid., pp. 10–25.

20 John Stuart Mill, On Liberty, ed. Currin V. Shields (Indianapolis: Bobbs-Merrill, 1956), p. 43. Originally published posthumously in 1907. 21 The amendment originally applied only to actions by the federal government, but the Supreme Court has held that it also limits state government’s infringement on speech.

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Over many years, courts have struggled to come up with a clear definition of commercial speech. 22 The Supreme Court has defined it as “speech propos- ing a commercial transaction,” but this still begs clar- ification. 23 An ad that said “Buy Nike shoes” would be commercial speech under this definition. But what about an ad picturing athletes with the statement “Just Do It,” in which there is no literal sales pro- posal? Elsewhere in the same case, the Supreme Court also defined commercial speech as “expression related solely to the economic interests of the speaker and its audience.” 24 Would Nike’s statements on sweatshops meet this standard?

The focal point of Kasky’s suit would become whether or not Nike’s communications were, in fact, commercial speech. At a Superior Court hear- ing in early 1999, his lawyers argued that they were, therefore, they should be required to meet standards of truth and honesty enforced in California law. They were not entitled to the defer- ence that would be given under the First Amendment to, for example, statements of political candidates or poets. Nike disagreed, saying that its statements about shoe and garment factories were part of a broader public debate and thus were speech enti- tled to strong First Amendment protection. 25 The judge agreed with Nike and dismissed the case. 26 Kasky appealed, but a year later the appeals court again rejected his argument. Kasky then appealed to the California Supreme Court.

There he won. In a 4–3 decision the California Supreme Court held that Kasky’s case should go to trial. 27 In reaching its decision, the majority created a novel, three-part definition of commercial speech and applied it to Nike’s messages. For speech to be commercial it had to (1) come from a business, (2) be

intended for an audience of consumers, and (3) make representations of facts related to products. Nike’s statements fit each requirement. The majority con- ceded that commercial and noncommercial speech were intermingled in the communications, but ar- gued, “Nike may not ‘immunize false or misleading product information from government regulation simply by including references to public issues.’” 28 That put Nike in the position of a used car dealer falsely advertising “none of our cars has ever been in an accident,” but evading prosecution for fraud by adding a political opinion such as, “our city should budget more for traffic safety.”

Dissenting opinions revealed serious disagree- ment among the justices. Justice Ming Chin attacked the majority for unfairly tilting the playing field against Nike. “While Nike’s critics have taken full advantage of their right to ‘uninhibited, robust, and wide-open’ debate,” he wrote, “the same cannot be said of Nike, the object of their ire. When Nike tries to defend itself from these attacks, the majority de- nies it the same First Amendment protection Nike’s critics enjoy.” 29

A second dissent came from Justice Janice R. Brown, who found Nike’s commercial and noncom- mercial speech inseparable. In her view, “Nike’s com- mercial statements about its labor practices cannot be separated from its noncommercial statements about a public issue, because its labor practices are the public issue.” 30 She admonished the majority for creating a test of commercial speech that was unconstitutional because it made “the level of protection given to speech dependant on the identity of the speaker— and not just the speech’s content.” 31

The consequences of the decision went far beyond Nike. Now any company doing business in California had to be careful about expressions of fact or opinion that reached consumers in the state. The sharpest and most ideological critics of a corporation could take is- sue with its statements, bring it to court, and force a trial about the accuracy of its claims. The decision was as unwelcome in the business community as it was unexpected. Nike would seek to overturn it.

22 Samuel A. Terilli, “Nike v. Kasky and the Running-But-Going- Nowhere Commercial Speech Debate,” Commercial Law and Policy 10 (2005). 23 Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 562 (1980). 24 Ibid., at 561. 25 Nike also asserted speech protections under Article I, section 2(a) of the California Constitution which reads: “Every person may freely speak, write and publish his or her sentiments on all subjects, being responsible for the abuse of that right. A law may not restrain or abridge liberty of speech or press.” 26 Kasky v. Nike, 79 Cal. App. 4th 165 (2000). 27 Kasky v. Nike, 27 Cal. 4th 939 (2002).

28 At 966, quoting Bolger v. Youngs Drug Prods. Corp., 463 U.S. 68 (1983). 29 At 970–971, quoting Garrison v. Louisiana 379 U.S. 75 (1964). 30 At 980. Emphasis in the original. 31 At 978.

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IN THE UNITED STATES SUPREME COURT Nike appealed to the United States Supreme Court, which accepted the case. In its brief, Nike asked that the California Supreme Court’s definition of com- mercial speech be struck down to remove its uncon- stitutional, chilling effect on public debate. Kasky argued once again that statements emanating from Nike’s public relation’s campaign fell into the cate- gory of free speech. He asserted that the First Amend- ment gave no shelter to false statements by a company about how its products were made.

Strangely, no decision would ever be made. The nine justices heard oral argument in April 2003. Then, late in June, they dismissed their consideration of the case as “improvidently granted.” 32 In a brief opinion Justice John Paul Stevens said the Court had erred in accepting it before trial proceedings in California were finished. The Court would wait.

This view was not unanimous. Three justices dis- sented. They saw no reason to wait and hinted that they were ready to strike down any restriction on Nike’s speech.

In my view . . . the questions presented directly con- cern the freedom of Americans to speak about public matters in public debate, no jurisdictional rule pre- vents us from deciding these questions now, and de- lay itself may inhibit the exercise of constitutionally protected rights of free speech without making the issue significantly easier to decide later on. . . . [A]n action to enforce California’s laws—laws that discourage certain kinds of speech—amounts to more than just a genuine, future threat. It is a present reality—one that discourages Nike from engaging in speech. It thereby creates “injury in fact.” Further, that injury is directly “traceable” to Kasky’s pursuit of this lawsuit. And this Court’s decision, if favorable to Nike, can “redress” that injury. 33

SETTLEMENT AND AFTERMATH With the Supreme Court dismissal, Kasky’s specific charges against Nike could go to trial in California. The company would now be forced to defend the

alleged misrepresentations about its labor practices. Its antagonists relished the prospect.

However, late in 2003 Kasky and Nike announced a settlement. In return for Kasky dropping the case, Nike agreed to give $1.5 million to an industry- friendly factory monitoring group. It may have paid Kasky’s legal fees. This was not a tough settlement for Nike.

Supporters on both sides were disappointed. Activists lost their grand show trial putting the cor- porate devil on display. Industry was disappointed that Nike did not stay the course because settlement left standing the California Supreme Court’s broad definition of commercial speech. This definition still stands.

NIKE TURNS A NEW LEAF Meanwhile, Nike was moving through a process of CSR review and implementation. In 2005 it published a Corporate Responsibility Report stating three strategic CSR goals. 34 First, it would seek to create industry- wide, systemic change for the better in contractor shoe and apparel factories. Second, it would promote sustainability by eliminating toxic chemicals in shoe- making and using more recycled materials. Third, it would improve society by promoting the idea of sport with its benefits of healthy exercise and keep- ing young people out of trouble.

Nike learned that its business processes and cul- ture were in tension with the policies in its code for contractors. Many of its own actions triggered vio- lations. For example, it rewarded its buyers for meeting price, quality, and delivery date targets, giving them a financial incentive to push contrac- tors hard. That undermined code policies to limit workweeks and hours in the factories. Nike prod- ucts were often seasonal and ordered in response to rapidly shifting fashion trends. This led Nike to adopt a low inventory policy, but in consequence the factories it contracted with were often pres- sured to meet last-minute production goals. Some- times their managers responded by cheating on labor guidelines. Changing Nike’s internal proc- esses to align them with its CSR goals meant slowing its reaction to consumer trends and risking loss of revenue. It also violated the spirit of Nike’s

32 Nike v. Kasky, 539 U.S. 654 (2003), per curiam. 33 Ibid., at 667, 668. The three dissenters were Anthony Kennedy, Stephen Breyer, and Sandra Day O’Connor.

34 Nike, Inc., FY04 Corporate Responsibility Report (Beaverton, OR: Nike, April 2005).

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aggressive procurement culture and met with internal resistance. 35

Nike’s main tactic for improving labor conditions is factory monitoring to check compliance with the Nike Code of Conduct. Its self-run monitoring program has two parts. One is a labor audit of factories requiring inspectors to check off boxes for requirements in areas such as work hours, wages, and grievance systems. The other is an environmental health and safety audit on compliance with rules on chemical management, fire safety, and protective equipment. These audits take 48 working hours to complete and result in letter grades from A to F. Experts say their design is exem- plary. 36 Their results are reviewed all the way up to Nike’s board of directors. Yet they have failed to end very significant labor problems.

Nike uses about 700 factories in 56 countries em- ploying 800,000 workers. It cannot hope to monitor them all, so it focuses its audits on roughly 20 percent that do most of its production or are high risk, trying to check on them once every three years. For exam- ple, in China it has 57 so-called “focus factories,” and in 2007 audited 22 of them, handing out five As, six Bs, eight Cs, and three Ds. 37 Other factories are moni- tored by voluntary responsibility alliances, such as the industry-funded Fair Labor Association. A few pay for their own audits. It is an expansive effort, but bad reports keep coming in.

In Vietnam, 20,000 workers walked off the job for two days at a plant making Nike shoes. They were asking for a 20 percent raise, but received only 10 per- cent and free lunches. On their return they were in a violent mood and the plant had to be closed for an- other three days. 38 This was just one of 720 strikes at factories in Vietnam in 2008. 39

When management at a Nike hat plant in Bangladesh learned that workers had attended a labor rights seminar, the personnel manager interrogated a woman who had attended, threatening to reinjure a

hand she had badly injured in the past unless she gave up the names of other attendees. She refused, but man- agement intimidated another person into revealing the names and those named were fired. Nike investigated the situation and got the workers rehired. 40

An Australian TV reporter posed as a fashion buyer to get inside a Malaysian garment factory making Nike T-shirts where he discovered parlous conditions. It employed immigrant workers who paid large recruit- ing fees to get their jobs, then had to surrender their passports to plant management, which held them until the recruiting fees were repaid, an unlikely event given the low wages paid. They lived in crowded, malo- dorous rooms. Nike admitted many code violations, rectified the problems, and called in managers from all of its 37 factories in that country for training. 41

These are more than isolated episodes. A scholarly analysis of 800 Nike audits concluded that despite years of effort, working conditions at its factories re- mained highly variable. While conditions improved in some plants, in others they stayed the same, and in many they deteriorated, leaving “little evidence that this system of private voluntary regulation is at all an effective strategy for improving labor standards.” 42 And an in-depth report by a global coalition of more than 100 unions and human rights groups concluded this:

Despite more than 15 years of codes of conduct adopted by major sportswear brands such as Adidas, Nike, New Balance, Puma and Reebok, workers making their products still face extreme pressure to meet production quotas, excessive, undocumented and unpaid overtime, verbal abuse, threats to health and safety related to the high quotas and exposure to toxic chemicals, and a failure to provide legally required health and other insurance programs. 43

35 Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review, December 2004, pp. 129–30. 36 John Ruwitch, “Nike’s Chinese Suppliers Defy Labour Laws,” National Post, March 15, 2008, p. FP16. 37 Nike, Inc., Innovate for a Better World: Nike China 2008 Corporate Responsibility Reporting Supplement (Beaverton, OR: Nike, 2008). 38 “Nike Strike Ends, Violence Begins,” The Toronto Star, April 3, 2008, p. B2. 39 Jeff Ballinger, “Finding an Anti-Sweatshop Strategy that Works,” Dissent, Summer 2009, p. 6.

40 Worker Rights Consortium, Case Summary: Dada Dhaka and Max Embo (Washington, DC: WRC, November 1, 2008). 41 Eugenia Levenson, “Citizen Nike,” Fortune, November 24, 2008, p. 165. The report can be viewed at 63vvpq. 42 Richard M. Locke and Monica Romis, “The Promise and Perils of Private Voluntary Regulation: Labor Standards and Work Organization in Two Mexican Garment Factories,” MIT Sloan School Working Paper 4734–09, January 13, 2009, p. 2. Richard M. Locke, Fei Qin, and Alberto A. Brause, “Does Monitoring Improve Labour Standards? Lessons from Nike,” Industrial & Labour Relations Review, October 2007. 43 Play Fair 2008, Clearing the Hurdles: Steps to Improving Wages and Working Conditions in the Global Sportswear Industry (Play Fair 2008 Campaign, April 2008), p. 6.

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Chapter 6 Implementing Corporate Social Responsibility 193

UNDERLYING PROBLEMS Why do such problems still exist? Nike’s 700-factory supply chain is too big to monitor. Its business model invites labor exploitation. When wages rise in one country, it seeks a lower-wage alternative. Factories are still faced with tight deadlines, sudden shifts in orders, and late design changes. They have insufficient power in supply chains to push back against global brands such as Nike. But they often have great power over workers eager for jobs. If timely order fulfillment is threatened, the easiest way to catch up is forced overtime or elimination of days off. 44

According to Jeffrey Ballinger, monitoring by Nike and groups such as the Fair Labor Association is a prime example of voluntary corporate responsi- bility being used to avoid real reform. 45 Audits focus on the accuracy of wage slips, worker-to-toilet ratios, and placement of fire extinguishers. They avoid securing core global labor rights such as collective bargaining. Part of the problem is that many nations do not adequately enforce their labor laws.

International Labor Organization Convention No. 81 requires countries to inspect workplaces for compliance, but most countries with low-wage labor markets do not do so, in part because they want to attract foreign investment. They welcome voluntary corporate responsibility inspection regimes that make it look like action is being taken, even if the action is light. Corporations, in turn, prefer voluntary action to strict regulation. So governments and

corporations unite in supporting CSR as a cosmetic touch to cover fundamental problems. In nations where labor laws are feebly enforced it is hard for workers to help themselves. They are often unin- formed about their rights; they have no examples of successful unionizing before them. Until workers are empowered, forced work in poor conditions will lead to more scandals, violence, and reputation damage for global brands.

Ballinger suggests a solution for Nike.

My research shows that about 75 cents per pair of shoes to the worker would be needed to fix prob- lems that workers have been complaining about since the 1980s. That is roughly 80 percent more to workers, or $1.80 on a $70 pair of shoes at Foot Locker. If Nike, instead, paid workers that 75 cents more per pair of shoes, the cost to Nike would be $210 million a year. . . . 46

Questions 1. What responsibility does Nike have for conditions

of work at foreign factories making its products? 2. Could Nike have better anticipated and more

effectively handled the sweatshop issue? What did it do right? What was ineffective or counter- productive?

3. Has Nike created and implemented an effective approach to social responsibility? Does it address root causes of problems in Nike’s supply chain? Should it now do more or do something different?

4. Did the California Supreme Court correctly decide the Kasky case? Why or why not?

5. How should the line between commercial and noncommercial speech be drawn?

44 Richard Read, “Nike Gets What It Pays For, Critics Say,” The Oregonian, August 5, 2008, p. A1. 45 Jeff Ballinger, “No Sweat? Corporate Social Responsibility and the Dilemma of Anti-Sweatshop Activism,” New Labor Forum, Spring 2008. 46 Ibid., pp. 95–96.

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Chapter Seven

Business Ethics Bernard Ebbers

September 27, 2006. At 9:00 a.m. on this Tuesday morning Bernard J. Ebbers, former CEO of WorldCom, pulled away from his home just outside Jackson, Mississippi. At 1:09 p.m. he arrived at a federal prison near Oakdale, Louisiana, drove through the gate, and surrendered himself to begin a 25-year sentence. The trip was 200 miles, far enough to end one life and begin another.

There is no parole for a federal sentence. Time can be reduced up to 15 percent for good behavior, but even with this Ebbers will serve 21 years and 4 months. Since he was 65 when he entered prison, he would be 86 on his projected release date of July 4, 2028. However, he has a serious heart condition. Besides his freedom, Ebbers

Former WorldCom chief Bernard Ebbers drives through the gates of a federal prison in Oakdale, Louisiana, to begin a 25-year sentence for his role in a massive accounting fraud. Source: © AP Photo/Rogelio V. Solis.

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1 United States v. Bernard J. Ebbers, Indictment, S3 02 Cr. 1144 (BSJ), 2004.

2 United States v. Bernard J. Ebbers, 458 F.3d 124 (2006).

3 Department of Justice, Statement of Attorney General Alberto R. Gonzales on the Bernard Ebbers Conviction, press release 05–122, March 15, 2005.

also lost his fortune. Once a billionaire, he forfeited all assets except a home and $50,000 to be used by his wife, Kristie.

Ebbers built WorldCom from a small phone company into a global telecommuni- cations giant. His rise began in 1984. After investing in a local long-distance company he was asked to manage it. He made it grow with mergers that were audacious in their reach. Eventually, it became a publicly traded corporation with annual revenues of $39 billion. As WorldCom grew so did Ebbers’ wealth, but extravagant spending forced him to use his stock as collateral for loans to pay his debts. If share prices fell too far he would be lost.

Fate is uncaring and about this time the 1990s dot-com investment bubble burst. WorldCom’s revenues declined and expenses for its fiber optic network rose more than anticipated. In 2000 the chief financial officer began to report false quarterly revenues, using accounting tricks to disguise rising expenses. The share prices held. However, internal auditors discovered the deceit and reported it to the Securities and Exchange Commission (SEC), which began an investigation.

The revenue manipulations became known to investors, and WorldCom shares lost 90 percent of their value. WorldCom’s board of directors forced Ebbers to resign. In 2002 the company set a record in failure, breaking Enron’s previous total for the largest bankruptcy in American history. Although it ultimately survived, 17,000 work- ers lost their jobs and investors lost billions of dollars.

Federal prosecutors charged Ebbers with nine counts of criminal conspiracy, securi- ties fraud, and filing false documents with the SEC. 1 He refused to plead guilty, claim- ing that his chief financial officer had duped him. At his trial in 2005 he testified that he had no knowledge of the fraud.

Q: Did you ever believe that any of the statements contained in those public filings were not true?

A: No, sir. Q: Did you ever believe that WorldCom had reported revenue that it was not entitled

to report? A: No, sir. . . . Q: Did you ever believe that WorldCom was putting out bad numbers in its financial

statements in any way at all? A: No. 2

Five of Ebbers’ subordinates, including the chief financial officer, had pled guilty to related charges and agreed to cooperate with prosecutors. They testified that Ebbers not only knew about the conspiracy, but also actively directed it. A jury convicted him on all counts. It was a big victory for federal prosecutors. “Today’s verdict is a triumph of our legal system,” declared Attorney General Alberto Gonzalez. 3

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4 Carrie Johnson, “Ebbers Gets 25-Year Sentence for Role in WorldCom Fraud,” Washington Post, July 14, 2005, p. A1.

