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Stakeholders, Ethics, Public Policy Sixteenth Edition

Anne T. LawrenceSan José State University

James WeberDuquesne University

Business and Society

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BUSINESS AND SOCIETY: STAKEHOLDERS, ETHICS, PUBLIC POLICY, SIXTEENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2014, and 2011. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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

This book is printed on acid-free paper.

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ISBN 978-1-260-04366-2 (bound edition)MHID 1-260-04366-5 (bound edition)ISBN 978-1-260-14049-1 (loose-leaf edition)MHID 1-260-14049-0 (loose-leaf edition)

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All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication DataNames: Lawrence, Anne T., author. | Weber, James (Business ethics professor), author.Title: Business and society: stakeholders, ethics, public policy / Anne T. Lawrence, San Jose State University, James Weber, Duquesne University.Description: Sixteenth edition. | New York, NY : McGraw-Hill Education, [2020]Identifiers: LCCN 2018052591 | ISBN 9781260043662 (alk. paper) | ISBN 1260043665 (bound edition) | ISBN 9781260140491 (loose-leaf edition) | ISBN 1260140490 (loose-leaf edition)Subjects: LCSH: Social responsibility of business.Classification: LCC HD60 .F72 2020 | DDC 658.4/08—dc23 LC record available at https://lccn.loc .gov/2018052591

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

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Anne T. Lawrence San José State UniversityAnne T. Lawrence is professor of management emerita at San José State University. She holds a Ph.D. from the University of California, Berkeley, and completed two years of post-doctoral study at Stanford University. Her articles, cases, and reviews have appeared in many journals, including the Academy of Management Review, Administrative Science Quarterly, Case Research Journal, Journal of Management Education, California Management Review, Business and Society Review, Research in Corporate Social Performance and Policy, and Journal of Corporate Citizenship. Her cases in business and society have been reprinted in many textbooks and anthologies. She has served as guest editor of the Case Research Journal. She served as president of both the North American Case Research Association (NACRA) and of the Western Casewriters Association and is a Fellow of NACRA, from which she received a Distinguished Contributor Award in 2014. She received the Emerson Center Award for Outstanding Case in Business Ethics (2004) and the Curtis E. Tate Award for Outstanding Case of the Year (1998, 2009, and 2015). At San José State University, she was named Outstanding Professor of the Year in 2005. In 2015, she received a Master Teacher in Ethics Award from The Wheatley Institution at Brigham Young University. She currently serves as chair of the board of the Case Research Foundation.

James Weber Duquesne UniversityJames Weber is a professor of management and business ethics at Duquesne University, where he also serves as the managing director of the Institute for Ethics in Business. He holds a Ph.D. from the University of Pittsburgh and has taught at the University of San Francisco, University of Pittsburgh, and Marquette University. His areas of interest and research include personal, managerial, and organizational values and cognitive moral reasoning. His work has appeared in Organization Science, Human Relations, Business & Society, Journal of Business Ethics, and Business Ethics Quarterly. He received the SIM Sumner Marcus Award for lifetime contribution to the Social Issues in Management division of the Academy of Management in 2013 and the Best Reviewer Award from Business & Society in 2015. He was recognized by the Social Issues in Management divi-sion with the Best Paper Award in 1989 and 1994 and received the Best Article Award from the International Association for Business and Society in 1998. He has served as division and program chair of the Social Issues in Management division of the Academy of Management. He has also served as president and program chair of the International Association of Business and Society (IABS).

About the Authors

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PrefaceIn a world economy that is becoming increasingly integrated and interdependent, the rela-tionship between business and society is becoming ever more complex. The globaliza-tion of business, the emergence of civil society organizations in many nations, and rapidly changing government regulations and international agreements have significantly altered the job of managers and the nature of strategic decision making within the firm.

At no time has business faced greater public scrutiny or more urgent demands to act in an ethical and socially responsible manner than at the present. Consider the following:

∙ The rise of populist and nationalist political leaders in the United States and parts of Europe and the Middle East have led to renewed debates on the proper role of govern-ment in regulating business and protecting stakeholders. As environmental, financial, employment, and consumer regulations have been rolled back, particularly in the United States, businesses have had to choose whether to take advantage of loosened rules or to follow a strategy of voluntary corporate responsibility. Long-standing trade relationships have been upended by tariffs and other barriers on imports, helping some businesses and hurting others. Changing immigration policy has required firms to rethink their policies toward their foreign-born workers, including so-called Dreamers brought to the United States illegally as children. In this rapidly changing environment, business firms have been challenged to manage in a way that remains consistent with their values.

∙ A host of new technologies have become part of the everyday lives of billions of the world’s people. Advances in the basic sciences are stimulating extraordinary changes in agriculture, telecommunications, transportation, and pharmaceuticals, which have the potential to enhance peoples’ health and quality of life. Artificial intelligence can be used to drive vehicles, diagnose illnesses, and manage investments. Technology has changed how we interact with others, bringing people closer together through social networking, instant messaging, and photo and video sharing. These innovations hold great promise. But they also raise serious ethical issues, such as those associated with the use of the Internet to exploit or defraud others, censor free expression, or invade individuals’ privacy. Businesses must learn to harness powerful technologies for good, while acting responsibly and ethically toward their many stakeholders.

∙ Businesses in the United States and other nations are transforming the employment relationship, abandoning practices that once provided job security and guaranteed pen-sions in favor of highly flexible but less secure forms of employment. The rise of the “gig” economy has transformed many workers into self-employed contractors. Many jobs, including those in the service sector, are being outsourced to the emerging econo-mies of China, India, and other nations. As jobs shift abroad, multinational corporations are challenged to address their obligations to workers in far-flung locations with very different cultures and to respond to initiatives, like the Responsible Business Alliance Code of Conduct, which call for voluntary commitment to enlightened labor standards and human rights. The #MeToo movement has focused a spotlight on sexual harassment and abusive behavior in the workplace, and led to the fall of well-known executives and media personalities and calls for change in workplace culture.

∙ Severe weather events—hurricanes, floods, and wildfires—have urgently focused attention on the human impact on natural systems, prompting both businesses and

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governments to act. An emerging consensus about the causes and risks of climate change is leading many companies to adopt new practices, and once again the nations of the world have experimented with public policies designed to limit the emissions of greenhouse gases, most notably in the Paris Agreement. Many businesses have cut air pollution, curbed solid waste, and designed products and buildings to be more energy-efficient, saving money in the process. A better understanding of how human activities affect natural resources is producing a growing understanding that economic growth must be achieved in balance with environmental protection if development is to be sustainable.

∙ Many regions of the world and its nations are developing at an extraordinary rate. Yet, the prosperity that accompanies economic growth is not shared equally. Access to health care, adequate nutrition, and education remain unevenly distributed among and within the world’s nations, and inequalities of wealth and income have become greater than they have been in many years. These trends have challenged businesses to consider the impact of their compensation, recruitment, and professional development practices on the persistent—and in some cases, growing—gap between the haves and the have-nots. Big corporate tax cuts in the United States have required companies to decide whether to distribute their windfalls to their executives, shareholders, employees, or customers; to invest in new jobs; or to buy back stock.

∙ The opioid epidemic has focused attention on the role of drug companies, distributors, and pharmacies—as well as government regulators—in contributing to the scourge of addiction, disability, and death caused by narcotics. The continuing pandemic of AIDS in sub-Saharan Africa and the threat of a swine or avian flu, the Zika virus, or another Ebola outbreak have compelled drug makers to rethink both their pricing policies and their research priorities. Many businesses must consider the delicate balance between their intellectual property rights and the urgent demands of public health, particularly in the developing world.

∙ In many nations, legislators have questioned business’s influence on politics. Business has a legitimate role to play in the public policy process, but it has on occasion shaded over into undue influence and even corruption. Technology offers candidates and politi-cal parties new ways to reach out and inform potential voters, but it has also created new opportunities for manipulation of the electoral process through deceptive messaging. Businesses the world over are challenged to determine their legitimate scope of influ-ence and how to voice their interests most effectively in the public policy process.

The new Sixteenth Edition of Business and Society addresses this complex agenda of issues and their impact on business and its stakeholders. It is designed to be the required textbook in an undergraduate or graduate course in Business and Society; Business, Gov-ernment, and Society; Social Issues in Management; or the Environment of Business. It may also be used, in whole or in part, in courses in Business Ethics and Public Affairs Manage-ment. This new edition of the text is also appropriate for an undergraduate sociology course that focuses on the role of business in society or on contemporary issues in business.

The core argument of Business and Society is that corporations serve a broad public purpose: to create value for society. All companies must make a profit for their owners. Indeed, if they did not, they would not long survive. However, corporations create many other kinds of value as well. They are responsible for professional development for their employees, innovative new products for their customers, and generosity to their communi-ties. They must partner with a wide range of individuals and groups in society to advance collaborative goals. In our view, corporations have multiple obligations, and all stakehold-ers’ interests must be considered.

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A Tradition of Excellence

Since the 1960s, when Professors Keith Davis and Robert Blomstrom wrote the first edi-tion of this book, Business and Society has maintained a position of leadership by discuss-ing central issues of corporate social performance in a form that students and faculty have found engaging and stimulating. The leadership of the two founding authors, and later of Professors William C. Frederick and James E. Post, helped Business and Society to achieve a consistently high standard of quality and market acceptance. Thanks to these authors’ remarkable eye for the emerging issues that shape the organizational, social, and public policy environments in which students will soon live and work, the book has added value to the business education of many thousands of students.

Business and Society has continued through several successive author teams to be the market leader in its field. The current authors bring a broad background of business and society research, teaching, consulting, and case development to the ongoing evolution of the text. The new Sixteenth Edition of Business and Society builds on its legacy of market leadership by reexamining such central issues as the role of business in society, the nature of corporate responsibility and global citizenship, business ethics practices, and the com-plex roles of government and business in a global community.

For Instructors

For instructors, this textbook offers a complete set of supplements.

Instructor LibraryThe Connect Management Instructor Library is a repository for additional resources to improve student engagement in and out of class. The instructor can select and use any asset that enhances their lecture. The Connect Instructor Library includes an extensive instruc-tor’s resource manual—fully revised for this edition—with lecture outlines, discussion case questions and answers, tips from experienced instructors, and extensive case teaching notes. A computerized test bank and power point slides for every chapter are also provided.

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Create

With McGraw-Hill Create, create.mheducation.com, the instructor can easily rearrange chapters, combine material from other content sources, and quickly upload self-developed content such as a course syllabus or teaching notes. Content may be drawn from any of the thousands of leading McGraw-Hill textbooks and arranged to fit a specific class or teach-ing approach. Create even allows an instructor to personalize the book’s appearance by selecting the cover and adding the instructor’s name, school, and course information and to select a print or eBook format.

For Students

Business and Society has long been popular with students because of its lively writing, up-to-date examples, and clear explanations of theory. This textbook has benefited greatly from feedback over the years from thousands of students who have used the material in the authors’ own classrooms. Its strengths are in many ways a testimony to the students who have used earlier generations of Business and Society.

The new Sixteenth Edition of the text is designed to be as student-friendly as always. Each chapter opens with a list of key learning objectives to help focus student reading and study. Numerous figures, exhibits, and real-world business examples (set as blocks of colored type) illustrate and elaborate the main points. A glossary at the end of the book provides definitions for bold-faced and other important terms. Inter-net references and a full section-by-section bibliography guide students who wish to do further research on topics of their choice, and subject and name indexes help students locate items in the book.

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Students—study more efficiently, retain more and achieve better outcomes. Instructors—focus on what you love—teaching.

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New for the Sixteenth Edition

Over the years, the issues addressed by Business and Society have changed as the envi-ronment of business itself has been transformed. This Sixteenth Edition is no exception, as readers will discover. Some issues have become less compelling and others have taken their place on the business agenda, while others have endured through the years.

The Sixteenth Edition has been thoroughly revised and updated to reflect the latest theoretical work in the field and statistical data, as well as recent events. Among the new additions are:

∙ New discussion of theoretical advances in stakeholder theory, corporate citizenship, public affairs management, public and private regulation, corporate governance, social and environmental auditing, social investing, reputation management, business partnerships, supply chain codes of conduct, social entrepreneurship, and corporate philanthropy.

∙ Treatment of practical issues, such as social networking, artificial intelligence and robotics, gender diversity, political advertising and campaign contributions, public and media relations, well as the latest developments in the regulatory environment in which businesses operate.

∙ New discussion cases and full-length cases on such timely topics as the role of busi-ness in the unfolding opioid crisis, Wells Fargo’s unauthorized consumer accounts, the Volkswagen diesel emissions scandal, the aftermath of the BP disaster in the Gulf of Mexico, the massive Equifax data breach, the consumer boycott of Stoli vodka, the business response to the movement for school safety, LaFarge’s dealings in the Syrian war zone, the potential regulation of Facebook in the United States and Europe, political action by the U.S. steel industry on the issue of tariffs, the rise of autonomous vehicles, law enforcement access to mobile phone data, executive misconduct at Wynn Resorts, business response to the threat to “Dreamers,” IKEA’s sustainable supply chain, Sales-force’s integrated philanthropy, and social media criticism of United Airlines.

Finally, this is a book with a vision. It is not simply a compendium of information and ideas. The new edition of Business and Society articulates the view that in a global community, where traditional buffers no longer protect business from external change, managers can create strategies that integrate stakeholder interests, respect personal values, support community development, and are implemented fairly. Most important, businesses can achieve these goals while also being economically successful. Indeed, this may be the only way to achieve economic success over the long term.

Anne T. LawrenceJames Weber

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AcknowledgmentsWe are grateful for the assistance of many colleagues at universities in the United States and abroad who over the years have helped shape this book with their excellent suggestions and ideas. We also note the feedback from students in our classes and at other colleges and universities that has helped make this book as user-friendly as possible.

We especially wish to thank two esteemed colleagues who made special contributions to this edition. David M. Wasieleski, professor of management and business ethics at Duquesne University, led the revisions of Chapters 5 and 6, to which he contributed his knowledge of ethics theory and organizational practice. Vanessa D. Hill, associate profes-sor of management at the University of Louisiana at Lafayette, generously shared with us her expertise on the employment relationship and workplace diversity and inclusion. She was the lead author of Chapters 15 and 16, which have greatly benefited from her insights. For these contributions, we are most grateful.

We also wish to express our appreciation for the colleagues who provided detailed reviews for this edition. These reviewers were Hossein Bidgoli, California State Uni-versity, Bakersfield; Ryan Fehr, Foster School of Business, University of Washington, Seattle; Scott Jeffrey, Monmouth University; Eun-Hee Kim, Gabelli School of Business, Fordham University; Jet Mboga, William Paterson University; Stephen P. Preacher, South-ern Wesleyan University; and A. J. Stagliano, Saint Joseph’s University. Their insights helped guide our revision.

Thanks are also due Daniel Jacobs of Loyola Marymount University; Samir Kumar Barua of the Indian Institute of Management Ahmedabad and Mahendra R. Gurarathi of Bentley University; Grishma Shah, Janet Rovenpor, and Musa Jafar of Manhattan College; Robyn Linde of Rhode Island College and H. Richard Eisenbeis of the Univer-sity of Southern Colorado Pueblo (retired); Cynthia E. Clark of Bentley University; and Debra M. Staab, a freelance writer and researcher, who contributed cases to this edition.

We are grateful to several individuals have made specific research contributions to this project. Denise Kleinrichert, of the Center for Ethical and Sustainable Business Manage-ment at San Francisco State University, provided new material on B Corporations and social entrepreneurship for Chapter 3, which we appreciate. Natalie Hanna and Kelsey Aemi of Duquesne University provided able research assistance. Thanks are due also to Carolyn Roose Eagle, Ben Eagle, and Nate Marsh for research support. Emily Marsh, of Colorbox Industries, provided graphic design services.

Debra M. Staab, in addition to authoring a case, provided research assistance and under-took the complex task of preparing the instructor’s resource manual, test bank, and other ancillary materials. Her contributions have been invaluable.

In addition, we are grateful to the many colleagues who over the years have gener-ously shared with us their insights into the theory and pedagogy of business and soci-ety. In particular, we would like to thank Cynthia E. Clark and Jill Brown of Bentley University; Shawn Berman, Harry J. Van Buren III, Natalia Vidal, and Garima Sharma of the University of New Mexico; Anke Arnaud of Embry Riddle Aeronautical Univer-sity; Jennifer J. Griffin of Loyola University of Chicago; Ronald M. Roman, Asbjorn Osland, Thomas Altura, and Matthew Maguire of San José State University; Heather Elms of American University; Joseph A. Petrick of Wright State University; Kathleen

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xii Acknowledgments

Rehbein of Marquette University; Judith Schrempf-Stirling of the University of Geneva; Michelle Westermann-Behaylo of the University of Amsterdam; Diane Swanson and Bernie Hayen of Kansas State University; Cynthia M. Orms of Georgia College & State University; Ali Al-Kazemi of Kuwait University; Sandra Waddock of Boston College; Mary C. Gentile of the University of Virginia Darden School of Business; Michael E. Johnson-Cramer and Jamie Hendry of Bucknell University; John Mahon and Stephanie Welcomer of the University of Maine; Bradley Agle of Brigham Young University; Gina Vega of Merrimack College; Craig Dunn and Brian Burton of Western Washington University; Lori V. Ryan of San Diego State University; Bryan W. Husted of EGADE Business School Monterrey; Sharon Livesey of Fordham University; Barry Mitnick of the University of Pittsburgh; Virginia Gerde of Furman University; Matthew Drake of Duquesne University; Robbin Derry of the University of Lethbridge; Jerry Calton of the University of Hawaii-Hilo; Linda Klebe Treviño of Pennsylvania State University; Mary Meisenhelter of York College of Pennsylvania; Amy Hillman and Gerald Keim of Arizona State University; Barbara Altman of Texas A&M University Central Texas; Randall Harris of Texas A&M University Corpus Christi; Richard Wokutch of Virginia Tech University; Dawn Elm of University of St. Thomas; Lynda Brown of the Univer-sity of Montana; Kathleen A. Getz of Loyola University – Maryland; Gordon P. Rands of Western Illinois University; Paul S. Adler of the University of Southern California; Linda C. Rodriguez of the University of South Carolina Aiken; Emmanuel Raufflet of HEC Montreal; Bruce Paton of Menlo College; Smita Trivedi, Tom E. Thomas, Geoffrey Desa, and Murray Silverman (retired), of San Francisco State University; Jacob Park of Green Mountain College; Armand Gilinsky of Sonoma State University; and Tara Ceranic Salinas of the University of San Diego.

These scholars’ dedication to the creative teaching of business and society has been a continuing inspiration to us.

We wish to express our appreciation to James E. Post, a former author of this book, who has continued to offer valuable intellectual guidance to this project. We also wish to note, with sadness and gratitude, the passing of our mentor and a former author of this book, William C. Frederick, in 2018. His ideas live on in this book.

We continue to be grateful to the excellent editorial and production team at McGraw-Hill. We offer special thanks to Laura Hurst Spell, our associate portfolio manager, for her skillful leadership of this project. We also wish to recognize the able assistance of Marla Sussman, executive editor, and of Jeni McAtee, content project manager, whose ability to keep us on track and on time has been critical. Lisa Granger headed the excellent market-ing team. Katie Reuter, content project manager (assessment); Susan K. Culbertson, buyer; Richard Wright, copy editor; Traci Vaske, content licensing specialist; and Jessica Cuevas, who designed the book cover, also played key roles. Each of these people has provided professional contributions that we deeply value and appreciate.

As always, we are profoundly grateful for the ongoing support of our spouses, Paul Roose and Sharon Green.

Anne T. Lawrence

James Weber

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Brief ContentsPART ONEBusiness in Society 1 1. The Corporation and Its Stakeholders 2 2. Managing Public Issues and Stakeholder

Relationships 25 3. Corporate Social Responsibility and

Citizenship 47 4. Business in a Globalized World 71

PART TWOBusiness and Ethics 93 5. Ethics and Ethical Reasoning 94 6. Organizational Ethics 115

PART THREEBusiness and Public Policy 137 7. Business–Government Relations 138 8. Influencing the Political Environment 161

PART FOURBusiness and the Natural Environment 187 9. Sustainable Development and Global

Business 188 10. Managing for Sustainability 211

PART FIVEBusiness and Technology 237 11. The Role of Technology 238 12. Regulating and Managing Technology 261

PART SIXBusiness and Its Stakeholders 281 13. Shareholder Rights and Corporate

Governance 282

14. Consumer Protection 305 15. Employees and the Corporation 327 16. Managing a Diverse Workforce 350 17. Business and Its Suppliers 374 18. The Community and the

Corporation 396 19. Managing the Public and the Corporate

Reputation 419

CASES IN BUSINESS AND SOCIETY 441 1. Profiting from Pain: Business and the

U.S. Opioid Epidemic 442 2. Wells Fargo’s Unauthorized Customer

Accounts 453 3. The Carlson Company and Protecting

Children in the Global Tourism Industry 462

4. BP Blowout: The Aftermath of the Gulf Oil Disaster 471

5. Google and the Right to Be Forgotten 480

6. General Motors and the Ignition Switch Recalls 490

7. The Upper Big Branch Mine Disaster 500

8. After Rana Plaza 510 9. The Boycott of Stoli Vodka 521

GLOSSARY 529

BIBLIOGRAPHY 542

INDEXESName 547Subject 550

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xiv

ContentsPART ONEBUSINESS IN SOCIETY 1

CHAPTER 1The Corporation and Its Stakeholders 2Business and Society 4

A Systems Perspective 5

The Stakeholder Theory of the Firm 6The Stakeholder Concept 8

Different Kinds of Stakeholders 9

Stakeholder Analysis 11Stakeholder Interests 12

Stakeholder Power 13

Stakeholder Coalitions 15

Stakeholder Mapping 16

The Corporation’s Boundary-Spanning Departments 19The Dynamic Environment of Business 20Creating Value in a Dynamic Environment 22Summary 22Key Terms 23Internet Resources 23Discussion Case: Insuring Uber’s App-On Gap 23

CHAPTER 2Managing Public Issues and Stakeholder Relationships 25Public Issues 26Environmental Analysis 28

Competitive Intelligence 31

Stakeholder Materiality 32

The Issue Management Process 33Identify Issue 33

Analyze Issue 34

Generate Options 35

Take Action 35

Evaluate Results 35

Organizing for Effective Issue Management 36Stakeholder Engagement 38

Stages in the Business–Stakeholder Relationship 38

Drivers of Stakeholder Engagement 39

The Role of Social Media in Stakeholder Engagement 40

Stakeholder Dialogue 41Stakeholder Networks 41

The Benefits of Engagement 42

Summary 43Key Terms 44Internet Resources 44Discussion Case: Businesses Respond to the Movement for School Safety 44

CHAPTER 3Corporate Social Responsibility and Citizenship 47Corporate Power and Responsibility 49Corporate Social Responsibility and Citizenship 51

The Origins of Corporate Social Responsibility 51

Balancing Social, Economic, and Legal Responsibilities 53The Corporate Social Responsibility Question 53

Support for Corporate Social Responsibility 53

Concerns about Corporate Social Responsibility 57

Social Entrepreneurs and B Corporations 59Management Systems for Corporate Social Responsibility and Citizenship 60Stages of Corporate Citizenship 62Assessing and Reporting Social Performance 64

Social Audit Standards 65

Social Reporting 65

Summary 67Key Terms 68Internet Resources 68Discussion Case: Corporate Social Responsibility at Gravity Payments 69

CHAPTER 4Business in a Globalized World 71The Process of Globalization 72

Major Multinational Enterprises 73

International Financial and Trade Institutions 75

The Benefits and Costs of Globalization 78Benefits of Globalization 78

Costs of Globalization 79

Doing Business in a Diverse World 81Comparative Political and Economic Systems 82

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Information Technology Ethics 121

Supply Chain Ethics 122

Making Ethics Work in Corporations 123Building Ethical Safeguards into the Company 123

Ethics in a Global Economy 129Efforts to Curtail Unethical Practices 130

Summary 132Key Terms 133Internet Resources 133Discussion Case: Equifax’s Data Breach 133

PART THREEBUSINESS AND PUBLIC POLICY 137

CHAPTER 7Business–Government Relations 138How Business and Government Relate 139

Seeking a Collaborative Partnership 139

Working in Opposition to Government 140

Legitimacy Issues 141

Government’s Public Policy Role 141Elements of Public Policy 142

Types of Public Policy 145

Government Regulation of Business 147Market Failure 147

Negative Externalities 148

Natural Monopolies 148

Ethical Arguments 148

Types of Regulation 149

The Effects of Regulation 154

Regulation in a Global Context 156Summary 157Key Terms 157Internet Resources 157Discussion Case: Should Facebook Be Regulated? 158

CHAPTER 8Influencing the Political Environment 161Participants in the Political Environment 163

Business as a Political Participant 163

Influencing the Business–Government Relationship 164

Corporate Political Strategy 164

Political Action Tactics 165Promoting an Information Strategy 166

Promoting a Financial-Incentive Strategy 170

Promoting a Constituency-Building Strategy 175

Global Inequality and the Bottom of the

Pyramid 84

Collaborative Partnerships for Global Problem Solving 86

A Three-Sector World 87

Summary 89Key Terms 89Internet Resources 89Discussion Case: Intel and Conflict Minerals 90

PART TWOBUSINESS AND ETHICS 93

CHAPTER 5Ethics and Ethical Reasoning 94The Meaning of Ethics 95

What Is Business Ethics? 96

Why Should Business Be Ethical? 97

Why Ethical Problems Occur in Business 101Personal Gain and Selfish Interest 101

Competitive Pressures on Profits 102

Conflicts of Interest 102

Cross-Cultural Contradictions 102

The Core Elements of Ethical Character 103Managers’ Values 103

Spirituality in the Workplace 104

Managers’ Moral Development 105

Analyzing Ethical Problems in Business 106Virtue Ethics: Pursuing a “Good” Life 107

Utility: Comparing Benefits and Costs 108

Rights: Determining and Protecting Entitlements 109

Justice: Is It Fair? 110

Applying Ethical Reasoning to Business Activities 110

The Moral Intensity of an Ethical Issue 111Summary 112Key Terms 112Internet Resources 113Discussion Case: LafargeHolcim and ISIS in Syria 113

CHAPTER 6Organizational Ethics 115Corporate Ethical Climates 116Business Ethics across Organizational Functions 118

Accounting Ethics 118

Financial Ethics 119

Marketing Ethics 120

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Levels of Political Involvement 178Managing the Political Environment 179Business Political Action: A Global Challenge 180Summary 182Key Terms 183Internet Resources 183Discussion Case: Political Action by the U.S. Steel Industry, 2015–2018 183

PART FOURBUSINESS AND THE NATURAL ENVIRONMENT 187

CHAPTER 9Sustainable Development and Global Business 188Business and Society in the Natural Environment 190

Sustainable Development 190

Threats to the Earth’s Ecosystem 191

Forces of Change 192

The Earth’s Carrying Capacity 194

Global Environmental Issues 196Climate Change 196

Ozone Depletion 199

Resource Scarcity: Water and Land 199

Decline of Biodiversity 201

Threats to Marine Ecosystems 202

Response of the International Business Community 203

Codes of Environmental Conduct 206

Summary 207Key Terms 208Internet Resources 208Discussion Case: Clean Cooking 208

CHAPTER 10Managing for Sustainability 211Role of Government 213

Major Areas of Environmental Regulation 213

Alternative Policy Approaches 218

Costs and Benefits of Environmental Regulation 222Managing for Sustainability 224

Stages of Corporate Environmental

Responsibility 224

The Ecologically Sustainable Organization 225Sustainability Management in Practice 225

Environmental Auditing and Reporting 227

Environmental Partnerships 228

Sustainability Management as a Competitive Advantage 228

Cost Savings 229

Brand Differentiation 229

Technological Innovation 230

Reduction of Regulatory and Liability Risk 231

Strategic Planning 231

Summary 233Key Terms 233Internet Resources 234Discussion Case: Hydraulic Fracturing—Can the Environmental Impacts Be Reduced? 234

PART FIVEBUSINESS AND TECHNOLOGY 237

CHAPTER 11The Role of Technology 238Technology Defined 239

Phases of Technology in Society 240

The Role of Technology in Our Daily Lives 241The Presence of the Internet 241

Unwanted Technology Threats 243

Public Access to and Use of Technology 245The Digital Divide in the United States and

Worldwide 245

Mobile Telephones 246

Social Networking 248

Ethical Challenges Involving Technology 250The Loss of Privacy 250

Free Speech Issues 251

Government Censorship of Free Speech 252The Impact of Scientific Breakthroughs 253

Genetically Engineered Foods 253

Sequencing of the Human Genome 255

Biotechnology and Stem Cell Research 256

Medical Breakthroughs 256

Summary 258Key Terms 258Internet Resources 258Discussion Case: To Lock or Unlock Your Phone: Personal Privacy or National Security 259

CHAPTER 12Regulating and Managing Technology 261Government Regulation of Technology 262

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The Role of Technology in Business 264Access to Stakeholders’ Personal Information 265

E-Business 266

The Use of Robots and Artificial Intelligence at Work 267The Chief Information, Security, Technology Officer 269Cybercrime: A Threat to Organizations and the Public 271

Exploring Why Hackers Hack 271

Costs of Cybercrime 272

Business Responses to Invasions of Information Security 274Government Efforts to Combat Cybercrime 275Summary 276Key Terms 277Internet Resources 277Discussion Case: The Arrival of Autonomous Cars—Bright Future or Looming Threat? 278

PART SIXBUSINESS AND ITS STAKEHOLDERS 281

CHAPTER 13Shareholder Rights and Corporate Governance 282Shareholders Around the World 283

Who Are Shareholders? 284

Objectives of Stock Ownership 285

Shareholders’ Legal Rights and Safeguards 286

Corporate Governance 287The Board of Directors 287

Principles of Good Governance 289

Special Issue: Executive Compensation 291Shareholder Activism 295

The Rise of Institutional Investors 296

Social Investment 297

Shareholder Lawsuits 298

Government Protection of Shareholder Interests 299

Securities and Exchange Commission 299

Information Transparency and Disclosure 299

Insider Trading 300

Shareholders and the Corporation 301Summary 302Key Terms 302Internet Resources 303