5 Quoted in Leonard Greene and Richard Wilner, “Bawling Bernie Smacked,” New York Post, July 14, 2005, p. 3.

6 Quoted in Johnson, “Ebbers Gets 25-Year Sentence for Role in WorldCom Fraud,” p. A1.

7 Andy Newman, “Mafia Turncoat Gets 20 Years for Running Ecstacy Ring,” The New York Times, September 7, 2002, p. 3.

8 Department of Corrections and Rehabilitation, Time Served on Prison Sentence (Sacramento, CA: DCR, March 2006), table 1.

Ebbers “wept and sniffled” at his sentencing. 4 Victims of the fraud were invited to speak. One was a former WorldCom sales representative whose retirement money evaporated from a company 401(k) plan. “My life was destroyed by the greed of Bernard Ebbers,” he said. “He can’t ever repay me or the tens of thousands like me whose lives disintegrated in the blink of an eye.” 5

Federal sentencing guidelines called for a sentence of 30 years based on the pres- ence of certain aggravating factors. Direct losses to investors were estimated to be $2.2 billion, there were thousands of victims, and as a CEO Ebbers had abused a position of public trust. Judge Barbara Jones decided to subtract five years. She was moved by 170 letters from Ebbers’ friends and neighbors asking for mercy. That left the sentence at 25 years. Ebbers requested further leniency because he suffers from cardiomyopathy, an inflammation of the heart. The judge rejected the relevance of this condition to sentencing. “Although I recognize . . . this is likely to be a life sen- tence for Mr. Ebbers,” she said, “I find anything else would not reflect the serious- ness of the crime.” 6

The judge recommended that Ebbers serve his time in a low-security facility. How- ever, the Federal Bureau of Prisons bases assignments on the length of sentences, assuming that a long sentence signals its bearer is more likely to pose an escape risk and to endanger fellow inmates. Because Ebbers’ sentence was 25 years, he was put in a medium-security facility. There, he lives with violence-prone inmates, sleeps in a cell rather than a dormitory, and encounters many locks and fences.

Ebbers’ wife, who was making the 400-mile round-trip to visit him on weekends, filed for divorce 19 months into his sentence. Ebbers still maintains his innocence and petitioned President George W. Bush for clemency in 2008. He was denied.

Criminal sentences are intended to punish individuals and deter future crime. Ebbers’ sentence inspires rumination. Was it fair retribution for his actions? Was its length necessary to deter more accounting fraud? And how did Ebbers’ 25 years compare with the sentences of violent criminals? It exceeded the 20 years given to Salvatore Gravano, a Mafia hit man who confessed to 19 murders. 7 It exceeded the average of 24.4 years served by first-degree murderers in California. 8

Ebbers is exposed now as unethical, a criminal, and deficient as a leader. In this chapter we add perspective to each of these dimensions. We discuss the sources of ethical values in business, including truth telling, a basic virtue that Ebbers neglected. Then we discuss prosecution of corporate crime. Finally, we look at factors shaping ethical climates in organizations and discuss the managerial tools leaders can use to elevate behavior.

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Chapter 7 Business Ethics 197

9 Quoted in Donald E. Fink, “New Lockheed Management Studying Impact of Payments,” Aviation Week & Space Technology, February 23, 1976, p. 15.

10 Quoted in Peter Pae, “Ex-Lockheed Chief Told of Paying Bribes,” Los Angeles Times, December 22, 2008, p. B10.


Ethics is the study of what is good and evil, right and wrong, and just and unjust. Business ethics, therefore, is the study of good and evil, right and wrong, and just and unjust actions in business. Ethical managers try to do good and avoid doing evil. A mass of principles, values, norms, and thoughts concerned with what con- duct ought to be exists to guide them. Yet in this vaporous mass, the outlines of good and evil are at times shadowy. Usually they are distinct enough, but often not. So, using ethical ideas in business is an art, an art requiring judgment about both the motivations behind an act and the act’s consequences.

Discussions of business ethics frequently emphasize refractory and unclear sit- uations, perhaps to show drama and novelty. Although all managers face difficult ethical conflicts, applying clear guidelines resolves the vast majority of them. The Eighth Commandment, for example, prohibits stealing and is plainly violated by taking tools home from work or the theft of trade secrets. Lies in advertising vio- late a general rule of the Western business world that the seller of a product must not purposely deceive a buyer. This general understanding stems from the Mosaic law, the Code of Hammurabi, Roman law, and other sources and is part of a gen- eral ethic favoring truth going back at least 3,000 years.

Overall, ethical traditions that apply to business support truth telling, honesty, protection of life, respect for rights, fairness, and obedience to law. Some beliefs in this bundle of traditions go back thousands of years. Others, such as the idea that a corporation is responsible for the long-term health of its workers, have emerged more recently. In keeping with this long and growing ethical heritage, most business actions can be clearly judged ethical or unethical; eliminating un- ethical behavior such as bribery or embezzlement may be difficult, but knowing the rightness or wrongness of actions is usually easy.

This does not mean that ethical decisions are always clear. Some are trouble- some because although basic ethical standards apply, conflicts between them defy resolution.

In the mid-1970s Lockheed Aircraft Corp. faced default on government loans. It paid $12 million ($48 million today) in bribes to politicians and business executives in Japan, selling 120 warplanes and 21 civilian airliners, protecting its future, and saving thousands of jobs. Making the payments broke no U.S. laws, but they broke a Japa- nese law. Sixteen people there were convicted of a crime, including a former prime minister and a likely future prime minister. Carl Kotchian, Lockheed’s president, had no regrets. Bribes were tangled with foreign sales. “Even when offering a better product,” he said, “we would lose out if we did not also make the required pay- ments.” 9 Competing in the industry meant slighting ethical norms. When the bribes came out, politicians and publics in both countries went into a dither. Kotchian re- tired to run an alfalfa farm saying, “I’d do it again.” 10

ethics The study of good and evil, right and wrong, and just and unjust.

business ethics The study of good and evil, right and wrong, and just and unjust actions in business.

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198 Chapter 7 Business Ethics

11 The Wealth of Nations, ed. Edwin Cannan (New York: Modern Library, 1937), p. 423; originally published in 1776. Smith also believed that merchants must abide by prevailing societal ethics.

12 This was the conviction of social Darwinist Herbert Spencer, who believed in two sets of ethics. Family ethics were based on the principle of charity and benefits were apportioned without relation to merit. State ethics were based on a competitive justice and benefits were apportioned strictly on merit. Family ethics interjected into business or government by well-meaning people interfered with the laws of nature and would slowly corrupt the workings of Darwinian natural selection. See “The Sins of Legislators,” in The Man versus the State (London: Watts, 1940); originally published in 1884.

Some ethical issues are hidden, at least initially, and hard to recognize.

A. H. Robins Co. began to market its Dalkon Shield intrauterine device through general practitioners while competitors continued selling them only through obstetricians and gynecologists. This strategy was wildly successful in getting market share for Robins and did not, ini- tially, seem to raise ethical issues, but when dangerous side effects with the device appeared, the gen- eral practitioners were slower to see than the specialists. Robins’ failure to make extra efforts in tracking the safety of the device then emerged as an ethical shortcoming. It cost women their lives.


In the ageless debate about whether ethics in business may be more permissive than general societal or personal ethics, there are two basic views.

The first, the theory of amorality, is that business should be amoral, that is, con- ducted without reference to the full range of ethical standards, restraints, and ide- als in society. Managers may use compromising ethics because competition distills their selfish actions into benefits for society. Adam Smith noted that the “invisible hand” of the market assures that “by pursuing his own interest [a merchant] fre- quently promotes that of the society more effectively than when he really intends to promote it.” 11

The apex of this view came during the latter half of the nineteenth century. It was widely believed that business and personal ethics existed in separate compartments, that business was a special sanctuary in which less idealistic ethics were permissi- ble. 12 Daniel Drew, who made a fortune in the 1860s by manipulating railroad stocks

theory of amorality The belief that business should be conducted without refer- ence to the full range of ethical stand- ards, restraints, and ideals in society.

Daniel Drew (1797–1879), speculator in railroad stocks and an exponent of the theory of amorality. Source: © Picture History/Napoleon Sarony.

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Chapter 7 Business Ethics 199

13 Bouck White, The Book of Daniel Drew (New York: Doubleday, Page & Company, 1910), pp.120-21.

without scruple, summed up the nine- teenth century compartmentalization of business decisions in these words:

Sentiment is all right up in the part of the city where your home is. But downtown, no. Down there the dog that snaps the quickest gets the bone. Friendship is very nice for a Sunday afternoon when you’re sitting around the dinner table with your relations, talking about the sermon that morn- ing. But nine o’clock Monday morn- ing, notions should be brushed aside like cobwebs from a machine. I never took any stock in a man who mixed up business with anything else. He can go into other things outside of business hours, but when he’s in the office, he ought not to have a relation in the world—and least of all a poor relation. 13

The theory of amorality has far less public acceptance today, but it lives on qui- etly. Many managers still allow competitive pressures to justify acts that would be wrong in private life. The theory of amorality releases them from feelings of guilt.

The second basic ethical view is the theory of moral unity, in which business ac- tions are judged by the general ethical standards in society, not by a special set of more permissive standards. Only one basic ethical standard exists, so business ac- tions are judged by the same principles as actions in other areas of life.

Many managers take this position today, and some did even in the nineteenth century. An example is James Cash Penney. We remember Penney for building a chain of department stores, but his first enterprise was a butcher shop. As a young man, Penney went to Denver, where, finding the shop for sale, he wired his mother for $3,000 to buy it. The departing butcher shop owner warned him that his suc- cess depended on orders from a nearby hotel. “To keep the hotel for a customer,” the butcher explained, “all you have to do is buy the chef a bottle of whiskey a week.” Penney regularly made the gift and business was good, but he soon had second thoughts. Resolving no longer to do business that way, he stopped the bribe, lost the hotel’s business, and went broke when the shop failed. He was 23 years old.

Penney later started the Golden Rule Department Store in Denver and always believed that principles of honesty led to its ultimate success. In contrast to the unsentimental lone wolf Daniel Drew, Penney reflects his focus on ethics in this little story.

theory of moral unity Business ac- tions are judged by the general ethical standards of so- ciety, not by a special set of more permis- sive standards.

James Cash Penney (1875–1971), son of a Baptist minister and an exemplar of the theory of moral unity. Source: © Oscar White/CORBIS.

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200 Chapter 7 Business Ethics

It seems that the manager of a chain store had run out of a certain line of goods and had appealed to the manager of another store in the chain for a share of the supply which this second man had on hand. This man consented—but sent some goods of poor quality which he had not been able to sell. He thought he was being very shrewd. But if I had the chance I would fire that man. He was not being square. He hadn’t the instinct of fair dealing. You can’t build a solid, substantial house with decayed planks, no matter what kind of a veneer is put over their rottenness. That man’s action was rotten, even though it was veneered with temporary shrewdness. 14

To J. C. Penney, and other exemplars of the theory of moral unity, desire to suc- ceed is never an excuse to neglect principled behavior. Actions are not moral just because they make money. Ethical conflicts cannot be avoided simply because they arise in the course of business.


Four great repositories of ethical values influence managers. They are religion, philosophy, cultural experience, and law (see Figure 7.1). A common theme, the idea of reciprocity, or mutual help, is found in each of these value systems. This idea reflects the central purpose of ethics, which is to bind individuals into a coop- erative social whole. Ethical values are a mechanism that controls behavior in business and in other areas of life. Ethical restraint is more efficient with society’s resources than are cruder controls such as police, lawsuits, or economic incentives. Ethical values channel individual energy into pursuits that are benign to others and beneficial to society.

reciprocity A form of social behavior in which people behave sup- portively in the expectation that this behavior will be given in return.

14 J. C. Penney, “It Is One Thing to Desire—and Another to Determine,” in Peter Krass, ed., The Book of Business Wisdom (New York: John Wiley & Sons, 1997), p. 89. Reprinted from American Magazine, August 1919. Emphasis in the original.





FIGURE 7.1 Major Sources of Ethical Values in Business

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Chapter 7 Business Ethics 201

15 See Oliver F. Williams and John W. Houck, Full Value: Cases in Christian Business Ethics (New York: Harper & Row, 1978), for discussion of these and other biblical sources of inspiration for managers.

16 Quoted in Tanri Abeng, “Business Ethics in Islamic Context: Perspectives of a Muslim Business Leader,” Business Ethics Quarterly, July 1997, p. 52.

17 Moses L. Pava, Business Ethics: A Jewish Perspective (New York: Yeshiva University Press, 1997), pp. 72–73.

Religion The great religions, including the Judeo-Christian tradition prominent in Ameri- can history, converge in the belief that a divine will reveals the nature of right and wrong behavior, including in business. Despite doctrinal differences, major reli- gions agree on ideas forming the basic building blocks of ethics in every society. For example, the principle of reciprocity is found, encapsulated in variations of the Golden Rule, in Buddhism, Confucianism, Hinduism, Islam, Judaism, and Chris- tianity. These religions also converge in emphasizing traits such as promise keep- ing, honesty, fairness, charity, and responsibility to others.

Christian managers often seek guidance in the Bible. Like the source books and writings of other main religions, the Bible was written in a premodern, agricul- tural society, and many of its ethical teachings require interpretation before they can be applied to problems in the modern workplace. Much of the ethical teaching in the Bible comes from parables. The parable of the prodigal son (Luke 15:11–32) tells the story of an unconditionally merciful father—an image applicable to ethi- cal conflicts in corporate superior–subordinate relationships. The story of the rich man and Lazarus (Luke 16:19–31) teaches concern for the poor and challenges Christian managers to consider the less privileged, a fitting admonition in a world where billions of people survive on less than $1 a day. 15

In Islam the Koran is a source of ethical inspiration. The Prophet Muhammad said, “Every one of you is a shepherd and everyone is responsible for what he is shepherd of.” 16 In a modern context, the Muslim manager is like a shepherd and the corporation is like a flock. The manager has a duty to rise above self-interest and protect the good of the organization.

In the Jewish tradition, managers can turn to rabbinic moral commentary in the Talmud and the books of Moses in the Torah. Here again, ancient teachings are regarded as analogies. For example, a Talmudic ruling holds that a person who sets a force in motion bears responsibility for any resulting harm, even if natural forces intervene ( Baba Qamma 60a). This is discussed in the context of an agrarian society in which a person who starts a fire is responsible for damage from flying sparks, even if nature intervenes with high winds. In an industrial context, the ethics lesson is that polluting companies are responsible for problems caused by their waste. 17 Another passage comments on a situation in which lab- orers are hired to dig in a field, but a nearby river overflows, preventing the work ( Bava Metzia 76b–77a). The Talmud counsels that if the employer knew the river was likely to overflow then the workers should be paid, but if the flood was un- predictable then the workers should bear the loss. This teaching may inform thinking about modern layoffs. In highly cyclical industries, workers can anticipate

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202 Chapter 7 Business Ethics

18 See Robert H. Carver, “If the River Stopped: A Talmudic Perspective on Downsizing,” Journal of Business Ethics 50 (2004), pp. 144–45.

19 Meir Tamari, quoted in Gail Lichtman, “Ethics Is Their Business,” The Jerusalem Post, May 25, 2001, p. 13.

20 Analects, book IV, chap. XII. Cited in Stephen B. Young, “The CRT Principles for Business as an Expression of Original Confucian Morality,” Caux Roundtable Newsletter, Fall 2000, p. 9.

21 Alasdair MacIntyre, After Virtue: A Study in Moral Theory (South Bend, IN: University of Notre Dame Press, 1981), p.115.

22 Plato, The Republic, F. M. Cornford, trans. (New York: Oxford University Press, 1945).

23 Nicomachean Ethics, J. A. K. Thomson, trans. (New York: Penguin Books, 1982), p. 51.

the risk of layoffs, but in more stable industries management may bear greater responsibility for job security. 18

Parables and stories in the literature of ancient worlds can seem so innocent as to have little value for modern managers. However, as one rabbinic scholar notes, “Our world has undergone tremendous technological changes, but the issues stay the same—egotism, jealousy, greed, among others.” 19 Thus, the central wisdom remains. When Confucius told Chinese merchants that “He who acts with a con- stant view to his own advantage ( li ) will be much murmured against,” he exposed a speck of truth visible in any era. 20

Philosophy A Western manager can look back on more than 2,000 years of philosophical in- quiry into ethics. This rich, complex tradition is the source of many notions about what is right or wrong in business. Every age has added new ideas, but it is a mis- take to regard the history of ethical philosophy as a single debate that, over centu- ries, has matured to bear the fruit of growing wisdom and clear, precise standards of conduct. Even after two millennia, there remains considerable dispute among ethical thinkers about the nature of right action. If anything, standards of ethical behavior were arguably clearer in ancient Greek civilization than they are now.

In a brief circuit of milestones in ethical thinking, we turn first to the Greek phi- losophers. Greek ethics, from Homeric times onward, were embodied in the dis- charge of duties related to social roles such as shepherd, warrior, merchant, citizen, or king. Expectations of the occupants of these roles were clearer than in contem- porary America, where social roles such as those of business manager or employee are more vague, overlapping, and marked by conflict. 21

Socrates (469–399 BC) asserted that virtue and ethical behavior were associated with wisdom and taught that insight into life would naturally lead to right con- duct. He also introduced the idea of a moral law higher than human law, an idea that activists use to demand supralegal behavior from transnational corporations. Plato (428–348 BC), the gifted student of Socrates, carried this doctrine of virtue as knowledge further by elaborating the theory that absolute justice exists independ- ently of individuals and that its nature can be discovered by intellectual effort. In The Republic, Plato set up a 50-year program for training rulers to rule in harmony with the ideal of justice. 22 Plato’s most apt pupil, Aristotle, spelled out virtues of character in the Nicomachean Ethics and advocated a regimen of continuous learn- ing to improve ethical behavior. 23

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The Stoic school of ethics, spanning four centuries from the death of Alexander to the rise of Christianity in Rome, furthered the trend toward character develop- ment in Greek ethics. Epictetus (AD 50–100), for instance, taught that virtue was found solely within and should be valued for its own sake, arguing that this inner virtue was a higher reward than external riches or worldly success.

In business, the ethical legacy of the Greeks and Romans lives on in the convic- tion that virtues such as truth telling, charity, obeying the law, justice, courage, friendship, and the just use of power are important qualities. Today when a man- ager trades integrity for profit, we condemn this on the basis of the teachings of the ancient Mediterranean world.

Ethical thinking after the rise of Christianity was dominated by the great Catholic theologians St. Augustine (354–430) and St. Thomas Aquinas (1225–1274). Both believed that humanity should follow God’s will; correct behavior in business and in all worldly activity was necessary to achieve salvation and life after death. Christianity was the source of many ethical teachings, including specific rules such as the Ten Commandments.

Christian theology created a lasting reservoir of ethical doctrine, but its com- mand of ethical thought weakened during the historical period of intellectual and industrial expansion in Europe called the Enlightenment. Secular philosophers such as Baruch Spinoza (1632–1677) tried to demonstrate ethical principles with logical analysis rather than ordain them by reference to God’s will. So also, Immanuel Kant (1724–1804) tried to find universal and objective ethical rules in logic. Kant and Spinoza, and others who followed, created a great estrangement with moral theology by believing that humanity could discover the nature of good behavior without reference to God. To this day, there is a deep divide between Christian managers who look to the Bible for divine guidance and other managers who look to worldly writing for ethical wisdom.

Other milestones of secular thinking followed. Jeremy Bentham (1748–1832) de- veloped the idea of utilitarianism as a guide to ethics. Bentham observed that an ethical action was the one among all alternatives that brought pleasure to the larg- est number of persons and pain to the fewest. The worldly impact of this ethical philosophy is almost impossible to overestimate, because it validated two domi- nant ideologies, democracy and industrialism, allowing them first to arise and then to flourish. The legitimacy of majority rule in democratic governments rests in large part on Bentham’s theory of utility as later refined by John Stuart Mill (1806–1873). Utilitarianism also sanctified industrial development by legitimizing the notion that economic growth benefits the majority; thus the pain and disloca- tion it brings to a few may be ethically permitted.

John Locke (1632–1704) developed and refined doctrines of human rights and left an ethical legacy supporting belief in the inalienable rights of human beings, including the right to pursue life, liberty, and happiness, and the right to freedom from tyranny. Our leaders, including business leaders, continue to be restrained by these beliefs.

A realist school of ethics also developed alongside the idealistic thinking of phi- losophers such as Spinoza, Kant, the utilitarians, and Locke. The realists believed that both good and evil were naturally present in human nature; human behavior

realist school A school of thought that rejects ethical perfection, tak- ing the position that human affairs will be characterized by flawed be- havior and ought to be de- picted as they are, not as we might wish them to be.

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24 His exact words were “the general welfare is no ideal, no goal, no remotely intelligible concept, but only an emetic.” In Beyond Good and Evil (New York: Vintage Books, 1966), p. 157; originally published in 1886.

25 Will Durant and Ariel Durant, The Lessons of History (New York: Simon & Schuster, 1968), pp. 37–42.

inevitably would reflect this mixture. Since good and evil occurred naturally, it was futile to try to teach ideals. Ideals could never be realized because evil was a permanent human trait. The realist school developed ethical theories that shrugged off the idea of perfect goodness. Niccolò Machiavelli (1469–1527) argued that important ends justified expedient means. Herbert Spencer (1820–1903) wrote prolifically of a harsh ethic that justified vicious competition among companies because it furthered evolution—a process in which humanity improved as the un- fit fell down. Friedrich Nietzsche (1844–1900) rejected the ideals of earlier “nice” ethics, saying they were prescriptions of the timid, designed to fetter the actions of great men whose irresistible power and will were regarded as dangerous by the common herd of ordinary mortals.

Nietzsche believed in the existence of a “master morality” in which great men made their own ethical rules according to their convenience and without respect for the general good of average people. In reaction to this master morality, the mass of ordinary people developed a “slave morality” intended to shackle the great men. For example, according to Nietzsche, the mass of ordinary people cel- ebrate the Christian virtue of turning the other cheek because they lack the power to revenge themselves on great men. He felt that prominent ethical ideals of his day were recipes for timidity and once said of utilitarianism that it made him want to vomit. 24 The influence of realists on managers has been strong. Spencer was wildly popular among the business class in the nineteenth century. Machiavelli is still read for inspiration. The lasting influence of realism is that many managers, deep down, do not believe that ideals can be achieved in business life.

Cultural Experience Every culture transmits between generations a set of traditional values, rules, and standards that define acceptable behavior. In this way, individuals channel their conduct in socially approved directions. Civilization itself is a cumulative cultural experience consisting of three stages; in each, economic and social arrangements have dictated a distinct moral code. 25

For millions of generations in the hunting and gathering stage of human develop- ment, ethics were adapted to conditions in which our ancestors had to be ready to fight, face brutal foes, and suffer hostile forces of nature. Under such circum- stances, a premium was placed on pugnacity, appetite, greed, and sexual readi- ness, since it was often the strongest who survived. Trade ethics in early civilizations were probably deceitful and dishonest by our standards, and eco- nomic transactions were frequently conducted by brute force and violence.

Civilization passed into an agricultural stage approximately 10,000 years ago, beginning a time when industriousness was more important than ferocity, thrift paid greater dividends than violence, monogamy became the prevailing sexual custom because of the relatively equal numbers of the sexes, and peace came to be valued over wars, which destroyed crops and animals. These new values were

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codified into ethical systems by philosophers and founders of religions. So the great ethical philosophies and theologies that guide managers today are largely products of the agricultural revolution.

Three centuries ago, society entered an industrial stage of cultural experience, and ethical systems began to reflect changed institutions, ideologies, and ecosys- tems. Powerful forces such as electricity, capitalism, constitutional democracy, population growth, and nuclear weapons have appeared. Industrialism has begun to create a distinct ethic, as its impacts put stress on ethical values that evolved in ancient, agriculture-based worlds, altering people’s judgments about good and evil. For example, the copious outpouring of material goods from factories en- courages materialism and consumption at the expense of older, scarcity-based vir- tues such as moderation and thrift. The old truism that nature exists for human exploitation is less compelling when reexamined in a cloud of industrial gases.

Ethical Variation in Cultures Ethical values differ among nations as historical experiences have interacted with philosophies and religions to create diverging cultural values and laws. Where differences do exist, are some cultures correct about proper business ethics and others wrong? There are two answers to this question.

The school of ethical universalism holds that in terms of biological and psycho- logical needs, human nature is everywhere the same. Ethical rules are transcul- tural because behavior that fulfills basic human needs should be the same everywhere; for example, basic rules of justice must be followed. Basic justice might be achieved, however, by emphasizing group welfare or by emphasizing individual rights, leaving room for cultural variation.

The school of ethical relativism holds that, although human biology is every- where similar, cultural experience creates widely diverging values, including ethi- cal values. Ethical values are subjective. There is no objective way to prove them right or wrong as with scientific facts. Truth is not a property inherent within them. They are ideas that work in their cultural setting. It is wrong, therefore, for one society to claim that its ethics are superior to those of another.

We cannot settle this age-old philosophical debate. However, ethical variation is a practical and urgent issue. Because of globalization, corporations extend their val- ues into foreign markets where they are sometimes inimical. Google is on a mission to make the world’s information accessible to everyone across all borders. Its search engine is based on a “democratic” algorithm that registers “votes” on Web pages. Its ethics code is summed in the phrase “Don’t be evil.” This bundle of values is dear to Google, but alien to the Chinese communist government, which employs Internet police to monitor and suppress dissent. Eventually, Google refused to compromise its strategic and ethical principles by remaining in the Chinese market.

What guidelines exist for companies that want flexibility in their ethical codes? Some scholars argue that at a high level of abstraction, the ethical ideals of all cul- tures converge to basic sameness. Thomas Donaldson and Thomas W. Dunfee see a deep social contract underlying all human societies. This contract is based on what they call hypernorms , or principles at the root of all human ethics. Examples include basic rights such as life, liberty, and the priority of the community over its

ethical universalism The theory that because human nature is every- where the same, basic ethical rules are applicable in all cultures. There is some room for variation in the way these rules are followed.

ethical relativism The theory that ethical values are created by cultural experi- ence. Different cultures may create different values and there is no uni- versal standard by which to judge which values are superior.

hypernorms Master ethical principles that underlie all other ethical principles. All variations of ethical princi- ple must con- form to them.

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26 Thomas Donaldson and Thomas W. Dunfee, “When Ethics Travel: The Promise and Peril of Global Business Ethics,” California Management Review, Summer 1999, p. 61.

27 Browning-Ferris Industries v. Kelko Disposal, 429 U.S. 257 (1989), at 260.

individual members. These hypernorms validate other ethical norms, which can differ from nation to nation but still be consistent with the hypernorms. For exam- ple, many U.S. corporations prohibit people from hiring their relatives. In India, however, tradition places a high value on supporting family and clan members, and some companies promise to hire workers’ children when they grow up. Al- though these practices are inconsistent, neither violates any universal prohibition. They exist in what Donaldson and Dunfee call “moral free space” where inconsist- ent norms are permitted if they do not violate any hypernorms. 26

Law Laws codify, or formalize, ethical expectations. They proliferate over time as emerging regulations, statutes, and court rulings impose new conduct standards. Corporations and their managers face a range of mechanisms set up to deter ille- gal acts, punish offenses, and rehabilitate offenders. In particular, they face civil actions by regulatory agencies and private parties and criminal prosecution by governments. We will discuss these mechanisms to illustrate how legal controls and sanctions work.

Damages For seven years Joseph Kelly managed “roll-off” operations in Burlington, Vermont, for Browning-Ferris Industries, a national waste disposal corporation. Roll-off waste is collected in long containers trucked to and from industrial and construction sites. Browning-Ferris had all of the city’s roll-off business until Kelly resigned to start a competing company. Soon he had 47 percent of the market and a Browning-Ferris executive in Boston called the local manager, telling him to “[p]ut [Kelly] out of business. Do whatever it takes. Squish him like a bug.” 27 The local manager, violating antitrust laws, used predatory pricing, slashing roll-off prices below cost. Even so, Kelly’s market share climbed to 56 percent, but he sued Browning-Ferris for antitrust violations anyway.

A Vermont jury awarded Kelly $51,146 in compensatory damages , which are pay- ments to redress actual, concrete losses suffered by injured parties due to wrong- ful conduct. Then, after Kelly’s attorney told the jury Browning-Ferris had a net worth of $1.3 billion, it awarded Kelly an additional $6 million in punitive damages , which are payments in excess of a wronged party’s actual losses, awarded when corporate conduct is not only damaging, but reprehensible. Punitive damages are intended to punish and deter similar actions in the future.

Such awards raise questions of fairness. In this case punitive damages were 115 times greater than compensatory damages. Is it fair to impose such a penalty based on a defendant’s status as a large corporation? Is a misdeed to be punished more harshly because the perpetrator is rich? Although Browning-Ferris was guilty, was its conduct so reckless, malicious, and harmful that retribution of $6 million was required?

The company appealed to the Supreme Court, arguing that the $6 million sum violated the Eighth Amendment’s prohibition against “cruel and unusual

compensatory damages Payments awarded to re- dress actual, concrete losses suffered by in- jured parties.

punitive damages Payments in excess of a wronged par- ty’s actual losses to deter similar actions and punish a corporation that has exhib- ited reprehensi- ble conduct.

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28 BMW of North America, Inc., v. Gore, 116 S.Ct. 1589 (1996). The Court based its decision on the Due Process Clause of the Fourteenth Amendment, which prohibits excessive or arbitrary punishment.

29 BMW of North America, Inc. v. Gore, 701 So. 2d 507 Ala. (1997).

30 State Farm Mutual Automobile Insurance Company v. Campbell, 123 S. Ct. 1513 (2003).

31 Campbell v. State Farm Mutual Automobile Insurance Company, 98 P.3d 409 (Utah, 2004).

32 Exxon Shipping Co. v. Baker, 128 S. Ct. 2605 (2008).

punishment.” Although the Court dismissed this appeal on narrow technical grounds, the justices were concerned about capricious punitive damages against large corporations, which were frequent, and in subsequent cases set increas- ingly strict guidelines. Since the Browning-Ferris decision the Court has spent more than 20 years working to limit punitive awards against corporations, not because it considers them too large, but because it believes they can be unpre- dictable, arbitrary, and disproportionate to the wrongdoing.

It started to rein them in with the case of an Alabama physician, Dr. Ira Gore, Jr., who bought a BMW for $40,751 and drove it for nine months without noticing any problem. After an auto detailer told him that part of the car had been repainted, Gore learned that BMW North America secretly repainted cars with shipping damage and sold them as new. Gore set his damages at $4,000 and sued, charging BMW with malicious fraud. A jury awarded him $4 million in punitive damages—1,000 times his actual loss.

On appeal, the Supreme Court held that such a big award for retouching paint was unconstitutionally excessive. 28 It said punitive damages must be reasonably related to the degree of reprehensibility in the company’s conduct and proportion- ate to the size of actual damages. Thus, the Alabama Supreme Court reconsidered the case and awarded Gore only $50,000. 29

In a subsequent case, the Court suggested rough guidelines for the ratio of puni- tive damages to compensatory damages. In it, a jury awarded $1 million in compen- satory damages to a Utah couple for emotional distress suffered when State Farm Insurance mishandled their accident claim. Then, believing State Farm had schemed to cheat other customers as well, jurors decided to take away several weeks of its profits with $145 million in punitive damages—a ratio of 145:1. The Supreme Court found this award “neither reasonable nor proportionate to the wrong committed” and suggested that a ratio greater than 4:1 is suspect and a ratio of 10:1 or higher probably could never be justified. 30 The Utah Supreme Court then reduced the award to $9 million, a 9:1 ratio, just below the unjustifiable maximum. 31

Most recently, the Court dramatically cut the punitive damages award against ExxonMobil for the Exxon Valdez oil spill. In 1993 an Alaska jury had given resi- dents near the spill compensatory damages of $500 million, then imposed a $5 bil- lion punitive award on the company. An appeals court subsequently halved this to $2.5 billion. When the Supreme Court got the case it further reduced the award to $500 million, a 1:1 ratio. In its opinion it suggested that the company’s actions were not intentionally malicious and, absent extraordinary malice, the 1:1 ratio was suf- ficient to punish and deter in most cases. 32 Unless the Court backs away from this line of decisions, it is unlikely that corporations will suffer punitive damages ex- ceeding this 1:1 ratio in the future. However, the most important factor in punitive

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33 Note that the Court let pass an $80 million award by an Oregon jury against Philip Morris USA where actual damages were $522,000, a ratio of 153:1. See Philip Morris USA v. Williams 129 S. Ct. 1436 (2009), per curium.

34 The Supreme Court established this precedent for liability in New York Central & Hudson River Railroad Co. v. United States, 212 U.S. 481 (1909).

damages continues to be the reprehensibility of corporate behavior and in cases of egregious, willful, or reckless conduct, exceptional awards are still likely. 33

Criminal Prosecution of Managers and Corporations Crimes are offenses against the public prosecuted by federal and state governments. Corporate crimes impair lawful competition in markets and harm consumers, inves- tors, and the public. They include managerial wrongdoing that falls in the category of white-collar crime , or nonviolent economic offenses involving cheating and decep- tion done for personal or corporate gain in the course of employment. These crimes are often difficult to detect, being hidden or disguised to look like legal activity. Un- like an armed robbery or murder there is no crime scene or body. Evidence may ex- ist only in a perplexing maze of documents and conspiratorial decisions.

Both individuals and corporations are prosecuted for crimes. Both kinds of prosecutions can be complicated, but it is easier to prosecute corporations because criminal law evolved in the twentieth century in ways that make organizations especially vulnerable. Under the doctrine of respondeat superior , (rez PON’ day aht superior), created by the Supreme Court in 1909, corporations are liable for the actions of employees who commit a crime in the course of their employment when their act is for the benefit of the company. 34

To establish guilty intent when crimes have occurred, the law assumes that a cor- poration has the aggregate knowledge of all its employees. Unlike with an individ- ual, prosecutors do not have to prove that a corporation had criminal intent, only that an employee committed a crime intended to benefit it. If so, the corporation is guilty of that crime, even if the employee’s action was against company rules and higher management had no knowledge of wrongdoing. And, unlike individuals, corporations are not allowed to invoke the Fifth Amendment right against self- incrimination when prosecutors ask them to turn over documents related to a crime.

Prosecutors find it easier to impose penalties on corporations because they are reluctant to go to trial. Juries are more inclined to convict corporations than indi- viduals. When Royal Caribbean Cruise Lines was indicted for criminal violations of the Clean Water Act it decided to fight and put together an all-star defense team including two former U.S. attorneys general. It still lost the case. For corporations in many industries, criminal prosecution risks catastrophe. A conviction can lead to a drop in share price, higher cost of capital, reputational damage, and loss of federal contracts and licenses. These secondary consequences punish not only the company, but also its employees, pensioners, shareholders, and communities, all innocent of any crime.

Arthur Andersen is a cautionary example. Its auditors failed to deter Enron from stating false earnings. While federal investigators were looking into Enron’s books Andersen shredded some germane documents, believing it had the right to do so. Indicted for obstruction of justice, it went to trial, and in 2002 a jury found

white-collar crime A nonviolent economic offense of cheating and deception done for personal or corporate gain in the course of employment.

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These factors are used by federal prosecutors to decide when a corporation should be charged with a crime. All factors must be weighed, al- though in some cases, such as the nature of the offense, a single factor could be of overriding im- portance. Note that the seventh factor requires reflection about consequences for innocent par- ties, a concern that leads to many deferred and nonprosecution agreements.

1. Nature and seriousness of the offense, includ- ing risk of harm to the public.

2. Pervasiveness of wrongdoing within the corpo- ration, including management complicity or involvement.

3. The corporation’s history of similar misconduct.

4. The corporation’s timely and voluntary disclo- sure of wrongdoing and its willingness to co- operate in the investigation.

5. Existence and effectiveness of a preexisting compliance program.

6. Remedial actions, including starting or improv- ing a compliance program, replacing manage- ment, and disciplining wrongdoers.

7. Consequences for shareholder, pension hold- ers, employees, and other innocent parties as well as the public.

8. Adequacy of prosecuting individuals responsi- ble for the crimes.

9. Adequacy of other remedies such as civil law- suits or enforcing regulations.

Source: “Principles of Federal Prosecution of Business Organizations,” United States Attorney’s Manual, Title 9 §928.800(B), at 15-16, August 28, 2008 (the Filip Memorandum).