Discussion Case: Corporate Governance and Executive Misconduct at Wynn Resorts 303

CHAPTER 14Consumer Protection 305The Rights of Consumers 307Self-Advocacy for Consumer Interests 308How Government Protects Consumers 309

Goals of Consumer Laws 309

Major Consumer Protection Agencies 311

Consumer Privacy in the Digital Age 314Using the Courts and Product Liability Laws 316

Strict Liability 317

Product Liability Reform and Alternative Dispute

Resolution 317

Positive Business Responses to Consumerism 320Managing for Quality 320

Voluntary Industry Codes of Conduct 321

Consumer Affairs Departments 322

Product Recalls 322

Consumerism’s Achievements 323Summary 323Key Terms 324Internet Resources 324Discussion Case: Volkswagen’s “Clean Diesel” Campaign 324

CHAPTER 15Employees and the Corporation 327The Employment Relationship 329Workplace Rights 330

The Right to Organize and Bargain

Collectively 330

The Right to a Safe and Healthy Workplace 333

Job Security and the Right to Due Process 334

Fair Wages and Income Inequality 337The Right to Privacy in the Workplace 339

Electronic Monitoring 340

Romance in the Workplace 341

Employee Drug Use and Testing 342

Alcohol Abuse at Work 343

Employee Theft and Honesty Testing 344

The Right to Blow the Whistle and Free Speech in the Workplace 345Summary 347Key Terms 347Internet Resources 347Discussion Case: The Ugly Side of Beautiful Nails 348

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CHAPTER 16Managing a Diverse Workforce 350The Changing Face of the Workforce 351Gender and Race in the Workplace 353

Women and Minorities at Work 353

The Gender and Racial Pay Gap 354

Where Women and Persons of Color Manage 356

Breaking the Glass Ceiling 356

Women and Minority Business Ownership 359

Government’s Role in Securing Equal Employment Opportunity 360

Equal Employment Opportunity 360

Affirmative Action 361

Sexual and Racial Harassment 362

What Business Can Do: Diversity and Inclusion Policies and Practices 364

Balancing Work and Life 367

Child Care and Elder Care 367

Work Flexibility 368

Summary 370Key Terms 371Internet Resources 371Discussion Case: Apple and the Dreamers 371

CHAPTER 17Business and Its Suppliers 374Suppliers 376Social, Ethical, and Environmental Issues in Global Supply Chains 378

Social Issues 379

Ethical Issues 380

Environmental Issues 382

Supply Chain Risk 383

Private Regulation of the Business–Supplier Relationship 384

Supply Chain Auditing 387

Supplier Development and Capability Building 389Summary 392Key Terms 393Internet Resources 393Discussion Case: IKEA’s Sustainable Cotton Supply Chain 393

CHAPTER 18The Community and the Corporation 396The Business–Community Relationship 398

The Business Case for Community Involvement 399

Community Relations 401Economic Development 401

Housing 402

Aid to Minority, Women, and Disabled Veteran-Owned

Enterprises 402

Disaster, Terrorism, and War Relief 403

Corporate Giving 403Forms of Corporate Giving 407

Priorities in Corporate Giving 409

Corporate Giving in a Strategic Context 410

Measuring the Return on Social Investment 412

Building Collaborative Partnerships 414Summary 415Key Terms 415Internet Resources 416Discussion Case: Salesforce’s 1+1+1 Integrated Philanthropy Model 416

CHAPTER 19Managing the Public and the Corporate Reputation 419The General Public 420What Is Reputation? 421

Why Does Reputation Matter? 422

The Public Relations Department 424Public Relations in the Internet and Social

Media Age 424

Brand Management 426Crisis Management 427Engaging Key Stakeholders with Specific Tactics 430

Executive Visibility 431

User-Generated Content 433

Paid Content 434

Event Sponsorship 434

Public Service Announcements 436

Image Advertisements 436

Summary 438Key Terms 438Internet Resources 438Discussion Case: United Airlines—Navigating a Social Media Storm 439

CASES IN BUSINESS AND SOCIETY 4411. Profiting from Pain: Business and the

U.S. Opioid Epidemic 442

2. Wells Fargo’s Unauthorized Customer Accounts 453

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3. The Carlson Company and Protecting Children in the Global Tourism Industry 462

4. BP Blowout: The Aftermath of the Gulf Oil Disaster 471

5. Google and the Right to Be Forgotten 480

6. General Motors and the Ignition Switch Recalls 490

7. The Upper Big Branch Mine Disaster 500

8. After Rana Plaza 510

9. The Boycott of Stoli Vodka 521

Glossary 529Bibliography 542IndexesName 547Subject 550

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P A R T O N E

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Business in Society

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C H A P T E R O N E

The Corporation and Its StakeholdersBusiness corporations have complex relationships with many individuals and organizations in society. The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. An important part of management’s role is to identify a firm’s relevant stakeholders and understand the nature of their interests, power, and alliances with one another. Building positive and mutually ben-eficial relationships across organizational boundaries can help enhance a company’s reputation and address critical social and ethical challenges. In a world of fast-paced globalization, shifting public expectations and government policies, growing ecological concerns, and new technologies, manag-ers face the difficult challenge of achieving economic results while simultaneously creating value for all of their diverse stakeholders.

This Chapter Focuses on These Key Learning Objectives:

LO 1-1 Understanding the relationship between business and society and the ways in which business and society are part of an interactive system.

LO 1-2 Considering the purpose of the modern corporation.

LO 1-3 Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and external stakeholders are.

LO 1-4 Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power.

LO 1-5 Recognizing the diverse ways in which modern corporations organize internally to interact with various stakeholders.

LO 1-6 Analyzing the forces of change that continually reshape the business and society relationship.

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Amazon—which some have called the “Earth’s biggest store”—is an important part of many of our lives. We browse on Amazon, watch on Amazon, and buy on Amazon. We freely disclose to Amazon our wishes, interests, and willingness to pay. You may well have purchased or rented this textbook from Amazon.

In 2018, Amazon was the largest Internet retailer in the world, measured both by annual revenue ($178 billion) and market capitalization (more than $800 billion). It was the second largest private employer in the United States (after Walmart), with more than 540,000 employees (not counting the additional 120,000 or so temporary workers the com-pany brought on each year during the busy holiday season).1 From its start in 1994 as a scrappy Seattle start-up selling books online, Amazon had grown at an astonishing pace; in 2017, Amazon was responsible for fully 70 percent of all growth in U.S. online commerce.2 By 2018, the company’s founder and CEO, Jeff Bezos, had become the world’s richest person, with a net worth greater than $100 billion.3 Shareholders in the company had been richly rewarded; in early 2018, the price of Amazon’s stock was more than 12 times higher than it had been a decade earlier. The company was enormously popular with consumers, who turned to Amazon for one-click convenience, free and speedy delivery, and the ability to compare a seemingly endless assortment of products on the basis of price and reviews. Small businesses affiliated with Amazon Marketplace were able to tap into the company’s global e-commerce platform and unrivaled logistics to reach customers they never could have reached before. No doubt, many had benefited from Amazon’s success.

Yet the company had also become the target of criticism from many quarters, charged with destroying brick-and-mortar businesses, relentlessly driving their own employees, unfairly besting competitors, and pressuring communities for concessions. Consider that:

∙ Much of Amazon’s success had come at the expense of brick-and-mortar stores. Iconic retailers—such as Macy’s, JCPenney, and Target—had shed thousands of jobs as Amazon attracted ever-larger slices of consumer spending. A leading economist calculated that the rise of online commerce had caused the cumulative loss of 1.2 million retailing jobs—positions such as cashiers, salespeople, and stock clerks—in the United States.4 Many of these jobs were held by women and minorities (who made up 60 percent and 40 percent, respectively, of department store employees).5 Traditional retailing, concluded Scott Galloway, the author of The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google, had been “ravaged and depopulated by a single player”—Amazon.6

∙ Amazon’s own employees, by some accounts, were subject to an unusually punishing work culture. An investigative report by The New York Times, based on interviews with more than 100 current and former white-collar employees, found a pattern of setting “unreasonably high” performance standards, continually monitoring performance, and weeding out employees in a “rank and yank” system that one called “purposeful Dar-winism.” Turnover rates were among the highest in the Fortune 500. Said one former marketer, “Amazon is where overachievers go to feel bad about themselves.”7

1 “Amazon Is Now the Size of a Small Country,” Business Insider, January 16, 2018.2 “U.S. E-Commerce Sales Grow 16.0% in 2017,” Internet Retailer, at www.digitalcommerce360.com, February 16, 2018.3 “Jeff Bezos Is Now the Richest Person in History,” http://money.cnn.com, January 9, 2018.4 Michael Feroli, chief U.S. economist at J.P. Morgan, cited in “Amazon to Add 100,000 Jobs as Brick-and-Mortar Retail Crum-bles,” The New York Times, January 12, 2017.5 “The Silent Crisis of Retail Employment,” The Atlantic, April 18, 2017, and “Decline in Retail Jobs Felt Entirely by Women,” Institute for Women’s Policy Research, December 2017.6 Scott Galloway, The Four: Scott Galloway, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google (New York: Penguin, 2017), Chapter 2. 7 “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” The New York Times, August 15, 2015.

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∙ Amazon’s control of both online and voice-activated search gave it powerful advantages—leading to what some saw as unfair competition. One study found that under some con-ditions, products displayed under “customers who bought this item also bought” were dominated by Amazon’s own private-label brands.8 Alexa, Amazon’s voice-activated virtual assistant on Echo and other digital devices, also gave the company an edge. The consulting firm Bain & Company found that Alexa’s recommendations were biased toward “Amazon’s Choice” and the company’s own private-label products (after prod-ucts the customer had previously ordered). “The ‘endless aisle’ just got a lot smaller,” Bain concluded.9

∙ In 2017, Amazon announced it would invest $5 billion to open a second North Ameri-can headquarters outside Seattle, promising to create 50,000 new jobs paying $100,000 or more. This was a tantalizing prospect, and 238 cities and regions submitted propos-als, with at least six offering financial incentives of $1 billion or more. Some public officials thought this was well worth it, but others thought taxpayer money should not be used to subsidize such a successful company. “Blindly giving away the farm isn’t our style,” said the mayor of San Antonio, Texas, which dropped out of the race.10

Amazon’s experience illustrates, on a particularly large scale, the challenges of manag-ing successfully in a complex network of stakeholders. The company’s actions affected not only itself, but also many other people, groups, and organizations in society. Customers, employees, business partners and suppliers, competitors, shareholders, creditors, govern-ments, and local communities all had a stake in Amazon’s decisions.

Every modern company, whether small or large, is part of a vast global business sys-tem. Whether a firm has 50 employees or, like Amazon, more than half a million—its links to customers, suppliers, employees, and communities are certain to be numerous, diverse, and vital to its success. This is why the relationship between business and society is important for you to understand as both a citizen and a manager.

Business and Society

Business today is arguably the most dominant institution in the world. The term business refers here to any organization that is engaged in making a product or providing a service for a profit. Consider that in the United States today there are 6 million businesses, according to government estimates, and in the world as a whole, there are uncounted millions more. Of course, these businesses vary greatly in size and impact. They range from a woman who helps support her family by selling handmade tortillas by the side of the road in Mexico City for a few pesos, to ExxonMobil, a huge corporation that employs almost 75,000 work-ers and earns annual revenues approaching $237 billion in almost every nation in the world.

Society, in its broadest sense, refers to human beings and to the social structures they collectively create. In a more specific sense, the term is used to refer to segments of humankind, such as members of a particular community, nation, or interest group. As a set of organizations created by humans, business is clearly a part of society. At the same time, it is also a distinct entity, separated from the rest of society by clear boundaries. Business

8 “The Antitrust Case Against Facebook, Google, and Amazon,” The Wall Street Journal, January 16, 2018, and “How Amazon Steers Shoppers to Its Own Products,” The Wall Street Journal, June 23, 2018; see also Galloway, op. cit.9 “Dreaming of an Amazon Christmas?” Bain & Company, November 9, 2017.10 “Amazon Just Revealed the Top Cities for HQ2—Here Are the Ones Throwing Hundreds of Millions to Land It,” Business Insider, January 18, 2018, and “As Cities Woo Amazon to Build Second Headquarters, Incentives Are Key,” The Wall Street Journal, October 19, 2017.

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is engaged in ongoing exchanges with its external environment across these dividing lines. For example, businesses recruit workers, buy supplies, and borrow money; they also sell products, donate time, and pay taxes. This book is broadly concerned with the relation-ship between business and society. A simple diagram of the relationship between the two appears in Figure 1.1.

As the Amazon example that opened this chapter illustrates, business and society are highly interdependent. Business activities impact other activities in society, and actions by various social actors and governments continuously affect business. To manage these interdependencies, managers need an understanding of their company’s key relationships and how the social and economic system of which they are a part affects, and is affected by, their decisions.

A Systems PerspectiveGeneral systems theory, first introduced in the 1940s, argues that all organisms are open to, and interact with, their external environments. Although most organisms have clear bound-aries, they cannot be understood in isolation, but only in relationship to their surroundings. This simple but powerful idea can be applied to many disciplines. For example, in botany, the growth of a plant cannot be explained without reference to soil, light, oxygen, moisture, and other characteristics of its environment. As applied to management theory, the systems concept implies that business firms (social organisms) are embedded in a broader social structure (external environment) with which they constantly interact. Corporations have ongoing boundary exchanges with customers, governments, competitors, suppliers, com-munities, and many other individuals and groups. Just as good soil, water, and light help a plant grow, positive interactions with society benefit a business firm.

Like biological organisms, moreover, businesses must adapt to changes in the environ-ment. Plants growing in low-moisture environments must develop survival strategies, like the cactus that evolves to store water in its leaves. Similarly, a telecommunications com-pany in a newly deregulated market must learn to compete by changing the products and services it offers. The key to business survival is often this ability to adapt effectively to changing conditions. In business, systems theory provides a powerful tool to help managers conceptualize the relationship between their companies and their external environments.

FIGURE 1.1Business and Society: An Interactive System Society

Business

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Systems theory helps us understand how business and society, taken together, form an interactive social system. Each needs the other, and each influences the other. They are entwined so completely that any action taken by one will surely affect the other. They are both separate and connected. Business is part of society, and society penetrates far and often into business decisions. In a world where global communication is rapidly expanding, the connections are closer than ever before. Throughout this book we discuss examples of organizations and people that are grappling with the challenges of, and helping to shape, business–society relationships.

The Stakeholder Theory of the Firm

What is the purpose of the modern corporation? To whom, or what, should the firm be respon-sible?11 No question is more central to the relationship between business and society.

In the shareholder theory of the firm (sometimes also called the ownership theory), the firm is seen as the property of its owners. The purpose of the firm is to maximize its long-term market value, that is, to make the most money it can for shareholders who own stock in the company. Managers and boards of directors are agents of shareholders and have no obligations to others, other than those directly specified by law. In this view, owners’ inter-ests are paramount and take precedence over the interests of others.

A contrasting view, called the stakeholder theory of the firm, argues that corporations serve a broad public purpose: to create value for society. All companies must make a profit for their owners; indeed, if they did not, they would not long survive. However, corpora-tions create many other kinds of value as well, such as professional development for their employees and innovative new products for their customers. In this view, corporations have multiple obligations, and all stakeholders’ interests must be taken into account. This perspective was well expressed by Laurence Fink, the CEO of BlackRock, a global firm that manages more than $5 trillion worth of assets for its clients. In his 2018 letter to CEOs, Fink stated that “. . . every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”12

Supporters of the stakeholder theory of the firm make three core arguments for their position: descriptive, instrumental, and normative.13

The descriptive argument says that the stakeholder view is simply a more realistic description of how companies really work. Managers have to pay keen attention, of course, to their quarterly and annual financial performance. Keeping Wall Street satisfied by man-aging for growth—thereby attracting more investors and increasing the stock price—is a core part of any top manager’s job. But the job of management is much more complex than this. In order to produce consistent results, managers have to be concerned with pro-ducing high-quality and innovative products and services for their customers, attracting

11 For summaries of contrasting theories of the purpose of the firm, see Margaret M. Blair, “Whose Interests Should Corpora-tions Serve,” in Margaret M. Blair and Bruce K. MacLaury, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (Washington, DC: Brookings Institution, 1995), Ch. 6, pp. 202–34; and James E. Post, Lee E. Preston, and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Palo Alto, CA: Stanford University Press, 2002).12 “Larry Fink’s Annual [2018] Letter to CEOs: A Sense of Purpose,” at www.blackrock.com.13 The descriptive, instrumental, and normative arguments are summarized in Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications,” Academy of Management Review 20, no. 1 (1995), pp. 65–71. See also, Post, Preston, and Sachs, Redefining the Corporation, Ch. 1.

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and retaining talented employees, and complying with a plethora of complex government regulations. As a practical matter, managers direct their energies toward all stakeholders, not just owners.

In what became known as the “dollar store wars,” two companies made competing bids to buy Family Dollar, a U.S. discount retail chain based in Charlotte, North Carolina—each with very different consequences for stakeholders. One suitor, Dollar Tree, offered $76.50 per share for the company, while the other, Dollar General, offered $80—seemingly a better deal for shareholders. But the Dollar General deal faced likely government antitrust scrutiny and would probably have required the closure of thousands of stores, throwing employees out of work and depriving low-income communities of access to a discount store. In the end, after considering the impact on all stakeholders, Family Dollar’s management recommended the lower-priced offer, and three-quarters of its shareholders agreed.14

The instrumental argument says that stakeholder management is more effective as a corporate strategy. A wide range of studies have shown that companies that behave respon-sibly toward multiple stakeholder groups perform better financially, over the long run, than those that do not. (This empirical evidence is further explored in Chapter 3.) These findings make sense, because good relationships with stakeholders are themselves a source of value for the firm. Attention to stakeholders’ rights and concerns can help produce moti-vated employees, satisfied customers, committed suppliers, and supportive communities, all good for the company’s bottom line.

The normative argument says that stakeholder management is simply the right thing to do. Corporations have great power and control vast resources; these privileges carry with them a duty toward all those affected by a corporation’s actions. Moreover, all stakehold-ers, not just owners, contribute something of value to the corporation. A skilled engineer at Microsoft who applies his or her creativity to solving a difficult programming problem has made a kind of investment in the company, even if it is not a monetary investment. Any individual or group who makes a contribution, or takes a risk, has a moral right to some claim on the corporation’s rewards.15

A basis for both the shareholder and stakeholder theories of the firm exists in law. The legal term fiduciary means a person who exercises power on behalf of another, that is, who acts as the other’s agent. In U.S. law, managers are considered fiduciaries of the owners of the firm (its shareholders) and have an obligation to run the business in their interest. These legal concepts are clearly consistent with the shareholder theory of the firm. How-ever, other laws and court cases have given managers broad latitude in the exercise of their fiduciary duties. In the United States (where corporations are chartered not by the federal government but by the states), most states have passed laws that permit managers to take into consideration a wide range of other stakeholders’ interests, including those of employees, customers, creditors, suppliers, and communities. (Benefit corporations, firms with a special legal status that obligates them to do so, are further discussed in Chapter 3.)

14 “Family Dollar Shareholders Approve Sale to Dollar Tree,” Charlotte Observer, January 22, 2015.15 Abe Zakhem and Daniel E. Palmer, “Normative Stakeholder Theory,” in David M. Wasieleski and James Weber (eds.), Stakeholder Management, Business and Society 360: Volume 1, pages 49–74 (Bingley, United Kingdom: Emerald Publishing Ltd., 2017). Another formulation of this point has been offered by Robert Phillips, who argues for a principle of stakeholder fairness. This states that “when people are engaged in a cooperative effort and the benefits of this cooperative effort are accepted, obligations are created on the part of the group accepting the benefit” [i.e., the business firm]. Robert Phillips, Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 9 and Ch. 5.

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In addition, many federal laws extend specific protections to various groups of stakehold-ers, such as those that prohibit discrimination against employees or grant consumers the right to sue if harmed by a product.

In other nations, the legal rights of nonowner stakeholders are often more fully devel-oped than in the United States. For example, a number of European countries—including Germany, Norway, Austria, Denmark, Finland, and Sweden—require public companies to include employee members on their boards of directors, so that their interests will be explicitly represented. Under the European Union’s so-called harmonization statutes, man-agers are specifically permitted to take into account the interests of customers, employees, creditors, and others.

In short, while the law requires managers to act on behalf of shareholders, it also gives them wide discretion—and in some instances requires them—to manage on behalf of the full range of stakeholder groups. The next section provides a more formal definition and an expanded discussion of the stakeholder concept.

The Stakeholder ConceptThe term stakeholder refers to persons and groups that affect, or are affected by, an organi-zation’s decisions, policies, and operations.16 The word stake originally meant a pointed stick or post. The word later became used as a verb, as when a person was said to mark territory with a stake to assert ownership—that is, to stake a claim.17 In the context of man-agement theory, stake is used more abstractly to mean an interest in—or claim on—a busi-ness enterprise. Those with a stake in the firm’s actions include such diverse groups as customers, employees, shareholders (also called stockholders), governments, suppliers, professional and trade associations, social and environmental activists, and nongovern-mental organizations. The term stakeholder is not the same as stockholder, although the words sound similar. Stockholders—individuals or organizations that own shares of a com-pany’s stock—are one of several kinds of stakeholders.

Business organizations are embedded in networks involving many participants. Each of these participants has a relationship with the firm, based on ongoing interactions. Each of them shares, to some degree, in both the risks and rewards of the firm’s activities. And each has some kind of claim on the firm’s resources and attention, based on law, moral right, or both. The number of these stakeholders and the variety of their interests can be large, making a company’s decisions very complex, as the Amazon example illustrates.

Managers make good decisions when they pay attention to the effects of their deci-sions on stakeholders, as well as stakeholders’ effects on the company. On the positive side, strong relationships between a corporation and its stakeholders are an asset that adds value. On the negative side, some companies disregard stakeholders’ interests, either out of the belief that the stakeholder is wrong or out of the misguided notion that an unhappy customer, employee, or regulator does not matter. Such attitudes often prove costly to the company involved. Today, for example, companies know that they cannot locate a factory or store in a community that strongly objects. They also know that making a product that is perceived as unsafe invites lawsuits and jeopardizes market share.

16 The term stakeholder was first introduced in 1963 but was not widely used in the management literature until the pub-lication of R. Edward Freeman’s Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984). For a comprehensive review of the stakeholder management literature, see Samantha Miles, “Stakeholder Theory Classification, Definitions and Essential Contestability,” in David M. Wasieleski and James Weber (eds.) Stakeholder Management, Business and Society 360: Volume 1, pages 21–48 (Bingley, United Kingdom: Emerald Publishing Limited, 2017).17 “Origin and Meaning of Stake,” Online Etymology Dictionary, at www.etymonline.com.

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Different Kinds of StakeholdersBusiness interacts with society in many diverse ways, and a company’s relationships with various stakeholders differ.

Market stakeholders are those that engage in economic transactions with the company as it carries out its purpose of providing society with goods and services. Each relationship between a business and one of its market stakeholders is based on a unique transaction, or two-way exchange. Shareholders invest in the firm and in return receive the potential for dividends and capital gains. Creditors loan money and collect payments of interest and principal. Employees contribute their skills and knowledge in exchange for wages, bene-fits, and the opportunity for personal satisfaction and professional development. In return for payment, suppliers provide raw materials, energy, services, finished products, and other inputs; and wholesalers, distributors, and retailers engage in market transactions with the firm as they help move the product from plant to sales outlets to customers. All businesses need customers who are willing to buy their products or services.

The puzzling question of whether or not managers should be classified as stakeholders along with other employees is discussed in Exhibit 1.A.

Nonmarket stakeholders, by contrast, are people and groups who—although they do not engage in direct economic exchange with the firm—are nonetheless affected by or can affect its actions. Nonmarket stakeholders include the community, various levels of government, nongovernmental organizations, business support groups, competitors, and the general public. Nonmarket stakeholders are not necessarily less important than others, simply because they do not engage in direct economic exchange with a business. On the contrary, interactions with such groups can be critical to a firm’s success or failure, as shown in the following example.

In late 2017, a company called Energy Management Inc. (EMI) said it would finally call off its sixteen-year effort to build a wind farm off the shore of Cape Cod, Massachusetts, to supply clean, renewable power to New England customers. The project, called Cape Wind, had generated intense opposition from residents of Cape

Are Managers Stakeholders?

Are managers, especially top executives, stakeholders? This has been a contentious issue in stakeholder theory. On one hand, the answer clearly is “yes” Like other stakeholders, managers are impacted by the firm’s decisions. As employees of the firm, managers receive compensation—often very generous compensation, as shown in Chapter 13. Their managerial roles confer opportunities for professional advancement, social status, and power over others. Managers benefit from the company’s success and are hurt by its failure. For these reasons, they might properly be classified as employees. On the other hand, top executives are agents of the firm and are responsible for acting on its behalf. In the stakeholder theory of the firm, their role is to integrate stakeholder interests, rather than to promote their own more narrow, selfish goals. For these reasons, they might properly be classified as representatives of the firm itself, rather than as one of its stakeholders. Management theory has long recognized that these two roles of managers potentially conflict. The main job of executives is to act for the company, but all too often they act primarily for themselves. Consider, for example, the many top executives of Lehman Brothers, MF Global, and Merrrill Lynch, who enriched them-selves personally at the expense of shareholders, employees, customers, and other stakeholders. The chal-lenge of persuading top managers to act in the firm’s best interest is further discussed in Chapter 13.

Exhibit 1.A

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Cod and nearby islands, who were concerned that its 130 wind turbines would spoil the view and get in the way of boats. A nonprofit group called Save Our Sound filed dozens of lawsuits, charging possible harm to wildlife, increased electricity rates, and danger to aircraft. Local utilities had withdrawn their commitments to buy power from the wind farm, and state regulators had denied permission for a power line connection to the mainland. “We were kept in a repeated sudden death period,” said the company’s discouraged owner, using a football analogy. “And the goal posts kept moving.”18

In this instance, various stakeholders were able to block the company’s plans completely—even though many did not have a market relationship with it.

Theorists also distinguish between internal stakeholders and external stakeholders. Internal stakeholders are those, such as employees and managers, who are employed by the firm. They are “inside” the firm, in the sense that they contribute their effort and skill, usu-ally at a company worksite. External stakeholders, by contrast, are those who—although they may have important transactions with the firm—are not directly employed by it.

The classification of government as a nonmarket stakeholder has been controversial in stakeholder theory. Most theorists say that government is a nonmarket stakeholder (as does this book) because it does not normally conduct any direct market exchanges (buying and selling) with business. However, money often flows from business to government in the form of taxes and fees, and sometimes from government to business in the form of subsidies or incentives. Moreover, some businesses—defense contractors for example—do sell directly to the government and receive payment for goods and services rendered. For this reason, a few theorists have called government a market stakeholder of business. And, in a few cases, the government may take a direct ownership stake in a company—as the U.S. government did after the financial crisis of 2008–09 when it invested in several banks and auto companies, becoming a shareholder of these firms. Government also has special influence over business because of its ability to charter and tax corporations, as well as make laws that regulate their activities. The unique relationship between government and business is discussed throughout this book.

Other stakeholders also have some market and some nonmarket characteristics. For example, business support groups, such as the Chamber of Commerce, are normally con-sidered a nonmarket stakeholder. However, companies may support the Chamber of Com-merce with their membership dues—a market exchange. Communities are a nonmarket stakeholder, but receive taxes, philanthropic contributions, and other monetary benefits from businesses. These subtleties are further explored in later chapters.

Modern stakeholder theory recognizes that most business firms are embedded in a com-plex web of stakeholders, many of which have independent relationships with each other.19 In this view, a business firm and its stakeholders are best visualized as an interconnected network. Imagine, for example, an electronics company, based in the United States, that produces smartphones, tablets, and music players. The firm employs people to design, engineer, and market its devices to customers in many countries. Shares in the company

18 “Now It’s Official: Cape Wind Project Dead,” Boston Globe, December 1, 2017, and “After 16 Years, Hopes for Cape Cod Wind Farm Float Away,” The New York Times, December 19, 2017. The story of the opposition to Cape Wind is told in Robert Whitcomb and Wendy Williams, Cape Wind: Money, Celebrity, Energy, Class, Politics, and the Battle for Our Energy Future (New York: PublicAffairs, 2008).19 Timothy J. Rowley, “The Power of and in Stakeholder Networks,” in David M. Wasieleski and James Weber (eds.) Stake-holder Management, Business and Society 360: Volume 1, pp. 101–122 (Bingley, United Kingdom: Emerald Publishing Limited, 2017).

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are owned by investors around the world, including many of its own employees and man-agers. Production is carried out by suppliers in Asia. Banks provide credit to the company, as well as to other companies. Competing firms sell their products to some of the same customers, and also contract production to some of the same Asian suppliers. Nongovern-mental organizations may seek to lobby the government concerning the firm’s practices, and may count some employees among their members. A visual representation of this company and its stakeholders is shown in Figure 1.2.

As Figure 1.2 suggests, some individuals or groups may play multiple stakeholder roles. Some theorists use the term role sets to refer to this phenomenon. For example, a person may work at a company, but also live in the surrounding community, own shares of com-pany stock in his or her 401(k) retirement account, and even purchase the company’s prod-ucts from time to time. This person has several stakes in a company’s actions.

Later sections of this book (especially Chapters 13 through 19) will discuss in more detail the relationship between business and its various stakeholders.

Stakeholder Analysis

An important part of the modern manager’s job is to identify relevant stakeholders and to understand both their interests and the power they may have to assert these interests. This process is called stakeholder analysis. The organization from whose perspective the analy-sis is conducted is called the focal organization.

FIGURE 1.2A Firm and its Stakeholders

BusinessFirm

Governments

Customers

Shareholders

Employees

Creditors

Competitors

Suppliers

Non-governmentalorganizations

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The first step of a stakeholder analysis is for managers of the focal organization to identify the issue at hand. For example, in the Cape Wind situation discussed earlier in this chapter, Energy Management Inc. had to analyze how to win regulatory approval for the construction of its wind farm. Once the issue is determined, managers must ask four key questions, as discussed below and summarized in Figure 1.3.

Who are the relevant stakeholders?

The first question requires management to identify and map the relevant stakeholders. Exhibit 1.B, which appears later in this chapter, provides a guide. However, not all stake-holders listed will be relevant in every management situation. For example, a privately held firm will not have shareholders. Some businesses sell directly to customers online, and therefore will not have retailers. In other situations, a firm may have a stakeholder—say, a creditor that has loaned money—but this group is not relevant to a particular issue that management faces.

But stakeholder analysis involves more than simply identifying stakeholders; it also involves understanding the nature of their interests, power, legitimacy, and links with one another.

Stakeholder InterestsWhat are the interests of each stakeholder?

Each stakeholder has a unique relationship to the organization, and managers must respond accordingly. Stakeholder interests are, essentially, the nature of each group’s stake. What are their concerns, and what do they want from their relationship with the firm?20

Shareholders, for their part, have an ownership interest in the firm. In exchange for their investment, shareholders expect to receive dividends and, over time, capital appreciation. The economic health of the corporation affects these people financially; their personal wealth—and often, their retirement security—is at stake. They may also seek to achieve social objectives through their choice of investments. Customers, for their part, are most

20 A full discussion of the interests of stakeholders may be found in R. Edward Freeman, Ethical Theory and Business (Englewood Cliffs, NJ: Prentice Hall, 1994).

FIGURE 1.3The Four Key Questions of Stakeholder Analysis

Who are the relevant stakeholders?

What are the interests of each stakeholder?

What is the power of each stakeholder?

How are coalitions likely to form?

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interested in gaining fair value and quality in exchange for the purchase price of goods and services. Suppliers wish to obtain profitable orders, use their capacity efficiently, and build stable relationships with their business customers. Employees, in exchange for their time and effort, want to receive fair compensation and an opportunity to develop their job skills. Governments, public interest groups, and local communities have another sort of relation-ship with the company. In general, their stake is broader than the financial stake of owners, customers, and suppliers. They may wish to protect the environment, assure human rights, or advance other broad social interests. Managers need to understand these complex and often intersecting stakeholder interests.

Stakeholder PowerWhat is the power of each stakeholder?

Stakeholder power means the ability to use resources to make an event happen or to secure a desired outcome. Stakeholders have five different kinds of power: voting power, eco-nomic power, political power, legal power, and informational power.

Voting power means that the stakeholder has a legitimate right to cast a vote. Share-holders typically have voting power proportionate to the percentage of the company’s stock they own. They typically have an opportunity to vote on such major decisions as mergers and acquisitions, the composition of the board of directors, and other issues that may come before the annual meeting. (Shareholder voting power should be distinguished from the voting power exercised by citizens, which is discussed below.)

For example, Starboard Value LP, a New York-based hedge fund, used its voting power as a shareholder to force change in a company it had invested in. Starboard bought more than 10 percent of the shares of Mellanox Technologies, an Israeli semiconductor company, and called for radical change, slamming management for “weak execution,” “excessive spending,” and “missed growth opportunities.” When Mellanox did not respond aggressively enough, in 2018 Starboard and its allies fielded their own slate of nominees in the election for the board of directors and organized support from other voting shareholders. The company eventually com-promised with Starboard, agreeing to add two of the activists’ nominees to the board and a third if performance goals were not met. In recent years, activist inves-tors like Starboard Value have won one board seat for every two board election campaigns they have waged.21

Suppliers, customers, employees, and other stakeholders have economic power with the company. Suppliers, for example, can withhold supplies or refuse to fill orders if a com-pany fails to meet its contractual responsibilities. Customers may refuse to buy a compa-ny’s products or services if the company acts improperly. They can boycott products if they believe the goods are too expensive, poorly made, or unsafe. Employees, for their part, can refuse to work under certain conditions, a form of economic power known as a strike or slowdown. Economic power often depends on how well organized a stakeholder group is. For example, workers who are organized into unions usually have more economic power than do workers who try to negotiate individually with their employers.

Governments exercise political power through legislation, regulations, or lawsuits. While government agencies act directly, other stakeholders use their political power

21 “Mellanox, Starboard Settle on New Board Members,” Reuters, June 19, 2018; “Starboard Value to Launch Proxy Fight for Entire Board at Mellanox,” The Wall Street Journal, January 17, 2018; and “Review and Analysis of 2017 U.S. Shareholder Activism,” Sullivan & Cromwell LLP, March 26, 2018.

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indirectly by urging government to use its powers by passing new laws or enacting regula-tions. Citizens may also vote for candidates that support their views with respect to govern-ment laws and regulations affecting business, a different kind of voting power than the one discussed above. Stakeholders may also exercise political power directly, as when social, environmental, or community activists organize to protest a particular corporate action.

Stakeholders have legal power when they bring suit against a company for damages, based on harm caused by the firm; for instance, lawsuits brought by customers for damages caused by defective products, brought by employees for damages caused by workplace injury, or brought by environmentalists for damages caused by pollution or harm to species or habitat. After the mortgage lender Countrywide collapsed, many institutional share-holders, such as state pension funds, sued Bank of America (which had acquired Country-wide) to recoup some of their losses.

Finally, stakeholders have informational power when they have access to valuable data, facts, or details and are able to bring their own information and perspectives to the atten-tion of the public or key decision makers. With the explosive growth of technologies that facilitate the sharing of information, this kind of stakeholder power has become increas-ingly important.

Consumers’ ability to use social networks to express their views about businesses they like—and do not like—has given them power they did not previously have. For example, Yelp Inc. operates a website where people can search for local businesses, post reviews, and read others’ comments. In 2016, a dozen years after its launch, Yelp attracted 145 million unique visitors every month. Its reviewers collectively have gained considerable influence. Restaurants, cultural venues, hair salons, and other establishments can attract customers with five-star ratings and “People Love Us on Yelp” stickers in their windows—but, by the same token, can be badly hurt when reviews turn nasty. A Harvard Business School study reported that a one-star increase in an independent restaurant’s Yelp rating led to a 5 to 9 percent increase in revenue. Some businesses have complained that Yelp reviewers have too much power. “My business just died,” said the sole proprietor of a housecleaning business. “Once they locked me into the 3.5 stars, I wasn’t getting any calls.”22

Activists often try to use all of these kinds of power when they want to change a compa-ny’s policy. For example, human rights activists wanted to bring pressure on Unocal Corpo-ration to change its practices in Burma (Myanmar), where it had entered into a joint venture with the government to build a gas pipeline. Critics charged that many human rights vio-lations occurred during this project, including forced labor and relocations. In an effort to pressure Unocal to change its behavior, activists organized protests at shareholder meetings (voting power), called for boycotts of Unocal products (economic power), promoted local ordinances prohibiting cities from buying from Unocal (political power), brought a lawsuit for damages on behalf of Burmese villagers (legal power), and gathered information about government abuses by interviewing Burmese refugees and publicizing the results online (informational power). These activists increased their chances of success by mobilizing many kinds of power. This combination of tactics eventually forced Unocal to pay com-pensation to people whose rights had been violated and to fund education and health care projects in the pipeline region.23

22 Michael Luca, “Reviews, Reputation, and Revenue: The Case of Yelp.Com,” Harvard Business School NOM Unit Working Paper No. 12-016, March 16, 2016; and “Is Yelp Fair to Businesses?” PC World, November 15, 2011.23 Further information about the campaign against Unocal is available at www.earthrights.org/unocal.

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Exhibit 1.B provides a schematic summary of some of the main interests and powers of both market and nonmarket stakeholders.

Stakeholder CoalitionsAn understanding of stakeholder interests and power enables managers to answer the final question of stakeholder analysis regarding coalitions.

How are coalitions likely to form?

Not surprisingly, stakeholder interests often coincide. For example, consumers of fresh fruit and farmworkers who harvest that fruit in the field may have a shared interest in reducing the use of pesticides, because of possible adverse health effects from exposure to chemicals. When their interests are similar, stakeholders may form coalitions, temporary alliances to pursue a common interest. Companies may be both opposed and supported by stakeholder coalitions, as shown in the example of the controversial Keystone XL pipeline.

TransCanada, a major North American energy company, sought approval to build a pipeline from Alberta, Canada, to Steele City, Nebraska, where it would connect to existing pipelines running to refineries and ports along the Gulf Coast. In opposing the Keystone XL pipeline, environmentalists argued it would enable the export of oil extracted from Canadian tar sands, an energy-intensive and dirty process. When burned, the tar sands oil would release carbon dioxide, contributing to further cli-mate change, and spills from the pipeline could foul water supplies. They were joined in coalition by other groups, such as ranchers, farmers, and Native Ameri-cans whose land would be crossed by the pipeline. On the other side, construction unions, many local governments, and business groups supported the pipeline, say-ing that it would create jobs, reduce U.S. dependence on foreign oil, and provide a safer method of transport than trains or tanker trucks. In 2018, debate still raged, and construction on the project had not begun.24

Stakeholder coalitions are not static. Groups that are highly involved with a company today may be less involved tomorrow. Issues that are controversial at one time may be uncontroversial later; stakeholders that are dependent on an organization at one time may be less so at another. To make matters more complicated, the process of shifting coali-tions does not occur uniformly in all parts of a large corporation. Stakeholders involved with one part of a large company often have little or nothing to do with other parts of the organization.

The discussion case at the end of this chapter describes the coalitions that developed in favor of and opposition to new regulations that would require the ride-hailing start-up Uber to insure drivers logged onto its system to look for customers.

Another variation of stakeholder analysis focuses on stakeholder salience. Some schol-ars have suggested that managers pay the most attention to stakeholders possessing greater salience. (Something is salient when it stands out from a background, is seen as important, or draws attention.) Stakeholders stand out to managers when they have power, legitimacy, and urgency. This section has already discussed various forms of stakeholder power. Legit-imacy refers to the extent to which a stakeholder’s actions are seen as proper or appropriate by the broader society, because they are clearly affected by the company’s actions. Urgency refers to the time-sensitivity of a stakeholder’s claim, that is, the extent to which it demands

24 “Keystone XL Pipeline Has Enough Oil Suppliers, Will be Built, TransCanada Says,” Inside Climate News, January 18, 2018; “Keystone Pipeline Pros, Cons and Steps to a Final Decision,” The New York Times, November 18, 2014.

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Stakeholders: Nature of Interest and PowerExhibit 1.B

StakeholderNature of Interest— Stakeholder Wishes To:

Nature of Power—Stakeholder Influences Company By:

Market Stakeholders

Employees ■ Maintain stable employment in firm■ Receive fair pay for work and mandated

benefits■ Work in safe, comfortable environment

■ Union bargaining power■ Work actions or strikes■ Publicity

Shareholders ■ Receive a satisfactory return on investments (dividends)

■ Realize appreciation in stock value over time

■ Exercising voting rights based on share ownership

■ Exercising rights to inspect company books and records

Customers ■ Receive fair exchange: value and quality for money spent

■ Receive safe, reliable products■ Receive accurate information■ Be able to voice concerns

■ Purchasing goods from competitors■ Boycotting companies whose products

are unsatisfactory or whose policies are unacceptable

Suppliers ■ Receive regular orders for goods■ Be paid promptly for supplies delivered■ Use capacity efficiently■ Build stable relationships with business

customers■ Be treated ethically

■ Refusing to meet orders if conditions of contract are breached

■ Supplying to competitors

Retailers, Wholesalers ■ Receive quality goods in a timely fashion at reasonable cost

■ Offer reliable products that consumers trust and value

■ Buying from other suppliers if terms of contract are unsatisfactory

■ Boycotting companies whose goods or policies are unsatisfactory

Creditors ■ Receive repayment of loans■ Collect debts and interest

■ Calling in loans if payments are not made■ Utilizing legal authorities to repossess or

take over property if loan payments are severely delinquent

immediate action. The more of these three attributes a stakeholder possesses, the greater the stakeholder’s salience and the more likely that managers will notice and respond.25

Stakeholder MappingOnce managers have conducted a stakeholder analysis, they can use it to develop a stakeholder map, a visual representation of the relationships among stakeholder inter-ests, power, and coalitions with respect to a particular issue.26 (A stakeholder map can

25 Ronald K. Mitchell, Bradley R. Agle, and Donna J. Wood, “Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts,” Academy of Management Review 22, no. 4 (1997), pp. 853–86.26 For two alternative approaches to stakeholder mapping, see David Saiia and Vananh Le, “A Map Leading to Less Waste,” Proceedings of the International Association for Business and Society 20: 302–13 (2009); and Robert Boutilier, Stakeholder Pol-itics: Social Capital, Sustainable Development, and the Corporation (Sheffield, UK: Greenleaf Publishing, 2009), Chs. 6 and 7.

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StakeholderNature of Interest— Stakeholder Wishes To:

Nature of Power—Stakeholder Influences Company By:

Nonmarket Stakeholders

Communities ■ Employ local residents in the company■ Ensure that the local environment is

protected■ Ensure that the local area is developed

■ Refusing to extend additional credit■ Issuing or restricting operating licenses

and permits■ Lobbying government for regulation of

the company’s policies or methods of land use and waste disposal

Nongovernmental organizations

■ Monitor company actions and policies to ensure that they conform to legal and ethical standards

■ Promote social and economic development

■ Gaining broad public support through publicizing the issue

■ Lobbying government for regulation of the company

Business support groups (e.g., trade associations)

■ Provide research and information which will help the company or industry perform in a changing environment

■ Using its staff and resources to assist company in business endeavors and development efforts

■ Providing legal or “group” political support beyond that which an individual company can provide for itself

Governments ■ Promote economic development■ Encourage social improvements■ Raise revenues through taxes

■ Adopting regulations and laws■ Issuing licenses and permits■ Allowing or disallowing commercial activity

The general public ■ Protect social values■ Minimize risks■ Achieve prosperity for society■ Receive fair and honest communication

■ Networking with other stakeholders■ Pressing government to act■ Condemning or praising individual

companies

Competitors ■ Compete fairly■ Cooperate on industry-wide or

community issues■ Seek new customers

■ Pressing government for fair competition policies

■ Suing companies that compete unfairly

also be used to represent stakeholder salience, to help a firm identify which stakeholders may require more of their attention.) Consider the following example:

In Anaheim, California, a real estate developer called SunCal purchased a large lot near to the Disneyland theme park. SunCal planned to build condominiums, with 15 percent of the units set aside for below-market-rate rental apartments. Because the site was in the resort district, the developer required special permission from the city council to proceed. Affordable housing advocates quickly backed SunCal’s plans. Some unions representing Disney employees also supported the idea, as did environmentalists drawn by the prospect of reducing long commutes, a contributor to the region’s air pollution. Disney, however, strenuously opposed SunCal’s plan, arguing that the land should be used only for tourism-related development such as hotels and restaurants; the company was supported by the chamber of commerce and various businesses in the resort district. The city council itself was split.

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If SunCal conducted a stakeholder analysis of this situation, it would conclude that the interests of relevant stakeholders were divided. Some, including Disney and vari-ous local businesses and some politicians, opposed its plan. But others, including some unions, affordable housing advocates, environmentalists, and other politicians, supported it. An analysis of coalitions would show how these stakeholders were likely to ally with one another. An analysis of power would show that Disney had enormous clout in Ana-heim, because it was the city’s major employer and taxpayer, with power far exceeding that of other relevant stakeholders. SunCal would no doubt conclude from this analysis that it was unlikely to succeed in building on this site. A stakeholder map of this situa-tion is shown in Figure 1.4. On the vertical axis, it shows various stakeholders’ level of power; on the horizontal axis, it shows their position on the issue of SunCal’s proposed development.

A stakeholder map is a useful tool, because it enables managers to see quickly how stakeholders feel about an issue. It helps them see how stakeholder coalitions are likely to form, how powerful these coalitions will be, and what outcomes are likely. The stakeholder map depicted in Figure 1.4 shows, for example, than the coalition in quadrant 4—Disney, local businesses, and some members of the City Council—is more powerful that the coa-lition in quadrant 2—unions, affordable housing activists, environmental groups, and other City Council members. An additional benefit of stakeholder analysis is that it can illuminate options that managers may not have initially noticed. In this example, SunCal might have realized that Disney (high opposition, high power) very much wanted to block the proposed development, but also had significant resources. Therefore, Disney might be willing to purchase the lot itself, providing funds for SunCal to use to purchase and develop another site, with support from unions, housing activists, and others. In short, stakeholder analysis and mapping can help managers “think outside the box.”

FIGURE 1.4Stakeholder Map of SunCal’s Proposed Development

Source: Graphic design by Colorbox Industries. © 2018. All rights reserved. Used by permission.

Disney

LocalBusinesses

CityCouncil

Unions

A�ordableHousing

EnvironmentalGroups

COALITIONIN OPPOSITION

COALITIONIN SUPPORT

LOW POWER

SUPPORT

HIGH POWER

OPPOSE

4 1

3 2

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The Corporation’s Boundary-Spanning Departments

How do corporations organize internally to respond to and interact with stakeholders?Boundary-spanning departments are departments, or offices, within an organization that

reach across the dividing line that separates the company from groups and people in soci-ety. Building positive and mutually beneficial relationships across organizational boundar-ies is a growing part of management’s role.

Figure 1.5 presents a list of the corporation’s market and nonmarket stakeholders, along-side the corporate departments that typically have responsibility for engaging with them. As the figure suggests, the organization of the corporation’s boundary-spanning functions

FIGURE 1.5 The Corporation’s Boundary-Spanning Departments

Go

vern

men

t

Com

mu

nity

CustomersSh

arehol

ders

Customer Relations

• Customer service• Total quality management• Liability lawsuit defense• Recall management

Shareholder Relations,Investor Relations

• External and internal audit• SEC filings, compliance• Communications• Proxy election managementPublic A�airs,

Governmental A�airs,Government Relations

• Public policy• Lobbying• Political action• Trade associations• Advocacy ads• Grassroots mobilization

Human Resources, Labor Relations

• Communications• Union negotiations• OSHA, EEOC, and labor law compliance• Diversity and family–work programs• Healthcare

Environment,Health & Safety,Sustainability

• EPA and state environmental compliance• Internal environmental auditing• Recycling, take-back

Community Relations,Corporate Citizenship

• Corporate philanthropy• Partners with community- based organizations• Volunteerism, employee time contributions

Public Relations,Media Relations,Corporate Communications

• Public relations• Brand management• Image advertising• Crisis management

CorporationCorporate Relations,Corporate Citizenship, CorporateResponsibility, External A�airs

• Environmental scanning• Stakeholder engagement• Social reporting and auditing

Environment Genera

l publi

c

NG

Os,

sup

plie

rsEm

ployees

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is complex. For example, in many companies, departments of public affairs or government relations interact with elected officials and regulators. Departments of investor relations interact with shareholders; human resources with employees; customer relations with cus-tomers; and community relations with the community. Specialized departments of envi-ronment, health, and safety may deal with environmental compliance and worker health and safety, and public relations or corporate communications. Many of these specific departments will be discussed in more detail in later chapters.

The Dynamic Environment of Business

A core argument of this book is that the external environment of business is dynamic and ever changing. Businesses and their stakeholders do not interact in a vacuum. On the con-trary, most companies operate in a swirl of social, ethical, global, political, ecological, and technological change that produces both opportunities and threats. Figure 1.6 diagrams the six dynamic forces that powerfully shape the business and society relationship. Each of these forces is introduced briefly below and will be discussed in more detail later in this book.

Changing societal expectations. Everywhere around the world, society’s expec-tations of business are rising. People increasingly expect business to be more responsible, believing companies should pay close attention to social issues and act as good citizens in society. New public issues constantly arise that require action. Increasingly, business is faced with the daunting task of balancing its social, legal, and economic obligations, seeking to meet its commitments to multiple stakehold-ers. Modern businesses are increasingly exploring opportunities to act in ways that balance numerous stakeholders’ needs with their multiple obligations. These changes in society’s expectations of business, and how managers have responded, are described in Chapters 2 and 3.

FIGURE 1.6Forces That Shape the Business and Society Relationship

Explosionof

NewTechnology

Dynamic Natural

Environment

Evolving GovernmentRegulationof Business

GlobalizationGrowingEmphasis onEthical Values

ChangingSocietal

Expectations

Businessand Its

Stakeholders

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Globalization. We live in an increasingly integrated world economy, characterized by the unceasing movement of goods, services, and capital across national borders. Large transnational corporations do business in scores of countries. Products and services people buy every day in the United States or Germany may have come from Indonesia, Haiti, or Mexico. Today, economic forces truly play out on a global stage. A financial crisis on Wall Street can quickly impact economies around the world. Societal issues—such as the race to find a cure for Ebola, the movement for gender equality, or the demands of citizens everywhere for full access to the Internet—also cut across national boundaries. Chapter 4 addresses the challenges of globalization.

Growing emphasis on ethical reasoning and actions. The public also expects business to be ethical and wants corporate managers to apply ethical principles or values—in other words, guidelines about what is right and wrong, fair and unfair, and morally correct—when they make business decisions. Fair employment practices, concern for consumer safety, contribution to the welfare of the community, and human rights protection around the world have become more prominent and important. Business has created ethics programs to help ensure that employees are aware of these issues and act in accordance with ethical standards. The ethical challenges faced by business, both domestically and abroad—and business’s response—are discussed in Chapters 5 and 6.

Evolving government regulations and business response. The role of government has changed dramatically in many nations in recent decades. Governments around the world have enacted a myriad of new policies that have profoundly constrained how business is allowed to operate. Government regulation of business periodically advances and then retreats, much as a pendulum swings back and forth. Because of the dynamic nature of this force, business has developed various strategies to influ-ence elected officials and government regulators at federal, state, and local levels. Companies may seek to be active participants in the political process, and in recent years the courts have given them more opportunities to do so. The changing role of government, its impact, and business’s response are explored in Chapters 7 and 8.

Dynamic natural environment. All interactions between business and society occur within a finite natural ecosystem. Humans share a single planet, and many of our resources—oil, coal, and gas, for example—are nonrenewable. Once used, they are gone forever. Other resources, like clean water, timber, and fish, are renewable, but only if humans use them sustainably, not taking more than can be naturally replen-ished. Climate change now threatens all nations. The relentless demands of human society, in many arenas, have already exceeded the carrying capacity of the Earth’s ecosystem. The state of the Earth’s resources and changing attitudes about the nat-ural environment powerfully impact the business–society relationship. These issues are explored in Chapters 9 and 10.

Explosion of new technology and innovation. Technology is one of the most dra-matic and powerful forces affecting business and society. It has led to the world appearing to be smaller and more connected. New technological innovations har-ness the human imagination to create new machines, processes, and software that address the needs, problems, and concerns of modern society. In recent years, the pace of technological change has increased enormously. From scientific break-throughs in medicine to autonomous vehicles and artificial intelligence, change keeps coming. The extent and pace of technological innovation pose massive chal-lenges for business, and sometimes government, as they seek to manage various privacy, security, and intellectual property issues embedded in this dynamic force.

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As discussed in Chapters 11 and 12, new technologies often force managers and organizations to examine seriously the ethical implications of their use.

Creating Value in a Dynamic Environment

These powerful and dynamic forces—fast-paced changes in societal and ethical expec-tations, the global economy, government policies, the natural environment, and new technology—establish the context in which businesses interact with their many market and nonmarket stakeholders, as discussed in Chapters 13 to 19. This means that the relation-ship between business and society is continuously changing in new and often unpredict-able ways. Environments, people, and organizations change; inevitably, new issues will arise and challenge managers to develop new solutions. To be effective, corporations must meet the reasonable expectations of stakeholders and society in general. A successful busi-ness must meet all of its economic, social, and environmental objectives. A core argument of this book is that the purpose of the firm is not simply to make a profit, but to create value for all its stakeholders. Ultimately, business success is judged not simply by a company’s financial performance but by how well it serves broad social interests.

∙ Business firms are organizations that are engaged in making a product or providing a service for a profit. Society, in its broadest sense, refers to human beings and to the social structures they collectively create. Business is part of society and engages in ongoing exchanges with its external environment. Together, business and society form an interactive social system in which the actions of each profoundly influence the other.

∙ According to the stakeholder theory of the firm, the purpose of the modern corporation is to create value for all of its stakeholders. To survive, all companies must make a profit for their owners. However, they also create many other kinds of value as well for their employees, customers, suppliers, communities, and others. For both practical and ethical reasons, corporations must take all stakeholders’ interests into account.

∙ Every business firm has economic and social relationships with others in society. Some are intended, some unintended; some are positive, others negative. Stakeholders are all those who affect, or are affected by, the actions of the firm. Some have a market relationship with the company, and others have a nonmarket relationship with it; some stakeholders are internal, and others are external.

∙ Stakeholders often have multiple interests and can exercise their economic, political, and other powers in ways that benefit or challenge the organization. Stakeholders may also act independently or create coalitions to influence the company. Stakeholder mapping is a technique for visually representing stakeholders’ relationship to an issue facing a firm.

∙ Modern corporations have developed a range of boundary-crossing departments and offices to manage interactions with market and nonmarket stakeholders. The organi-zation of the corporation’s boundary-spanning functions is complex. Most companies have many departments specifically charged with interacting with stakeholders.

∙ A number of broad forces shape the relationship between business and society. These include changing societal and ethical expectations; a dynamic global economy; redefini-tion of the role of government; ecological and natural resource concerns; and the trans-formational role of technology and innovation. To deal effectively with these changes, corporate strategy must address the expectations of all of the company’s stakeholders.

Summary

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Chapter 1 The Corporation and Its Stakeholders 23

Discussion Case: Insuring Uber’s App-On GapAt around 8 p.m. on a New Year’s Eve, a mother and her two young children were walking home in San Francisco. At a busy intersection, the family waited for the “walk” signal and then started across the street. Just then, an SUV made a right turn, striking all three members of the family in the crosswalk. The mother and her 5-year-old son were seriously injured. Her 6-year-old daughter was killed. The man behind the wheel of the SUV identi-fied himself as a driver for the ride-hailing service Uber.

Uber immediately distanced itself from the tragedy, saying that the driver was “not providing services on the Uber system at the time of the accident.” The family’s attorney contested this, saying that the driver was logged onto the Uber application, appeared on the system as available to accept a rider, and was interacting with his device when he struck the mother and children.

In other words, the tragic incident had apparently occurred during the app-on gap—the driver was on the road with his Uber application activated, but had not yet connected with or picked up a rider. So, who was responsible, the driver or the ride-hailing service?

Uber was, in the words of a New York Times columnist, “the hottest, most valuable tech-nology startup on the planet.” The company was founded in 2009 as “everyone’s private driver,” providing a premium town car service that could be summoned online. In 2012, it rolled out UberX, a service that enabled nonprofessional drivers to use their own vehicles to transport riders. Customers could use the Uber app to hail a car, connect with a willing driver, watch the vehicle approach on a map, pay their fare, and receive a receipt, all on their smartphone. Uber provided the technology and took a commission on each transaction.

Uber’s disruptive business model caught on rapidly. By 2014, Uber’s ride-sharing service had spread to more than 120 cities in 36 countries. In the United States, the service could reach 137 million people with an average pickup time of less than 10 minutes. Demand was growing so fast that Uber was scrambling to recruit 20,000 new drivers, whom Uber called “transpor-tation entrepreneurs,” every month. Private investors were enthusiastic about the company’s prospects: Uber had attracted $1.2 billion in funding and was valued at $18.2 billion.

Key Terms stakeholder (nonmarket), 9stakeholder map, 16stakeholder power, 13stakeholder salience, 15stakeholder theory of the firm, 6

boundary-spanning departments, 19business, 4external stakeholder, 10focal organization, 11general systems theory, 5interactive social system, 6internal stakeholder, 10

shareholder theory of the firm, 6society, 4stakeholder, 8stakeholder analysis, 11stakeholder coalitions, 15stakeholder interests, 12stakeholder (market), 9

Internet Resources

www.economist.com The Economistwww.fortune.com Fortunewww.nytimes.com The New York Timeswww.wsj.com The Wall Street Journalwww.bloomberg.com Bloombergwww.ft.com Financial Times (London)www.cnnmoney.com CNN Money

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Drivers who partnered with Uber had the flexibility to drive when and as much as they wished. They could also make a decent living; the median annual income for its full-time drivers in San Francisco, for example, was about $74,000. But they also assumed risk. In the event of an accident, Uber instructed its drivers to submit a claim to their personal insurance carrier first. If it was denied, Uber’s backup commercial liability insurance would go into effect, but only after the driver had been summoned by a customer or had one in the vehicle.

Traditional taxicab companies did not welcome competition from Uber. Cabdrivers in many cities across the world protested the entry of Uber into their markets, conducting strikes and “rolling rallies” charging Uber with unfair practices. Uber drivers did not have to comply with many of the rules that applied to taxicabs, such as those requiring commer-cial driver’s licenses, regular mechanical inspections, and commercial liability insurance. Governments at city, state, and national levels had become involved, with some imposing restrictions and others even banning Uber outright.

In the wake of the 6-year-old’s death in San Francisco, California legislator Susan Bonilla introduced a bill that would require Uber and other ride-hailing companies to provide commercial liability insurance from when the driver turned on the app to when the customer got out of the car, thus filling the app-on gap.

The American Insurance Association, representing insurance companies, supported the legislation, saying that personal auto policies should not be expected to cover ride-hailing drivers once they signaled availability. “This is not someone commuting to work or going to the grocery store or stopping to pick their children up from school,” a spokesperson said. The family of the girl killed on New Year’s Eve also supported Bonilla’s bill, as did con-sumer attorneys and the California App-Based Drivers Association.

But others lined up in opposition. Uber and other ride-hailing companies strenuously objected to the bill, as did trade associations representing high-technology and Internet-based firms, apparently concerned about increases in their costs of doing business. The bill, said an Uber spokesperson, was “an example of what happens when special interest groups dis-tract lawmakers from the best interests of consumers and small businesses.”