Charging Factors

it guilty. The judge imposed a $500,000 criminal fine, affordable enough, and put Andersen on five years’ probation, but the company was moribund, its clients fleeing from an auditor whose name was now synonymous with scandal. Still, Andersen appealed and three years later a unanimous Supreme Court overturned the conviction, saying flawed jury instructions allowed the guilty verdict. 35 It was too late, Andersen had expired.

The Department of Justice, which controls all criminal prosecutions in which the United States has an interest, weighs nine factors (see the accompanying box) in deciding whether or not to indict a corporation and, depending on the out- come, allows U.S. attorneys to enter deferred prosecution agreements (DPAs) and nonprosecution agreements (NPAs) in which the government will delay or not pros- ecute if the corporation takes steps to compensate victims and prevent future wrongdoing. Since 1993 there have been more than 150 DPAs and NPAs, most with well-known companies including Aetna, Boeing, Chevron, Fiat, Monsanto, Pfizer, and Sears.

When a company signs a DPA or NPA it is not indicted. It agrees to a set of terms, typical among them being to set up or improve an internal compliance pro- gram, to pay restitution to victims, to forfeit income from criminal activity, to co- operate with an investigation, to fire guilty executives, and to hire a monitor who will oversee its compliance with the DPA or NPA and report at intervals to prose- cutors. It must fulfill these terms in a specific time, usually three to five years.

deferred prosecution agreement An agreement between a pros- ecutor and a corporation to delay prosecu- tion while the company takes remedial actions.

35 Andersen v. United States, 544 U.S. 696 (2005).

nonpro- secution agreement An agreement in which U.S. at- torneys decline prosecution of a corporation that has taken appro priate steps to report a crime, cooper- ate, and com- pensate victims.

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36 Federal Bureau of Investigation, “Pfizer $2.3 Billion Settlement,” press release, September 3, 2009.

37 United States v. Lea W. Fastow, Indictment, U.S.D.C., S. Dist. Texas, Cr. No. H-03.

38 Department of Justice, “Prepared Remarks of Deputy Attorney General Paul J. McNulty at the Corporate Fraud Task Force Fifth Anniversary Event,” Washington, DC, July 17, 2007, p. 1.

39 Skilling has since won an appeal to have his sentence recalculated.

Because corporations are so fearful of indictment, even when they are innocent of wrongdoing or the wrongdoing is confined to a few rogue employees, they are drawn into DPAs and NPAs. Some critics believe the agreements let corporate criminals off too easily. Others think managers of basically innocent companies make rational decisions to avoid trials, but their firms are then unfairly branded as criminals and federal prosecutors gain power to dictate their affairs.

Executives are more often prosecuted than corporations, though harder to convict. Unlike a corporation, where evidence that an employee committed a crime is suffi- cient for conviction, the government must prove beyond a reasonable doubt that an executive either had specific knowledge of a crime and acted to abet it or realized the probable existence of a crime and consciously avoided inquiring into it. Unlike cor- porations, executive defendants do not have to produce information, so pretrial in- vestigation can be lengthy and expensive. And cases are complex. At Pfizer the FBI spent four years going through boxes of documents, scanning them into computers, and doing name and keyword searches trying to reveal how a regional sales manager directed kickbacks to doctors who prescribed its drugs. 36 White-collar crimes such as accounting frauds require prosecutors to educate lay juries about intricate financial transactions that even experienced auditors find hard to follow. This was a problem in the trial of Richard Scruchy, former CEO of HealthSouth, who was tried on 36 counts of conspiracy, fraud, and money laundering. After sitting through five months of testimony, fossilized jurors acquitted him of all wrongdoing.

After a cluster of corporate frauds, including the Enron and WorldCom collapses, President George W. Bush set up a Corporate Fraud Task Force to prosecute manag- ers. A separate Enron Task Force was created to concentrate on the labyrinthine En- ron fraud. To pierce the veil of culpability, its prosecutors methodically pressured lower-level managers into cooperating as witnesses. In return for guilty pleas and testimony against their former bosses, they received lighter sentences. It was ruthless work. To get the cooperation of former Chief Financial Officer Andrew S. Fastow, prosecutors charged his wife, Lea, a former assistant treasurer at Enron, with defrauding the company for personal enrichment. 37 Both Fastows then agreed to a reduction of charges in return for his testimony. As managers caved in, the task force moved up the chain of responsibility to the very top where former CEOs Kenneth L. Lay and Jeffrey K. Skilling maintained ignorance of any wrongdoing.

Eventually, the task force triumphed in a 17-week trial in which jurors con- victed both Lay and Skilling on multiple counts of conspiracy and fraud. After inculpating testimony by almost two dozen former subordinates, jurors simply did not believe that Lay and Skilling lacked knowledge of any schemes. 38 Although Lay died of a heart attack before sentencing, Skilling was sentenced to 24 years and 4 months in prison. 39 Because Andrew Fastow cooperated with the govern- ment, his sentence was only six years. Lea Fastow served five months in prison.

monitor A person hired by a corpora- tion to oversee fulfillment of conditions in an agreement to avoid crimi- nal indictment.

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40 Government Accountability Office, Corporate Crime: DOJ Has Taken Steps to Better Track Its Use of Deferred and Non-Prosecution Agreements, but Should Evaluate Effectiveness, GAO-10-110, December 2009, p. 36.

41 Kathleen F. Brickey, “In Enron’s Wake: Corporate Executives on Trial,” Journal of Criminal Law & Criminology, Winter 2006, pp. 401–07. Convictions of K. Lay and J. Skilling are included in the figures.

42 See United States v. Booker, 125 S.Ct. 738 (2005).

43 United States Sentencing Commission, Guidelines Manual, §2B1.1 (November 2009).

44 Ibid.

The government’s record in prosecuting executives is mixed. The Enron Task Force was disbanded in 2006 after bringing criminal charges against 27 executives and obtaining 20 convictions. The larger Corporate Fraud Task Force investigated more than 400 corporate fraud cases and obtained more than 1,300 convictions, including 350 senior executives, before merging into a 25-agency financial fraud task force in 2009. 40

Such large conviction numbers are impressive, but most offenders have pleaded guilty. Corporate criminals remain extremely difficult to prosecute. When cases with high-level executives go to trial, prosecutors struggle. A study of 17 major corporate fraud prosecutions over four years, including Enron trials, shows that government prosecutors failed to convict most of the defendants. Of 46 executives, 20 were convicted but 11 were acquitted and juries deadlocked on 15 others. 41

Sentencing and Fines In 1991 the U.S. Sentencing Commission, a judicial agency that standardizes pen- alties for federal crimes, released guidelines for sentencing both managers and corporations. These guidelines are not mandatory, but most judges follow them. 42 When managers are convicted of a crime, their prison sentences are based on a numerical point system. Calculations begin with a base score for the type of of- fense. Points are then added or subtracted because of enhancing or mitigating fac- tors. A sentence for fraud, for example, begins with a base level of 6, then 15 factors are considered, including the number of victims and their losses. As losses to vic- tims rise on a scale from $5,000 to $400 million or more, between 2 and 30 points are added. As the number of victims rises from 10 to 250 or more, between 2 and 6 points are added. 43 Downward adjustments are made if the manager has no criminal history or cooperated with authorities. The point total is then converted into a prison sentence using a table. Besides prison terms, managers may also be fined, put on probation, given community service, asked to make restitution to injured parties, or banned from working as corporate officers or directors.

Corporations cannot be imprisoned, but they can be fined. Criminal fines are in- tended to punish, to deter future lawbreaking, to cause disgorgement of wrongful gains, and to remedy harms where possible. As with the prison sentences of manag- ers, judges base their fine calculations on a point system in the federal sentencing guidelines. The calculation begins with a fine range based on the type of offense, then adds or subtracts points based on aggravating or mitigating factors such as top- management involvement and cooperation during the investigation. If, for example, management “willfully obstructed” authorities, three points are added. Up to five points may be subtracted if top managers immediately reported the crime. 44

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45 Securities and Exchange Commission, “SEC Charges General Electric with Accounting Fraud,” Litigation Release No. 21166, August 4, 2009.

46 United States Sentencing Commission, 2009 Sourcebook on Federal Sentencing Statistics (Washington, DC: USSC, 2009), table 52.

A cynical public doubts that fines are large enough to hurt. The Environmental Protection Agency once threatened to impose a $27,500 fine on General Electric each day it failed to clean up toxic waste at a factory. Based on GE’s revenues it was the equivalent of trying to intimidate a person making $1 million a year with a fine of three cents a day. Another time, the government fined GE $50 million to settle accounting fraud charges. 45 It was the equivalent of a $2.74 fine for the hypo- thetical millionaire.

The largest fine ever levied is a $2.5 billion civil penalty by the Securities and Exchange Commission against WorldCom in 2003. The record for a criminal fine is $1.2 billion. It was imposed on Pfizer in 2009 for paying kickbacks to doctors who prescribed its drugs for uses not allowed by the Food and Drug Administration. This was 15 percent of its net income for the year, an amount that affected Pfizer’s operations. Corporate fines are frequent. In 2009, for example, 177 companies were sentenced for crimes. Of these 131 were fined. The mean fine was $14,861,234. 46


Strong forces in organizations shape ethical behavior. Depending on how they are managed, these forces elevate or depress standards of conduct. We discuss here four prominent and interrelated forces that shape conduct: leadership, strategies and policies, organization culture, and individual characteristics (see Figure 7.2).

Leadership The example of company leaders is perhaps the strongest influence on integrity. Not only do leaders set formal rules, but by their example they also reinforce or undermine right behavior. Subordinates are keen observers and quickly notice if




Leader’s Example

Strategies/ Policies

Individual Characteristics

Organization Culture


FIGURE 7.2 Four Internal Forces Shaping Corporate Ethics

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47 Quoted in Linda K. Treviño and Katherine A. Nelson, who tell this story in their book, Managing Business Ethics: Straight Talk about How to Do It Right, 5th ed. (New York: John Wiley & Sons, 2011), p. 161.

48 Betsy Bernard, President AT&T, “Seven Golden Rules of Leadership,” Vital Speeches of the Day, December 15, 2002, p. 155.

standards are, in practice, upheld or evaded. Exemplary behavior is a powerful tool available to all managers. It was well used by this executive.

When Paul O’Neill arrived as CEO at Alcoa, a secretary put papers in front of him to join an expensive country club. His dues would be paid by the company. He was expected to join because other senior executives could not continue their paid memberships unless the CEO was a member. Before signing, he looked into the club and realized that it had a discriminatory membership policy. He was urged just to go along and join, like others before him. Since he was new, he ought to wait a while before disturbing Alcoa custom. However, he refused to join. His thoughts were: “What excuse am I going to use 6 or 12 months from now? I’ve just discovered my principles? They were on vacation . . . when I first came?” 47 He then set up a policy against reimbursing executives for dues in discriminatory clubs.

A common failing is for managers to show by their actions that ethical duties may be compromised. For example, when managers give themselves expensive perks, they display an irreverence for the stewardship of money that rightly be- longs to investors as owners, not to management. An executive at one large corpo- ration describes how arrogant behavior sends the wrong signals.

Too often through my career I’ve been at management dinners—no customers—and I see $600 bottles of wine being ordered. Think about the message that sends out through the whole organization. And don’t ever think such attitudes don’t spread and infect the whole firm. Leadership, after all, is about communicating values. And deeds trump words any day. The message in that bottle is this: Some sales representative and a couple of tech- nicians, supported by others, busted their butts to get that $600 to the bottom line. And their work, as evaluated by the guy who bought the wine, was worth a couple of tasty swallows. If money is the way we keep track of the good things our employees accomplish for our customers, then who do we think we are spilling it? 48

Many employees are prone to cynicism. Diverting blame for mistakes, breaking small promises, showing favoritism, and diversion of even trivial company re- sources for personal use are ill-advised—because if the leader does it, an oppor- tunistic employee can rationalize his or her entitlement to do it also. According to Sherron Watkins, a whistle-blower at Enron, Andrew Fastow was such a shrewdly observant subordinate. As Enron’s chief financial officer, he created a warren of complex and deceitful investments that not only contributed nonexistent revenue, but also diverted corporate funds into his and his wife’s pockets. What inspired Fastow to act as he did? According to Watkins, it may have been the example set by CEO Ken Lay.

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49 Sherron S. Watkins, “Ethical Conflicts at Enron: Moral Responsibility in Corporate Capitalism,” California Management Review, Summer 2003, p. 17.

50 Sherron Watkins, “Pristine Ethics,” Vital Speeches of the Day, May 1, 2003, p. 435.

51 Quotes in this paragraph are from Dennis K. Berman and Rebecca Blumstein, “Behind Lucent’s Woes: All-Out Revenue Goal and Pressure to Meet It,” The Wall Street Journal, March 29, 2001, pp. A1 and A8.

Ken Lay had Enron . . . use his sister’s travel agency. That gave millions of dollars to that agency and it was a wretched travel agency. The service wasn’t even good and I can speak to that because I have some horror stories about their travel scheduling. This went on for years and years and years. Now, if you take someone like Andy Fastow who does not appear to have a good sense of right and wrong, that’s telling him that “hey, my partnerships are helping Enron meet their financial statement tar- gets so why shouldn’t I carve some out for myself because Ken Lay has been carv- ing some out for his sister?” 49 He also abused the corporate jet in really onerous ways. He moved a stepdaugh- ter back and forth to France—furniture, not her! . . . [O]nce again that sent a message to executives that when you get to the top, the company is there for you versus you being there to serve the company. 50

Strategies and Policies A critical function of managers is to create strong competitive strategies that ena- ble a company to meet strategic goals without encouraging ethical compromise. In companies with deteriorating businesses, managers have great difficulty meeting performance targets and may feel pressure to compromise ethical standards. Even in strong companies, strategies must be executed with policies that reinforce hon- est achievement. Of special concern are unrealistic performance goals that pres- sure those who must make them work.

At Lucent Technologies CEO Richard McGinn made the company’s shares rocket by promising 20 percent yearly sales growth. Twice he missed quarterly targets and each time the stock plummeted. He could not miss again. Warned by subordinates that fourth quarter sales might fall short, he “went ballistic.” 51 Under intense pres- sure to meet the revenue goal, the sales force reacted. It first offered legitimate dis- counts to customers, but the goal was still unmet. Other tactics then emerged from the shadows. Customers were given credits toward future purchases and these were booked as revenue in the fourth quarter. Revenues were booked when products were sold to distributors, not final customers, an unoriginal trick known as “channel stuffing.” Told again by the head of sales that the revenue target was hopeless, McGinn said he would not take no for an answer. Ultimately, the target was missed. McGinn was fired. Lucent had to report that $679 million in fourth quarter revenue was unallowable. One sales agent lost his job for falsifying sales documents. McGinn later rationalized that he “never asked anyone to do anything untoward.”

Reward and compensation systems can also expose employees to ethical compromises.

Ads for the Laser Vision Institute stated a fee of $499 per eye for laser surgery, al- though small type warned that the “price may vary according to RX and astigma- tism.” When prospects arrived they did not see physicians at first; instead, they met

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52 Marc Borbely, “Lasik Surgery Sales Tactics Raise Eyebrows,” Washington Post, September 4, 2001, p. A1.

53 Edgar H. Schein, The Corporate Culture Survival Guide, rev. ed. (San Francisco: Jossey-Bass, 2009), pp. 21–27.

with counselors who decided what type of surgery the person needed and collected a deposit. What patients did not realize was that the counselors worked on an incen- tive system. They made yearly base salaries of $40,000 but added to their income with bonuses paid when patients were upgraded to more expensive surgeries. For the $499 procedure they got a per-eye bonus of only $1. But the amount rose with the surgery’s price—$2 for a $599 surgery, $6 for the $799 procedure, $16 for $999, and so forth, up to $40 for patients paying $1,599. To be eligible for these bonuses the counselors had to have a 75 percent close rate on people who came in. It is no surprise, then, that prospects were subjected to aggressive tactics similar to those faced by car buyers and that, in the end, 88 percent paid more than $499. 52 Eventu- ally, customers sued over “bait and switch” tactics and the Federal Trade Commis- sion ordered the company to stop making false claims.

When companies adopt policies that put employees under pressure, they should build in strong ethical rules too. When the tide of money runs high, shore up the ethical dikes.

Corporate Culture Corporate culture refers to a set of values, norms, rituals, formal rules, and physical artifacts that exists in a company. Corporate cultures are powerful and deep. In the words of one scholar, they are “like water around fish.” They evolve as companies cope with recurring stresses in their competitive environments. Over time, atti- tudes and behaviors that solve problems and bring success are reinforced and be- come permanent parts of the culture. Often the influence of a founder is important and lasting. Henry Ford’s early philosophy of brutal labor policies endured so strongly that more than 50 years after his death Ford Motor had to root out perva- sive authoritarianism in its management ranks before it could adapt more flexible manufacturing methods to compete with Japanese rivals.

According to a pioneering researcher, Edgar Schein, a corporate culture can be understood by separating it into three levels and reflecting on their relationship. 53 The first level is one of artifacts, which include both physical expressions of culture and visible behaviors. Physical elements include ways of dressing, office layouts, and symbolic displays such as picture walls of former executives. Visible behav- iors include patterns of interaction, for example, the use of first or last names as an indication of formality, and the kinds of decisions made.

At the second level are the organization’s espoused values, that is, formal state- ments of belief and intention. Espoused values are found in documents such as mission statements, codes of ethics, and employee handbooks. They state what the organization officially stands for. Often, inconsistencies are observed between the physical and behavioral artifacts on the first level and the espoused policies on the second level.

When such inconsistencies arise they are explained by the hidden influence of a third cultural level of tacit underlying values. At this level reside the deep, shared as- sumptions in the organization’s culture about how things really work. These are the

corporate culture A set of values, norms, rituals, formal rules, and physical artifacts that exists in a company.

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54 Joseph L. Badaracco, Jr., and Allen P. Webb, “Business Ethics: A View from the Trenches,” California Management Review, Winter 1995, p. 11.

55 Warren B. Rudman, ed., A Report to the Special Review Committee of the Board of Directors of Fannie Mae (Washington, DC: Paul, Weiss, Rifkind, Wharton & Garrison, February 23, 2006), p. 439.

unspoken, unwritten beliefs about the nature of the company and what behaviors bring success. Though often unarticulated, these silent assumptions are usually the cause of deviation from nice-sounding espoused values.

A simple example of such an inconsistency is a company with a mission state- ment that emphasizes teamwork, but in which a visible artifact, a prominently placed employee-of-the-month award plaque, seems to contradict the official emphasis on teamwork. This may indicate that at the level of tacit underlying assumptions employees understand individual achievement as the route to promotion despite the mission statement’s endorsement of teamwork.