Sources: “Deadly Pedestrian Accident Driver Claimed He Drove for Uber,” January 1, 2014, www.abclocal.go.com; “Uber and a Child’s Death,” The New York Times, January 27, 2014; “An Uber Impact: 20,000 Jobs Created on the Uber Platform Every Month,” Uber press release, May 27, 2014; “With Uber, Less Reason to Own a Car,” The New York Times, June 11, 2014; “Uber and Airbnb’s Incredible Growth in 4 Charts,” VB News, June 19, 2014, online at www.venturebeat.com; “In Uber vs. Taxi Companies, Local Governments Play Referee,” Christian Science Monitor, July 7, 2014; “The Company Cities Love to Hate,” Bloomberg Businessweek, July 7, 2014; “Uber, Lyft, Sidecar Fight to Block New California Regulations,” San Jose Mercury News, August 13, 2014; “The Question of Coverage for Ride Service Drivers,” The New York Times, September 5, 2014; and private correspondence with the office of Assemblywoman Susan Bonilla.

Discussion Questions

1. Who are Uber’s relevant market and nonmarket stakeholders in this situation?2. What are the various stakeholders’ interests? Please indicate if each stakeholder would

likely support, or oppose, a requirement that Uber extend its insurance to cover the app-on gap.

3. What sources of power do the relevant stakeholders have?4. Based on the information you have, draw a stakeholder map of this case showing each

stakeholder’s position on the issue, its degree of power, and likely coalitions. What con-clusions can you draw from the stakeholder map?

5. Which of the stakeholders mentioned do you think has the most salience, and why?6. Based on your stakeholder analysis and map, what do you think Uber should do in

response to the bill introduced by Susan Bonilla, and why?

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C H A P T E R T W O

Managing Public Issues and Stakeholder RelationshipsBusinesses today operate in an ever-changing external environment, where effective management requires anticipating emerging public issues and engaging positively with a wide range of stake-holders. Whether the issue is growing concerns about climate change, health care, safety at work or in our schools, social equality, or consumer safety, managers must respond to the opportunities and risks it presents. To do so effectively often requires building relationships across organizational boundaries, learning from external stakeholders, and altering practices in response. Effective man-agement of public issues and stakeholder relationships builds value for the firm.

This Chapter Focuses on These Key Learning Objectives:

LO 2-1 Identifying public issues and analyzing gaps between corporate performance and stakeholder expectations.

LO 2-2 Applying available tools or techniques to scan an organization’s multiple environments and assess-ing stakeholder materiality.

LO 2-3 Describing the steps in the issue management process and determining how to make the process most effective.

LO 2-4 Identifying the managerial skills required to respond to emerging issues effectively.

LO 2-5 Understanding the various stages through which businesses can engage with stakeholders, what drives this engagement, and the role social media can play.

LO 2-6 Recognizing the value of creating stakeholder dialogue and networks.

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A 2016 study from the Public Affairs Council found that many major corporations are feeling increased pressure to speak out on social issues, ranging from discrimination and human rights to environmental sustainability and quality education. Among companies with more than $15 billion in annual revenue, more than three in four said expectations for engagement had risen. Most of the pressure to engage in social issues, said the companies, has come from their own employees.1

Legislative battles in North Carolina, Tennessee, Mississippi, and Georgia prompted business leaders to take a stand favoring rights for transgender individuals. Dow Chemical, Alcoa, and Northrup Grumman lobbied elected officials and publicly condemned measures seen as discriminatory. Monsanto lead the fight in Missouri against a bill that would allow businesses to deny certain services to same-sex couples as a matter of religious freedom. In response to North Carolina’s state legislature passing a law that blocked antidiscriminatory protections at the local level, Deutsche Bank, the German financial institution with signifi-cant business in the United States, said it would freeze its plans to add jobs in North Caro-lina. PayPal announced it would halt its plans to open a new global operations center there.

While some thought these issues had little to do with business, executives pointed out these discriminatory state laws could harm local economies and hamper business’s ability to recruit and retain bright young workers. In the past few years, businesses have employed a number of measures to voice their views. These have ranged from joining coalitions, to issuing press releases, to engaging in lobbying at the state or local governmental levels. Experts believe that these efforts had some impact, such as in North Carolina where com-pany protests contributed to the state legislature’s repeal of a law that discriminated against gays and lesbians. Public reaction has been generally positive to these business actions. A Global Strategy Group poll found that 78 percent of Americans supported corporate engagement in social issues such as discrimination, human rights, and equality.2

In this case, emerging social issues focused on individual rights prompting various busi-nesses and their executives to become engaged and take action. This will likely improve the communities where these firms hire employees, operate, and sell their products. Yet, as this chapter will show, companies sometimes also ignore or mismanage public issues.

Public Issues

A public issue is any issue that is of mutual concern to an organization and one or more of its stakeholders. (Public issues are sometimes also called social issues or sociopolitical issues.) They are typically broad issues, often impacting many companies and groups, and of concern to a significant number of people. Public issues are often contentious—different groups may have different opinions about what should be done about them. They often, but not always, have public policy or legislative implications.

The emergence of a new public issue often indicates there is a gap between what the firm wants to do or is doing and what stakeholders expect. Scholars have called this the performance–expectations gap. Stakeholder expectations are a mixture of people’s opin-ions, attitudes, and beliefs about what constitutes reasonable business behavior. Managers and organizations have good reason to identify emergent expectations as early as possible. Failure to understand stakeholder concerns and to respond appropriately will permit the

1 “Taking a Stand: How Corporations Speak Out on Social Issues,” Public Affairs Council, 2016.2 “Why Companies Are Getting More Engaged on Social Issues,” Public Affairs Council, August 30, 2016, pac.org; “Big Busi-ness Speaks Up on Social Issues,” The Wall Street Journal, April 17, 2016, www.wsj.com; and “Seeking End to Boycott, North Carolina Rescinds Transgender Bathroom Law,” Reuters, March 30, 2017, www.reuters.com.

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performance–expectations gap to grow: the larger the gap, the greater the risk of stake-holder backlash or of missing a major business opportunity. The performance–expectations gap is pictured in Figure 2.1.

Emerging public issues are both an opportunity and a risk. On one hand, correctly anticipating the emergence of a public issue can confer a competitive advantage. However, they also are a risk because issues that firms do not anticipate and plan for effectively can seriously hurt a company, as the following example shows.

The Italian–U.S. automobile maker, Fiat Chrysler, became aware of a serious prob-lem involving more than 11 million vehicles, including older Jeeps with rear gas-oline tanks that were linked to numerous fatal fires. Yet, Fiat Chrysler was slow to respond to the increasing expectations of its customers and regulators, the National Highway Traffic Safety Administration (NHTSA). The NHTSA accused the firm of misleading and obstructing regulators tasked with overseeing the resolution of many consumer complaints, inadequate and lagging repairs authorized through their dealerships, and failing to notify car owners of the recalls in a timely manner. The firm agreed to a consent agreement that included a fine of $105 million and an unprecedented buyback option covering hundreds of thousands of vehicles, whose owners can receive a trade-in or a financial incentive to get their vehicles repaired. Fiat Chrysler also agreed to submit to an independent monitor’s audit of its recall performance over the following three-year period.3

Understanding and responding to changing stakeholder expectations is a business neces-sity. As Mark Moody-Stuart, former managing director of Royal Dutch/Shell, put it in an interview, “Communication with society. . . is a commercial matter, because society is your customers. It is not a soft and wooly thing, because society is what we depend on for our living. So we had better be in line with its wishes, its desires, its aspirations, its dreams.4

3 “U.S. Auto Safety Regulators Fine Fiat Chrysler Record $105 million,” Reuters, July 26, 2015, www.reuters.com.4 Interview conducted by Anne T. Lawrence, “Shell Oil in Nigeria,” interactive online case published by www.icase.co.

FIGURE 2.1The Performance–Expectations Gap

Time

ExpectedCorporate Performance (What stakeholdersexpect)

ActualCorporatePerformance(What actuallyhappens)

Performance –ExpectationsGap

High

Low

Pe

rfo

rman

ce (S

oci

al a

nd

Eco

no

mic

)

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Every company faces many public issues. Some emerge over a long period of time; others emerge suddenly. Some are predictable; others are completely unexpected. Some companies respond effectively; others do not. Consider the following recent examples of public issues and companies’ responses:

∙ Sexual harassment: An often well-kept secret vaulted into the public spotlight in 2017: accusations of sexual harassment in the corporate boardroom, executive suite, and workplace. Numerous high-profile business leaders were accused, including Fox News host Bill O’Reilly, film producer Harvey Weinstein, television show host Matt Lauer, Fox News CEO Roger Ailes, Ford Motor Company president for North America Raj Nair, CEO of the Humane Society of the United States Wayne Pacelle, and billionaire and casino executive Steve Wynn, along with many others. These executives resigned or were fired amidst sexual harassment accusations.

∙ Consumer safety: The Centers for Disease Control and Prevention declared separate E. coli outbreaks that sickened hundreds of customers at two different Chipotle Mexican Grill restaurants in the Pacific Northwest in 2015. These incidents followed other occur-rences where customers became ill from a salmonella outbreak involving tomatoes in Minnesota, as well as an outbreak of norovirus in California and Massachusetts. Chipotle tried to counter the negative publicity by pledging $10 million to help local growers meet new food safety standards and invited its 50,000 employees nationwide to tune in to a broadcasted meeting with executives at their Denver headquarters.

∙ Protection of personal information: Instances of the illegal acquisition, or hacking, of individuals’ personal identification and financial information have become common occurrences. Yahoo, Equifax, Delta Airlines, FedEx, England’s National Health Ser-vices, Merck Pharmaceuticals, Forever 21, Target, and many more organizations expe-rienced data breaches that compromised and exposed personal data of its customers or employees. These breaches may have reflected managers’ failure to keep abreast of the latest techniques used by sophisticated cybercriminals.

Whether the focus is sexual harassment in the workplace, consumer safety, or the pro-tection of personal information, society has increased its demands that businesses take on important public issues and become more involved in addressing them. Another critical public issue that caught the attention of many business organizations after a school shoot-ing in Florida—gun violence and school safety in America—is discussed in the case at the end of this chapter.

A survey of Millennials (people born between 1977 and 1994) was conducted in 2014 and found that four out of five Millennials “need (not just want) business to get involved in addressing social issues and believe business can make a greater impact.” One Millennial from China explained: “Compared to governments, businesses have the potential and the possibility to make real change in society happen faster and more efficiently. Businesses have the resources—from financial means, collective intelligence to technology—to con-tribute and make a difference.”5

Environmental Analysis

As new public issues arise, businesses must respond. Organizations need a systematic way of identifying, monitoring, and selecting public issues that warrant organizational action because of the risks or opportunities they present. Organizations rarely have full control of

5 The Future of Business Citizenship, People’s Insights Magazine, www.scribd.com.

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a public issue because of the many factors involved. But it is possible for the organization to create a management system that identifies and monitors issues as they emerge.

To identify those public issues that require attention and action, a firm needs a frame-work for seeking out and evaluating environmental information. (In this context, environ-mental means outside the organization; in Chapters 9 and 10, the term refers to the natural environment.) Environmental analysis is a method managers use to gather information about external issues and trends, so they can develop an organizational strategy that mini-mizes threats and takes advantage of new opportunities.

Environmental intelligence is the acquisition of information gained from analyzing the multiple environments affecting organizations. Acquiring this information may be done informally or as a formal management process. If done well, this environmental intelli-gence can help an organization avoid crises and spot opportunities.

According to management scholar Karl Albrecht, scanning to acquire environmental intelligence should focus on eight strategic radar screens.6 Radar is an instrument that uses microwave radiation to detect and locate distant objects, which are often displayed on a screen; law enforcement authorities use radar, for example, to track the speed of passing cars. Albrecht uses the analogy of radar to suggest that companies must have a way of tracking important developments that are outside of their immediate view. He identifies eight different environments that managers must systematically follow. These are shown in Figure 2.2 and described next.

∙ Customer environment includes the demographic factors, such as gender, age, marital status, and other factors, of the organization’s customers as well as their social values or preferences, buying preferences, and technology usage. For example, the explosion of social media has created opportunities for creating new marketing approaches that provide potential consumers with coupons or sales information on their smartphones as they leave their car and walk toward the retail store.

∙ Competitor environment includes information on the number and strength of the orga-nization’s competitors, whether they are potential or actual allies, patterns of aggres-sive growth versus static maintenance of market share, and the potential for customers to become competitors if they “insource” products or services previously purchased from the organization. (This environment is discussed further in the next section of this chapter.)

∙ Economic environment includes information about costs, prices, international trade, and any other features of the economic environment. The severe recession that hit the world’s economy in the late 2000s greatly shifted the behavior of customers, suppli-ers, creditors, and other stakeholders, dramatically impacting decision making in many firms.

∙ Technological environment includes the development of new technologies and their applications affecting the organization, its customers, and other stakeholder groups. Faster access to information through cell phones, tablets, and other handheld electronic devices changed how people around the world were alerted to the devastation of natural disasters or terrorist actions and how they could be contacted regarding new job open-ings or the launching of innovative consumer products.

∙ Social environment includes cultural patterns, values, beliefs, trends, and conflicts among the people in the societies where the organization conducts business or might

6 Adapted from Karl Albrecht, Corporate Radar: Tracking the Forces That Are Shaping Your Business (New York: American Management Association, 2000).

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conduct business. Issues of civil or human rights, family values, and the roles of spe-cial interest groups are important elements in acquiring intelligence from the social environment.

∙ Political environment includes the structure, processes, and actions of all levels of government—local, state, national, and international. Awareness of the stability or insta-bility of governments and their inclination or disinclination to pass laws and regulations is essential environmental intelligence for the organization. The emergence of strict environmental laws in Europe—including requirements to limit waste and provide for recycling at the end of a product’s life—have caused firms all over the world that sell to Europeans to rethink how they design and package their products.

∙ Legal environment includes patents, copyrights, trademarks, and considerations of intel-lectual property, as well as antitrust considerations and trade protectionism and organi-zational liability issues. China’s commitment to triple its patent filings from nearly one million in 2013 to three million by 2020 sent shock waves through the global business community.

∙ Geophysical environment relates to awareness of the physical surroundings of the orga-nization’s facilities and operations, whether it is the organization’s headquarters or its field offices and distribution centers, and the organization’s dependency and impact on natural resources such as minerals, water, land, or air. Growing concerns about global warming and climate change, for example, have caused many firms to seek to improve their energy efficiency.

FIGURE 2.2 Eight Strategic Radar Screens

Source: Adapted from Karl A. Albrecht, Corporate Radar: Tracking the Forces That Are Shaping Your Business (New York: American Management Association, 2000).

CustomerEnvironment

SeekingEnvironmental

Intelligence

SocialEnvironment

GeophysicalEnvironment

LegalEnvironment

PoliticalEnvironment

TechnologicalEnvironment

EconomicEnvironment

CompetitorEnvironment

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The eight strategic radar screens represent a system of interrelated segments, each one connected to and influencing the others.

Companies do not become experts in acquiring environmental intelligence overnight. New attitudes have to be developed, new routines learned, and new policies and action pro-grams designed. Many obstacles must be overcome in developing and implementing the effective scanning of the business environments. Some are structural, such as the report-ing relationships between groups of managers; others are cultural, such as changing tradi-tional ways of doing things. In addition, the dynamic nature of the business environments requires organizations to continually evaluate their environmental scanning procedures.

Competitive IntelligenceOne of the eight environments discussed by Albrecht is the competitor environment. The term competitive intelligence refers to the systematic and continuous process of gathering, analyzing, and managing external information about the organization’s competitors that can affect the organization’s plans, decisions, and operations. (As discussed in Chapter 1, competitors may be considered a nonmarket stakeholder of business.) The acquisition of this information benefits an organization by helping it better understand what other compa-nies in its industry are doing. Competitive intelligence enables managers in companies of all sizes to make informed decisions ranging from marketing, research and development, and investing tactics to long-term business strategies. “During difficult times, excellent competitive intelligence can be the differentiating factor in the marketplace,” explained Paul Meade, vice president of the research and consulting firm Best Practices. “Companies that can successfully gather and analyze competitive information, then implement strategic decisions based on that analysis, position themselves to be ahead of the pack.”7

However, the quest for competitors’ information can also raise numerous ethical issues. Businesses may overstep ethical and legal boundaries when attempting to learn as much as they can about their competitors, as the following example shows.

Today, Deloitte is one of the world’s largest accounting firms, employing 245,000 people in 150 countries and providing various accounting and consulting services. But, in the mid-2000s, the firm wanted to dramatically grow its federal security consulting services from a $300 million to more than a billion dollars in annual revenues. Deloitte formed a competitive intelligence unit (CIU). “Our job was to spy on Ernst & Young, PriceWaterhouseCoopers, KPMG, and some of the consulting competitors,” said a CIU employee. “We were trying to steal their pricing models, how they determined discounts, and especially new product lines or service lines.”

One example of how the CIU conducted its business occurred in 2007 when they learned that BearingPoint, a consulting firm, was struggling financially and had called an emergency meeting to determine its fate. Deloitte’s CIU agents traveled to the meeting location and spent several days stationing themselves at a bar, picking up scraps of conversation from distraught BearingPoint partners. Others spent time in bathrooms. “You can’t believe what people will say while they’re in there,” said a CIU agent. The best source for information was a Bearing Point meeting room the agents discovered. They entered the meeting room, found notes and other docu-ments left behind, and brought this information back to Deloitte’s CIU. According to one Deloitte CIU employee, “There were accounts that would have taken years

7 See Best Practices report at www.benchmarkingreports.com/competitiveintelligence.

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for Deloitte to develop relationships at the Department of Defense, the Department of Homeland Security, and other institutions. It was a huge opportunity.” A few years later, Deloitte was able to take advantage of an opportunity to buy BearingPoint’s North American public services unit for $350 million as Bearing-Point worked through a bankruptcy.

As the example above indicates, the perceived value of intellectual property or other information may be so great that businesses or their employees may be tempted to use unethical or illegal means to obtain such information. Although questionable, Deloitte employees did nothing illegal. Competitive intelligence acquired ethically remains one of the most valued assets sought by businesses. A business must balance the importance of acquiring information about its competitors’ practices with the need to comply with all applicable laws, domestic and international, and to follow the professional standards of fairness and honesty. Disclosure of all relevant information prior to conducting an inter-view and avoidance of conflicts of interest are just a few of the ethical guidelines promoted by the Strategic and Competitive Intelligence Professional’s code of ethics.8

Stakeholder MaterialityAfter the many environments are scanned, a company needs to evaluate and prioritize the impact that its stakeholders and their issues may have on the company. The importance attributed to a stakeholder is often referred to as materiality. Stakeholder materiality is an adaptation of an accounting term that focuses on the importance or significance of some-thing. In this case, it describes a method used to prioritize the relevance of the stakeholders and their issues to the company.

Sonoco, a global provider of packaging products and services, completed its first stakeholder materiality assessment of economic, environmental, and social issues in 2014. The company began by identifying potential stakeholders and created a list of nine stakeholders: customers, suppliers, peers, shareholders, non-governmental organizations, community leaders, government regulators, employees, and lead-ership. The company then searched various sources for information on each stakeholder, such as websites, corporate social responsibility reports, mission statements, and 10-K filings to create a list of issues. They used a four-point scale to rate each stakeholder from low to high based on the significance of the issue to the stakeholder. This scoring system enabled Sonoco to identify highly influential stakeholder groups as having the greatest potential impact on the company’s strategic objectives or those stakeholders most influenced by the company’s operations.9

After the information is collected, it needs to be analyzed and placed on a matrix that shows the importance of the issue for the stakeholder and the importance of the issue assigned by the company. This evaluation allows the company to prioritize their attention on issues in the quadrant showing issues of importance to stakeholders AND the company. An example of such a matrix representing stakeholder materiality at Nestlé is shown in Figure 2.3. Nestlé assessed the degree of stakeholder importance for an issue, as well as the potential impact of the issue on Nestlé. This combination enabled the company to place a higher, or lower, priority on many public issues.

8 For information about the professional association focusing on competitive intelligence, particularly with attention to ethical considerations, see the Strategic and Competitive Intelligence Professionals’ website at www.scip.org.9 Information from Nestlé’s website, www.nestleusa.com/csv/what-is-csv/materiality-and-stakeholder-engagement.

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The Issue Management Process

Once a company has identified a public issue and detects a gap between society’s expec-tations and its own practices, what are its next steps? Proactive companies do not wait for something to happen; they actively manage issues as they arise. The process of doing so is called issue management. The issue management process, illustrated in Figure 2.4, has five steps or stages. Each of these steps is explained below, using the example of the poul-try industry’s response to concerns over antibiotics in chickens.

Identify IssueIssue identification involves anticipating emerging concerns, sometimes called “horizon issues” because they seem to be just coming up over the horizon like the first morning sun. Sometimes managers become aware of issues by carefully tracking the media, experts’ views, activist opinion, and legislative developments to identify issues of concern to the pub-lic. Normally, this requires attention to all eight of the environments described in Figure 2.2. Organizations often use techniques of data searching, media analysis, and public surveys to track ideas, themes, and issues that may be relevant to their interests all over the world. They also rely on ongoing conversations with key stakeholders. Sometimes firms are com-pletely unaware of the issue before it emerges and must attempt to respond to mounting public pressure by activists or government regulators.

Consumer-health groups and the U.S. Food and Drug Administration (FDA) called on animal-breeding farms in the United States to reduce the use of antibiotics in

FIGURE 2.3 The Stakeholder Materiality Matrix

Source: Nestlé

Over- andunder-nutritionHuman

rightsWater

stewardship

Food andproductsafety

Climatechange

Food andnutrition security

Women’sempowerment

Water, sanitationand hygiene

Responsible sourcingand traceability

Fair employmentand youthemployability

Employee safety,health, and wellness

Moderate

Low

Sta

keh

old

er

Inte

rest

Hig

h

Significant

Environmental sustainability Our people, human rights, and complianceWaterRural developmentNutrition

Impact on Nestlé

Major

Natural resourcestewardship

Rural development andpoverty alleviation

Animalwelfare

Business ethics

Responsiblemarketing

and influence

Resource e�ciency, (food)waste, and circular economy

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their feed for cattle, hogs and chickens. Many poultry producers, for example, used antibiotics in their chickens’ feed since it increased their weight and prevented out-breaks of illnesses. But the consumer groups and the FDA charged that overuse of antibiotics also increased the development of potentially deadly bacteria that antibi-otics could not kill. These antibiotic-resistance bacteria could be transferred to peo-ple who ate the meat (or consumed the milk or eggs) of treated animals. Although the health risks were small, public outcry increased dramatically, and consumers called for action by the animal producers.10

The concern over increased health risk from antibiotics caught poultry producers by surprise, and many firms began an immediate investigation into the issue.

Analyze IssueOnce an issue has been identified, its implications must be analyzed. Organizations must understand how the issue is likely to evolve, and how it is likely to affect them. For each company, the ramifications of the issue will be different.

Understanding how the use of antibiotics could affect the health of humans con-suming chickens was complex. On one hand, the company was concerned about the public’s safety, and did not want customers to become ill if they consumed chickens raised with antibiotics. On the other hand, antibiotics were a mainstay for most poultry producers in the United States. Bigger, healthier chickens trans-lated into greater profits. Poultry producers were unsure of the consequences of removing antibiotics for their companies, both in terms of their chickens’ health but also the firms’ profitability. One outbreak of illness could quickly spread throughout their entire flock of chickens, resulting in devastating costs for the

10 “Tyson Seeks Lead in No-Antibiotics Poultry,” The Wall Street Journal, February 21, 2017, www.wsj.com.

FIGURE 2.4The Issue Management Process IDENTIFY

ISSUEANALYZE

ISSUE

GENERATEOPTIONS

TAKEACTION

EVALUATERESULTS

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firm. Yet, they could not ignore the rising outrage over the use of antibiotics in the raising of chickens.11

Generate OptionsAn issue’s public profile indicates to managers how significant an issue is for the organi-zation, but it does not tell them what to do. The next step in the issue management process involves generating, evaluating, and selecting among possible options. This requires com-plex judgments that incorporate ethical considerations, the organization’s reputation and good name, and other nonquantifiable factors.

Many of the poultry producers started to investigate if there were alternatives avail-able to them to replace the use of antibiotics. Firms explored the use of organic and antibiotics-free production practices that could keep the flocks healthy and robust, while also keeping pace with the changing consumer demands. The use of probiotics—beneficial, plant-based bacteria that can strengthen immune systems—appeared to be a viable alternative.

Selecting an appropriate response often involves a creative process of considering vari-ous alternatives and rigorously evaluating them to see how they work in practice.

Take ActionOnce an option has been chosen, the organization must design and implement a plan of action. Sometimes there may be unintended consequences from the actions undertaken by the company.

Purdue Farms, the third-largest U.S. poultry producer, addressed emerging con-sumer concerns about antibiotics by announcing its “no antibiotics ever” policy. The firm stated it would eliminate, by June 2016, antibiotics in all chicken products sold in supermarkets across the United States. Other poultry producers quickly followed. Tyson Foods, the country’s largest poultry producer, announced in February 2017 that it would eliminate antibiotics used in its chicken products, including breasts, wings, and nuggets. “We believe our responsibility is to grow and grow responsibly,” said Tyson’s CEO Tom Hayes.12

Evaluate ResultsOnce an organization has implemented the issue management program, it must continue to assess the results and make adjustments if necessary. Many managers see issue manage-ment as a continuous process, rather than one that comes to a clear conclusion.

Although specific results from the switch to chickens raised without antibiotics had not yet been fully studied, experts made some predictions. Some argued that the likelihood of serious illness, even death, caused by ingesting antibiotic-resistant bacteria would be reduced. Others argued that more medical research jobs would be created to study probiotics and other alternative treatments to keep poultry and livestock healthy and growing.

11 Ibid., The Wall Street Journal, February 21, 2017, and “Perdue to Eliminate Antibiotics in Some Chicken Products,” The Wall Street Journal, February 26, 2016, www.wsj.com.12 Ibid., The Wall Street Journal, February 21, 2017, and “Adjuncts and Alternatives in the Time of Antibiotic Resistance and in Feed Antibiotic Bans,” Microbial Biotechnology, June 22, 2017, onlinelibrary.wiley.com.

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This example illustrates the complexity of the issue management process. Figure  2.4 is deliberately drawn in the form of a loop. When working well, the issue management process continuously cycles back to the beginning and repeats, pulling in more informa-tion, generating more options, and improving programmatic response. Such was the case with the concern over the use of antibiotics in animals. Poultry producers stated they were committed to addressing the issue and knew that they needed to monitor the progress being made with the development of technologies and new medicines to fully address an emerg-ing public issue.

Contemporary issue management is truly an interactive process, as forward-thinking companies must continually engage in a dialogue with their stakeholders about issues that matter, as Purdue Farms, Tyson Foods, and other firms have learned. New challenges may emerge from anywhere in the world and at any time. Managers must not only implement programs, but continue to reassess their actions to be consistent with both ethical practices and long-term survival.

Organizing for Effective Issue Management

Who manages public issues? What departments and people are involved? There is no sim-ple answer to this question. Figure 1.5, presented in Chapter 1, showed that the modern corporation has many boundary-spanning departments. Which part of the organization is mobilized to address a particular emerging issue often depends on the nature of the issue itself. For example, if the issue has implications for public policy or government regula-tions, the public affairs or government relations department may take a leadership role. (The public affairs department is further discussed in Chapter 8.) If the issue is an environ-mental one, the department of sustainability or environment, health, and safety may take on this role. Some companies combine multiple issue management functions in an office of external relations or corporate affairs. The following example illustrates how one com-pany has organized to manage emerging public issues.

At Publix, the largest employee-owned grocery chain in the United States with revenues of over $34.6 billion in 2017, the coordination of public issues is handled by six different, yet related, teams: corporate communications, customer care, government relations, media and community relations, social media, and special projects. The corporate communications team handles a wide array of internal communications, including an eight-page monthly newsletter, Publix News. When customers contact the company with a potential public issue, the customer care team responds to resolve customer concerns and answer customer questions. If the public issue has a governmental element, then the government relations team is organized to communicate with federal, state, and local officials regarding matters affecting the company’s ability to effectively compete in the marketplace. Each division within the company has a media and community relations team who interacts with the news media and the communities served by the company to address any public issue. A social media team at Publix uses Facebook, Twitter, and other channels to monitor and handle any emerging public issues. And, finally, the special projects team preserves and promotes the company’s history as an important part of the Publix culture. The company relies on its tradition to guide responses to public issues as they arise.13

13 See the Publix Company website at corporate.publix.com.

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Public affairs professionals help companies and nonprofits manage their operations by anticipating governmental concerns and actions, understanding how stakeholders influence a firm’s license to operate, and helping their organization deal with emerging threats and opportunities. The Foundation for Public Affairs (FPA) reported in 2017 that “when politi-cal risk and economic uncertainty are high, . . . the public affairs function becomes even more indispensable.”14 FPA survey data showed that 56 percent of companies had increased their public affairs budgets in the previous three years and only 26 percent had experienced a decrease. And CEOs are increasingly getting involved in public affairs, with 57 percent engaged moderately or extensively and only 9 percent not engaged at all. One example of an exemplary corporate response to an important public issue is described in Exhibit 2.A.

What kinds of managers are best able to anticipate and respond effectively to emerging public issues? What skill sets are required? The European Academy of Business in Society (EABIS) undertook a major study of leaders in companies participating in the United Nations Global Compact. (This initiative is a set of basic principles covering labor, human rights, and environmental standards, to which companies can voluntarily commit.) The researchers were interested in the knowledge and skills required of what they called the “global leader of tomorrow.”

They found that effective global leadership on these public issues required three basic capabilities. The first was an understanding of the changing business context: emerging environmental and social trends affecting the firm. The second was an ability to lead in the face of complexity. Many emerging issues, the researchers found, were surrounded by ambiguity; to deal with them, leaders needed to be flexible, creative, and willing to learn from their mistakes. The final capability was connectedness: the ability to engage with external stakeholders in dialogue and partnership. More than three-fourths of executives polled said that these skills were important.15

14 Quotation from “The State of Corporate Public Affairs,” Foundation for Public Affairs, 2017.15 European Academy of Business in Society, Developing the Global Leader of Tomorrow (United Kingdom: Ashridge, December 2008). Based on a global survey of 194 CEOs and senior executives in September–October 2008.