All corporate cultures have ethical dimensions. When the behavior of employ- ees fails to match the values in a written ethics code, it can be a reflection of silent assumptions lying deep in the culture that confute the code. For example, recent graduates of the Harvard MBA program who were interviewed about the ethical atmosphere in their organizations revealed the strong presence of four informal but powerful “commandments” conveyed to them early in their careers.

First, performance is what really counts, so make your numbers. Second, be loyal and show us that you’re a team player. Third, don’t break the law. Fourth, don’t overinvest in ethical behavior. 54

These “commandments” clearly strain the spirit of any strong corporate ethics code. When the contradictions between espoused values and underlying tacit as- sumptions grow too wide trouble is not far ahead. The story of Fannie Mae illus- trates the point.

Franklin D. Raines was a suave and exceptionally talented manager who became CEO of Fannie Mae, the giant mortgage company. Fannie Mae had a strong Ethical Responsibility Policy that called for “a corporate culture characterized by openness, integrity, responsibility, and accountability.” 55 Raines often espoused these values of honesty and openness in talks to employees. However, in his first few months on the job, he discovered that Fannie Mae would miss earnings per share (EPS) targets that triggered maximum executive bo- nuses. Raines told the firm’s controller to prepare a list of “alternative” accounting methods and in a meeting with senior managers it was agreed to use them to meet the targets. This action overrode the advice of both internal and external auditors and sent the message to the organization that meeting EPS goals was what mat- tered, not the way they were met. Next Raines set in motion a five-year plan to double EPS from $3.23 to $6.46 and again tied bonuses to meeting yearly EPS goals. He pushed the plan hard. What happened to the culture is encapsulated in a speech to Fannie Mae’s internal audi- tors by their boss. “Be objective, be fair but tough . . . [and] never compromise or dilute your con- clusions . . . By now every one of you must have 6.46 branded in your brains. You must be able to say it in your sleep, you must be able to recite it forwards and back- wards, you must have a raging fire in your belly that burns away all doubts, you

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56 Quoted in Office of Federal Housing Enterprise Oversight, Report of the Special Examination of Fannie Mae (Washington, DC: OFHEO, May 2006), p. 42.

57 Eric Dash, “Ex-Officers Sued by U.S.” The New York Times, December 19, 2006, p. 1.

58 Joe Sexton, “Con Edison Agrees to $9 Million Fine for Contamination,” The New York Times, November 16, 1994, p. A1.

59 Dan Van Natta, Jr., “Con Ed Cited in Intimidation of Employees,” The New York Times, December 19, 1995, p. B1.

must live, breath and dream 6.46, you must be obsessed on 6.46 . . . Remember Frank has given us an opportunity to earn not just our salaries . . . but substantially over and above if we make 6.46 . . . It is our moral obligation to . . . have made tangi- ble contributions to Frank’s goals.” 56 The mixed message in this speech typified the pervasive conflict between es- poused values of openness and honesty and the tacit underlying assumption that meeting EPS targets in any way possible was the road to success. The result was years of questionable accounting. Eventually, probes by regulators forced Raines and other top executives to resign and the company had to restate $6.3 billion in earnings. 57

Cultures are resilient. Observers are always puzzled when corporations with strong ethics programs founder. Why after years of formal effort to make Shell Oil a more responsible corporation was the CEO caught leading other executives in a conspiracy to lie about the company’s oil reserves? Why was the CEO of Boeing, an experienced executive brought out of retirement to elevate the company’s eth- ics, forced to resign over an affair with a subordinate? Why, after years of effort to elevate its ethics, did Chiquita Brands’ top executives and board of directors cov- ertly approve illegal bribes, not once, but many times? One explanation is that these are simply perverse actions by a few bad apples. But a better explanation, insofar as humans can know the source of evils in their nature, likely lies deeper, in the persistence of contradictions in corporate cultures. As the story of Consolidated Edison illustrates, cultures are extremely resistant to change.

After a steam explosion that killed three people and sprayed asbestos over a Manhattan neighborhood, Consolidated Edison pleaded guilty to four federal environmental crimes. Only two weeks later in a state court it accepted guilt for 319 environmental violations over many years. It entered an agreement for broad reform “from the chairman to the lineman” and the court appointed a monitor to supervise its efforts during three years of probation. 58 Edison’s leadership rolled out a program of environmental responsibility. A new senior vice president for environmental affairs was put in charge. Two high-level en- vironmental committees were formed to review progress. Every employee was made personally responsible for environmental safety and encouraged to raise problems openly. Any worker had the power to stop a job immediately on seeing a problem. However, violations continued. More than a year later the court-appointed moni- tor reported that workers who spoke out were being intimidated. When one em- ployee complained about pollutants leaking into the Hudson River, a supervisor called him a “snake” and a “troublemaker.” 59 Another was transferred from his job. The monitor believed the company nurtured a “destructive corporate culture” that inhibited environmental responsibility.

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60 Schein, The Corporate Culture Survival Guide, pp. 153–63.

61 Liane Young and Rebecca Saxe, “Innocent Intentions: A Correlation Between Forgiveness for Accidental Harm and Neural Activity,” Neuropsychologia 47 (2009), p. 2070.

62 See the discussion in Steven Kaplan, Kurt Pany, Janet Samuels, and Jian Zhang, ” An Examination of the Association Between Gender and Reporting Intentions for Fraudulent Financial Reporting, Journal of Business Ethics 87 (2009), p. 17.

63 Gary R. Weaver and Bradley R. Agle, “Religiosity and Ethical Behavior in Organizations: A Symbolic Interactionist Perspective,” Academy of Management Review, January 2002, p. 79.

64 Terry W. Low, Linda Ferrell, and Phylis Mansfield, “A Review of Empirical Studies Assessing Ethical Decision Making in Business,” Journal of Business Ethics, June 2000, p. 185.

65 Kibeom Lee, et al., “Predicting Integrity with the HEXACO Personality Model,” Journal of Occupational and Organizational Psychology 81 (2008), p. 155.

This was correct. Although the espoused values of Consolidated Edison had been quickly elevated, tacit underlying assumptions were much slower to change. For dec- ades its workers shared the assumption that keeping power on was the top priority. They went to heroic lengths to fix problems, often ignoring formal procedures to speed the job. The work culture required unquestioned obedience to supervisors. Group loy- alty was strong. No one confronted co-workers about environmental hazards and no one ratted outside the group. Anyone who did was ostracized. 60 These underlying val- ues endured, leading to repeated violations of the new environmental policies.

Individual Characteristics Researchers try to discover what individual qualities are associated with ethical behavior. Demographic factors seem to explain little. 61 Some studies show that women are more ethical than men, but results are mixed. 62 No studies find men to be more ethically sensitive than women, but some show no difference. A few stud- ies suggest that people with more education are more ethical, but others do not. Similarly, some studies find that religious belief leads to more ethical attitudes, but many others fail to discover any relationship. 63 There are indications that higher ethics come with advancing age and longer work experience. 64 Personality traits may be more important, but are less studied in the literature of ethics. The only personality trait extensively studied and correlated with unethical behavior is Machiavellianism, the tendency of an individual to use self-centered, immoral, manipulative behavior in a group. However, the correlations tend to be modest and some studies fail to find a relationship. 65

Many companies now use integrity tests to predict whether job applicants are inclined to antisocial, counterproductive behaviors such as rule breaking, fraud, cheating, and theft. Over many years these tests have been shown to work well. Some of them simply ask test takers to admit antisocial behaviors such as stealing. They also ask about attitudes toward theft. For example: “When you read about a robbery in the newspaper do you ever hope the thief gets away with it?” or “At your previous job did you think about ways you could have gotten away with stealing if you wanted to?” Using many such questions an integrity test can sepa- rate those more inclined to steal from more honest people because thieves think more about stealing and justify it more easily. Other kinds of integrity tests predict a broader range of counterproductive work behaviors by measuring traits such as

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66 Christopher M. Berry, Paul R. Sackett, and Shelly Wiemann, “A Review of Recent Developments in Integrity Test Research,” Personnel Psychology, Summer 2007, p. 276.

67 Jay P. Mulki, Jorge Fernando Jaramillo, and William B. Locander, “Critical Role of Leadership on Ethical Climate and Salesperson Behavior,” Journal of Business Ethics 86 (2009).

68 Paul Gallagher, “Lessons from the Dark Side,” Human Resource Executive, July 2009.

69 “Two Residents of Minnesota Sentenced for Defrauding Flint Hills Resources,” States News Service, February 2, 2005.

dependability, conscientiousness, thrill seeking/risk taking, conformity, hostility, response to authority. Although these tests predict integrity, it is not clear exactly what they measure. Experts believe they work by measuring a complex, multi- level hierarchy of personality components that is not fully understood. 66

While there is limited evidence that fixed traits determine whether a person makes ethical decisions, there is overwhelming evidence that individuals are in- fluenced to be more or less ethical by the situations they are in. Employees, for example, are more ethical when the company has an ethics code. Salespeople are more ethical when the sales manager clearly defines boundaries of ethical behav- ior. 67 Alternately, in a corporation with a dreary ethical climate, corrupt leaders, or performance pressures, otherwise honest individuals may buckle. This situational variation is due to the work of what sociologist Philip Zimbardo calls “dynamic psychological processes,” or innate, predictable, and powerful tendencies in “ordi- nary” good people. They include obedience to authority, need to belong, desire to conform, self-justification, and rationalization. Consider the Rybergs.

Nick Ryberg, an ambitious manager, was hired to direct human resources for a large company. He, his wife, Carolyn, and their two daughters moved to the Twin Cities area in Minnesota to begin. They sought status, using material displays to exhibit a lifestyle of success. Soon, Nick suggested that Carolyn start an executive search firm to find job can- didates for his company. It would help the company and bring in a little extra money for their family. In an initial job she submitted some résumés for engineers and billed the company. This was legitimate work, but though legal it was a conflict of interest for Nick. Therefore, he asked her to send the invoice in her maiden name. Over time the scheme changed. Carolyn started two more companies in her maiden name for invoicing Nick’s company. 68 At times Nick and Carolyn worried they had be- come criminals, but the work was authentic. Gradually, Nick began to submit invoices where little work, then no work, was done. The shadow over their lives darkened. Besides the human resources department, he also supervised accounting, secu- rity, records management, and IT. This was a management mistake. It reduced checks and balances on him. He set the recruiting budget and stayed within it. No one questioned the invoices. The family got luxury cars, expensive vacations, and a $200,000 kitchen remodel. He felt in control. It was hard to stop. Eventually, they made an error by submitting an invoice with an address that did not match one of Carolyn’s companies. An audit led to fraud charges. They pled guilty and agreed to pay $964,265 in restitution. Nick was sentenced to 30 months in federal prison and Carolyn to 24 months. 69 They lost all but 15 boxes of personal be- longings. Their high-school-age daughters went to separate homes. Their thoughts turned to shame and remorse. After prison they pursued theology studies and spoke on campuses about the need to avoid ethical traps.

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70 Philip Zimbardo, The Lucifer Effect: Understanding How Good People Turn Evil (New York: Random House, 2007), p. 320.

71 In re Caremark International Inc. Derivative Litigation, 698 A2d 970 (1996).

The story of the Rybergs illustrates many situational dynamics. They started with a small first step, then advanced. They wanted to fit in with an affluent status group. They admit to growing arrogance and sense of entitlement. They rational- ized to justify wrongdoing. Also, because of poor management, there was oppor- tunity. According to Zimbardo, situational factors such as these are so powerful, that “any deed, for good or evil, that any human being has ever done, you and I could also do–given the same situational forces.” 70


Years ago, little thought was given to formal management of ethics. One pioneer was James Cash Penney, who introduced a company conduct code in 1913. His effort was a lonely one. Until the 1980s, most companies gave more thought to managing petty cash than to elevating ethics. Since then, more and more compa- nies have set up ethics and compliance programs , or systems of structures, policies, procedures, and controls designed to prevent lawbreaking and promote ethical behavior. In general, these programs originated in scandal and they continue to grow from it. Although a few companies voluntarily adopted them years ago, more put them in place after being ordered to by courts as part of their restitution for corporate wrongdoing. Now, the vast majority of law-abiding companies use them as protection against criminal indictment.

The wider movement to ethics and compliance programs began in the 1980s. In response to a run of billing frauds and cost overruns, military contractors started the Defense Industry Initiative, a project requiring firms to adopt ethics codes and train employees to obey laws. More scandal-spawned ethics programs came in the mid-1990s, when the federal government cracked down on hospitals and nursing homes for Medicare billing fraud. Corporations in the health care industry rushed to follow the defense industry model.

The need to manage ethics was driven home to other industries in the 1996 Caremark case. Caremark International, a health care company, was caught giving kickbacks to physicians who referred patients to its clinics. After being indicted, the company set up a compliance program, but it was too late to prevent a $250 mil- lion fine. Angry shareholders sued its directors for breach of duty because they had failed to set up an ethics program earlier and this omission exposed the firm to a big fine. Caremark’s directors narrowly escaped paying damages from their own pockets after a settlement. However, the judge who approved this settlement made it plain that if directors fail to set up a compliance program they can be sued for a breach of duty. 71

Meanwhile, the U.S. Sentencing Commission in 1991 established the first sen- tencing guidelines. As previously explained, these guidelines set forth imprison- ment and fine calculations for managers and corporations, allowing reductions in

ethics and compliance program A system of structures, policies, proce- dures, and controls used by corporations to promote ethical behavior and ensure compliance with laws and regulations.

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72 New York Stock Exchange Listing Manual, §503 A.10, “Code of Business Conduct and Ethics,” amended November 25, 2009; and NASDAQ Stock Market Listing Rules, Rule 5610, adopted March 12, 2009.

both if companies had ethics and compliance programs. These reductions are a major incentive.

After the turn-of-the-century fraud scandals Congress created requirements for antifraud mechanisms with the Sarbanes-Oxley Act in 2002, including a code of ethics for financial officers, an internal process for reporting illegal behavior, and protection for employees who reveal wrongdoing. The Department of Justice and the Securities and Exchange Commission adopted new guidelines for making the presence of ethics and compliance programs a factor in the decision to prosecute. And both the New York and NASDAQ stock exchanges require that listed compa- nies have in place codes of conduct and procedures to enforce them. 72

Because of these actions all listed public corporations now have at least some elements of a comprehensive program in place, though the efforts differ in their vigor and their aims. Ethics and compliance programs may combine two distinct approaches to prevent wrongdoing. A compliance approach teaches employees to meet legal and regulatory requirements and emphasizes following rules. An ethics approach teaches values such as integrity, truth, fairness, and respect for others, preparing workers to separate right from wrong in moral spheres of work life. Most companies focus on compliance, but many put effort into both.

While there is no standard format, the U.S. Sentencing Commission’s Guidelines Manual sets forth seven minimum steps that define a diligent effort (see the box). Many companies explicitly follow these steps, which have a strong compliance orientation, and others create processes that meet their general requirements in a variety of ways. The seven steps are a convenient framework for explaining the basic elements of programs.

1. Establish standards and procedures to prevent and detect criminal conduct. Com- panies meet this requirement with a variety of written documents. The centerpiece is often a short statement of guidelines at a high level of abstraction. An example

compliance approach Training em- ployees to fol- low rules in laws, regula- tions, and policy.

ethics approach Training employees to make decisions based on ethi- cal values.

The U. S. Sentencing Commission sets forth these seven steps as minimally required to prevent crim- inal behavior and promote an ethical corporate culture. For federal prosecutors and regulators they define an acceptable effort by managers to ensure that companies and their employees fol- low the law.

1. Establish standards and procedures.

2. Create high-level oversight.

3. Screen out criminals.

4. Communicate standards to all employees.

5. Monitor and set up a hotline.

6. Enforce standards, discipline violators.

7. Assess areas of risk, modify the program.

Source:   Guidelines Manual , §8B2.1, effective November 1, 2004.

Seven Steps for an Ethics Program

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73 Accenture, Code of Business Ethics: Our Core Values in Action (New York: Accenture, August 1, 2007, ver. 4.11), p. 32.

is GE’s (see the accompanying box). Most companies also set forth an expanded code of conduct, often in a booklet of 20 to 50 pages with graphic designs and stock photos of well-groomed people at work. Simple writing is used to make the standards clear. Cisco Systems once revised its code to an eighth-grade reading level. Many begin with a list of basic values such as honesty, integrity, fairness, respect for others, and upholding the law and the spirit of the law that should characterize employee behavior. Then they set forth brief guidance in a range of problem areas, including conflict of interest, bribery, gifts, insider trading, anti- trust violations, trade secrets, political contributions, and discrimination. These relatively brief treatments are usually backed by separate, detailed compliance policies, so that the complete “code of ethics” of a large company can include doz- ens of documents running hundreds of pages.

Conduct codes contain typical elements, including introductions by CEOs, ways to report wrongdoing, tips for making ethical decisions, and disciplinary procedures. There is inexhaustible sameness in their content and format. They are saturated with similar principles, cover much the same compliance issues, and contain virtually identical guides for reporting concerns. Creativity comes at the margins. Accenture’s graceful Code of Business Ethics is filled with photographs of trees and contains simple cases in question-and-answer format. Here is an exam- ple from the section titled “Integrity.”

Q: My supervisor asked me to prepare a purchase order for services costing $30,000. Her spending authority is only $25,000. Can I break the request into two purchase orders to avoid getting higher level approval? She says that is savvy business practice. What should I do?

A: Not getting the proper approvals violates Accenture policy, which is to ensure that adequate internal accounting controls are maintained and operating effectively. If you are uncomfortable telling your supervisor, alert your local Finance lead. 73

• Obey the applicable laws and regulations gov- erning our business conduct worldwide.

• Be honest, fair and trustworthy in all your GE activities and relationships.

• Avoid all conflicts of interest between work and personal affairs.

• Foster an atmosphere in which fair employ- ment practices extend to every member of the diverse GE community.

• Strive to create a safe workplace and to protect the environment.

• Through leadership at all levels, sustain a culture where ethical conduct is recognized, valued and exemplified by all employees.

Source: General Electric Company, Integrity: The Spirit & Letter of Our Commitment , January 2008, p. 3.

THE GE Code of Conduct

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74 Raymond V. Gilmartin, Ethics and the Corporate Culture (Waltham, MA: Bentley College Center for Business Ethics, November 10, 2003), p. 12.

75 Martin T. Biegelman, Building a World-Class Compliance Program (New York: John Wiley & Sons, 2008), pp. 155 and 178; and Michael D. Greenberg, Perspectives of Chief Ethics and Compliance Officers on the Detection and Prevention of Corporate Misdeeds (Santa Monica, CA: Rand Corporation, 2009), p. 29.

76 Vanessa O’Connell, “How Troubled Past Finally Caught Up with James Minder,” The Wall Street Journal, March 8, 2001, p. A1.

Codes are usually distributed to all employees. Many companies ask them to sign an annual form certifying compliance. Multinational companies translate them into many languages. Dow’s booklet is translated into 20, PepsiCo’s 30, Abbott Labs’ 35, and Merck’s 55.

2. Give oversight of the program to the board of directors and assign responsibility for it to a high-level executive who, in turn, will assign day-to-day responsibility to a specific manager. The Guidelines Manual requires that the board of directors exercise “rea- sonable oversight” over an ethics and compliance program, that one or more top executives take responsibility for it, and that specific managers be assigned day- to-day supervision. An example of a structure that meets these requirements is the Abbott Laboratories program shown in Figure 7.3. This structure is the result of a strengthened compliance effort coming after the FBI uncovered a 10-year fraud to cheat customers and Abbott paid $614 million in fines. 74

At Abbott a chief ethics and compliance officer takes day-to-day responsibility for running the program. This ethics chief reports directly to Abbott’s top execu- tive, the chairman and CEO, and also reports directly to the board of directors through periodic reports to its Public Policy Committee and annual reports to the full board. This reporting relationship strengthens the ethics effort. 75 In some companies the ethics chief reports to the director of human resources or the legal department, but at Abbott the ethics program is independent and must answer only to the board, which has ultimate responsibility for ethics, and to the CEO, so its actions carry greater credibility. In addition, the ethics officer chairs a Business Conduct Committee that includes the heads of Abbott’s business divisions and other top executives.

Below the chief ethics and compliance officer the program structure reaches down into the organization. Each business division has an ethics and compliance officer who reports to a divisional vice president of ethics and compliance, who in turn reports back to the corporate ethics chief. In this way the program parallels Abbott’s operating structure. Note how a reporting chain for ethics staff is created separately from the line chain of command all the way up to the board of direc- tors. This separation is an important check and balance. If ethics officers reported only to division managers, without a separate reporting channel, they would have less independence.

3. Exclude individuals with a history of illegal or unethical conduct from positions of substantial authority. Criminal background checks are inexpensive. Companies that fail to conduct them can be surprised, as was Smith & Wesson Holding Corp. on discovering that its chairman was the notorious “Shotgun Bandit” who had terror- ized victims in a string of armed robberies years before. 76 He resigned.

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Division President

Division President

Division President

Division Ethics & Compliance


Division Ethics & Compliance


Division Ethics & Compliance


Annual Report

Periodic Status Reports

Division Vice President

Ethics & Compliance

Division Vice President

Ethics & Compliance

Division Vice President

Ethics & Compliance

Board of Directors

Business Conduct Committee

Chairman and CEO

Public Policy Committee

Line Organization

Ethics & Compliance Organization

Office of Ethics &


Chair of Committee

Chief Ethics & Compliance


FIGURE 7.3 Oversight Structure of Abbott Laboratories’ Ethics and Compliance Program

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77 Gary McWilliams, “RadioShack CEO Agrees to Resign,” The Wall Street Journal, February 21, 2006, p. A3.

78 Keith J. Winstein, “Inflated Credentials Surface in Executive Suite,” The Wall Street Journal, November 13, 2008, p. B1.

79 William C. Byham, “Can You Interview for Integrity?” Across the Board, March/April 2004, pp. 36–37.

80 Elizabeth Schainbaum, “The Wheel of Compliance,” Compliance Today, March 2008, p. 31.

81 Lockheed Martin, The 2005 Ethics Effect: Leader’s Guide (Marietta, GA: Lockheed Martin, 2005), p. 5.

Companies also check for false claims about education and job experience on résumés. Again, failure to check can lead to surprises. In 2006 the chief executive of RadioShack was forced to resign after claiming a bachelor’s degree in psychology from a small Baptist college that never offered degrees in that subject. 77 More recently, The Wall Street Journal checked the degree claims of 358 senior execu- tives and directors at publicly traded companies and found seven cases of false claims. 78

Even if an executive candidate’s claims are accurate, it is hard to measure their inner character. Some psychologists believe that integrity can be tested in inter- views. One expert recommends building rapport with the subject, then eliciting comments on ethical issues late in an interview. He suggests these inquiries. “Give me an example of an ethical decision you have had to make on the job?” “Have you ever had to bend the rules or exaggerate a little bit when trying to make a sale?” and “Tell me about an instance when you’ve had to go against company guidelines or procedures to get something done.” 79

4. Periodically communicate standards and procedures to all employees from the lowest up to the board of directors. Companies reinforce standards using everything from T-shirts to posters to newsletters. At one Kaiser Permanente facility the ethics and compliance staff held a fair with candy, popcorn, and a “Wheel of Compliance” that employees could spin and win prizes if they correctly answered a question about ethical standards. 80 However, training is the key to communicating ethics and compliance knowledge.

Generally, such training is most effective when company managers do it, not outsiders, and when it steers away from abstract philosophy to focus on the work lives of attendees. A few companies offer in-depth seminars lasting one to three days with discussion of policies and case studies. Briefer sessions are more typical. One-to-three-hour yearly sessions in which employees watch a video and discuss cases are common. Most popular are interactive sessions on a company intranet in which employees read short cases and try to pick the correct or most ethical re- sponses from multiple-choice alternatives.

At Lockheed Martin employees attend one- or two-hour training sessions where they discuss incidents enacted on a video. Here are examples.

On his way to lunch, Charlie cuts his leg on a desk drawer that was not completely closed. Charlie’s supervisor has been talking for weeks that the group’s injury per- formance had not been good but one more incident would break the Target Zero goal for the department. Chloe, a co-worker, notices that Charlie hurt himself. Charlie asks her not to say anything. 81

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226 Chapter 7 Business Ethics

82 Lockheed Martin, Leader’s Guide: A Culture of Trust 2009, at ethics/, p. 12.

83 Andrew Singer, “Cisco Transmits Ethics to a ‘Wired’ Work Force,” Ethikos, September/October 2009, p. 1.

84 KPMG, Ethics and Compliance Report 2009 (New York: KPMG LLP, 2009), p. 24.

Vivian, a factory employee, and her supervisor, Rhomeyn, notice that test data is missing from a part already stamped as inspected. Rhomeyn goes to speak with Burt, the employee who stamped the paperwork indicating that the part was inspected. Burt, however, is nowhere to be found. It turns out his co-worker, Chris, has been covering for him. Burt’s perception is that he is being harassed. Burt also tells Chris that he didn’t do the testing, but it isn’t a big deal—he will just do it now. 82

5. Monitor the organization for criminal conduct, and set up a system for reporting of suspicious conduct without fear of retaliation. Monitoring entails collection of data that can indicate suspicious activity. For example, some companies require reports of unusual financial transactions. Ethical audits can also detect problems. HCA Healthcare Corp. conducts two-day ethical compliance audits to reveal strengths and weaknesses at its hospitals. Employees are interviewed randomly as auditors cover a 53-page checklist.

All programs now have 24-hour toll-free telephone and e-mail hotlines for re- porting suspected wrongdoing. To protect users’ identities, they usually allow anonymous contacts. Whistle-blowers fear revenge, so hotlines must be supported with strong policies against retaliation. On average, between 2 and 4 percent of U. S. employees use hotlines each year. 83

Hotlines create an enormous amount of work for ethics offices. Many callers seek advice: “Would it be a conflict of interest for me to work in the evening?” Others have trivial complaints, such as “My supervisor came back an hour late from lunch.” Allegations must be investigated; for instance, “I think one of my team members gave confidential papers to a client.” Although few calls reveal criminal wrongdoing, hotlines open a critical channel of communication. Here is an example of a hotline contact and how it was handled at KPMG.

A hotline report was filed alleging business integrity issues, such as over-stating credentials to a client, about a professional. Additional concerns of unprofessional conduct, such as demeaning team members, were raised by other reporters shortly thereafter. An investigation by the Ethics and Compliance Group substantiated the allegations. Firm and area functional leadership demoted the professional, issued a written reprimand, appointed a coach, and reduced the professional’s annual per- formance rating for the purposes of determining compensation. 84

6. Enforce standards by providing both incentives to reward compliance and discipline to deter criminal conduct. It has been objected that doing the right thing should re- quire no incentive; however, many companies link ethics to performance reviews, promotions, and compensation. This seems like a powerful incentive, but in prac- tice it is difficult and awkward to rate ethical performance. Tenet Healthcare tried to tie the bonuses of its top 800 managers to a numerical ethics score between �5 and �5, with each point changing the bonus by 5 percent. Managers felt

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Chapter 7 Business Ethics 227

85 Andrew W. Singer, “At Tenet Healthcare: Linking Ethics to Compensation,” Ethikos, January–February 2001, pp. 4–5.

86 Warren B. Rudman, et al., A Report to the Chairman and Board of Directors of the Boeing Company Concerning the Company’s Ethics Program and Its Rules and Procedures for the Treatment of Competitors’ Proprietary Information (Washington, DC: Paul, Weiss, Rifkind, Wharton & Garrison LLP, November 3, 2003), p. 36.

87 Xerox, “Overview of Xerox Business Ethics & Compliance Office,” at, accessed February 12, 2010.

88 Ben W. Heineman, Jr., “Avoiding Integrity Land Mines,” Harvard Business Review, April 2007, p. 104.

humiliated, however, when they received negative scores, called “dings” in com- pany slang. 85

When Boeing made compliance with the company’s ethics code part of every employee’s evaluation it ran into the same problem. According to a report on Boeing’s ethics program, it almost never affected the outcome.

Managers perceive pressure (often self-imposed) not to rate any employee as below average in ethics. There is also resistance against rating any employee above aver- age, as that implies that other employees are not doing as well with ethical conduct. The strong tendency, therefore, is to award all employees an average score for this component, effectively rendering it meaningless. 86

Written disciplinary policies are widespread. Discipline is usually based on factors such as seriousness of the violation, the organizational level or leadership role of the violator, extent of cooperation with the investigation, prior misconduct, and willful- ness of the action. A progressive range of disciplinary options—counseling, oral rep- rimand, probation, suspension, salary reduction, termination—can be used as fits the case. Xerox, for example, uses disciplinary guidelines that specify minimum and maximum penalties by type of infraction for first and second offenses but “[t]here are no guidelines for third offenses because there are no options at that point.” 87

7. If criminal conduct occurs, modify the program to prevent repeat offenses. Periodi- cally assess the risks of criminal conduct and try to reduce them. Unless lawbreaking is the isolated failure of one person, the program is not working. It should be modi- fied by changing or adding elements, restructuring responsibilities, or reapprais- ing the culture in which it operates.

Some companies use ethical risk assessment to predict areas of ethical and legal risk in their businesses. General Electric, for example, formed a risk committee of top executives that meets quarterly to assess changing global ethical standards. This committee then decides whether GE should alter existing standards or adopt new ones. 88


Nearly all large U.S. corporations now have at least some ethics and compliance mechanisms centered on a code of conduct. Fewer have full, comprehensive pro- grams. In a recent survey only 23 percent of human resource managers reported a full range of program elements, comparable to the seven steps discussed above,

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89 Society for Human Resource Management, The Ethics Landscape in American Business (Alexandria, VA: SHRM, 2008), p. 10.

90 Miriam Hechler Baer, “Governing Corporate Compliance,” Boston College Law Review, September 2009, p. 962.

91 See Nicole Andreoli and Joel Lefkowitz, “Individual and Organizational Antecedents of Misconduct in Organizations,” Journal of Business Ethics, 2009, pp. 314–15 and 320–21.

in their organizations. However, 67 percent reported having at least four of these elements. 89

The main incentive is almost universally the desire to avoid lawbreaking and reduce sanctions for corporations terrified of criminal indictment. One way to look at these programs is that they extend the reach of federal regulators and prosecutors who must police corporations in the public interest. In effect, ethics and compliance programs recruit corporations and their employees to police themselves. Codes of conduct almost always make it the duty of employees to report violations, and some impose discipline for failure to report even suspected illegal behavior, in effect, turning the entire workforce into an army of snitches working for the Department of Justice or, put more politely, “a corporate system of espionage to ferret out wrongdoing.” 90

Do the programs work? Surveys of employees reporting misconduct suggest their effectiveness in reducing unethical or illegal behavior is “modest and/or mixed.” 91 Weak effect can result when companies fail to commit resources to the program. Sometimes ethics managers are marginalized in the hierarchy and have inadequate influence. Top executives who fail to lead by example undermine for- mal efforts. In such cases silent assumptions deep in the corporate culture work to undermine official intentions.


Ethics is the study of good and evil. These are understood to be separate due to religious and philosophical teachings at the foundation of social norms and the law. Although it is naively thought that business requires ethical compromise, it does so no more or less than any other part of life. Not everyone can achieve their goals in business because success depends on more than forces the indi- vidual can control. It depends also on overcoming competition, economic con- ditions, and other rudiments of fortune. So there are sometimes strong motives and pressures to reach goals by lying, deceiving, and cheating. But doing evil is never right.

In this chapter we focused on the dynamics of ethics in organizations. The single most important factor in good corporate ethics is the example of leaders, who shape strategies and cultures. In recent years highly standardized ethics and com- pliance programs have emerged to fight bad conduct in corporations. They still depend heavily on effective leadership to work. Their effectiveness in reducing evil in practice has so far been mixed, but they are promising. In the next chapter we move from a focus on organizations to a focus on individuals and how they make ethical decisions.

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The Trial of Martha Stewart From indictment to sentencing, the case of Martha Stewart was a matter of intense public interest. Some thought that her misdeeds, if any, were slight. Cynics believed the government was prosecuting a celebrity for a minor infraction to show it was tough on busi- ness crime. An indignant Wall Street Journal com- plained that innocent employees and shareholders of Martha Stewart Living Omnimedia were paying the price for the government’s zeal. 1 Feminists argued that she was picked on for being a successful woman. “It’s hard to imagine a male in precisely this spot,” said Mary Becker, a DePaul University law professor. “Targeting a successful woman is very consistent with dominant cultural values.” 2

Others believed that her prosecution was justified. “I don’t buy any of it,” wrote Scott Turow, a criminal defense lawyer and the author of best-selling legal fiction. “What the jury felt Martha Stewart did—lying about having received inside information before she traded—is wrong, really wrong.” 3

This is the story.

DECEMBER 27 On the morning of Thursday, December 27, 2001, Douglas Faneuil was on duty at the mid-Manhattan office of Merrill Lynch. Faneuil, 24, who had been in his job only six months, assisted a stockbroker named Peter Bacanovic. It was two days after Christmas and Bacanovic was on vacation. Staffing was thin and Faneuil expected a slow day with light trading.

Soon Faneuil took a call from Aliza Waksal. Aliza was the daughter of Samuel Waksal, co-founder of ImClone Systems, a biopharmaceutical company. She wanted to sell her ImClone shares. Faneuil exe- cuted the order and by 9:48 a.m. her 39,472 shares had been sold for $2,472,837. Then Faneuil had a call from Samuel Waksal’s accountant requesting that another 79,797 shares held in his Merrill Lynch ac- count be transferred to Aliza’s account and then

sold. The call was followed by a written direction saying that making the transfer and sale that morn- ing was imperative.

Faneuil sought help on the transfer and called Peter Bacanovic in Florida. Bacanovic, 39, was an old friend of Waksal’s. He had worked at ImClone for two years before coming to Merrill Lynch, and he handled the personal accounts of Waksal and his daughter. When Bacanovic learned that the Waksals were selling, he instructed Faneuil immediately to call another of his clients, Martha Stewart, while he remained on the line.

Bacanovic, who was active in New York social life, first met Martha Stewart in the mid-1980s when they were introduced by her daughter Alexis. Stewart was one of his most important clients. He handled her pension and personal accounts. He also handled accounts for her company, Martha Stewart Living Omnimedia, Inc.

At 10:04 a.m. Faneuil dialed Stewart, but reached her administrative assistant Ann Armstrong, who said Stewart was on an airplane. Bacanovic left a brief message, asking Stewart to call back when she became available. In her phone log, Armstrong wrote, “Peter Bacanovic thinks ImClone is going to start trading downward.” Bacanovic instructed Faneuil that when Stewart called back he should tell her that the Waksals were selling all their shares. At this time ImClone was priced at $61.53 a share.

This instruction from Bacanovic bothered Faneuil. Merrill Lynch had a written policy (see Exhibit 1) that required its employees to hold client information in strict confidence. But he was very busy and working under a sense of urgency, handling calls from the Waksals, and making calls to Merrill Lynch staff in several offices arranging the transfer of Sam Waksal’s shares to his daughter.

Several hours later, Stewart’s plane landed in San Antonio to refuel. She went into the airport and on her cell phone called Ann Armstrong to check for messages. At 1:39 p.m. she phoned Merrill Lynch, reaching Faneuil, who told her that Sam Waksal and his daughter had sold all of their shares. She asked for the current price of ImClone. Faneuil quoted ap- proximately $58 a share. Stewart told him to sell all 3,928 shares she owned.

1 “The Trials of Martha,” The Wall Street Journal, February 13, 2004, p. A12.

2 Quoted in Jonathan D. Glater, “Stewart’s Celebrity Created Magnet for Scrutiny,” The New York Times, sec. 1, p. 1.

3 Scott Turow, “Cry No Tears for Martha Stewart,” The New York Times, May 27, 2004, p. 29.

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She hung up and immediately put in a call to Sam Waksal. The two were close friends who had been introduced by Stewart’s daughter Alexis in the early 1990s. Unable to reach him, she left a message that his assistant took down as “Martha Stewart some- thing is going on with ImClone and she wants to know what.” 4 By 1:52 p.m. Stewart’s ImClone shares had been sold at an average price of $58.43, for a total of approximately $228,000.

THE PUZZLE OF THE WAKSAL TRADES What was going on with ImClone? For almost 10 years Waksal had put ImClone’s resources into the develop- ment of a promising new colon cancer drug named Erbitux. Two months earlier, ImClone had submitted a licensing application for approval of Erbitux to the Food and Drug Administration (FDA). On Decem- ber 26, Waksal learned from an ImClone executive that, according to a source within the FDA, on December 28 ImClone would receive a letter rejecting the Erbitux application. When the FDA’s action was publicly an- nounced ImClone’s share price was sure to plummet.