Coca-Cola Sets Recycling Goals

For many years, Coca-Cola was the target of environmental activists because the firm produced billions of plastic bottles that often ended up in landfills and oceans. In January 2018, the company announced an ambitious sustainability goal: it would collect and recycle the equivalent of all the packaging it put out into the world by 2030. The program was called “A World Without Waste” and included investing in more efficient packaging, local recycling programs, and consumer education. The program was announced shortly after Greenpeace, an environmental advocacy group, identified Coca-Cola, PepsiCo, and Nestlé as some of the world’s worst polluters. Greenpeace was also critical of Coca-Cola’s new sustainability initiative. “The plan failed to include any reduction of the company’s rapidly increasing use of single-use plastic bottles globally, which now stands at well over 110 billion annually,” according to a Greenpeace press release. Coca-Cola CEO James Quincey disagreed. “If we recollect all the bottles, there is no such thing a single use bottle. Every bottle comes back and every bottle has another life.” Rather than tackle the difficult task of collecting every bottle it produced, Coca-Cola aimed to collect an equivalent number of bottles. But, Quincey admitted that the biggest challenge for his company’s plan would be in developing countries that did not have modern systems of waste collection. “That’s clearly going to be a lot of groundwork with a lot of other organizations and the governments to start building that infrastructure.”

Source: “Coca-Cola, Criticized for Plastic Bottles, Sets Recycling Goals,” The Wall Street Journal, January 19, 2018, www.wsj.com.

Exhibit 2.A

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Stakeholder Engagement

One of the key themes of this book is that companies that actively engage with stake-holders do a better job of managing a wide range of issues than companies that do not. The term stakeholder engagement is used to refer to this process of ongoing relationship building between a business and its stakeholders. In the animal-breeding farms example presented earlier in this chapter, the companies’ challenge was to engage with its various stakeholder groups, consumers, the media, government agencies, suppliers and others, in addressing an emerging issue of food product safety. This section will further explore the various forms the business–stakeholder relationship takes, when stakeholder engagement is likely to occur, what drives this engagement, and the expanding role assumed by social media in stakeholder engagement.

Stages in the Business–Stakeholder RelationshipOver time, the nature of business’s relationship with its stakeholders often evolves through a series of stages. Scholars have characterized these stages as inactive, reactive, proactive, and interactive, with each stage representing a deepening of the relationship. Sometimes, companies progress through this sequence from one stage to the next; other companies remain at one stage or another, or move backward in the sequence.16

∙ Inactive companies simply ignore stakeholder concerns. These firms may believe—often incorrectly—that they can make decisions unilaterally, without taking into con-sideration their impact on others. Executives at Home Depot failed to listen to their employees’ concerns about potential breaches of the company’s data security systems and later experienced the theft of detailed consumer information from 56 million credit and debit cards. Their inactive response was costly: according to some estimates, the information from the stolen cards could be used to make $3 billion in illegal purchases.

∙ Companies that adopt a reactive posture generally act only when forced to do so, and then in a defensive manner. For example, in the film A Civil Action, based on a true story, W. R. Grace (a company that was later bought by Beatrice Foods) allegedly dumped toxic chemicals that leaked into underground wells used for drinking water, causing illness and death in the community of Woburn, Massachusetts. The company paid no attention to the problem until forced to defend itself in a lawsuit brought by a crusading lawyer on behalf of members of the community.

∙ Proactive companies try to anticipate stakeholder concerns. These firms use environ-mental scanning practices to identify emerging public issues. They often have special-ized departments, such as those at Publix, described earlier in the chapter. These firms are much less likely to be blindsided by crises and negative surprises. Stakeholders and their concerns are still, however, considered a problem to be managed, rather than a source of competitive advantage.

∙ Finally, an interactive stance means that companies actively engage with stakeholders in an ongoing relationship of mutual respect, openness, and trust. For example, in an effort to address continuing high unemployment rates, Starbucks teamed with Opportu-nity Finance Network, a group of community development financial institutions, to launch “Create Jobs for USA.” Donations from Starbucks customers, employees, and others were pooled into a nationwide fund to promote community business lending. The

16 This typology was first introduced in Lee Preston and James E. Post, Private Management and Public Policy (Englewood Cliffs, NJ: Prentice Hall, 1975). For a more recent discussion, see Sandra Waddock and Andreas Rasche, Building the Responsible Enterprise: Where Vision and Values Meet Value (Palo Alto: Stanford University Press, 2012).

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focus of this program later expanded to include veterans with a goal of employing 10,000 veterans and active duty spouses by 2018.17

Firms with this approach recognize that positive stakeholder relationships are a source of value and competitive advantage for the company. They know that these relationships must be nurtured over time.

Drivers of Stakeholder EngagementWhen are companies most likely to engage with stakeholders, that is, to be at the interac-tive stage? What drives companies to go beyond an inactive or reactive stage to a proactive or interactive stage of stakeholder engagement?

Stakeholder engagement is, at its core, a relationship. The participation of a business orga-nization and at least one stakeholder organization is necessary, by definition, to constitute engagement. In one scholar’s view, engagement is most likely when the company and its stake-holders both have an urgent and important goal, the motivation to participate, and the organi-zational capacity to engage with one another. These three elements are presented in Figure 2.5.

Goals

For stakeholder engagement to occur, both the business and the stakeholder must have a problem that they want solved. The problem must be both important and urgent (the concept of stakeholder materiality was discussed earlier in this chapter). Business is often spurred to act when it recognizes a gap between its actions and public expectations, as discussed earlier. The company may perceive this gap as a reputational crisis or a threat to its license to operate in society. For their part, stakeholders are typically concerned about an issue important to them—whether child labor, animal cruelty, environmental harm, or something else—that they want to see addressed.

Motivation

Both sides must also be motivated to work with one another to solve the problem. For example, the company may realize that the stakeholder group has technical expertise to help it address an issue. Or, it needs the stakeholder’s approval, because the stakeholder is in a position to influence policymakers, damage a company’s reputation, or bring a law-suit. Stakeholders may realize that the best way actually to bring about change is to help a

17 These programs are profiled in Starbucks’ Global Responsibility Report at globalassets.starbucks.com/assets/.

FIGURE 2.5Drivers of Stakeholder Engagement

Source: Adapted from Anne T. Lawrence, “The Drivers of Stakeholder Engagement: Reflections on the Case of Royal Dutch/Shell,” Journal of Corporate Citizenship, Summer 2002, pp. 71–85.

Company Stakeholders(s)

Goal To improve corporate reputation; to earn a license to operate; to win approval of society

To change corporate behavior on an issue of concern

Motivation Needs stakeholder involvement because of their expertise or control of critical resources

Governmental campaigns, protest perceived as inadequate to change corporate behavior

Organizational capacity Top leaders committed to engagement; well-funded department of external (stakeholder) affairs

Experienced staff; core group of activists committed to dialogue with business

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company alter its behavior. In other words, both sides depend on each other to accomplish their goals; they cannot accomplish their objectives on their own. (Theorists sometimes refer to this as interdependence.)

Organizational Capacity

Each side must have the organizational capacity to engage the other in a productive dia-logue. For the business, this may include support from top leadership and an adequately funded external affairs or comparable department with a reporting relationship to top exec-utives. It may also include an issue management process that provides an opportunity for leaders to identify and respond quickly to shifts in the external environment. For the stake-holder, this means a leadership or a significant faction that supports dialogue and individu-als or organizational units with expertise in working with the business community.

In short, engagement is most likely to occur where both companies and stakeholders perceive an important and urgent problem, see each other as essential to a solution, and have the organizational capacity to interact with one another.

The Role of Social Media in Stakeholder EngagementSocial media plays an increasingly important role in businesses’ effort to address public issues and engage stakeholders. Beyond the common use of social media as an advertising tool, many companies now use social networks to identify and solve problems faster, share information better among their employees and partners, and bring customers’ ideas for new product designs to market earlier.

Experts argue that corporate social networking has its advantages and its disasdvan-tages. Some studies show that many employees enjoy creating a corporate social networking page that is separate from their public social networking profile. While adding work colleagues and supervisors to a public social networking group is pos-sible, many people prefer to keep their social lives separate from their work lives. In addition, creating internal blog posts, commenting on projects, and keeping up with work-related news is advantageous to some workers, supporting the building of social network pages at work.

Yet, experts also point out that a corporate social network can cost thousands of dollars to build. In order to erect an internal networking platform to house the employees’ social network pages, numerous specialists must be hired. Once a platform is con-structed, employees must spend the time to create profiles, maintain updates, and net-work within a corporate social networking group, generally all occurring on company time. Many employees do not want to spend the time or effort building a corporate net-working page. Since employees cannot access an internal social networking group after leaving a job, many employees feel as though spending time working on a networking page is futile. In addition, any information posted to a corporate social networking page remains the property of a company. Thus, most employees looking to gain recognition with new customers and new employers will not spend time building an internal social networking page.18

Despite some of the reservations voiced by employees, businesses and their public affairs managers have increasingly turned to social media platforms to engage with mul-tiple stakeholders, resulting in communication that has become faster and more effective.

18 Adapted from “What Is Social Networking?” Wisegeek, n.d., www.wisegeek.com.

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Stakeholder Dialogue

The process of engaging with stakeholders can take many forms, but it often eventually involves dialogue with stakeholders. One management theorist has defined dialogue as “the art of thinking together.”19 In stakeholder dialogue, a business and its stakeholders come together for face-to-face conversations about issues of common concern. There, they attempt to describe their core interests and concerns, define a common definition of the problem, invent innovative solutions for mutual gain, and establish procedures for imple-menting solutions. To be successful, the process requires that participants express their own views fully, listen carefully and respectfully to others, and open themselves to creative thinking and new ways of looking at and solving a problem. The promise of dialogue is that, together, they can draw on the understandings and concerns of all parties to develop solutions that none of them, acting alone, could have envisioned or implemented. A power-ful, global example of stakeholder dialogue leading to action is described in Exhibit 2.B.20

Stakeholder NetworksDialogue between a single firm and its stakeholders is sometimes insufficient to address an issue effectively. Corporations sometimes encounter public issues that they can address effectively only by working collaboratively with other businesses and concerned persons and organizations in stakeholder networks. One such issue that confronted Nike, Inc., was

19 William Isaacs, Dialogue and the Art of Thinking Together (New York: Doubleday, 1999).20 This section draws on the discussion in Anne T. Lawrence and Ann Svendsen, The Clayoquot Controversy: A Stakeholder Dialogue Simulation (Vancouver: Centre for Innovation in Management, 2002). The argument for the benefits of stakeholder engagement is fully developed in Ann Svendsen, The Stakeholder Strategy: Profiting from Collaborative Business Relation-ships (San Francisco: Berrett-Koehler, 1998).

Merck and Access Accelerated

Around the world, approximately 400 million people lack access to effective and affordable health care. According to the World Health Organization, low- and middle-income countries bear about 90 percent of the world’s disease burden. Merck, a German-based multinational chemical, pharmaceutical, and life sci-ences company, began a global partnership program, Access Accelerated, to tackle this complex challenge by researching innovative solutions, developing new approaches, and improving existing programs to help people at the point of care. At the 2017 World Economic Forum, Merck convened with 21 other leading pharmaceutical companies and dozens of multilateral organizations, government agencies, and NGOs, as well as academic institutions, health industry associations, and experts from the private sector. They began a dialogue to explore accessing information on the world’s most pressing health issues and to design how to best launch global initiatives to focus on improving both treatment and prevention of noncommunicable diseases in low- and middle-income countries. By 2018, Merck and its business partners had joined the Kenya Ministry of Health, the World Bank Group, and AMPATH, a Kenyan hospital, to launch the first noncommunicable disease (NCD) county pilots. The pilots integrated NCD services into primary health care in two Kenyan counties: Busia and Trans Nzoia. In another effort, Celgene Corporation, a business partner in Access Accelerated, announced the launch of Celgene Cancer Care Links, a new grant program designed to support and enhance patient cancer care in resource-constrained countries.

Source: See Merck’s Corporate Responsibility Report at reports.emdgroup.com/2016/cr-report/products/access-to-health.html and the Access Accelerated website, accessaccelerated.org

Exhibit 2.B

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a growing demand by environmentally aware consumers for apparel and shoes made from organic cotton.

Cotton, traditionally cultivated with large quantities of synthetic fertilizers, pesti-cides, and herbicides, is one of the world’s most environmentally destructive crops. In the late 1990s, in response both to consumer pressure and to its own internal commitments, Nike began for the first time to incorporate organic cotton into its sports apparel products. Its intention was to ramp up slowly, achieving 5 percent organic content by 2010. However, the company soon encountered barriers to achieving even these limited objectives. Farmers were reluctant to transition to organic methods without a sure market, processors found it inefficient to shut down production lines to clean them for organic runs, and banks were unwilling to loan money for unproven technologies. The solution, it turned out, involved extensive collaboration with groups throughout the supply chain—farmers, cooperatives, merchants, processors, and financial institutions—as well as other companies that were buyers of cotton, to facilitate the emergence of a global market for organic cot-ton. By 2015, 88 to 90 percent of Nike’s cotton-containing apparel used at least 5 percent organic cotton. Nike reported in its 2014–2015 sustainable business report that they are committed to their goal of “100% of our cotton more sustainably (certified organic, licensed to the Better Cotton Standard System for recycled cotton) across NIKE, Inc. by the end of calendar year 2020.”21

In this instance, Nike realized that in order to reach its objective, it would be necessary to become involved in building a multi-party, international network of organizations with a shared interest in the issue of organic cotton.

The Benefits of EngagementEngaging interactively with stakeholders—whether through dialogue, network building, or some other process—carries a number of potential benefits. Managers increasingly rec-ognize the critical nature of this corporate strategy as the number of stakeholders and the complexity of the issues involving stakeholders are increasing significantly, as one busi-ness consulting organization reports.22

In an era of hyper-transparency and intensifying political and social disruptions, companies are re-evaluating their purpose in society and the benefits of engaging with multiple stakeholders. There are growing calls from government and civil society for corporations to become partners in supporting a more inclusive econ-omy and sustainable environment and these expectations will only increase. More than ever before, companies face competitive pressure to integrate new ideas and voices into their work. These changes are adding significant value to the business and the communities in which they operate.23

Companies deeply engaging in stakeholder partnerships bring a number of dis-tinct strengths. Stakeholder groups are often aware of shifts in popular sentiment before

21 Nike’s description of its sustainability targets and measures are provided in Nike’s Sustainable Business Report, 2014–2015 found at about.nike.com.22 For an overview of stakeholder engagement, see Michael Yaziji and Jonathan Doh, NGOs and Corporations: Conflict and Collaboration: (Cambridge, UK: Cambridge University Press, 2009), ch. 7, “Corporate-NGO Engagements: From Conflict to Collaboration,” pp. 123–45.23 “The Future of Stakeholder Engagement,” BSR, October 2016, p. 3.

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companies are, and are thus able to alert companies to emerging issues. For example, as described earlier in this chapter, Purdue Farms’ and Tyson Foods’ engagements with consumer-activist groups and government agencies helped raise its awareness of concerns about their antibiotic use in animals. Stakeholders often operate in networks of organi-zations very different from the company’s; interacting with them gives a firm access to information in these networks. As introduced at the beginning of this chapter, businesses took action against various social issues, joining social activist and community groups in protest of the government’s actions. Community groups raised important issues about gun violence and gun control after a school shooting in Florida, causing businesses to re-think their positions on these social issues, as discussed at the end of this chapter.

Firms are learning that their engagement with stakeholders is of critical importance to the organization and need to address multiple levels of engagement. This engagement should include both internal, as well as external, stakeholders and emphasize issues that directly affect corporate strategy. As the BSR report on stakeholder engagement points out, there are five drivers fueling a change in stakeholder engagement: communication, indi-vidual empowerment, automation of work, climate change and other sustainability issues, and supply chain impact.24

Companies are learning that it is important to take a strategic approach to the manage-ment of public issues, both domestically and globally. This requires thinking ahead, under-standing what is important to stakeholders, scanning the environment, and formulating action plans to anticipate changes in the external environment. Effective issue management requires involvement both by professional staff and leaders at top levels of the organiza-tion. It entails communicating across organizational boundaries, engaging with the public, and working creatively with stakeholders to solve complex problems.

24 Each of these drivers of stakeholder engagement are discussed in detail in “The Future of Stakeholder Engagement, Ibid.

∙ A public issue is an issue that is of mutual concern to an organization and one or more of the organization’s stakeholders. Stakeholders expect a level of performance by busi-nesses, and if it is not met a gap between performance and expectation emerges. The larger the gap, the greater risk of stakeholder backlash or missed business opportunity.

∙ The eight strategic radar screens (the customer, competitor, economic, technological, social, political, legal, and geophysical environments) enable public affairs manag-ers to assess and acquire information regarding their business environments. Manag-ers must also assess the importance or materiality of public issues to the firm and its stakeholders.

∙ The issue management process includes identification and analysis of issues, the gener-ation of options, action, and evaluation of the results.

∙ In the modern corporation, the issue management process takes place in many boundary- spanning departments. Some firms have a department of external affairs or corporate relations to coordinate these activities and top management support is essential for effective issue management.

∙ Stakeholder engagement involves building relationships between a business firm and its stakeholders around issues of common concern and is enhanced by understanding the goals, motivations, and organizational capacities relevant to the engagement. Social media is playing a more expansive role in stakeholder engagement.

∙ Stakeholder dialogue is central to good stakeholder engagement, supported by network building or partnerships.

Summary

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Discussion Case: Businesses Respond to the Movement for School Safety

The quiet community of Parkland, Florida, was rocked in 2018 when a 19-year-old former student entered Marjory Stoneman Douglas High School with a duffel bag containing an AR-15-style rifle, a vest with additional magazines for the weapon, and a semi-automatic version of the M16 rifle used by the U.S. military. Within minutes, he had shot and killed 17 people, and the nation mourned another tragic school shooting.

In response, Parkland students launched the #NeverAgain movement and protested con-tinuing gun violence, especially in schools; the lack of gun control measures; and a mental health system that had allowed someone with a troubled history to purchase an assault rifle. A month later hundreds of thousands of people—children, parents, politicians, and celebrities—gathered for “The March For Our Lives” in Washington, DC, jamming onto Pennsylvania Avenue from the White House to the U.S. Capitol in what may have been the biggest rally for tighter gun control in American history. Other similar marches and pro-tests were held that day in nearly every major U.S. city. Many called on Congress to take action and pass strict gun control legislation, as had also occurred after prior mass shooting incidents in Las Vegas, Newtown, Orlando, and other cities and towns.

Some protesters simply called for a ban on assault rifles and more thorough back-ground checks for gun purchasers. Others specifically targeted the National Rifle Asso-ciation (NRA), an advocacy organization that had vigorously opposed any restrictions on gun ownership. In response to the Parkland students, NRA’s CEO Wayne LaPierre told an audience at the Conservative Political Action Conference that “as usual the opportunists wasted not one second to exploit tragedy for gain,” adding that gun control

Internet Resources

www.wn.com/publicissues World News, Public Issueswww.nifi.org National Issues Forumwww.un.org/en/globalissues United Nations, Global Issueswww.issuemanagement.org Issue Management Councilwww.scip.org Strategic and Competitive Intelligence Professionalswww.wfs.org World Future Societywww.globalissues.org Global Issuesmillennium-project.org The Millennium Projectwww.cfr.org Council on Foreign Relationspac.org/fpa Foundation for Public Affairs, Public Affairs Council

Key Terms stakeholder engagement, 38stakeholder dialogue, 41stakeholder materiality, 32stakeholder network, 41

competitive intelligence, 31environmental analysis, 29environmental intelligence, 29issue management, 33

issue management process, 33performance–expectations gap, 26public issue, 26

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advocates and the media “hate the NRA, they hate the Second Amendment [to the U.S. Constitution, which states the right of the people to keep and bear arms], [and] they hate individual freedom.”

In the wake of the Parkland shootings and subsequent protests, several companies broke their relationship with the NRA and its members. MetLife, a large insurance company, announced it would stop providing discounts for auto and home insurance for NRA mem-bers. “We value all our customers but have decided to end our discount program with the NRA,” the company announced in a press statement. The cybersecurity firm Syman-tec stopped its discount program for NRA members who purchased its LifeLock identity theft protection service and Norton antivirus software. SimpliSafe, a home security ser-vices company, ended its NRA promotions. Numerous rental car companies, including Hertz, Enterprise (which also operates Alamo and National), and Avis Budget, ended their NRA-membership discount programs.

The First National Bank of Omaha was among the first banks to end a Visa credit card with NRA branding that offered cardholders 5 percent cashback on gas and sporting goods purchases. Bank of America said they would no longer lend money to manufactur-ers of military-inspired firearms that civilians could use, such as AR-15-style rifles. Delta and United Airlines, two of America’s largest passenger airline carriers, cut ties with the NRA after a call to boycott the NRA became a top trend on Twitter. Both airline compa-nies ended discount programs for NRA members through their group travel programs, including United’s program to offer discounts to NRA members traveling to the NRA’s annual meeting. “Bank and other companies are sensitive to being on the wrong side of a social media campaign, which can spread pretty quickly these days,” said University of Michigan marketing professor Erik Gordon. “They don’t want to risk having people march or boycott.”

The NRA was quick to fire back. In an official statement, the organization said, “Some corporations have decided to punish NRA membership in a shameful display of political and civic cowardice. In time, these brands will be replaced.”

Some businesses experienced a backlash to their actions. Senator Michael Crapo, the head of the Senate banking committee, sent blistering letters to top executives at some major banks accusing them of using their market power to manage social policy. He warned them against developing ways to monitor gun transactions through their payments systems. The Georgia state legislature removed a provision in a tax bill which would have given Delta Airlines a $40 million airline fuel tax exemption. Analysts calculated that only 13 NRA members actually had used Delta’s group travel discount, resulting in a cost to Delta of more than $3 million per NRA passenger served. Delta’s CEO responded, “The decision [to cancel the NRA discount] was not made for economic gain and our values are not for sale.” Others argued that the so-called liberal reaction by businesses to join the gun protesters galvanized conservative groups, deepening their support of the NRA and their resolve to protect their right to bear arms.

Sources: “NRA-Affiliated Businesses Shed Ties after Parkland, Florida, School Shooting,” USA Today, February 23, 2018, www.usatoday.com; “Firms Reassess Involvement in Gun Industry in Wake of Florida Shooting,” The Wall Street Journal, February 25, 2018, www.wsj.com; “Banks Tried to Curb Gun Sales; Now Republicans Are Trying to Stop Them,” The New York Times, May 25, 2018, www.nytimes.com; and, “Only 13 NRA Members Used Delta’s Discount, It Cost the Airline a $40 Million Tax Break,” Washington Post, March 3, 2018, www.washingtonpost.com.

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Discussion Questions

1. What was the public issue facing the companies in this case?2. Describe the “performance–expectations gap” found in the case. What were the stake-

holders’ (community and school students) expectations, and how did they differ from businesses’ performance?

3. If you applied the strategic radar screens model to this case, which of the eight environ-ments would be most significant, and why?

4. Apply the issue management life cycle process model to this case. Which stages of the process can you identify?

5. In your opinion, did businesses respond appropriately to this issue? Why or why not?6. If you had been a manager of one of the airlines or banks discussed in the case, what

would you have decided to do (or not do) in the face of emerging public concern about gun violence in schools?

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C H A P T E R T H R E E

Corporate Social Responsibility and CitizenshipThe idea that businesses bear broad responsibilities to society as they pursue economic goals is an age-old belief. Both market and nonmarket stakeholders expect businesses to act responsibly, and many companies have responded by making social goals a part of their overall business operations and adopting the goal of being a good corporate citizen. Businesses embracing these responsibili-ties often build positive relationships with stakeholders, discover business opportunities in serving society, and transform a concern for financial performance into a vision of integrated financial, social, and environmental performance. Business ventures of all sizes—entrepreneurial, small to medium business enterprises, and corporate endeavors—hold innate responsibilities to those they impact market and nonmarket stakeholders. Establishing effective structures and processes to meet a com-pany’s social and corporate citizenship responsibilities, assessing the results of these efforts, and reporting on the firm’s performance to the public are important challenges facing today’s managers and business owners.

This Chapter Focuses on These Key Learning Objectives:

LO 3-1 Understanding the role of big business and the responsible use of corporate power in a democratic society.

LO 3-2 Knowing when the idea of corporate social responsibility originated and investigating how a com-pany’s purpose or mission can integrate social objectives with economic and legal objectives.

LO 3-3 Examining the key arguments in support of and concerns about corporate social responsibility.

LO 3-4 Defining global corporate citizenship and recognizing the rapidly evolving management practices to support global citizenship.

LO 3-5 Examining businesses with an explicitly social mission, such as social ventures and B corporations.

LO 3-6 Distinguishing among the sequential stages of global corporate citizenship.

LO 3-7 Understanding how businesses assess and report their social performance.

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Do managers have a responsibility to their shareholders? Certainly they do, because the owners of the business have invested their capital in the firm, exhibiting the ownership theory of the firm presented in Chapter 1. Do managers also have a responsibility, a social responsibility, to their company’s other market and nonmarket stakeholders—the people who live where the firm operates, who purchase the firm’s product or service, or who work for the firm? Does the stakeholder theory of the firm, described in detail in Chapter 1, expand a firm’s obligations to include multiple stakeholders present in an interactive social system? Generally, yes, but while managers may have a clear responsibility to respond to all stakeholders, just how far should this responsibility go? Consider the following examples:

Starbucks Coffee Company launched a $70 million initiative to help coffee farming communities around the world mitigate their climate change impacts and promote long-term crop stability. Starbucks transformed a 240-hectare farm located on the slopes of the Poas Volcano in Costa Rica into a global agronomy center, enabling the company to expand its Coffee and Farming Equity practices program (C.A.F.E.). Starbucks’ chairman Howard Schultz said, “This investment, and the cumulative impact it will have when combined with programs we have put into place over the last forty years, will support the resiliency of coffee farmers and their families as well as one million people that represent our collective coffee supply chain.”1

Joshua Shapiro visited three small villages in Uganda and was shocked by the unsafe cooking conditions he saw there. Kitchens were small, dark, and unventi-lated. People could barely breathe. According to the World Health Organization, around 3 billion people cook and heat their homes using open fires and simple stoves burning wood, animal dung, and crop waste for fuel. Shapiro, an engineer in Carnegie Mellon University’s CREATE lab, began working on an idea and returned five years later as part of the Toyota’s Ideas for Good project to install a half-dozen hand-built, solar-powered ventilation systems to clear the air in the kitchens. Schapiro and his venture partner, Mike Taylor, assembled and installed an addi-tional 25 systems during their second trip to Uganda and planned to construct hundreds more. These social entrepreneurs were funded by gifts and grants from various nonprofit organizations, corporations, and individuals.2

Are the efforts described above examples of social responsibility and citizenship prac-ticed by a corporation and social entrepreneurs? Do they represent a successful merger of social and economic objectives, or should these programs be questioned as inappropriate uses of business assets—finances, personnel, and products? How far should an organization or entrepreneur go to help those in society in need of their support? How much is too much?

This chapter describes the role business plays in society, introduces the concepts of cor-porate social responsibility and global citizenship, and describes how businesses implement them in practice. How organizations should balance their multiple responsibilities— economic, legal, and social—and become a valued corporate citizen is an ongoing chal-lenge. What are the advantages and drawbacks of being socially responsible? Should the purpose or mission of the business explicitly seek to integrate social objectives with eco-nomic objectives? How does a business become a better corporate citizen; what steps are necessary? What standards do businesses use to assess their social performance, and how do they report their performance to stakeholders?

1 “Starbucks Expands $70 Million Ethical Sourcing Program with New Global Agronomy Center,” Fort Mills Times, March 19, 2013, www.fortmilltimes.com.2 “CMU Researchers Hope to Install Ventilation Systems to Remove Harmful Cooking Fumes,” Pittsburgh Post-Gazette, July 8, 2017, www.post-gazette.com.

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CORPORATE POWER AND RESPONSIBILITY

Undeniably, businesses, especially large corporations—whether by intention or accident, and whether for good or evil—play a major role in all that occurs in society. The power exerted by the world’s largest business organizations is obvious and enormous. This influ-ence, termed corporate power, refers to the capability of corporations to influence govern-ment, the economy, and society, based on their organizational resources.

One way to get a sense of the economic power of the world’s largest companies is to compare them with nations. Figure 3.1 shows some leading companies alongside countries whose total gross domestic product is about the same as these companies’ revenue. The revenues of the wealthiest company in the world, Walmart, are about the same as the gross domestic product (GDP) of Belgium. China Natural Petroleum’s revenues are the same as Chile’s GDP; Apple’s revenues are the same as Vietnam’s GDP; Amazon’s revenues are the same as Hungary’s GDP; and BMW’s revenues are the same as Ukraine’s GDP.

The size and global reach of major international enterprises such as Walmart and the others listed in Figure 3.1 give them tremendous power. Through their ever-present mar-keting, they influence what people want and how they act around the world. We count on corporations for job creation; much of our community well-being; the standard of living

FIGURE 3.1 Comparison of Annual Sales Revenue and the Gross Domestic Product for Selected Multinational Enterprises and Nations in $ Billions*

Sources: “Fortune Global 500,” fortune.com; and World Bank data, databank.worldbank.org.

*2017 $ billions of sales compared to 2016 gross domestic product in $ billions.

Walmart

Toyota Motor

Apple

Exxon Mobil

GeneralMotors

Amazon

Costco

China Mobile Communications

BMW

Ecuador

Ukraine

Romania

Qatar

Hungary

Kuwait

Morocco

Vietnam

Bangladesh

Chile

Philippines

Belgium486

315

263

255

216

205

166

135

118

107

104

Wells Fargo94

205

166

132

118

110

104

97

216

250

263

321

492

$ Billions of Sales(2017)

Gross Domestic Product,$ Billions (2016)

State Grid

China National Petroleum

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we enjoy; the tax base for essential municipal, state, and national services; and our needs for banking and financial services, insurance, transportation, communication, utilities, entertainment, and a growing proportion of health care. These corporations have the resources to make substantial contributions to political campaigns, as discussed in Chapter 8, thus influencing the policies of governments. They dominate not only the traditional domains of product manufacture and service delivery, but also increasingly reach into such traditionally public sector activities as education, law enforcement, and the provision of social services.3

The following well-known quotation, frequently appearing in journals for business executives, challenges its readers to assume a responsible role for business in society:

Business has become . . . the most powerful institution on the planet. The dominant institution in any society needs to take responsibility for the whole. . . . Every deci-sion that is made, every action that is taken, must be viewed in light of that kind of responsibility.4

The tremendous power of the world’s leading corporations has both positive and neg-ative effects. A big company may have definite advantages over a small one. It can com-mand more resources, produce at a lower cost, plan further into the future, and weather business fluctuations somewhat better. Globalization of markets can bring new products, technologies, and economic opportunities to developing societies, and help those in need. For example, as discussed in Chapter 11, UPS teamed up with regional African health care providers to use drones for shipping needed medical supplies within minutes, rather than hours, to save lives.

Yet, the concentration of corporate power can also harm society. Huge businesses can disproportionately influence politics, shape tastes, and dominate public discourse. They can move production from one site to another, weakening unions and communities. These compa-nies can also use their economic influence to collude to fix prices, divide markets, and quash competition in ways that can negatively affect consumer choices, employment opportunities, or the creation of new businesses. The Carbon Majors Report released in 2017 claimed that, since 1988, just 100 companies had been the source of more than 70 percent of the world’s greenhouse gas emissions. Multinational energy companies, including ExxonMobil, Shell, BP, and Chevron, were identified as among the highest emitting investor-owned companies.5

The focused power found in the modern business corporation means that every action it takes can affect the quality of human life—for individuals, for communities, and for the entire globe. The obligation this gives rise to is the notion of the iron law of responsibility. The iron law of responsibility says that in the long run those who do not use power in ways that society considers responsible will tend to lose it.

Given the virtually immeasurable power in the hands of the leaders of large, global corporations, stakeholders throughout the social system expect business to take great care in wielding its power responsibly for the betterment of society. As a result, social responsi-bility has become a worldwide expectation.

3 For two classic analyses of corporate power, see Alfred C. Neal, Business Power and Public Policy (New York: Praeger, 1981); and Edwin M. Epstein and Dow Votaw, eds., Rationality, Legitimacy, Responsibility: Search for New Directions in Busi-ness and Society (Santa Monica, CA: Goodyear, 1978). More recent treatments may be found in Luis Suarez-Villa, Corporate Power, Oligopolies, and the Crisis of the State (Albany, NY: State University of New York Press, 2015) and Steve Coll, Private Empire” ExxonMobil and American Power (New York: Penguin Books, 2012).4 David C. Korten, “Limits to the Social Responsibility of Business,” The People-Centered Development Forum, article 19, June 1, 1996.5 “Just 100 Companies Responsible for 71% of Global Emissions, Study Says,” The Guardian, July 10, 2017, www.theguardian.com.

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CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP

Corporate social responsibility (CSR) means that a corporation should act in a way that enhances society and its inhabitants and be held accountable for any of its actions that affect people, their communities, and their environment. This concept is based in the root of the term responsibility, meaning “to pledge back,” creating a commitment to give back to society and the organization’s stakeholders.6 It implies that harm to people and society should be acknowledged and corrected if possible. It may require a company to forgo some profits if its social impacts seriously hurt some of its stakeholders or if its funds can be used to have a positive social impact.

Being socially responsible does not mean that a company must abandon its other mis-sions. As discussed later in this chapter, a business has many responsibilities: economic, legal, and social; the challenge for management is to integrate them all into a coherent and comprehensive mission. As Axel Weber, chairman of UBS, a Swiss global financial ser-vices company, explained,

“I see it as my duty to understand the scope and scale of societal challenges. [At UBS] we consider the immediate and long-term effects of these challenges. We look at how they may impact the firm, our clients, and other stakeholders, and what action we may need to take in response. Acting responsibly, achieving a positive societal change—through our own activities as well as through the products, ser-vices and advice we offer to our clients—that’s one of our key roles.”7

More recently, many companies have adopted the term corporate citizenship to refer the actions they take to put their commitments to corporate social responsibility into practice. The term global corporate citizenship, similarly, refers to putting these commitments into practice worldwide, not only locally or regionally. Companies demonstrate their corporate citizenship by proactively building stakeholder partnerships, discovering business oppor-tunities in serving society, and transforming a concern for financial performance into a vision of integrated financial and social performance.

The Origins of Corporate Social ResponsibilityIn the United States, the idea of corporate social responsibility appeared around the start of the 20th century. Corporations at that time came under attack for being too big, too pow-erful, and guilty of antisocial and anticompetitive practices. Critics tried to curb corporate power through antitrust laws, banking regulations, and consumer protection laws.

Faced with this social protest, a few farsighted business executives advised corporations to use their power and influence voluntarily for broad social purposes rather than for prof-its alone. Some of the wealthiest business leaders—steelmaker Andrew Carnegie is a good example—became great philanthropists who gave much of their wealth to educational and charitable institutions. Other business leaders, like automaker Henry Ford, developed paternalistic programs to support the recreational and health needs of their employees. These business leaders believed that business had a responsibility to society that went beyond their efforts to make profits.

Today a new cohort of philanthropists is emerging. Mark Zuckerberg, CEO of Face-book, and his wife, physician Priscilla Chan, announced that they would give away about

6 For a more complete discussion of the roots of corporate social responsibility and how it is practiced, see Jerry D. Goldstein and Andrew C. Wicks, “Corporate and Stakeholder Responsibility: Making Business Ethics a Two-Way Conversation,” Business Ethics Quarterly 17 (2007), pp. 375–98.7 “Interview with Axel Weber on Corporate Culture and Responsibility at UBS,” UBS website, www.ubs.com.

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99 percent of their Facebook shares through the Chan Zuckerberg Initiative. The initiative focused on “personalized learning, curing disease, connecting people and building strong communities.” Some have predicted that this new cohort of business executives could amass even greater wealth than their predecessors, through inheritance, entrepreneurial success, and other means. They will be in a position to transform charitable giving unlike any previous generation.8 Corporate philanthropy is discussed in more detail in Chapter 18.

William C. Frederick, a leading scholar and a coauthor of several earlier editions of this text-book, described how business’s understanding of corporate social responsibility has evolved over the past half century.9 During each of four historical periods, corporate social responsi-bility has had a distinct focus, set of drivers, and policy instruments, as shown in Figure 3.2. Corporate social responsibility is defined in its most basic form as “learning to live with, and respect, others.” In his view, corporate social responsibility evolved from a stewardship, to

8 “Facebook’s Mark Zuckerberg and Wife Giving Away 99% of Shares,” The Wall Street Journal, December 1, 2015, www.wsj.com; and, Portraits of Young Philanthropists: How Generation X and Generation Y Are Transforming Charitable Giving, (New York, The Economist, 2014).9 For a comprehensive review of the history of corporate social responsibility see William C. Frederick, “Corporate Social Responsibility: From Founders to Millennials,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social Responsibility, pp. 3–38, (Bingley, UK: Emerald Publishers, 2018).

Phases of Corporate SocialResponsibility CSR Drivers CSR Policy Instruments

CSR1Early in the 20thcentury butformally in the1950s–60s

CSR21960s–70s

CSR31980s–90s

CSR41990s–present

Corporate Social StewardshipCorporate philanthropy—acts of charityManagers as publicTrustee-stewardsBalancing social pressures

Corporate Social ResponsivenessSocial impact analysisStrategic priority for social responseOrganizational redesign and trainingfor responsivenessStakeholder mapping andimplementation

Corporate/Business EthicsFoster an ethical corporate cultureEstablish an ethical organizationalclimate Recognize common ethical principles

Corporate/Global CitizenshipStakeholder partnershipsIntegrate financial, social, andenvironmental performanceIdentify globalization impactsSustainability of company andenvironment

Executive conscienceCompany image/reputation

Social unrest/protestRepeated corporate misbehaviorPublic policy/government regulationStakeholder pressures think tankpolicy papers

Religious/ethnic beliefsTechnology-driven value changesHuman rights pressuresCode of ethicsEthics committee/o�cer/auditsEthics trainingStakeholder negotiations

Global economic trade/investmentHigh-tech communication networksGeopolitical shifts/competitionEcological awareness/concernNGO pressures

Philanthropic fundingPublic relations

Stakeholder strategyRegulatory complianceSocial auditsPublic a�airs functionGovernance reformPolitical lobbying

Mission/vision/valuesStatementsCEO leadership ethics

IntergovernmentalcompactsGlobal audit standardsNGO dialogueSustainability audits/reports

FIGURE 3.2 Evolving Phases of Corporate Social Responsibility

Source: William C. Frederick, “Corporate Social Responsibility: Deep Roots, Flourishing Growth, Promising Future,” in Andrew Crane, Abagail Williams, Dirk Matten, Jeremy Moon, and Donald S. Siegel, (Editors), The Oxford Handbook of Corporate Social Responsibility (Oxford: Oxford University Press, 2008), pp. 522–532.

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strategic responsiveness, to an ethics-based understanding based in culture, to what Frederick calls the most recent phase of corporate social responsibility: corporate citizenship.

BALANCING SOCIAL, ECONOMIC, AND LEGAL RESPONSIBILITIES

Being socially responsible by meeting the public’s continually changing expectations requires wise leadership at the top of the corporation. Companies with the ability to rec-ognize profound social changes and anticipate how they will affect operations have proven to be survivors. They get along better with government regulators, are more open to the needs of the company’s stakeholders, and often cooperate with legislators as new laws are developed to cope with social problems.

Nestlé, the world’s leading nutrition, health, and wellness company with its head-quarters in Switzerland, launched a large-scale research project on children’s nutrition leading to product modification or new product development. The global initiative focused on 10 countries and collaborated with over 240,000 public health opinion leaders, third-party organizations, and pediatricians around the world. The Kids Nutrition and Health Study targeted children’s nutrient intake, dietary pat-terns, and family lifestyle factors. The aim was to help parents ensure the healthy growth and development of their children, while also giving the company insights into how to modify existing product ingredients and develop new products.10

The actions taken by Nestlé are an example of a business organization’s leaders being guided by enlightened self-interest. This concept reflects the notion that providing value to stakeholders is in a business’s long run self-interest. Nestlé’s research initiative certainly cost the company money in the short run, but new product development and assistance to the families and children who used their products and the communities where they lived would also bring long-term benefits through enhanced reputation and customer loyalty.

Social responsibility is not a business organization’s sole responsibility. In addition, as members of civil society, organizations have legal obligations, as well as economic respon-sibilities, to their owners and other stakeholders affected by the financial well-being of the firm. Any organization or manager must seek to juggle these multiple responsibilities—economic, legal, and social. The belief that the business of business is solely to attend to shareholders’ return on investment and make a profit is no longer widely held and has no legal foundation, as discussed next in the chapter. Rather, many business executives believe the key challenge facing their organizations today is to meet their multiple economic and social responsibilities simultaneously.

THE CORPORATE SOCIAL RESPONSIBILITY QUESTION

As we have seen, there are various views about the expression of business’s social respon-sibilities and these views evolve over time. The arguments supporting corporate social responsibility and concerns about it are detailed next and summarized in Figure 3.3.

Support for Corporate Social ResponsibilityMany business executives believe that companies should make a profit but should balance this with their social responsibilities. Clearly, many stakeholder groups see the value in

10 “Nestlé in Society: Creating Shared Value and Meeting Our Commitments, 2016,” Nestlé’s Annual Social Report, 2016, www.nestle.com/csv.

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corporate socially responsible action, since it preserves the environment, protects consum-ers, safeguards the safety and health of employees, and prevents job discrimination, but shareholders also expect business to maintain a strong return on their financial invest-ments. Government officials also support CSR in that it ensures corporate compliance with laws and regulations that protect the general public from abusive business practices. In other words, both businesspeople and stakeholders, and both supporters and critics of business, have reasons for wanting businesses to act in socially responsible ways.

Balances Corporate Power with Responsibility

Today’s business enterprise possesses much power and influence. Most people believe that responsibility must accompany power, whoever holds it. This obligation, presented earlier in this chapter, is the iron law of responsibility. Corporations’ reputations, especially in the banking industry, have taken a hit since the economic downturn of 2008–09. Half of American adults surveyed said their trust in banks had declined after the downturn, joining a growing distrust of Wall Street and mortgage lenders. This shows one example of how managers’ misuse of corporate power and their lack of responsibility as trustees of the public’s wealth can result in their loss of power.

Discourages Government Regulation

One of the most appealing arguments in support of CSR is that voluntary socially responsible acts may head off increased government regulation of business. Some regulation may reduce freedom for both business and society, and freedom is a desirable public good. In the case of business, regulations tend to add economic costs and restrict flexibility in decision making. From business’s point of view, participating in programs typically the focus for government efforts, can produce a unique business opportunity as the following example illustrates.

In the United States, food producers could use up to ten different label phrases on their packages, ranging from “expires on” to “better if used by.” Many consumers complained to the Department of Agriculture that they were increasingly confused by the different messages. In 2017, the Food Marketing Institute and the Grocery Manufacturers Association, the two largest trade groups for the U.S. grocery indus-try, announced they had adopted standardized, voluntary regulations to clear up what product date labels mean. Manufacturers would begin to put on their food packages “use by” or “best if used by.” This change was meant to explain to the consumer when the product would be at its peak flavor and safe to consume—and potentially stave off further government rules on labeling.11

11 “Changes Planned to Sell-by Dates on Food,” telegram.com, February 16, 2017, www.telegram.com.

In Support for Corporate Social Responsibility

Concerns about Corporate Social Responsibility

Balances corporate power with responsibility.Discourages government regulation.Promotes long-term profits for business.Improves stakeholder relationships.Enhances business reputation.

Lowers economic efficiency and profit.Imposes unequal costs among competitors.Imposes hidden costs passed on to stakeholders.Requires skills business may lack.Places responsibility on business rather than individuals.

FIGURE 3.3The Support for and Concerns about Corporate Social Responsibility

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Businesses may act in a socially responsible way to benefit its stakeholders, but also to fend off additional burdensome government regulations, as the example above illustrates. Therefore, if business by its own socially responsible behavior can discourage greater gov-ernment involvement in the business–consumer stakeholder relationship, it is accomplish-ing a public good as well as its own private good.

Promotes Long-Term Profits for Business

At times, social initiatives by business produce long-run business profits. In 1951, a New Jersey judge ruled in a precedent-setting case, Barlow et al. v. A.P. Smith Manufacturing, that a corporate donation to Princeton University was an investment by the firm, and thus an allowable business expense. The rationale was that a corporate gift to a school, though costly in the present, might later provide a flow of talented graduates to work for the com-pany. The court ruled that top executives must take “a long-range view of the matter” and exercise “enlightened leadership and direction” when it comes to using company funds for socially responsible programs.12

A classic example of the long-term benefits of social responsibility was the Johnson & Johnson Tylenol incident in the 1980s, when several people died after ingesting Extra-Strength Tylenol capsules laced with the poison cyanide. To ensure the safety of its customers, Johnson & Johnson immediately recalled the product, an action that cost the firm millions of dollars in the short term. The company’s production processes were never found defective. Customers rewarded Johnson & Johnson’s responsible actions by continuing to buy its products, and in the long run the com-pany once again became profitable.

Empirical evidence has supported this view. Studies generally have found that most of the time, more responsible companies also had better financial results; the statistical asso-ciation has been highly to modestly positive across the range of all prior studies. According to one recent study, when firms practice socially responsible activities the firm’s financial performance is enhanced, especially in a highly competitive industry environment.13

Improves Stakeholder Relationships

Managers often believe that developing a strong social agenda and series of social pro-grams will improve the firm’s stakeholder relationships. Whether it improved the qual-ity of people it attracted as employees, or appealed to consumers to purchase the firm’s product or services, or built strong ties with the community residents in which it oper-ated, or persuaded investors to purchase company stock, managers felt that social action by the firm was viewed positively by stakeholders. In a national survey of 1,000 executives, 70 percent said that company-sponsored social programs aided them in recruiting employ-ees and 68 percent reported that employees were more engaged in their work if they were involved in social-oriented projects on and off the job.14 As Doris Gonzalez, director of corporate citizenship at IBM, explained:

“Corporate Social Responsibility has long stopped being just a ‘nice to have’ set of programs that help companies tell their story of how they invest resources in a local community. These programs are at the core of employee engagement, retention

12 Barlow et al. v. A.P. Smith Manufacturing (1951, New Jersey Supreme Court), discussed in Clarence C. Walton, Corporate Social Responsibility (Belmont, CA: Wadsworth, 1967), pp. 48–52.13 Kim Kwang-Ho, Kim MinChung, and Qian Cuili, “Effects of Corporate Social Responsibility on Corporate Financial Perfor-mance: A Competitive-Action Perspective,” Journal of Management, 44 (2018), pp. 1097–1118.14 “Covestro Grant to Expand ‘Social Purpose’ Programs,” Pittsburgh Post-Gazette, April 6, 2018, www.post-gazette.com.

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and recruiting, as well as making an impact in the community. Most importantly, in order to be sustainable, corporate responsibility programs must be aligned with business strategies. At IBM, the corporate giving programs make a difference in the communities where employees live and work as well as improve the skills and suc-cess of the staff, and ultimately, our business.”15

This belief was borne out in recent research where corporate social responsibility was analyzed in comparison to the relationships between the firm and various stakeholders. As one study concluded, “The quality of the relationship between the company and its stake-holders represents a key factor that affects the success of the company.” Managers must be acutely aware of these relationships and understand how best to manage them.16

Enhances Business Reputation

The social reputation of the firm is often viewed as an important element in establishing trust between the firm and its stakeholders. Reputation refers to desirable or undesirable qualities associated with an organization or its actors that may influence the organization’s relationships with its stakeholders.17 Reputation Institute created the RepTrak® model that examines 15 stakeholders in more than 25 industries, involving more than 7,000 compa-nies in 40 countries. Since 2005, Forbes Magazine has published its annual “World’s Most Reputable Companies” list to recognize firms with exemplary reputations.18

As further explored in Chapter 19, a firm’s reputation is a valuable intangible asset, as it prompts repeat purchases by loyal consumers and helps to attract and retain better employ-ees to spur productivity and enhance profitability. Employees who have the most to offer may be attracted to work for a firm that contributes to the social good of the community, or is more sensitive to the needs and safety of its consumers, or takes better care of its employees. Research has confirmed that a firm’s “good deeds” or reputation increases its attractiveness to employees.19 An example of a company that has embraced having a solid reputation when managing their stakeholders is described next.

Sodexo, a provider of integrated food and facilities management services through-out North America including many hospitals, senior living centers, colleges, uni-versities, and school districts, was committed to developing a positive reputation. “Being a responsible corporate citizen is at the core of Sodexo’s business,” declared the company’s website. “We set the benchmark in areas such as sustainability, diversity and inclusion, wellness, and the fight against hunger.” Sodexo’s “The Better Tomorrow Plan” impacted 80 countries at 30,600 locations and engaged the company’s 380,000 employees. The program addressed 14 different issues, such as reducing the firm’s carbon and water usage in all company operations and at all client’s locations, providing and promoting varied and balanced food options to

15 Doris B. Gonzalez, “The Role CSR Plays in Employee Engagement,” CRO Magazine, March/April 2016, www.thecro.com.16 The quote is from Andrija Baric, “Corporate Social Responsibility and Stakeholders: Review of the Last Decade (2006–2015),” Business Systems Research 8 (2017), pp. 133–46.17 The definition of reputation is adapted from John F. Mahon, “Corporate Reputation: A Research Agenda Using Strategy and Stakeholder Literature,” Business & Society 41, no. 4 (December 2002), pp. 415–45. For the “reputation index,” see Charles Fombrun, Reputation: Realizing Value from the Corporate Image (Cambridge, MA: Harvard University Press, 1996) and Rating Research LLC, www.ratingresearch.com.18 See www.reputationinstitute.com and fortune.com/worlds-most-admired-companies.19 Turhan Erkmen and Emel Esen, “The Mediating Role of Trust to Managers on the Relationship Between Corporate Reputa-tion Practices and Employees’ Course of Actions to Customers, Social Responsibility Journal 10 (2014), pp. 296–82.

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its clients, increasing the purchase of products sourced from fairly and responsibly certified sources, and ensuring compliance with a Global Sustainable Supply Chain Code of Conduct.20

Concerns about Corporate Social ResponsibilityThe economist Milton Friedman famously stated in 1970, “There is only one responsibility of business, namely to use its resources and engage in activities designed to increase its profits.” Some people in the business world—such as the 16 percent of CEOs in a McKinsey survey who believe that the appropriate role of business is to provide the highest possible returns to shareholders while obeying all laws and regulations—clearly agree with this view. According to some of the more radical critics of the private business system, social responsibility is noth-ing but a clever public relations smokescreen to hide business’s true intentions to make as much money as possible, often at the expense of workers, communities, and customers.21 See Figure 3.3 again for some of the concerns about corporate social responsibility, discussed next.

Lowers Economic Efficiency and Profits

According to one argument, when a business uses some of its resources for social pur-poses, it risks lowering its efficiency or even going out of business.

Life was very good for Aaron Feuerstein in the mid-1990s. His company, Malden Mills, was flourishing, despite a sharp decline in the textile industry in the United States. Malden Mills’ popular flagship product, Polartec, was widely used in high-performance athletic and aerobic apparel, outerwear products, and had even been adopted for military use. On December 11, 1995, as Feuerstein was returning from his 70th birthday party, he saw his factory burn to the ground. Critics thought Feuerstein should just accept the $300 million in insurance money and relocate or dissolve the business. Feuerstein was committed to his employees, so he vowed to keep them all on the payroll, at a cost of $1.5 million per week, and continue their benefits for at least 90 more days. The eventual cost of $25 million in employee wages, lawsuits filed by injured employees, and the $100 million cost to rebuild the factory turned out to be too much for Feuerstein’s company. By 2001, Malden Mills had filed for bankruptcy, and Feuerstein eventually lost control of the company.22

In this example, Feuerstein’s motives were admirable; his commitments to his employ-ees eventually became too costly and threatened the survival of the firm.

Business managers and economists argue that the business of business is business. Businesses are told to concentrate on producing goods and services and selling them at the lowest competitive price. When these economic tasks are done, the most efficient firms survive. Even though corporate social responsibility is well-intended, such social activities lower business’s efficiency, thereby depriving society of higher levels of economic produc-tion needed to maintain everyone’s standard of living.23

20 The quotation and information about Sodexo is from the company’s website, www.sodexousa.com.21 For an investigation and critical analysis of the impact of corporate social responsibility see Daina Mazutis, “Much Ado about Nothing: The Glacial Pace of CSR Implementation in Practice,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social Responsibility, pp. 177–244, (Bingley, UK: Emerald Publishers, 2018).22 “The Mensch of Malden Mills: CEO Aaron Feuerstein Puts Employees First,” CBS News 60 Minutes, July 3, 2003, cbsnews.com; and, David W. Gill, “Was Aaron Feuerstein Wrong?” Ethix, June 25, 2011, ethix.org.23 This argument is most often attributed to Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970, pp. 33, 122–26.

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Imposes Unequal Costs among Competitors

Another concern about social responsibility is that it imposes greater costs on more responsible companies, putting them at a competitive disadvantage. Consider the follow-ing scenario:

A manufacturer operating in multiple countries wishes to be more socially respon-sible worldwide and decides to protect its employees by installing more safety equipment at its plants than local law requires. Other manufacturers in competition with this company do not take similar steps, choosing to install only as much safety equipment as required by law. As a result, their costs are lower, and their profits higher. In this case, the socially responsible firm penalizes itself and even runs the risk of going out of business, especially in a highly competitive market.

This kind of problem becomes acute when viewed from a global perspective, where laws and regulations differ from one country to the next. If one nation requires higher and more costly pollution control standards, or stricter job safety rules, or more stringent pre-market testing of prescription drugs than other nations, it imposes higher costs on business. This cost disadvantage means that competition cannot be equal. Foreign competitors who are the least socially responsible will actually be rewarded because they will be able to capture a bigger share of the market.

Imposes Hidden Costs Passed On to Stakeholders

Many social proposals undertaken by business do not pay their own way in an economic sense; therefore, someone must pay for them. Ultimately, society pays all costs. For exam-ple, if a company chooses to install expensive pollution abatement equipment, the air may be cleaner, but ultimately someone will have to pay. Shareholders may receive lower div-idends, employees may be paid less, or consumers may be charged higher prices. If the public knew that it would eventually have to pay these costs, and if it knew how high the true costs were, it might not be so insistent that companies act in socially responsible ways. The same might be true of government regulations intended to produce socially desirable business behavior. By driving up business costs, these regulations often increase prices and lower productivity.

Requires Skills Business May Lack

Businesspeople are not primarily trained to solve social problems. They may know about supply chain management, marketing, accounting, finance, information technology, and per-sonnel work, but what do they know about inner-city issues or world poverty or violence in schools? Putting businesspeople in charge of solving such problems may lead to unnecessarily expensive and poorly conceived approaches. Business analysts might be tempted to believe that methods that succeed in normal business operations will also be applicable to complex social problems, even though different approaches may work better in the social arena.

A related idea is that public officials who are duly elected by citizens in a democratic society should address societal issues. Business leaders are not elected by the public and therefore do not have a mandate to solve social problems. In short, businesspeople do not have the expertise or the popular support required to address what are essentially issues of public policy.

Places Responsibility on Business Rather Than Individuals

The entire idea of corporate responsibility is misguided, according to some critics. Only individual persons can be responsible for their actions. People make decisions; organiza-tions do not. An entire company cannot be held liable for its actions, only those individuals

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who are involved in promoting or carrying out a policy. Therefore, it is wrong to talk about the social responsibility of business when it is the social responsibility of individual busi-nesspersons that is involved. If individual business managers want to contribute their own personal money to a social cause, let them do so; but it is wrong for them to contribute their company’s funds in the name of corporate social responsibility.24 Together, the above argu-ments claim that the attempt to exercise corporate social responsibility places added bur-dens on both business and society without producing the intended effect of social improvement or produces it at excessive cost.

This view was challenged several years ago when a survey by the consulting firm McKinsey reported that a solid majority—84 percent—of business executives said that they believe that companies should balance their responsibility to their investors with their responsibilities of other business stakeholders. In another survey of executives, 80 percent said that companies must demonstrate a mission that balances profit and purpose to grow and be successful.25 Recently, senior executives from all over the world were asked about the role of corporate social responsibility as part of their business strategy. Their responses are shown in Figure 3.4.

SOCIAL ENTREPRENEURS AND B CORPORATIONS

Some businesses have a social mission at their very core. Two such businesses are ventures launched by social entrepreneurs and benefit corporations.

Social entrepreneurs are like traditional entrepreneurs who act boldly to pursue oppor-tunities, attract support, and build new organizations. Yet, unlike traditional entrepre-neurs, social entrepreneurs are typically driven by a core mission to create and sustain social rather than economic value. When a person or group of people identify a social need and use their entrepreneurial skills to address this need, this process is called social entrepreneurship, and the organizations they found are called social ventures. Although

24 This argument, like the “lowers economic efficiency and profits” argument, often is attributed to Friedman, “Social Respon-sibility of Business” Ibid.25 “Covestro Grant Expand ‘Social Purpose’ Programs,” Pittsburgh Post-Gazette, April 6, 2018, www.post-gazette.com.

FIGURE 3.4The Role of CSR in Business Strategy

Source: “Top Trends 2016,” Ethical Corporation, ethicalcorp.com.

Asia–Pacificexecutives

North Americanexecutives

Europeanexecutives

90%

88%

10%

15%

0 20 40 60 80 100

85%

12%

No Yes

Senior executives were asked: Is CSR becoming an increasingly important part of your business strategy? Their responses were:

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their primary purpose is to achieve a social or environmental objective, this focus does not preclude these entrepreneurs from creating an economically viable organization that can continue to address social needs.

B Corporations are businesses that focus on social responsibility and corporate citizen-ship by blending their social and environmental objectives with financial goals to use the power of business to solve social and sustainability challenges. To qualify for B Corpo-ration status, an organization must meet rigorous, independent social and environmental performance standards, assessed by the nonprofit organization, B Lab. The idea is that a business cannot just claim it is socially responsible, but it must prove it by meeting the B Lab standards. By 2018, there were 2,504 organizations, in more than 50 countries and 35 U.S. states among 130 industries that had received the B Corp certification. (Certified B Corporations are different from businesses that are chartered in a state as a “benefit corporation.” Benefit corporations use the protection afforded by state-driven statutes to enable the company to address social objectives, as well as financial objectives, without facing legal challenges by stockholders for shirking the firm’s financial responsibilities.)

Certified B Corporations are more likely to receive various government recognitions, such as the U.S. Drug Administration’s organic seal, or to qualify for a LEED certification for their buildings (designating environmental excellence), or to be certified as engaging in fair trade. B Corporations are subjected to random audits, and these reports are made pub-lic, adding a layer of transparency to the process and certification. In addition, B Corpora-tions must modify their company’s bylaws in order to formalize their social mission.26

The metrics used by B Lab to assess a company’s submission for review can be completed online in 1 to 3 hours, and include meeting rigorous standards that demonstrate a company’s leadership commitment to specific environmental and social commitments to improve their stakeholders’ well-being, including their workers and the community. In addition, these com-panies are held to specific standards of accountability for their actions and must demonstrate transparency of their decisions and practices regarding their stakeholder impacts.

Warby Parker is a B Corporation. Four college friends started the company to design, manufacture, and distribute high-quality eyeglasses selling for around $95 rather than the more common $500 price tag. Its founders also wanted to have a social impact, so they adopted the policy that for every pair of eyeglasses sold, one pair would be donated to someone in need. Warby Parker also pledged to become one of the few carbon-neutral eyewear brands in the world. “It was important to the four of us that if we are going to dedicate our life savings and our time to building an organization, we wanted to have a positive impact,” said Neil Blumenthal, one of the founders. This combination of economic and social objectives qualified Warby Parker for B Corporation certification.27

MANAGEMENT SYSTEMS FOR CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP

Corporate social responsibility and citizenship require more than espoused values; they require action. Companies must establish management processes and structures to carry out their citizenship commitments. This section describes some of the ways forward-thinking companies are changing to improve their ability to act as socially responsible citizens.