Waksal was in possession of material insider in- formation. It was material because any reasonable investor would find it important in deciding to buy or sell ImClone stock. It was insider information be- cause it was not yet known to the public. Since the FDA application was so critical, ImClone’s general counsel had declared a “blackout period” after December 21 when employees should not trade ImClone shares. The purpose of the blackout was to guard against illegal insider trading.

4 Complaint, Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic, 03CV 4070 (NRB)(S.D.N.Y.), June 4, 2003, p. 7.

Despite being informed of the blackout and de- spite possessing knowledge of the law with respect to insider trading, Waksal elected to sell. This was ex- ceptionally foolish. His motive was to escape the un- pleasant consequences of debt. He had obligations of $75 million, most of which was margin debt secured by shares he owned in ImClone. Servicing this debt was costing him $800,000 a month. He knew that if ImClone’s share price slipped very far, many of his shares would be sold, dramatically lowering his net worth. He also tipped family and friends to sell on December 27. Besides his daughter Aliza, his father sold 135,000 shares, his sister Patti sold 1,336 shares, and another daughter, Elana, sold 4,000 shares. Waksal also tipped an investment adviser who sold all of her 1,178 shares on December 27 and passed the tip to a physician on one of ImClone’s advisory boards, who sold more than $5 million in shares—all he owned— on the same day.

On Friday, December 28, the FDA faxed ImClone a “refusal to file” letter at 2:55 p.m. Later in the after- noon, after the market closed with ImClone trading at $55.25 a share, the company issued a press release disclosing the FDA’s action. On December 31, the next trading day, ImClone opened at $45.39 a share. If Martha Stewart had waited until then to sell her shares, she would have gotten about $178,292 or $49,708 less than she received by selling on the after- noon of December 27. ImClone closed on December 31 at $46.46. It had dropped about 16 percent on the news of the FDA’s action.

AN UNSETTLED AFTERMATH Four days later a supervisor at Merrill Lynch ques- tioned Faneuil about the ImClone trades. Afterward, Faneuil called Bacanovic, who was still vacationing in Florida. Bacanovic told him that Martha Stewart sold her shares because of a prearranged plan to

EXHIBIT 1 Client Information Privacy Policy

Merrill Lynch protects the confidentiality and security of client information. Employees must understand the need for careful handling of this information. Merrill Lynch’s client information privacy policy provides that—

… • Employees may not discuss the business affairs of any client with any other employee,

except on a strict need-to-know basis. • We do not release client information, except upon a client’s authorization or when

permitted or required by law.

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reduce her taxes. He told Faneuil about a December 20 telephone call in which he and Stewart had gone down a list of the stock holdings in her account de- ciding which ones to sell at a loss to balance out capi- tal gains from other sales during 2001.

Soon, however, Faneuil had a call from Eileen DeLuca, Martha Stewart’s business manager, who demanded to know why the ImClone shares had been sold, since the sale had resulted in a profit that disrupted her tax-loss selling plan. Again he called Bacanovic. This time, Bacanovic told him that Stewart had sold because they had a preexisting agreement to sell ImClone if the price fell below $60 a share.

Merrill Lynch contacted the Securities and Ex- change Commission (SEC) to report suspicions of insider trading in ImClone. On January 3, 2002, SEC attorneys called Faneuil to interview him. Faneuil told them Stewart had sold because the price of Im- Clone fell below $60 a share. He did not tell them that he had conveyed news about the Waksals’ sales to her. On January 7, SEC attorneys interviewed Bacanovic on the telephone. He told them he had spoken to Martha Stewart on the day she traded and recommended that she sell based on their preexisting $60 sell agreement.

On January 16, Martha Stewart and Peter Bacanovic had a breakfast meeting. Their conversa- tion is unrecorded. According to Faneuil, after the meeting Bacanovic told him, “I’ve spoken to Martha. I’ve met with her. And everyone’s telling the same story . . . This was a $60 stop-loss order. That was the reason for her sale. We’re all on the same page, and it’s the truth.” 5 In at least five subsequent conversa- tions, Bacanovic reassured Faneuil of the need to stick to this story. If he did, Bacanovic promised to give him extra compensation.

On January 30, in response to a request for docu- ments by the SEC, Bacanovic turned over the work- sheet that he said was used in his December 20 tax sale conversation with Martha Stewart. It was a sin- gle-page printout listing approximately 40 securities in her account and noting the number of shares and the purchase price. The notation “@60” appeared near the entry for ImClone,

On January 31, Martha Stewart had a lengthy con- versation with a criminal attorney. Following the con- versation she went to her assistant Ann Armstrong

asking to see the telephone log. Sitting at Armstrong’s computer, she changed Bacanovic’s December 27 phone message from “Peter Bacanovic thinks ImClone is going to start trading downward,” to “Peter Bacanovic re imclone.” 6 Then, thinking better of it, she told Armstrong to restore the original word- ing and left.

INTERVIEWS On February 2, Martha Stewart was interviewed in New York by attorneys from the SEC, the Federal Bureau of Investigation (FBI), and the U.S. Attorney’s Office. Asked to explain her ImClone transaction, she said she and Bacanovic had decided to sell if ImClone fell below $60 a share. On December 27 she had spo- ken to Bacanovic, who told her it had fallen below $60 and inquired if she wished to sell. She had as- sented, in part, because she was on vacation and did not want to worry about the stock market. She did not recall speaking to Faneuil on that day. She denied knowledge of the December 27 phone message from Bacanovic, even though only two days before she had gone to her assistant’s computer to alter its wording. According to one attorney present, at the end of the interview Stewart asked in a “curt, an- noyed” tone, “Can I go now? I have a business to run.” 7

On February 13, Bacanovic was subpoenaed by the SEC to testify under oath in New York. He re- ported a December 20 phone call with Stewart in which he recommended the sale of ImClone if it fell below $60. The worksheet he turned over to the agency had notes of this conversation. He also stated that he had not discussed the ImClone stock sale with Stewart since December 27. Yet records of calls between Bacanovic’s and Stewart’s cell phones show that by this time they had spoken often, including once on the day of Stewart’s interview in New York. The content of their conversations is unrecorded.

On March 7, Douglas Faneuil was interviewed by SEC attorneys. Details of this session have not been made public, but his subsequent indictment alleges that he failed to fully and truthfully disclose all he

5 Brooke A. Masters, “Stewart Ordered Sale, Says Witness,” The Washington Post, February 5, 2004, p. E1.

6 Matthew Rose and Kara Scannell, “Dramatic Flourishes at Stewart, Tyco Trials,” The Wall Street Journal, February 11, 2004, p. C1.

7 Thomas S. Mulligan, “Jurors Hear of Attempt by Stewart to Alter Phone Log,” Los Angeles Times, February 11, 2004, p. C7.

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knew about the events of December 27. 8 Following the interview, Bacanovic offered Faneuil an extra week of vacation and airfare for a trip as a reward for sticking to Bacanovic’s script. 9

On April 10, Stewart was interviewed again on the telephone by investigators. She told them she had spoken with Bacanovic on December 27, but she could not remember if Bacanovic had mentioned the Waksals. She said again that the two had set up a $60 sell order on ImClone.

TURMOIL After these interviews, government investigators con- tinued the painstaking work of gathering, verifying, and interpreting details. Meanwhile, the main actors in the ImClone trades struggled in the backwash of their actions. In late May, Samuel Waksal resigned as the CEO of ImClone. In early June, the Associated Press broke the story that Martha Stewart was being investi- gated, setting off a three-week decline in the share price of Martha Stewart Living Omnimedia. Merrill Lynch suspended Peter Bacanovic without pay.

When Waksal was arrested and charged with criminal insider trading on June 12, shares in Stewart’s company fell 5.6 percent. Waksal would eventually plead guilty to insider trading charges, receive a prison sentence of 87 months, and pay a fine of $4 million. The family members were forced to dis- gorge the profits from their trades, with interest, and the two other tippees—the investment adviser and the physician—paid disgorgement of profits, interest, and civil fines totaling $112,000 and $2.7 million, respectively.

Stewart issued a statement saying she and her broker had agreed on a $60 sell order in October 2001, that he had called her on December 27 and told her ImClone was trading under $60, and that she had told him to sell in line with their prior understand- ing. She denied having nonpublic information at the time. Later in the month she repeated this story at a conference for securities analysts and investors. Her intent was to halt the decline in her company’s shares. At this time she held 61,323,850 shares and had suffered paper losses of more than $462 million over three weeks.

Douglas Faneuil’s conscience bothered him. In late June he went to a manager at Merrill Lynch and volunteered what he believed was the complete and accurate story of December 27 and its aftermath. Sub- sequently, he spoke again to government investiga- tors, who then subpoenaed both Stewart and Bacanovic to testify at an investigative hearing. This time, both declined, invoking their Fifth Amendment privilege against self-incrimination. Faneuil pled guilty to a misdemeanor charge of accepting money from Bacanovic in return for not informing federal investigators of illegal conduct. Merrill Lynch fired Bacanovic.

INDICTMENTS It took the government a year and a half, but on June 4, 2003, in a “coordinated action,” both the U.S. Attor- ney’s Office and the SEC filed indictments against Martha Stewart and Peter Bacanovic.

The U.S. Attorney’s Office filed a criminal com- plaint with multiple counts under the basic charges of, first, conspiracy, and second, obstruction of justice and making false statements. 10 The two were charged with conspiring to conceal evidence that Bacanovic had given nonpublic information about ImClone to Stewart. And they were accused of lying to gov- ernment attorneys to hamper the investigation. In addition, only Martha Stewart was charged with securities fraud. The charge was that she had made a series of false statements about her innocence to mis- lead investors and prop up her company’s share price. Conviction on all counts could bring a maxi- mum of 30 years in prison and a fine of $2 million. Bacanovic alone was additionally charged with per- jury for altering the worksheet that listed Stewart’s stocks by adding “@60” near ImClone to fool investi- gators. He faced a maximum of 25 years in prison and a $1.25 million fine.

In its separate civil action, the SEC charged Stewart and Bacanovic with insider trading. 11 It sought disgorgement of illegal gains and the imposition of a fine. In addition, it sought to bar Stewart from acting as a director or officer of a public company.

10 United States v. Martha Stewart and Peter Bacanovic, 03 Cr. 717 (MGC)(S.D.N.Y.), 2003.

11 Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic, 03 CV 4070 (NRB)(S.D.N.Y), 2003.

8 Misdemeanor Information, United States v. Faneuil, 02 Cr. 1287, S.D.N.Y. (2002), pp. 7–8.

9 Ibid., p. 8.

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Martha Stewart’s lawyers immediately issued a statement challenging the government’s case. “Martha Stewart has done nothing wrong,” they said. They accused the government of making an “unprece- dented” interpretation of the securities laws when it charged her with fraudulent manipulation simply because she spoke out publicly to maintain her innocence. And they questioned the government’s motive for the other charges, raising themes that would course through the media during the subse- quent trial.

Is it for publicity purposes because Martha Stewart is a celebrity? Is it because she is a woman who has successfully competed in a man’s business world by virtue of her talent, hard work and demanding standards? Is it be- cause the government would like to be able to define securities fraud as whatever it wants it to be? 12

A week later, Martha Stewart went to the FBI’s Manhattan office for processing. She was given a mug shot, fingerprinted, and released without bail. She also resigned her positions as director and chief creative officer of Martha Stewart Living Omnimedia, taking on the nonofficer position of founding edi- torial director. She continued to receive her annual salary of $900,000 and in 2003 she was awarded a $500,000 bonus.

THE TRIAL OPENS On January 20, 2004, Martha Stewart and Peter Bacanovic appeared in the Manhattan courtroom of the Hon. Miriam Goldman Cedarbaum, a federal dis- trict court judge with 18 years’ bench experience. They entered pleas of not guilty and jury selection began. Potential jurors were given 35 pages of questions de- signed to detect biases. One question was, “Have you ever made a project or cooked a recipe from Martha Stewart?” 13 Eight women and four men were picked.

The trial began January 27. The lead prosecutor was Assistant U.S. Attorney Karen Patton Seymour. In her opening argument she told the jury that Martha

Stewart sold ImClone after a “secret tip” from Bacanovic that the Waksals were selling. Then, she and Bacanovic tried to cover it up. Stewart’s motive, she argued, was a desire to protect her multimillion- dollar business empire. Seymour pointed out that every $1 decline in the stock price of Martha Stewart’s company decreased her net worth by $30 million. “Ladies and gentlemen,” she said, “lying to federal agents, obstructing justice, committing perjury, fabri- cating evidence and cheating investors in the stock market—these are serious federal crimes.” 14

In his opening argument Stewart’s attorney, Robert G. Morvillo, pronounced her “innocent of all charges” and tried to offer reasonable explanations for her actions. He pointed out that the ImClone shares she sold were less than 1 percent of her net worth. He told the jury that December was a busy month for her and she gets worn out. When she called Faneuil about the trade she was in a noisy air- port on her cell phone and thought she was talking to Bacanovic. She had no way of knowing that insider trading was taking place. “How,” he asked, “was she supposed to figure out the broker, who has always been honorable, was asking her to commit a crime?” If, indeed, she had been told that Waksal and his daughter were selling, it meant that Merrill Lynch was making the sales, which it would not do if it be- lieved them to be illegal.

Morvillo explained that Stewart and Bacanovic had established a $60 sell agreement the week before her trades. And he called Stewart’s alteration of her assistant’s entry in the phone log “much ado about nothing.” He said that she was changing it “to be consistent with what she recalled,” but then quickly realized that her change “might be misconstrued.” He concluded his opening statement by asking the jury to “decide the case based upon what is correct and just.” 15

TESTIMONY Key witnesses for the government were Helen Glotzer, an SEC attorney, and Catherine Farmer, an FBI agent. Both had been present at interviews of Stewart and

12 Robert G. Morvillo and John J. Tigue, “Press Statement,” June 4, 2003, at

13 Thomas S. Mulligan, “Stewart Case Poses Challenges for All Parties as Trial Begins Today,” Los Angeles Times, January 20, 2004, p. C1.

14 Kara Scannel and Matthew Rose, “Early Sparks at the Stewart Trial,” The Wall Street Journal, January 28, 2004, p. C1.

15 Quotations of Morvillo are from “Opening Argument on Behalf of Martha Stewart,” January 27, 2004, at www.

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Bacanovic and both testified about apparent false statements, including Stewart’s denial that she spoke with Faneuil on December 27 and her denial that she knew that the Waksals were selling.

The government’s star witness, however, was Douglas Faneuil. Under questioning by Seymour, Faneuil described his morning phone call to Bacanovic on December 27. On learning that the Waksals were selling Bacanovic said: “Oh my God, you’ve got to get Martha on the phone!” Faneuil said that he then asked Bacanovic, “Can I tell her about Sam? Am I al- lowed to?” “Of course,” replied Bacanovic, “That’s the whole point.” 16 When Martha Stewart called in that afternoon, she asked, “What’s going on with Sam?” Faneuil said that he told her, “We have no news about the company, but we thought you might like to act on the information that Sam is selling all his shares.” He described her end of the conversation as a series of “clipped demands.”

Faneuil also recounted how Bacanovic had tried to pull him into a cover-up. He described a scene at a cof- fee shop near their office in which he told Bacanovic, “I was on the  phone. I know what happened.” In response Bacanovic put an arm around him and said, “With all due respect, no, you don’t.” 17

During cross-examination Bacanovic’s attorney, David Apfel, tried to tarnish Faneuil as an unreliable witness. He called Faneuil an admitted liar who had changed his story seeking leniency from prosecutors. He brought out Faneuil’s use of recreational drugs. And he introduced e-mail messages by Faneuil to show that he disliked Martha Stewart and might have held a grudge against her. One read: “I just spoke to MARTHA! I have never, ever been treated more rudely by a stranger on the telephone.” An- other was: “Martha yelled at me again today, but I snapped in her face and she actually backed down! Baby put Ms. Martha in her place!!!” 18 Faneuil also testified about a time when he put Martha Stewart on hold. When he came back on the line she threatened to pull her account from Merrill Lynch unless the hold music was changed. Jurors laughed.

Faneuil’s testimony took 13 hours over six days. On his last day he was cross-examined by Stewart’s attorney Morvillo, who tried to depict him as over- whelmed by the rush of events on December 27. He pointed out that Faneuil had taken 75 phone calls that day and some e-mails. He questioned why his memory of Stewart’s call was sharp, in contrast to some other calls about which he was less clear. He got Faneuil to admit that he suspected the Waksals of insider trading, but said nothing to Bacanovic.

Following Faneuil, Stewart’s administrative as- sistant Ann Armstrong was called to testify about how Stewart altered the message of Bacanovic’s call. Taking the stand, she began to sob. After getting a glass of water from the defense table she tried to resume, but could not. Judge Cedarbaum recessed the trial to the next day, when Armstrong recounted how Stewart first altered, then instructed her to re- store, the wording of the phone message.

Maria Pasternak was a friend who had been traveling with Martha Stewart on December 27. Pasternak related conversations with Stewart at a re- sort in Los Cabos over the following days. She said Stewart told her that the Waksals were trying to sell all their shares in ImClone and that she had sold all her shares. She testified that Stewart remarked, “Isn’t it nice to have brokers who tell you those things?” But under cross-examination she vacillated about the clarity of her recall. The judge instructed jurors to disregard the remark.

An expert ink analyst with the U.S. Secret Service was called for his analysis of Bacanovic’s tax sale work- sheet. Larry Stewart, who is not related to Martha Stewart, testified that tests he conducted showed two pens had been used on the worksheet. All the nota- tions on it, except “@60,” were made by a “cheap” Paper Mate pen. The “@60” was written with a sec- ond, unidentified pen. The second pen did not match any of 8,500 ink samples on record, so he concluded it was either foreign or very rare. 19 This was important evidence for the prosecution, which argued that the “@60” had been added only after December 27, when the defendants constructed a cover-up.

After the prosecution finished its case, Martha Stewart’s lawyers elected to use a minimal defense. They called only one witness, a former Stewart lawyer

16 Brooke A. Masters, “Broker’s Aide Says He Was Told to Tip Off Stewart,” The Washington Post, February 3, 2004, p. E1.

17 Testimony quoted in Constance L. Hays, “Witness Describes Stewart Cover-Up,” The New York Times, February 5, 2004, p. C4.

18 Brooke A. Masters, “Broker’s Assistant, Stewart Clashed,” The Washington Post, February 5, 2004, p. E1.

19 Matthew Rose and Kara Scannell, “Stewart Trial Gets Testimony of a Broker’s Tip,” The Wall Street Journal, February 20, 2004, p. C3.