26 For an overview of the B Corporation movement see Caddie Putnam Rankin, “Safeguarding Corporate Social Responsi-bility: The Benefit Movement,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social Responsibility, pp. 245–64, (Bingley, UK: Emerald Publishers, 2018).27 See the B Corporation website at www.bcorporation.net and the Warby Parker website at www.warbyparker.com.

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BSR, a management consultancy formerly called Businesses for Social Responsibility, surveyed its more than 300 members and found that the goal of a global citizenship man-agement system was to integrate corporate responsibility and citizenship concerns into a company’s values, culture, operations, and business decisions at all levels of the organization. They also found that the CEO exerted the greatest influence over the company’s CSR agenda, more so than consumers, investors, employees or the government.28 Managers engaged in corporate citizenship are increasingly being tasked by executive leadership to work across departments and business units on a global basis to ensure the company has developed a strong approach to meeting a range of stakeholder expectations. This responsibility has evolved from overseeing programs targeted primarily toward the community and only uti-lizing philanthropy and volunteers, to a more integrated approach that leverages company skills and resources that impact society and drive stakeholder expectations.29

Corporate citizenship is a rapidly evolving area of managerial practice in many organi-zations. While businesses administer this corporate activity in different ways, Elin Wall-berg at Samsung Electronics provides one example of a manager with an extensive social program background who is directing her firm’s corporate citizenship strategy.

Elin Wallberg has served as the corporate citizenship officer of Samsung Elec-tronics Nordic since 2014. Wallberg is responsible for corporate citizenship in the Nordic region, which includes heading Samsung’s programs in technology, innova-tion, education, and learning, where young innovators create start-up firms aimed to benefit the next generation. Wallberg had over 10 years of experience in driving innovation in technology and partnerships in various organizations. Prior to joining Samsung, she was head of programs at Global Child Forum, where she ran the ini-tiative Children in a Digital World. Before that, she had been instrumental at Save the Children in setting up the Centre for Child Rights and Corporate Social Respon-sibility in Beijing.30

CEOs increasingly have accepted the multiple responsibilities of business notion—economic, social and legal—that make up the citizenship profile, as described by senior Walmart executives:

“Long-term capitalism takes a deeper view of business’s role in society, recognizing that, in the long run, the interests of stakeholders converge with the interests of the broader community. The actions of any one company may reverberate throughout the various systems in which it operates, generating second- and third-order ben-efits. . . . Under long-term capitalism, companies recognize that fact and, through concerted actions with otters of sufficient scale, work to ensure constant improve-ments to those systems.”31

Visionary CEOs clearly see citizenship as an opportunity to create value for their organization, gain a competitive advantage, and help address some of the world’s biggest challenges. As businesses have become more committed to citizenship, specialized con-sultancies and professional associations for managers with responsibility in this area have emerged. Many of these organizations, including BSR, whose study is cited earlier, are profiled in Exhibit 3.A.

28 “The State of Sustainable Business 2017,” BSR, July 2017, www.bsr.org.29 “Best Practices in Corporate Citizenship Structures,” tcc group blog, December 18, 2017, www.tccgrp.com. 30 From www.crunchbase.com/person/elin-wallberg.31 “Business and Society in the Coming Decades,” McKinsey & Company, April 2015, www.mckinsey.com.

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STAGES OF CORPORATE CITIZENSHIP

Companies do not become socially responsible or good corporate citizens overnight. The process takes time. New attitudes have to be developed, new routines learned, new policies and action programs designed, and new relationships formed. Many obstacles must be overcome. What process do companies go through as they proceed down this path? What factors push and pull them along?

Philip H. Mirvis and Bradley K. Googins of the Center for Corporate Citizenship at Boston College developed a five-stage model of global corporate citizenship, based on their work with hundreds of practitioners in a wide range of companies.32 In their view, firms typically pass through a sequence of five stages as they develop as corporate citizens. Each stage is characterized by a distinctive pattern of concepts, strategic intent, leadership, structure, issues management, stakeholder relationships, and transparency, as illustrated in Figure 3.5.

Elementary Stage. At this stage, citizenship is undeveloped. Managers are uninterested and uninvolved in social issues. Although companies at this stage obey the law, they do not move beyond compliance. Companies tend to be defensive; they react only when threatened. Communication with stakeholders is one-way: from the company to the stakeholder.

32 Philip H. Mirvis and Bradley K. Googins, Stages of Corporate Citizenship: A Developmental Framework (Chestnut Hill, MA: Center for Corporate Citizenship at Boston College, 2006). For a contrasting stage model, based on the experience of Nike, see Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review, December 2004, pp. 125–32.

Professional Associations and Consultancies in Corporate Social Responsibility and Citizenship

around the Globe

As the practice of corporate citizenship has spread, so have professional associations and consultancies serving managers in this arena. Among the leading organizations are these:

• In the United States, BSR (formerly Business for Social Responsibility) provides consulting services to its network of more than 250 member companies and other partners to build a just and sustainable world.

• Canadian Business for Social Responsibility seeks to accelerate and scale corporate social and environ-mental sustainability in Canada by strategically bringing together stakeholders to tackle key issues.

• The European Network for Corporate Social Responsibility Europe (CSR Europe) is the leading European business network with 48 multinational corporate members and 42 national partner organizations, repre-senting over 10,000 companies. It provides the opportunity for companies to share best practices on CSR and innovate with peers.

• Forum Empresa is an American alliance of CSR-based business organizations to promote CSR throughout the Americas, with over 133 independent organizations from more than 67 different countries. Forum Empresa’s programs reach over 6,000 companies around the world.

• Established in 2001 in South Africa, the African Institute of Corporate Citizenship is committed to being the center of excellence in corporate citizenship in Africa and it focuses on the role of business in building sustainable communities.

• From its origins as a sustainability pioneer in the region, CSR Asia has evolved to help hundreds of orga-nizations across Asia embrace sustainability at every level.

• Launched in 2002, the Asian Forum on Corporate Social Responsibility (AFCSR) is Asia’s leading annual conference and awards program on corporate social responsibility.

Source: More information about these organizations is available online at www.bsr.org, www.cbsr.ca, www.csreurope.org, www.csr360gpn.org, aiccafrica.org, csr-asia.com, and www.asianforumcsr.com.

Exhibit 3.A

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Engaged Stage. At this second stage, companies typically become aware of changing public expectations and see the need to maintain their license to operate. Engaged companies may adopt formal policies, such as governing labor standards or human rights. They begin to interact with and listen to stakeholders, although engagement occurs mainly through established departments. Top managers become involved. Often, a company at this stage will step up its philanthropic giving or commit to specific environmental objectives. Brew Dog, a Scottish-based brewery and pub chain, announced that it would distribute 10 percent of its profits to its staff and another 10 percent to charities chosen by the company’s workers and investors. The company demonstrated philanthropy, supportive leadership, and interactive stake-holder relationships, all part of corporate citizenship at the engaged stage.33

Innovative Stage. At this third stage, organizations may become aware that they lack the capacity to carry out new commitments, prompting a wave of structural innovation. Departments begin to coordinate, new programs are launched, and many companies begin reporting their efforts to stakeholders. (Social reporting is discussed later in this chapter.) External groups become more influential. Companies begin to understand more fully the business reasons for engaging in citizenship. The actions taken by Nestlé and Sodexo, described earlier in this chapter, illustrate a company at this stage.

Integrated Stage. As they move into the fourth stage, companies see the need to build initiatives that are more coherent. Mirvis and Googins cite the example of Asea Brown Boveri (ABB), a Swedish–Swiss multinational pioneering technology leader, which carefully coordinates its many sustainability programs from the CEO level down to line officers in more than 100 countries where the company has a presence.

33 “Brew Dog Gives Away 20 Percent of Profits,” Ethical Performance, September 29, 2017, ethicalperformance.com.

CitizenshipContent

StrategicIntent Leadership Structure

IssuesManagement

Stage 5:Transforming

Change thegame

Marketcreation orsocial change

Visionary,aheadof the pack

Mainstream:business driven

Defining Multi-organization

Fulldisclosure

Stage 4:Integrated

Sustainabilityor triplebottom line

Valueproposition

Champion,in front of it

Organizationalalignment

Proactive,systems

Partnershipalliance

Assurance

Stage 3:Innovative

Stakeholdermanagement

Businesscase

Steward,on top of it

Cross-functionalcoordination

Responsive,programs

Mutualinfluence

Publicreporting

Stage 2:Engaged

Philanthropy,environmentalprotection

License tooperate

Supporter,in the loop

Functionalownership

Reactive,policies

Interactive Publicrelations

Stage 1:Elementary

Jobs, profits, and taxes

Legalcompliance

Lip service,out of touch

Marginal,sta�-driven

Defensive Unilateral Flankprotection

TransparencyStakeholderRelationships

FIGURE 3.5 The Stages of Global Corporate Citizenship

Source: Adapted from the Boston College Center for Corporate Citizenship’s “Stages of Corporate Citizenship: A Developmental Framework,” by Philip Mirvis, Ph.D. and Bradley K. Googins, Ph.D., 2006.

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Integrated companies may adopt sustainability/triple bottom line measures, turn to external audits, and enter into ongoing partnerships with stakeholders.

Transforming Stage. This is the fifth and highest stage in the model. Companies at this stage have visionary leaders and are motivated by a higher sense of corporate purpose. They partner extensively with other organizations and individuals across business, industry, and national borders to address broad social problems and reach underserved markets.

Northwestern Mutual, a U.S. life insurance and financial services organization, illustrates the transforming stage of corporate citizenship. The company’s signature outreach program focused on fundraising to cure childhood cancer. A review of social issues that mattered to employees and representatives found that this program aligned with the company’s mission—helping others build a secure future. After selecting the childhood cancer focus, the company commissioned a survey to under-stand the current field of research. The survey discovered inadequate financial sup-port addressing this disease. Northwestern Mutual created a strategic philanthropy and community relations department to engage its employees with local neighbor-hoods, schools, and cultural programs and events—all to bring more attention to childhood cancer. “By involving multiple stakeholders in our corporate citizenship efforts, we foster transparent and synergistic relationships,” said John Kordsmeier, president of the Northwestern Mutual Foundation.34

The model’s authors emphasize that individual companies can be at more than one stage at once, if their development progresses faster in some areas than in others. For example, a company might audit its activities and disclose the findings to the public in social reports (transparency, stage 5), but still be interacting with stakeholders in a pattern of mutual influence (stakeholder relationships, stage 3). This is normal, the authors point out, because each organization evolves in a way that reflects the special challenges it faces. Nevertheless, because the dimensions of global corporate citizenship are linked, they tend to become more closely aligned over time.

ASSESSING AND REPORTING SOCIAL PERFORMANCE

As companies around the world expand their commitment to corporate responsibility and citizenship, they have also improved their capacity to measure performance and assess results. A social audit is a systematic evaluation of an organization’s social, ethical, and environmental performance.35

In a social audit, a company’s performance is evaluated relative to a set of externally imposed standards. The results of the audit are used to improve the firm’s performance and to communicate with stakeholders and the public. The scholar Simon Zadek has identified six benefits of social audits. They help businesses know what is happening within their firm, understand what stakeholders think about and want from the business, tell stakeholders what the business has achieved, strengthen the loyalty and commitment of stakeholders, enhance the organization’s decision making, and improve the business’s overall performance.

34 “The Corporate Citizen,” Boston College Center for Corporate Citizenship, Winter 2016, p. 28.35 The concept of a social audit was first introduced in Howard R. Bowen, Social Responsibilities of the Businessman (New York: Harper, 1953). 

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Today, many businesses use social audits to measure the societal impact of their actions. In a world where the use of company resources must be justified, the greater the social equity documented, the stronger the argument a business can make that it is meeting its social obligations. Businesses also used their social audit results to minimize risks or cap-italize on opportunities. They see the process as fostering innovation within the company. Some believe that to communicate with the organization’s stakeholders in a transparent manner is simply the ethical thing to do.

Social Audit StandardsIn response to the emerging efforts by governments to promote global citizenship, a num-ber of different corporate citizenship standards have been developed that establish mea-sures or benchmarks against which a firm’s citizenship activities (or those of its suppliers or partners) can be compared in a social audit. Social audits look not only at what an orga-nization does, but also at the results of these actions. For example, if a company supports a tutorial program at a local school, the audit might not only look at the number of hours of employee volunteerism, but also assess changes in student test scores as an indicator of the program’s social impact.

Audit standards can be created in three different ways. Companies can develop stan-dards designed to set expectations of performance for themselves or their suppliers or partners. For example, Apple developed its own supplier code of conduct. Or, companies within an industry can agree on a common industrywide standard, as several high technol-ogy companies did when they agreed to the Responsible Business Alliance (RBS) Code of Conduct, formerly the Electronic Industry Citizenship Coalition.

The RBA Code of Conduct is a set of standards on social, environmental and ethi-cal issues in the electronics industry supply chain. The standards set out in the Code of Conduct reference international norms including the Universal Declaration of Human Rights, ILO International Labor Standards, OECD Guidelines for Multina-tional Enterprises, International Organisation for Standards, the Social Account-ability 8000, and many more (some of these standards are discussed next). The RBA Code of Conduct is reviewed every three years to ensure its relevance to inter-national norms and issues members may face in their supply chains.36

Both companywide and industrywide supply chain codes of conduct, as well as auditing processes, are further described in Chapter 17.

Finally, audit standards can be developed by global nongovernmental organizations or standard-setting organizations. A number of such organizations have developed standards to judge corporate performance. These include the International Organisation for Stan-dards (ISO 14001 and 26000), Social Accountability 8000, AccountAbility (or AA 1000), and the United Nations Global Compact and the Global Reporting Initiative, which is pro-filed in Exhibit 3.B.

Social ReportingWhen a company decides to publicize information collected in a social audit, this is called corporate social reporting. While there is a risk of incurring reputational damage from exposing any problems publicly, many companies see value in practicing transparency. The term trans-parency refers to a quality of complete clarity; a clear glass window, for example, is said to be transparent. When companies clearly and openly report their performance—financial,

36 See the Responsible Business Alliance website at responsiblebusiness.org.

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social, and environmental—to their various stakeholders, they are acting with transpar-ency. One region where the trend toward corporate reporting and transparency has been particular apparent is Australia and New Zealand.

By 2014, 99 percent of all Australian and New Zealand companies indicated that they would conduct an assessment of their business operations and publicly report the results that year, according to a study by the Australian Centre for Corporate Social Responsibility. They attributed their nearly unanimous preference for report-ing to the International Integrated Reporting Commission’s Integrated Reporting Framework and the new Global Reporting Initiative fourth generation (G4) guide-lines (see Exhibit 3.B). The companies surveyed said they believed in transparent reporting because they understood it could build a reputation for responsibility, contribute to the company’s brand, engage senior leadership in strategic conversa-tions, improve stakeholder engagement, and identify opportunities for improve-ment. According to Victoria Whitaker, head of GRI Focal Point Australia, “businesses around the world are recognizing that reporting can help them under-stand the context in which they operate and the stakeholders whom they serve. Done well it informs corporate strategy and decision making.”37

A survey of business firms by KPMG, an accounting and consulting firm, reported on the state corporate social reporting in 2017, as shown in Exhibit 3.C. This survey found that 93 percent of the world’s largest companies produced some type of a corporate social report for external stakeholders that covered social and environmental responsibility practices.

As noted in Exhibit 3.C, an emerging trend in corporate reporting is the integration of legally required financial information with social and environmental information into a sin-gle integrated report. By 2017, a majority of the largest companies included information of corporate responsibility in their annual financial reports. This reflected a dramatic rise in integrated reporting, from 8 percent in 2008 and 51 percent in 2013 to 78 percent by 2017.38

37 Information from “The 10th Year-Progress and Prospects for CSR in Australia and New Zealand,” Australian Centre for Corporate Social Responsibility, 2014. Also see Colin Higgins, Markus J. Milne, and Bernadine van Gramberg, “The Uptake of Sustainability Reporting in Australia,” Journal of Business Ethics, 2015, pp. 445–68.38 KPMG report 2017, Ibid.

The Global Reporting Initiative (GRI)

The GRI is based on the belief that a sustainable global economy should combine long-term profitability with ethical behavior, social justice, and environmental care. This means that when companies and organizations consider sustainability—and integrate it into how they operate—they must consider four key areas of their performance and impacts: economic, environmental, social, and governance. GRI’s Sustainability Reporting Framework is a reporting system that enables all companies and organi-zations to measure, understand, and communicate this information using common metrics, so performance can be compared across firms and industries. The GRI Guidelines offer an international reference for all those interested in the disclosure of the governance approach and the environmental, social, and economic per-formance and impacts of organizations. The Guidelines are developed through a global multi-stakeholder process involving representatives from business, labor, civil society, and financial markets, as well as auditors and experts in various fields; and in close dialogue with regulators and governmental agencies in several countries.

Sources: See the Global Reporting Initiatives website at www.globalreporting.org.

Exhibit 3.B

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Why do companies publish social responsibility reports? According to one study, most firms (80 percent) are motivated by ethical concerns. Ethical drivers replaced economic considerations (80 percent versus 50 percent) as the primary motivator for publishing these reports, a complete reverse from a few years ago when economic considerations were viewed as the most important. Nearly two-thirds of the 250 firms worldwide reported that they engaged with their stakeholders in a structured way, up from 33 percent a decade ear-lier. These relevant stakeholder groups have expanded from social and environmental groups to include financial analysts and investors. Other firms pointed to increasing gov-ernmental regulatory pressure to report financial as well as nonfinancial data.39

In today’s business climate, multiple stakeholders demand that businesses adopt mea-surable standards for corporate responsibility and citizenship, audit their organizations according to these standards, and report the results to the public.

39 “Socially Responsible Investment Analysts Find More Large U.S. Companies Reporting on Social and Environmental Issues,” Social Investment Research Analysts Network report, www.kld.com; and KPMG report 2017, Ibid.

The State of Corporate Social Reporting, 2017

In the KPMG Survey of Corporate Responsible Reporting 2017, the following trends were noted:

• Corporate responsibility (CR) reporting has filtered down from large companies to mid-sized companies, as 75 percent of the 4,900 large and mid-cap firms surveyed issued CR reports.

• Across all industry sectors, CR reporting was more than 60 percent, the first time in the survey’s history.• Companies in Latin America reported a large surge in CR reporting, driven by regulation, foreign investor

demands, and the need to build and protect public trust.• Integrated Reporting has taken off in Japan, Brazil, Mexico, and Spain. Most of the largest companies,

78 percent, integrate financial and nonfinancial data in their reports, suggesting they believe that CR information is relevant for investors.

• Around two-thirds of all reports utilize the Global Reporting Initiative (GRI) G4 Guidelines or Standards.

Exhibit 3.C

∙ The world’s largest corporations are capable of wielding tremendous influence, at times even more than national governments, due to their economic power. Because of this potential influence, the organizations’ stakeholders expect businesses to enhance soci-ety when exercising their power.

∙ The idea of corporate social responsibility was adopted by business leaders in the United States in the early 20th century. It has evolved from a notion of stewardship and strate-gic responsiveness to an ethics-based understanding found in culture and the practice of corporate citizenship. Socially responsible businesses attempt to balance economic, legal, and social obligations. Following an enlightened self-interest approach, a firm may be economically rewarded while society benefits from the firm’s actions.

∙ Corporate social responsibility is a controversial notion. Some argue that its benefits include discouraging government regulation, promoting long-term profitability for the firm, and enhancing the company’s stakeholder relationships and business reputation. Others believe that it lowers efficiency, imposes undue costs, and shifts unnecessary obligations to business. Most executives believe that they should use their corporate

Summary

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Internet Resources

www.bsr.org BSR: The business of a better worldwww.businessinsociety.eu The Business in Society Gatewaywww.bcorporation.net Certified B Corporationwww.csrwire.com The Corporate Social Responsibility Newswireconsciouscompanymedia.com Conscious Company Mediawww.3blassociation 3BL Associationwww.unicef.org/csr UNICEF and Corporate Social Responsibilitywww.globalreporting.org Global Reporting Initiativewww.unglobalcompact.org United Nations Global Compact

power and influence to balance their response to multiple stakeholders rather than max-imize stockholders’ return alone.

∙ Global corporate citizenship refers to putting a commitment to serving various stake-holders into practice by building stakeholder partnerships, discovering business oppor-tunities in serving society, and transforming a concern for financial performance into a vision of integrated financial and social performance worldwide. Global corporate citizenship programs can be considered a strategic investment by the firm.

∙ Social entrepreneurs incorporate social and environmental benefit into their core busi-ness mission. B Corporations, similarly, are businesses that seek and achieve certifi-cation, through rigorous assessments by the nonprofit B Lab organization, gained via specific social and environmental standards.

∙ Companies progress through five distinct stages as they develop as global corporate citizens; these are termed the elementary, engaged, innovative, integrated, and trans-forming stages. A specific company may be at more than one stage at once, as it may be progressing more quickly on some dimensions than on others.

∙ Many companies have created systemic audits of their social, ethical, and environmen-tal performance, measured against industrywide performance expectations as well as auditing standards developed by global standard-setting organizations. An emerging trend is the practice of communicating social, environmental, and financial results to stakeholders through an integrated corporate report.

Key Terms social audit, 64social entrepreneurs, 59social entrepreneurship, 59social venture, 59transparency, 65

B Corporation, 60corporate citizenship, 51corporate power, 49corporate social reporting, 65corporate social responsibility, 51

enlightened self-interest, 53integrated report, 66iron law of responsibility, 50reputation, 56

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Discussion Case: Corporate Social Responsibility at Gravity Payments

Dan Price, the founder of Gravity Payments, a small, privately owned company that pro-vided high-service and low-cost credit card processing, surprised his 120-person staff when he announced in 2015 that over the next three years he would raise the salary of all employees, even the lowest paid clerk, customer service representative, and salesperson, to a minimum of $70,000. The average annual salary at that time at Gravity was around $48,000, so the increase would nearly double some employees’ salaries. Price explained that he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit.

Price’s announcement was met with mixed reactions. Some employees were thrilled, clapping and whooping when they heard the announcement. “I’m freaking out,” said one employee. Others—many from the financial services community—said that this was just a costly publicity stunt. The conservative radio show host Rush Limbaugh said he “smelled a socialist agenda.” However, others were supportive. Other talk show hosts lined up inter-views with Price. Job seekers by the thousands sent in résumés. Harvard business profes-sors flew out to Gravity Payment’s headquarters to conduct a case study. Third graders wrote Price thank-you notes, and single women wanted to date him.

Price was no stranger to the spotlight. He had earned the honor of Entrepreneur of the Year in 2014 from Enterprise Magazine. GeekWire named Price its Young Entrepreneur of the Year in 2013, and in 2010 he received the Small Business Administration’s National Young Entrepreneur of the Year award. Price also annually donated 10 percent of Gravity’s profits to charity. The equitable employee salary announcement seemed like another step toward achieving Price’s goals as a business owner.

Price launched Gravity (a name, Price explained, that was selected since “you could understand [it] on the phone”) while attending college, but the firm actually grew out of a technology consulting business he created while in high school. His goal was to manage credit card transactions for small businesses, like coffeehouses, in a more affordable and transparent way. “I never intended to make a lot of money, or really any,” said Price. “I was really upset at this industry for the way they were treating my [consulting] clients, and I just wanted to blow the thing up. So I was like, ‘I’m going to charge a third of what everyone [else does].’”

Financial analysts recognized Gravity Payments’ success; his company processed nearly $10 billion in credit card transactions and generated revenues of about $150 million annually. When asked why he did not “cash out,” Price responded, “I’ll ask my friends who have sold their businesses, ‘Did that business get to the goal that you originally had in mind?’ And they’re all happy they sold because of the phenomenal financial outcome. But when I ask them, ‘Did you actually accomplish the nonfinancial goal that you set out in starting a business?’ . . . they almost all say no.”

Price encountered hard times in 2008 when Gravity lost 20 percent of its revenue nearly overnight because customers were running less volume through the system during the eco-nomic recession. Price recalled that half of his staff was in his office asking for raises and the other half was definitely afraid they were going to lose their jobs. So, he called his employees together and explained that the company had eight months of cash in the bank. “If we hold our expenses steady and just sell the same amount every month for five months, we’ll get back to break-even and not have to do any benefit cuts, any layoffs, anything like that,” he told his staff. Given Price’s response during the economically challenging times,

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it did not surprise his employees when he took the bold move of promising every employee a salary of $70,000 annually.

Price’s commitment to a new company minimum wage captured national attention given the soaring disparity between executives’ pay and that of their employees. In the United States, where the pay gap was the greatest for any country, chief executives earned more than 300 times what the average worker made (as discussed in more detail in Chapter 13). Some people, like Gilded Age’s executive J. Pierpont Morgan and management scholar Peter Drucker, advocated a 20-to-1 executive to average employee ratio. Price’s 1-to-1 ratio was unprecedented in the business community. “The market rate for me as a CEO com-pared to a regular person is ridiculous, it’s absurd,” explained Price, who admitted that his only main extravagances were snowboarding and picking up the bar bill for his friends. He drove a 12-year-old Audi, which he received in a barter for service from the local dealer. “As much as I’m a capitalist, there is nothing in the market that is making me do it,” said Price, referring to paying wages that would make it possible for his employees “to go after their own American dream, buy a house and pay for their children’s education.”

Price admitted that hearing his employees’ problems with making ends meet on wages that were well above the $7.50 per hour minimum wage or even at $40,000 a year “just eats at me inside.” He wanted to address the social issue of wage inequality and felt that as a business leader he was in a position to do something, but he wanted to do something that would not result in raising prices for his customers or cutting back on services. Hayley Vogt, a 24-year-old communications coordinator at Gravity who earned $45,000 annually, said, “I’m completely blown away right now [after hearing Price’s announcement].” She said she had worried about covering rent increases and a recent emergency room bill. “Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work some-place where someone is actually doing something about it and not just talking about it.”

Fifteen months after Price’s unprecedented announcement, his employees decided that he should not be driving around in his outdated Audi, so they bought him a Tesla. Price posted to his Facebook page, “Gravity employees saved up and pitched in over the past six months and bought me my dream car. A brand new, gorgeous blue #Tesla. Still in shock. How do I even begin to say thank you?” As for the pay raises, commentators remained divided. Paul Davidson, of USA Today, commented, “Big pay hikes may yield surprisingly beneficial results, especially in the current tight labor market.” Yet, other experts said that the outsized, across-the-board increase Price shelled out should not set a benchmark for most companies.

Sources: “One Company’s New Minimum Wage: $70,000 a Year,” The New York Times, April 13, 2015, www.nytimes.com; “A Company Copes with Backlash Against the Raise that Roared,” The New York Times, July 31, 2015, www.nytimes.com; “Employees Just Bought a Tesla for their CEO Because He Raised Minimum Salaries to $70,000,” Business Insider, July 14, 2016, www.businessinsider.com; and, “Does a $70,000 Minimum Wage Work?” USA Today, May 26, 2016, www.usatoday.com.

Discussion Questions

1. Is Price demonstrating elements of corporate social responsibility by his actions in this case, or not?

2. How is Price exhibiting the fourth Phase of Corporate Citizenship (Figure 3.2, 1990s to present: Corporate/Global Citizenship) in his actions at Gravity Payments?

3. What arguments in support of, or concerns about, corporate social responsibility (refer-ring to Figure 3.3) are relevant to this case?

4. Is Price acting like an executive of a firm that could be certified as a B corporation?5. What stage of global corporate citizenship (using Figure 3.5) is Gravity Payments oper-

ating at, and why do you think so?

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C H A P T E R F O U R

Business in a Globalized WorldThe world economy has become increasingly integrated, and many businesses have extended their reach beyond national borders. Yet the process of globalization is controversial, and the involve-ment of corporations in other nations is not always welcome. Doing business in diverse political and economic systems and in societies with stark differences in wealth and income poses difficult challenges. When a multinational corporation buys resources, manufactures products, or sells goods and services in multiple countries, it is inevitably drawn into a web of global social and ethical issues. Understanding what these issues are and how to manage them through collaborative action with governments and civil society organizations is a vital skill for today’s managers.

This Chapter Focuses on These Key Learning Objectives:

LO 4-1 Defining globalization and classifying the major ways in which companies enter the global marketplace.

LO 4-2 Identifying the international financial and trade institutions that have shaped the globalization pro-cess in recent decades.

LO 4-3 Analyzing the benefits and costs of the globalization of business.

LO 4-4 Identifying the major types of political and economic systems in which companies operate across the world.

LO 4-5 Understanding global inequalities of wealth and income and analyzing the special challenges of serving those at the “bottom of the pyramid.”

LO 4-6 Assessing how businesses can work collaboratively with governments and the civil sector to address global social issues.

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In 2016, Uber finally gave up on its quest to dominate the huge Chinese market for ride- hailing services. After two years of bruising competition, during which it lost $2 billion, Uber threw in the towel and agreed to sell its business there to its Chinese competitor, Didi Chuxing. In exchange, Uber received $1 billion and a 20 percent minority stake in Didi, and both companies agreed to give the other’s CEO a seat on its board. Uber had made an enormous effort, but in the end, could not overcome the many obstacles to besting its local rival. The U.S.–based company had struggled to set up in-country servers to get around China’s Internet firewall, deal with Chinese customers’ aversion to paying by credit card, and comply with government regulations that pressured the company to collaborate with municipal taxi companies. Didi, by contrast, was able to leverage its local connections and financing to become a formidable opponent, even against the ride-hailing industry’s world leader. Commented the author of Global Vision: How Companies Can Overcome the Pit-falls of Globalization, “China is an incredibly complex market that differs culturally, polit-ically, and economically from the United States.”1

In 2018, the process of globalization was in some ways at a crossroads. In many respects, the world’s economy remained as deeply integrated and interdependent as ever. Multinational enterprises continued to deliver much-needed technical know-how, capital, managerial experience, products, and services across national borders. At the same time, populist political movements in the United States, Europe, and elsewhere had pushed back against international trade agreements and common markets, citing the costs of globaliza-tion to their own industries and citizens. Some firms, like Uber, were pulling back from expensive foreign commitments, and the profits of multinationals compared with domestic firms were dropping.2 How companies can best deal with the challenges of doing business in a world of great complexity and flux is the subject of this chapter. It will also examine the respective roles of business, civil society organizations, and governments in addressing common global problems.