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and note-taker at the February 4 meeting with investi- gators, who testified for only 15 minutes. There was much speculation about whether Martha Stewart would take the stand in her own defense. If she did, prosecutors would push her, try to trap her in incon- sistencies and provoke her temper. If she did not, the intense curiosity of the jurors to learn what she could say to them would be unfulfilled. In the end, she did not take the stand.

Late in the trial Judge Cedarbaum dismissed the government’s allegations of securities fraud. This charge had met with wide skepticism from the begin- ning. How could a defendant exercise her right to speak out in self-defense if doing so could be con- strued as criminal manipulation of share prices? Ce- darbaum held that, given the evidence, no reasonable juror could find her guilty beyond a reasonable doubt. 20

After the defense called its single witness, there had been 27 witnesses during 19 days of testimony. Closing arguments came on March 2. Prosecutor Michael Schachter told jurors that Stewart and Bacanovic believed they would never be caught. But mistakes they made trying to deceive left a trail of damning inconsistencies. He carefully listed contra- dictions in their stories. Bacanovic’s lawyer gave a closing argument trying once again to undermine the credibility of Douglas Faneuil’s testimony.

In his closing argument for Martha Stewart, Morvillo ridiculed the conspiracy charge, saying the events alleged by the government amounted to “a confederation of dunces.” 21 Nobody, he argued, “could have done what Peter Bacanovic and Martha Stewart are alleged to have done and done it in a dumber fashion.” He asked the jurors to consider that if the two had really conspired they would have been much more consistent in their stories. Their in- consistencies were a sign of innocence. This was a dangerous argument, because it conceded some con- tradictions in testimony.

Morvillo then made the case for Stewart’s inno- cence. She had no evidence that anything was wrong with the trade. She had no reason to suspect that Waksal would behave so foolishly as to trade during a blackout period. She had a preexisting agreement

with her broker to trade ImClone if it fell below $60. She could not hear well enough on the phone to know she was talking to Faneuil, not Bacanovic. The amount of the trade was too small to tempt jeopard- izing her future. Her change in Ann Armstrong’s telephone log was insignificant. Faneuil was an un- trustworthy witness. Finally, he explained that she did not take the stand because she twice testified on the record at investigative hearings two years before and “her recollection [of the events] hasn’t gotten any better.” He concluded with this.

This has been a two-year ordeal for this good woman. It’s an ordeal based on the fact that she trusted her financial adviser not to put her in a compromising position. It’s an ordeal based on the fact that she voluntarily submit- ted to a government interview. And it’s an or- deal that is in the process of wiping out all the good that she has done, all her contributions, all her accomplishments . . . Martha Stewart’s life is in your hands . . . I ask you to acquit Martha Stewart. I ask you to let her return to her life of improving the quality of life for all of us. If you do that, it’s a good thing. 22

THE VERDICT The jury deliberated for 14 hours over three days. On March 5 one female juror wept as the verdicts were announced. Stewart and Bacanovic were each found guilty on four counts of lying and conspiring to lie to conceal the fact that she had been tipped with insider information. However, the jury could not agree that the government had proved beyond a reasonable doubt its allegation that Stewart and Bacanovic fabri- cated the $60 sale agreement and it acquitted them on those counts.

Jurors described their deliberations as calm. They found Faneuil credible and gave much weight to his testimony. Ann Armstrong was also an important witness because she cried. “We feel that she knew that something was wrong,” said the forewoman. Jurors were also suspicious of the January 16 break- fast meeting between Stewart and Bacanovic and they felt cynical about Stewart hiring a criminal de- fense lawyer even before she was contacted by gov- ernment investigators. They put little stock in the

20 United States v. Martha Stewart and Peter Bacanovic, 305 F. Supp. 2d 368, February 27, 2004.

21 “Closing Argument on Behalf of Martha Stewart,” March 2, 2004, at, p. 1. 22 Ibid., p. 10.

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“conspiracy of dunces” argument. “We felt that she was a smart lady who made a dumb mistake,” said the forewoman. 23

A juror named Chappell Hartridge characterized the verdict as “a victory for the little guys who lose money in the market because of these kinds of trans- actions.” 24 After looking into Hartridge’s back- ground, Stewart’s legal team believed he had not been completely honest on his jurors’ questionnaire. When asked about contacts with law enforcement, he did not disclose an arrest for assaulting a former girl- friend, and several other problems. Arguing that they would have exercised a challenge to keep Chappell off the jury had they known, her lawyers moved for a new trial. Judge Cedarbaum ruled that the allega- tions were little more than hearsay and there was no evidence that bias in Chappell affected the verdict. 25

Meanwhile, prosecutors had filed a criminal com- plaint against Larry Stewart, the ink expert who testi- fied at the trial. Stewart was accused of perjury for

saying that he had conducted the ink tests after a co- worker came forward saying that, in fact, she had done them. Again Stewart’s attorneys filed a motion for retrial. Again Cedarbaum denied the motion, be- cause “there was no reasonable likelihood that this perjury could have affected the jury’s verdict, and be- cause overwhelming independent evidence supports the verdict . . .” 26 Subsequently, Larry Stewart was tried and, based on evidence that his co-worker had a history of harassment, acquitted of perjury. 27

SENTENCING On July 16, 2004, Martha Stewart appeared before Judge Cedarbaum. Addressing the judge, she ap- pealed for leniency, saying, “Today is a shameful day. I ask that in judging me, you remember all the good I’ve done and the contributions I’ve made.” Prosecutor Seymour countered, arguing that Stewart was “ask- ing for leniency far beyond” that justified for “a seri- ous offense with broad implications” for the justice system. Judge Cedarbaum responded, “I believe that you have suffered, and will continue to suffer, enough.” 28 Her sentence was five months’ imprison- ment followed by five months’ of home confinement. She was fined $30,000. This set of penalties was at the light end of what could have been imposed under federal sentencing guidelines and showed that Judge Cedarbaum was using what discretion she had to avoid a harsh sentence.

After the sentencing, Martha Stewart emerged from the courthouse to read a less contrite statement. “I’m just very, very sorry that it’s come to this, that a small personal matter has been able to be blown out of all proportion, and with such venom and such gore—I mean, it’s just terrible.” 29

At a separate hearing that day, Peter Bacanovic re- ceived a nearly identical sentence of five months in prison, five months of home confinement, and a $4,000 fine. A week later Daniel Faneuil appeared be- fore Judge Cedarbaum. Tearfully, he apologized for

23 Kara Scannell, Matthew Rose, and Laurie P. Cohen, “In Stewart Case, Reluctant Jurors Found Guilt after Skimpy Defense,” The Wall Street Journal, March 8, 2004, p. A1.

24 Constance L. Hays, “Martha Stewart Seeks New Trial, Saying a Juror Lied,” The New York Times, April 1, 2004, p. C3.

25 United States v. Martha Stewart and Peter Bacanovic, 317 F. Supp. 2d 426, May 5, 2004.

26 United States v. Martha Stewart and Peter Bacanovic, 323 F. Supp. 2d 606, July 8, 2004.

27 “Jurors Acquit Stewart Witness,” Los Angeles Times, October 6, 2004, p. C3.

28 Thomas S. Mulligan, “Stewart Gets 5 Months in Prison, Then Delivers a Plug for Her Firm,” Los Angeles Times, July 17, 2004, p. A4.

29 Ibid., p. A1.

Martha Stewart outside the Man- hattan courthouse after hearing the verdict. Source: © AP Photo/Julie Jacobson.

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his actions. His cooperation with federal prosecutors saved him from going to prison. His sentence was a $2,000 fine.

On October 8, Martha Stewart reported to a mini- mum-security prison camp in West Virginia to begin her incarceration. She had appealed her case, but the appeal was expected to take two years. Therefore, she elected to serve her sentence. Doing so would end much of the speculation and tumult affecting both her and her company.

She served her time. In prison she worked in the garden and cleaned the warden’s office for 12 cents an hour. She disliked the food but made some friends among the other women. She gave them yoga lessons and a seminar on entrepreneurship. Her last day of home confinement (extended three weeks due to a violation that was not publicly ex- plained) ended on September 1, 2005. In 2006 a fed- eral appeals court turned down her request to overturn her conviction. 30 Then she settled with the SEC, which had brought a civil case of insider trad- ing against her in 2003. In the settlement, she neither admitted nor denied guilt. She agreed to a five-year ban on serving as an officer or director of her com- pany and a $195,081 fine. In the same settlement,

Bacanovic agreed to a fine of $75,645. 31 Stewart’s legal troubles were finally over with the end of court-ordered probation in March 2007.

Questions 1. Did Martha Stewart commit the crime of insider

trading when she sold her ImClone shares on December 27, 2001?

2. Did the U.S. attorneys and the Securities and Exchange Commission use good judgment in in- dicting Martha Stewart? Do you believe that her indictment was based on evidence of a serious crime, or do you believe that prosecutors con- sciously or unconsciously had additional motives for pursuing the case?

3. Do you agree with the jury that she was guilty be- yond a reasonable doubt of the conspiracy and obstruction of justice charges?

4. Was her punishment, including both imprison- ment and fines, appropriate? Were the punish- ments of Peter Bacanovic and Douglas Faneuil appropriate?

30 U.S. v. Martha Stewart and Peter Bacanovic, 433F. 3d 273 (2006).

31 See Securities and Exchange Commission, Litigation Release No. 19794, SEC v. Martha Stewart and Peter Bacanovic, 03 Civ. 4070 (RJH) (S.D.N.Y.), August 7, 2006.

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Chapter Eight

Making Ethical Decisions in Business David Geffen

David Geffen entered the world in 1943, the son of poor Russian immigrants. His father, Abe, was without ambition or talent, a passive man, often unemployed, who deferred to life. His mother, Batya, a bustling, pugnacious woman, supported the family making brassieres and corsets in their small apartment. She doted over young David, teaching him worldly lessons as she went about her business. Among them, apparently, was integrity. “She taught me to tell the truth,” he would later say. 1

Batya accepted and praised David even as he turned into a brash young boy. His elementary school teachers found him voluble, impulsive, and hard to discipline. He was also adventurous. At 10 he took trains into Manhattan by himself, getting off at the Times Square station and walking to see Broadway musicals. Show business was another world. It fascinated him. At home he filled out applications in different names for the CBS Record Club, joining it about 50 times to build a collection of show tunes from free sign-up offers. Meanwhile, on Broadway, he bought tickets for shows, then scalped them outside the theaters. 2

Although Geffen was coming of age as an entrepreneur, he still had to face school. His grades were poor in junior high, and he sometimes forged his parents’ signatures on report cards so they would not see. In high school he was enthusiastic about the drama club and involved himself in plays, but in class he rejected authority. An English teacher characterized him this way: “Rather talkative, self-centered, ignores teachers’ orders and instructions. Is fresh, at times, and conceited, as well. Is not as good as he thinks he is.” 3

Geffen graduated from high school wanting to get rich in show business. Adversity, its source in his nature, lay ahead. He immediately went to Los Angeles, where he found a menial job and attended night classes at a junior college, telling friends he was going to UCLA. Soon he dropped out of school and returned to New York

1 Quoted in John Duka, “The Ego and the Art of David Geffen,” The New York Times, October 3, 1982, sec. 3, p. 1. 2 Tom King, The Operator (New York: Random House, 2000), p. 23. 3 Quoted in King, The Operator, p. 32.

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because his father was ill. He attended evening classes for a while, then, when his father died, left to attend the University of Texas at Austin. But he was impatient, unsuited for classrooms and libraries, and made little progress before dropping out, abandoning further efforts at formal education, and returning to Los Angeles. This time he found a job in entertainment, working as an usher at CBS Television City. But he was soon fired for trying to hit an audience member. Lacking funds, he went back to New York.

There Geffen got a job with a production company, but he was fired after two weeks. On his untimely departure a casting director suggested a good place to start in the entertainment industry was the mailroom of a talent agency. With résumé in hand, he applied to one agency where his lack of a college degree and irregular job history brought rejection. Geffen learned quickly, just not from textbooks. He tele- phoned a second agency, the William Morris Agency, saying he was a cousin of famous record producer Phil Spector. This was not true, although he had met Spector. However, the claim got him an interview. He appeared in a suit and tie, his résumé revised to show a theater arts degree from UCLA. He got the job.

In his first week a tremor went through the mailroom. A new trainee had been fired for lying on his application. Now knowing that the agency would check on his degree, Geffen came an hour early every day, going through each mailbag until, after several weeks, he found the letter from UCLA. Conspiring with his brother, a UCLA law school graduate, he counterfeited a confirming letter that saved his job.

From the mailroom a 21-year-old Geffen launched the career that made him “the richest man in Hollywood.” 4 He worked harder and faster than others. He read eve- rything that passed through the mailroom to learn how deals were done and even learned to read documents upside down when he stood at agents’ desks. He stayed late and skipped vacations. Told that the agency’s president, Nat Lefkowitz, worked on Saturdays, he came in too, lingering by the lobby elevators to run into him and impress him on the ride up. Soon Geffen had a mentor and Lefkowitz made him the secretary to an agent, the first step out of the mailroom. But another misadventure lay between Geffen and his destiny.

One day the agent Geffen worked for talked an employee of a rival agency into mailing a list of that agency’s clients. This was a precious gem of competitor espio- nage. When it arrived, Geffen intercepted it in the mail, gave it to Lefkowitz, and took credit for it. The agent, Geffen’s boss, was infuriated and fired him.

Geffen ran to Lefkowitz, begging to stay, later telling his brother he had said their mother had cancer and he needed the job to pay for her operation. 5 Geffen not only stayed, but Lefkowitz promoted him to assistant agent.

A lie is a false statement made with intent to deceive. It steals from others the power to make decisions that protect their rights or interests. Lies are condemned by those who believe that ethical rules such as telling the truth must always be followed, that actions are right or wrong in themselves, no matter the consequences. In moral philosophy this position is called deontological (dēŏn tĕ logical) ethics from the Greek word deont, meaning that which is binding.

deontological ethics The idea that actions are right and wrong in them- selves indepen- dently of any consequences.

4 Bernard Weinraub, “David Geffen, Still Hungry,” The New York Times Magazine, May 2, 1993, p. 28. 5 King, The Operator, pp. 56–57.

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Irrespective of moral admonitions Geffen was now on his way. His extraordinary qualities—a work ethic, audacity, and shrewdness—prevailed in a business that rewards such traits. He became an agent representing talent such as Janis Joplin and Bob Dylan, started record labels that produced 50 gold and 31 platinum albums, produced Broadway shows, including “Cats” and “Dreamgirls,” and co-founded DreamWorks film studios. He would know presidents; own homes in Manhattan, Malibu, and Beverly Hills; fly in his own Gulfstream jet; and sell a painting by Jackson Pollock for more than a painting had ever sold for before. Along the way he joined Henry Ford, Thomas Edison, Steve Jobs, Bill Gates, and others who have prevailed without a college degree. In recent years Forbes has listed his wealth at between $4 billion and $5 billion.

In 1980, in an act reflecting ignorance, disregard, or pardon of Geffen’s earlier degree claim, Governor Jerry Brown appointed him to the University of California Board of Regents, the governing body that presides over UCLA and the other system campuses. He served for seven years and was subsequently generous with his make-believe alma mater. To support the UCLA theater arts program he donated $5 million for a theater building, which was named the Geffen Playhouse. Later, saying “each of us has a responsibility to give back in some way,” he gave $200 million to UCLA’s medical school, which was renamed the David Geffen School of Medicine. 6

Looking back, Geffen’s achievements and atonements can be weighed against his early indiscretions. A school of moral philosophy called consequentialism holds that actions are right or wrong based on their consequences. This perspective is less majestic than its deontological competitor. It affirms the simple maxim: the greatest good for the greatest number. His career has brought countless hours of entertainment

conse- quentialism The idea that actions are right or wrong, in part or whole, based on their consequences.

David Geffen in 1993. Source: Lynn Goldsmith/ CORBIS.

6 Quoted in Jill Feiwell, “Geffen Gives UCLA $200 Million,” Daily Variety, May 8, 2002, p. 1.

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to millions around the world, employment to tens of thousands, and, through his philanthropic gifts, advances in medicine and the arts.

Geffen’s actions challenge moral philosophy. If ethical rules must without excep- tion be followed and doing wrong is never right, his legacy is flawed. If ethical think- ing must judge not just the action, but also its consequences for the overall good, if what happens later counts, then the balance tips to a moral outcome.

In this chapter we will discuss a wide range of principles and approaches to mak- ing ethical decisions. These include intuitive judgment, principles great and small, procedures that corporations suggest to their employees, and practical tips.


We begin with a compendium of ethical principles—some ancient, some modern. There are many such principles in the philosophical and religious traditions of East and West.

From a larger universe, we set forth 14 principles that every manager should know and think about. (See the accompanying box and discussion that follows.) The 14 principles here are fundamental guides or rules for behavior. Each of them has strengths and weaknesses. Some were created to be universal tests of conduct. Others have a more limited reach and apply only in certain spheres of human relations. Some are ideals. Others accommodate balancing of interests where per- fection is elusive. A few invite compromise and can be used to rationalize flawed behavior. One principle, might equals right, is a justification for ignoble acts, but we include it here because it has been a basis of ethical reasoning since time immemorial.

These principles distill basic wisdom from 2,000 years of ethical thought. To the extent that they offer ideas for thinking about and resolving ethical dilemmas, they are not vague abstractions but useful, living guides to analysis and conduct. 7 We present them alphabetically.

The Categorical Imperative The categorical imperative (meaning, literally, a command that admits no exception) is a guide for ethical behavior set forth by the German philosopher Immanuel Kant in his Foundations of the Metaphysics of Morals, a tract published in 1785. In Kant’s words: “Act only according to that maxim by which you can at the same time will that it should become a universal law.” 8

In other words, one should not adopt principles of action unless they can, with- out inconsistency, be adopted by everyone. Lying, stealing, and breaking promises, for example, are ruled out because society would disintegrate if they replaced

categorical imperative Act only ac- cording to that maxim by which you can at the same time will that it should become a universal law.

7 T. K. Das asked managers to rank the favorability of these principles for use in business decisions in “How Strong Are the Ethical Preferences of Senior Business Executives,” Journal of Business Ethics, January 2005. Among the 14 ethical principles discussed in this chapter, they ranked the Golden Rule most favorably and the Conventionalist Ethic least favorably. 8 Immanuel Kant, Foundations of the Metaphysics of Morals, trans. Lewis White Beck (Indianapolis: Bobbs-Merrill, 1969), p. 44; written in 1785.

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