The Process of Globalization

Globalization refers to the increasing movement of goods, services, capital, and labor across national borders. Globalization is a process, that is, an ongoing series of interrelated events. International trade and financial flows integrate the world economy, leading to the spread of technology, culture, and politics. Thomas Friedman, a columnist for The New York Times and a well-known commentator, has described globalization as a system with its own internal logic:

Globalization is not simply a trend or a fad but is, rather, an international system. It is the system that has now replaced the old Cold War system, and, like that Cold War system, globalization has its own rules and logic that today directly or indi-rectly influence the politics, environment, geopolitics, and economics of virtually every country in the world.3

1 “Why Uber Couldn’t Crack China,” Fortune, August 7, 2017; “The Real Reason Uber is Giving Up in China,” Harvard Busi-ness Review, August 2, 2016; and “Uber Slayer: How China’s Didi Beat the Ride-Hailing Superpower,” October 6, 2016, at www.bloomberg.com. See also Robert Salomon, Global Vision: How Companies Can Overcome the Pitfalls of Globalization (Basingstoke, UK: Palgrave Macmillan, 2016).2 “Multinationals: The Retreat of the Global Economy,” The Economist, January 28, 2017.3 Thomas L. Friedman, The Lexus and the Olive Tree (New York: Anchor Books, 2000), p. ix.

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The process of globalization is so pervasive that it affects all businesses—whether they are small or large, local or multinational, or an employer of one or many.

Firms can enter and compete in the global marketplace in several ways. Many compa-nies first build a successful business in their home country, and then export their products or services to buyers in other countries. In other words, they develop global market chan-nels for their products. Nestlé, for example, began in Switzerland, but now sells its food and beverage products all over the world. An emerging trend is what The Economist mag-azine has called a rising cohort of small companies that, while remaining local, have suc-cessfully used e-commerce platforms to sell to customers around the world. PayPal, the digital payments firm, has reported that it facilitates $80 billion a year in cross-border transactions, many of which are of this type.4

Other firms begin in their home country but realize that they can cut costs by locating some or all of their global operations in another country. This decision leads to estab-lishing manufacturing plants or service operations abroad. For example, BMW, which is headquartered in Germany, has manufacturing facilities in 15 countries, including Brazil, Thailand, Egypt, Indonesia, and the United States. Finally, a third strategy involves sub-contracting manufacturing to suppliers located abroad. In other words, these companies develop global supply chains. For example, in the apparel and shoe industries, companies such as Nike, Gap, and Abercrombie & Fitch have extensive networks of suppliers outside the United States—mostly in Asia—that make products of their design. Suppliers and their relationship to lead firms are further discussed in Chapter 17.

These three strategies of globalization can be summarized in three words: sell, make, and source. Today, many companies have all three elements of global business—market channels, manufacturing operations, and supply chains.

Major Multinational EnterprisesA multinational enterprise (MNE) is a firm with significant foreign assets or revenues, or that has subsidiaries outside its home country. Although only one in a thousand of the world’s businesses are multinational, because they are among the largest, they have an outsized impact. By some estimates, MNEs account for more than half of world trade, comprise 40 percent of the world’s stock value, and own much of its intellectual prop-erty.5 Their affiliates—meaning suppliers, subcontractors, retailers, and other entities with which they have some business relationship—collectively produce 10 percent of global gross domestic product (GDP).6

Although many firms conduct business across national boundaries, most global com-merce is carried out by a small number of powerful firms. (Corporate power is further discussed in Chapter 3.) Who are these leading multinational enterprises? Figure 4.1 lists the top 10 nonfinancial MNEs, ranked in order of the value of the foreign assets they con-trol. Leading the list is Royal Dutch Shell, the international petroleum company. Rounding out the group are several of the world’s leading automakers, other petroleum companies, a food and beverage maker, and a telecommunications firm.7 Although Figure  4.1 does not include any information technology firms (such as Google, Apple, and Microsoft), the number of such firms in the top 100 has more than doubled in the past five years. For their

4 “Multinationals: The Retreat of the Global Economy,” The Economist, January 28, 2017.5 Ibid.6 “Globalization in the Age of Trump,” Harvard Business Review, July–August 2017.7 United Nations Conference on Trade and Development, World Investment Report 2017, www.unctad.org. Data are for 2016.

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part, the world’s major financial institutions also extend across the globe; four of the five largest banks in the world, ranked by assets, are in China.8 JP Morgan Chase, the largest U.S.–based bank, operates in more than 60 countries.

Although much of global commerce is carried out by a small number of large firms, globalization affects almost all businesses, whatever their size and reach. Even small, local firms use products and services that originate abroad, and they often compete with other businesses from around the world.

Another important aspect of globalization is the worldwide flow of capital. Foreign direct investment (FDI) occurs when a company, individual, or fund invests money in another coun-try, for example, by buying shares of stock in or loaning money to a foreign firm. The world economy is bound together by such cross-border flows of capital. In 2016, FDI was $1.75 trillion, still below its average right before the financial crisis of 2008.9 An emerging trend in foreign direct investment is the rise of sovereign wealth funds. These are funds oper-ated by governments to invest their foreign currency reserves. They are most commonly operated by nations that export large amounts of oil and manufactured goods; the largest are run by Norway, the United Arab Emirates (Abu Dhabi), China, Kuwait, and Saudi Arabia. In recent years, sovereign wealth funds have made significant cross-border investments.

In past years, some U.S. companies sought to avoid corporate taxes by merging with companies located in other countries with lower tax rates and shifting their headquarters there, in a phenomenon known as inversion. For example, in 2014 Burger King (based in the United States) acquired Tim Horton’s, a Canadian coffee-and-donut chain, for $11.5 billion. After the acquisition, Burger King reincorporated in Canada and renamed itself Restaurant Brands International, saving the company an estimated $275 million in U.S. taxes over the next three years. Many commentators expected this trend would slow after the implementation in 2018 of new tax legislation in the United States, which reduced corporate tax rates from 35 percent to 21 percent.

8 “Bank Rankings: Top Banks in the World,” www.accuity.com. Data are as of February 2017.9 UNCTAD, “World Investment Report 2017,” www.unctad.org.

Corporation Home Economy IndustryForeign Assets (in $ millions)

Royal Dutch Shell United Kingdom Petroleum $349,720

Toyota Motor Japan Motor vehicles 303,678

BP United Kingdom Petroleum 235,124

Total France Petroleum 233,217

Anheuser-Busch InBev Belgium Food & Beverages 208,012

Volkswagen Group Germany Motor vehicles 197,254

Chevron United States Petroleum 189,116

General Electric United States Industrial and Commercial Machinery

178,525

Exxon Mobil Corporation United States Petroleum 165,969

Softbank Corp Japan Telecommunications 145,611

FIGURE 4.1The World’s Top 10 Nonfinancial Multinational Enterprises, Ranked by Foreign Assets

Source: United Nations, “The World’s Top 100 Non-Financial MNEs, Ranked by Foreign Assets, 2016,” www.unctad.org. All data are for the year 2016.

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Finally, globalization involves the movement of people across national borders. Although recent political movements in some countries have sought to block or reduce the inflow, human migration has continued. In 2017, 258 million persons—about 3.4 percent of the world’s population—were living in countries other than those in which they were born. The proportion was higher—12 percent—in developed countries. More than half of the world’s migrants were living in just ten countries, topped by Saudi Arabia (37 percent of its population), Canada (22 percent), and the United States and Germany (15 percent each).10 Some of these people had migrated legally, some illegally; some were seeking economic opportunity, while others were fleeing war or persecution. In the mid to late 2010s, as many as 800,000 people a year poured out of Syria to escape brutal armed conflict, many settling in Europe.

How did European businesses respond to this influx of refugees from Syria and nearby countries? In 2015, dozens of German companies joined together as Wir Zusammen, or “We Together,” under the leadership of the CEO of the country’s largest Internet provider, to pool their resources to help integrate migrants. This was potentially a boon to an economy in which more than a million jobs were unfilled. The idea was for the companies to collaborate in providing language training, housing, and training—and even sports leagues. For example, ThyssenKrupp, a major conglomerate and member of the group, created hundreds of internships and apprenticeships for refugees. Wir Zusammen also ran an ad campaign designed to encourage Germans to see migrants as partners, not threats.11

A study of 300 companies in Germany found that integrating these workers was chal-lenging, because of language barriers and lack of documentation. But the companies reported that many refugee employees had succeeded when given appropriate support.12

The role of businesses in employing immigrant workers is further explored in Chapter 16.

International Financial and Trade InstitutionsGlobal commerce is carried out in the context of a set of important international financial and trade institutions (IFTIs). The most important of these are the World Bank, the Inter-national Monetary Fund, and the World Trade Organization. By setting the rules by which international commerce is transacted, these institutions increasingly determine who wins and who loses in the global economy.

The World Bank (WB) was set up in 1944, near the end of World War II, to provide economic development loans to its member nations. Its main motivation at that time was to help rebuild the war-torn economies of Europe. Today, the World Bank is one of the world’s largest sources of economic development assistance; it provided $61 billion in loans, grants, equity investments and guarantees in 2016 for roads, dams, power plants, and other infrastructure projects, as well as for education, health, and social services. The bank gets its funds from dues paid by its member countries and from money it borrows in the international capital markets. Representation on the bank’s governing board is based on economic power; that is, countries have voting power based on the size of their economies.

10 “Migrants Are on the Rise Around the World, and Myths About Them Are Shaping Attitudes,” The New York Times, June 20, 2018.11 “German Billionaire Rallies Business to Migrant Cause,” Financial Times, January 7, 2017.12 “International Migration Report 2017,” United Nations Department of Economic and Social Affairs, December 2017; “How 300 Companies Integrated 2,500 Refugees into Germany’s Labor Market,” Boston Consulting Group, May 30, 2017, www.bcg.com; and “Germany Bets on Second Time Lucky with Migrant Workers,” Reuters, August 18, 2017.

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As the United States—the bank’s largest shareholder—became increasingly reluctant to support the bank’s mission during the Trump administration, the bank’s leadership began to turn to partnerships with private investors to fund various development projects.13

The World Bank’s sister organization is the International Monetary Fund (IMF). Founded at the same time as the bank (and today residing across the street from it in Washington, DC), the IMF has a somewhat narrower purpose: to stabilize the system of currency exchange rates and international payments to enable member countries to participate in global trade. It does this by lending foreign exchange to member countries. Like the World Bank, the IMF sometimes imposes strict conditions on governments that receive its loans. These conditions may include demands that governments cut spending, devalue their currencies, increase exports, liberalize financial markets, and reduce wages. These conditions often lead to hardship.

One country that was particularly hard hit by loan conditions was Greece, one of the poorest nations in the European Union. Beginning in 2010, the IMF, the European Central Bank, and several European countries made a series of multibillion-dollar loans to Greece to enable it to pay its bills and service its debts. In exchange, the lenders imposed severe conditions, including sharp cuts in govern-ment spending and the sale of public assets. The Greek economy shrank by a quarter, the unemployment rate rose to 27 percent, and half its young people were thrown out of work. Public pensions and salaries were slashed. The Greek people voted in a new government whose candidates had called the austerity measures “waterboarding” and advocated for a restructuring of the country’s debt. By 2018, Greece’s economy had finally improved somewhat, and the nation hoped to be able to renegotiate its loans on more favorable terms.14

Significant progress has been made to reduce indebtedness by poor countries. By the mid-2000s, many developing countries had accumulated huge debts to the World Bank, the IMF, and other lenders. The total amount of money owed was almost $3 trillion. One of the unintended consequences of past loans was persistent poverty, because a large share of many nations’ earnings went to pay off debt rather than to develop the economy or improve the lives of citizens. In response, many industrialized nations extended aid to heavily indebted countries to enable them to pay down loans to the World Bank, IMG, and other lenders. By 2017, more than $77 billion in debt relief had been extended to 36 heav-ily indebted countries, significantly reducing these nations’ payments and enabling them to direct more resources to alleviating poverty.15

However, problems remained. Poor countries still owed billions more, and the world financial crisis weakened their ability to pay—and the ability of developed countries to offer aid. And, so-called vulture funds sought to take advantage of the indebted countries, a situation that is profiled in Exhibit 4.A.

The final member of the triumvirate of IFTIs is the World Trade Organization (WTO). The WTO, founded in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT), is an international body that establishes the ground rules for trade among nations. Most of the world’s nations are members of the WTO, which is based in Switzerland.

13 “The World Bank is Remaking Itself as a Creature of Wall Street,” The New York Times, January 25, 2018.14 “Plausible that Greece Will Exit Bailout Programme This Year,” Financial Times, January 4, 2018; and “Explaining Greece’s Debt Crisis,” The New York Times, June 17, 2016.15 “Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, Statistical Update,” (Washington, D.C.: International Monetary Fund, September 1, 2017).

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Its major objective is to promote free trade; that is, to eliminate barriers to trade among nations, such as tariffs. A tariff is a tax on an imported (or sometimes exported) product, often imposed by governments to protect their own industries from foreign competition. Unlike the WB and the IMF, the WTO does not lend money or foreign exchange; it simply sets the rules for international trade. The WTO conducts multiyear negotiations, called rounds, on various trade-related topics, rotating its meetings among different cities.

Under the WTO’s most favored nation rule, member countries may not discriminate against foreign products. Most import restrictions (such as protective tariffs) are illegal. Under rare circumstances, they are permitted to protect a nation from an imported prod-uct scientifically proven to be unsafe—or to safeguard a nation’s industry from a sudden, unforeseen, and damaging surge in imports. The Trump administration cited the latter exception when it imposed tariffs on imported solar panels in 2018, saying the restrictions were needed to protect American industry from unfair foreign competition. Exhibit 4.B explores whether jobs were gained or lost because of this protectionist policy. (Trade pol-icy is further discussed in Chapter 7, and corporate efforts to obtain protective tariffs are described in the discussion case at the end of Chapter 8.)

If countries disagree about the interpretation of this or any other WTO rule, they can bring a complaint before the WTO’s Dispute Settlement Body (DSB), a panel of appointed experts, which meets behind closed doors. Usually, member countries comply voluntarily with the DSB’s rulings. If they do not, the DSB can allow the aggrieved nation to take retaliatory measures, such as imposing their own tariffs. Rulings are binding; the only way a decision can be overruled is if every member country opposes it.

These three international financial and trade institutions are important because no busi-ness can operate across national boundaries without complying with the rules set by the WTO, and many businesses in the developing world are dependent on World Bank and IMF loans for their very lifeblood. The policies these institutions adopt, therefore, have much to do with whether globalization is perceived as a positive or negative force, a sub-ject to which we turn next.

Vulture Funds and Heavily Indebted Nations

A “vulture fund” is a private equity fund (also called a hedge fund) that buys the debt of weak companies or heavily indebted countries with the intention of making a profit. (The term analogizes these investors to vultures, birds of prey that feed on dead or dying animals.) For example, when Argentina defaulted on about $81 billion of loans in 2001, a hedge fund called Elliott Management bought some of these defaulted loans at a deep discount. It then sued, demanding that Argentina pay back the loans at full face value with inter-est, much more than it had paid. In 2012, a U.S. judge ruled in favor of the hedge fund—and said that until Argentina paid what it owed to Elliott Management, it was barred from paying any of its creditors (who had already agreed to accept less). In 2016, Argentina finally capitulated, agreeing to pay $2.4 billion to settle debt that Elliott Management had purchased 15 years earlier for just $117 million, generating an enormous windfall. Both the IMF and the World Bank said that the behavior of vulture funds like Elliott Management threatened the financial recovery of fragile economies. “When vulture funds sue for such exorbitant amounts, it’s clearly taking away money that should be invested in health, education, infrastructure, and other social problems, and goes to line the pockets of already wealthy investors,” said a representative of the nongovern-mental organization (NGO) Africa Action.

Sources: “How One Hedge Fund Made $2 Billion from Argentina’s Economic Collapse,” The Washington Post, March 29, 2016; and “A Good Week for Vulture Funds,” The New Yorker, March 5, 2016.

Exhibit 4.A

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The Benefits and Costs of Globalization

Globalization has both benefits and costs, and not all countries and stakeholders are affected equally. In this section, we present some of the arguments advanced by both sides in the debate over this important issue.

Benefits of GlobalizationProponents of globalization point to its many benefits. One of the most important of these is that globalization tends to increase economic productivity. That means, simply, that more is produced with the same effort.

Why should that be? As the economist David Ricardo first pointed out, productivity rises more quickly when countries produce goods and services for which they have a nat-ural talent. He called this the theory of comparative advantage. Suppose, for example, that one country had a climate and terrain ideally suited for raising sheep, giving it an advantage in the production of wool and woolen goods. A second country had a favorable combination of iron, coal, and water power that allowed it to produce high-grade steel. The first country would benefit from trading its woolen goods for the second country’s steel, and vice versa; and the world’s economy overall would be more productive than if both countries had tried to make everything they needed for themselves. In other words, in the context of free trade, specialization (everyone does what they are best at) makes the world economy as a whole more efficient, so living standards rise.

Many countries today have developed a specialization in one or another skill or industry. India, with its excellent system of technical education, has become a world

Tariffs on Solar Panels: Job Creator or Job Destroyer?

In 2018, President Trump imposed a 30 percent tariff on imported solar panels and cells, set to phase out after four years. “Our companies have been decimated,” the president said, “and those companies are going to be coming back strong.” The immediate effect of the tariff was to raise the prices of imported solar panels and cells, most of which came from China, South Korea, and Malaysia. Two U.S.–based solar equipment manufacturers responded enthusiastically. Suniva praised the move for “holding China and its proxies accountable,” and SolarWorld said it was “hopeful [the tariffs] will be enough.” How many U.S. jobs were protected or created? According to the Solar Foundation, although 38,000 American workers were employed in all aspects of solar manufacturing, only 2,000 made solar panels and cells. One foreign solar-panel maker reportedly contacted the city of Jacksonville, Florida, after the tariff announcement to discuss opening a manufacturing plant there, promising as many as 800 new jobs. Other companies opposed the tariffs, saying they would eliminate the jobs of many Americans who installed and maintained solar systems for businesses, homes, and utilities. Almost 90 percent of solar panels were imported, and as their prices rose, demand for these systems was expected to fall. The Solar Energy Industries Association, a trade group, estimated that the tariffs would lead to the loss of 23,000 U.S. jobs in 2018 alone as solar investments were cancelled or delayed. The chief executive of SunPower, a U.S. firm that sourced its panels from Asia, commented that tariffs would “burden domestic manufacturers and suppliers of other key components, raise prices for customers, and eliminate tens of thousands of jobs.” And some feared that the Administration’s move would prompt retaliation from Asian countries, hurting U.S. exporters. “This is now really starting to escalate,” said one prominent economist.

Sources: “Manufacturers Fight Over New Tariffs’ Effect on U.S. Jobs,” The Wall Street Journal, January 23, 2018; “Job Creator, or Job Killer? Trump Angers Solar Installers with Panel Tariff” and “Q&A: Winners, Losers of Trump’s Solar Panel Tariff,” The New York Times, January 23, 2018; “Trump Says Solar Tariff Will Create ‘Lots of Jobs.’ But It Could Wipe Out Many More,” The Washington Post, January 29, 2018; and “President Trump’s Solar Tariffs Are a Big Blow to Renewables,” Fortune, January 22, 2018.

Exhibit 4.B

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powerhouse in the production of software engineers. China has become expert in electronics manufacturing. France and Italy, with their strong networks of skilled craftspeople and designers, are acknowledged leaders in the world’s high fashion and footwear design industries. The United States, with its concentration of actors, directors, special effects experts, and screenwriters, is the global headquarters for the movie industry.

Comparative advantage can come from several possible sources, including natural resources; the skills, education, or experience of a critical mass of people; or an existing production infrastructure.

Globalization also tends to reduce prices for consumers. If a shopper in the United States goes into Walmart to buy a shirt, he or she is likely to find one at a very reason-able price. Walmart sources its apparel from all over the world, enabling it to push down production costs. Globalization also benefits consumers by giving them access to a wide range of diverse goods and the latest “big thing.” Teenagers in Malaysia can enjoy the lat-est Johnny Depp or Jennifer Lawrence movie, while American children can play with new Sony PlayStation games from Japan.

For the developing world, globalization also brings benefits. It helps entrepreneurs the world over by giving all countries access to foreign investment funds to support economic development. Globalization also transfers technology. In a competitive world marketplace, the best ideas and newest innovations spread quickly. Multinational corporations train their employees and partners how to make the fastest computer chips, the most productive food crops, and the most efficient light bulbs. In many nations of the developing world, global-ization has meant more manufacturing jobs in export sectors and training for workers eager to enhance their skills.

The futurist Allen Hammond identifies two additional benefits of globalization. First, he says that world trade has the potential of supporting the spread of democracy and freedom.

The very nature of economic activity in free markets. . . requires broad access to information, the spread of competence, and the exercise of individual decision mak-ing throughout the workforce—conditions that are more compatible with free soci-eties and democratic forms of government than with authoritarian regimes.16

Second, according to Hammond, global commerce can reduce military conflict by acting as a force that binds disparate peoples together on the common ground of business interac-tion. “Nations that once competed for territorial dominance,” he writes, “will now compete for market share, with money that once supported military forces invested in new ports, telecommunications, and other infrastructure.” In this view, global business can become both a stabilizing force and a conduit for Western ideas about democracy and freedom.

Costs of GlobalizationIf globalization has all these benefits, why are so many individuals and organizations so critical of it? The answer is complex. Just as some gain from globalization, others are hurt by it. From the perspective of its victims, globalization does not look nearly so attractive.

One of the costs of globalization is job insecurity. As businesses move manufacturing across national borders in search of cheaper labor, workers at home are laid off. Jobs in the domestic economy are lost as imports replace homemade goods and services. In the American South, for example, tens of thousands of jobs in the textile industry have been lost, as jobs have shifted to low-labor cost areas of the world, leaving whole communities

16 Allen Hammond, Which World? Scenarios for the 21st Century (Washington DC: Island Press, 1998), p. 30.

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devastated. In the past, mainly manufacturing was affected by the shift of jobs abroad; more recently, clerical, white-collar, and professional jobs have also been “offshored.” Many customer service calls originating in the United States are now answered by opera-tors in the Philippines and India. The back-office operations of many banks—sorting and recording check transactions, for example—are done in India and China. Aircraft manu-facturers are using aeronautical specialists in Russia to design parts for new planes. Even when jobs are not actually relocated, wages may be driven down because companies facing foreign competition try to keep their costs in check. Much of the opposition to globaliza-tion in affluent nations comes from people who feel their own jobs, pay, and livelihoods threatened by workers abroad who can do their work more cheaply.

Some evidence suggests a countertrend, as some companies have moved produc-tion back to the United States, in part to gain greater control over the supply chain. Wages have increased in China and many other developing nations, while wages in the United States have stagnated. Productivity is considerably higher in the United States than in China. And, some small businesses have found that solving everyday production problems with a contractor halfway around the globe can be daunting. “If we have an issue in manufacturing, in America we can walk down to the plant floor,” explained the founder of a business called LightSaver Technologies that made emer-gency lights for homeowners. “We can’t do that in China.” The company had recently relocated production from China to a facility near its headquarters in California.17

Not only workers in rich countries are affected by globalization. When workers in Indo-nesia began organizing for higher wages, Nike Corporation moved much of its production to Vietnam and China. Many Indonesian workers lost their jobs. Some call this feature of global capitalism the race to the bottom.

Another cost of globalization is that environmental and labor standards may be weak-ened as companies seek manufacturing sites where regulations are most lax. Just as com-panies may desire locations offering the cheapest labor, they may also search for locations with few environmental protections; weak regulation of occupational health and safety, hours of work, and discrimination; and few rights for unions. A related concern is that the World Trade Organization’s most favored nation rules make it difficult for individual nations to adopt policies promoting environmental or social objectives, if these have the effect of discriminating against products from another country.

For example, the United States banned the importation of Indonesian clove ciga-rettes, saying that the sweet-flavored cigarettes attracted younger smokers, drawing them into nicotine addiction and violating U.S. tobacco control laws. Indonesia brought a complaint before the WTO’s dispute settlement body. The WTO ruled in Indonesia’s favor, saying that because the United States permitted the sale of another flavored cigarette—menthols—it had acted in a discriminatory way by excluding Indonesian clove cigarettes. The dispute was finally settled after Indonesia agreed to the ban in exchange for other concessions from the United States.18

Critics of globalization say that incidents such as this one show that free trade rules are being used to restrict the right of sovereign nations to make their own laws setting health or environmental standards for imported products.

17 “Small U.S. Manufacturers Give Up on ‘Made in China,’” Bloomberg Businessweek, June 21, 2012.18 “U.S., Indonesia Settle Fight over Clove Cigarettes,” The Hill, October 3, 2014. Details on this and other cases before the WTO’s dispute settlement body are available at www.wto.org.

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Another cost of globalization is that it erodes regional and national cultures and under-mines cultural, linguistic, and religious diversity. In other words, global commerce makes us all very much the same. Is a world in which everyone is drinking Coke, watching Holly-wood movies, texting on an iPhone, and wearing Gap jeans a world we want, or not? Some have argued that the deep anti-Americanism present in many parts of the world reflects resentment at the penetration of the values of dominant U.S.–based multinational corpora-tions into every corner of the world.

With respect to the point that globalization promotes democracy, critics charge that market capitalism is just as compatible with despotism as it is with freedom. Indeed, mul-tinational corporations are often drawn to nations that are governed by antidemocratic or military regimes, because they are so effective at controlling labor and blocking efforts to protect the environment. For example, Unocal’s joint-venture collaboration to build a gas pipeline with the military government of Myanmar (Burma), a notorious abuser of human rights, may have brought significant financial benefits to the petroleum company.

Figure 4.2 summarizes the major points in the discussion about the costs and benefits of globalization.

This discussion raises the very real possibility that globalization may benefit the world economy as a whole, while simultaneously hurting many individuals and localities. An ongoing challenge to business, government, and society is to find ways to extend the bene-fits of globalization to all, while mitigating its adverse effects.19

Doing Business in a Diverse World

Doing business in other nations is much more than a step across a geographical boundary; it is a step into different social, political, cultural, and economic realities. As shown in Chapters 1, 2, and 3, even businesses operating in one community or one nation cannot function successfully without considering a wide variety of stakeholder needs and inter-ests. When companies operate globally, the number of stakeholders to be considered in decision making, and the diversity of their interests, increases dramatically.

19 For arguments for and against globalization, and on strategies to make the world’s governing institutions more effective, see Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: W.W. Norton, 2011); Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press, 2007); and Joseph E. Stiglitz, Mak-ing Globalization Work (New York: W.W. Norton, 2007).

Benefits of Globalization Costs of Globalization

Increases economic productivity. Causes job insecurity.

Reduces prices for consumers. Weakens environmental and labor standards.

Gives developing countries access to foreign investment funds to support economic development.

Prevents individual nations from adopting policies promoting environmental or social objectives, if these discriminate against products from another country.

Transfers technology. Erodes regional and national cultures and undermines cultural, linguistic, and religious diversity.

Spreads democracy and freedom, and reduces military conflict.

Is compatible with despotism.

FIGURE 4.2Benefits and Costs of Globalization

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Comparative Political and Economic SystemsThe many nations of the world differ greatly in their political, social, and economic sys-tems. One important dimension of this diversity is how power is exercised, that is, the degree to which a nation’s people may freely exercise their democratic rights. Democracy refers broadly to the presence of political freedom. Arthur Lewis, a Nobel laureate in eco-nomics, described it this way: “The primary meaning of democracy is that all who are affected by a decision should have the right to participate in making that decision, either directly or through chosen representatives.” According to the United Nations, democracy has four defining features:20

∙ Fair elections, in which citizens may freely choose their leaders from among candidates representing more than one political party.

∙ An independent media, in which journalists and citizens may express their political views without fear of censorship or punishment.

∙ Separation of powers among the executive, legislative, and judicial branches of government.∙ An open society where citizens have the right to form their own independent organiza-

tions to pursue social, religious, and cultural goals.

During much of the twentieth century, democratic rights spread for the first time to many nations around the world. Consider, for example, that at the beginning of the 20th century no country in the world had universal suffrage (all citizens can vote); today, a majority of countries do. The collapse of communist party rule in the former Soviet Union and its satellites in eastern and central Europe in the early 1990s was followed by the first open elections ever in these countries. These changes led some observers to call the end of the 20th century the “third wave of democracy.”

Somewhere after the turn of the century, however, the trend toward democratization seemed to stall. According to a study by Freedom House, a nongovernmental research organization, 2017 marked the eleventh consecutive year in which more of the world’s nations experienced declines in political rights and civil liberties than experienced improve-ments. In some countries that already lacked freedom, authoritarian leaders further consol-idated their power. For example, in China, the regime placed further restrictions on dissent within the ruling Communist Party; and in Russia, the regime intimidated opponents and repressed free elections. Perhaps more surprisingly, formerly free countries suffered set-backs. In Venezuela, which had been democratic for more than 40 years, the elected presi-dent stripped the legislature of power, killed demonstrators, and imprisoned political opponents, effectively ushering in authoritarian rule. Declines in democratic rights also occurred in Turkey, Ethiopia, Hungary, and other nations. In all, Freedom House concluded that in 2017 one quarter of the world’s nations were “not free,” when rated on their political rights and civil liberties; an additional 30 percent were only “partly free.”21

The degree to which human rights are protected also varies widely across nations. Human rights, further discussed in Chapters 5 and 17, refer broadly to the rights and priv-ileges accorded to all people, simply by virtue of being human, for example, the rights to a decent standard of living, free speech, religious freedom, and due process of law, among others. Fundamental human rights have been codified in various international agreements,

20 United Nations Development Programme, Human Development Report 2000 (New York: Oxford University Press, 2000), Ch. 3, “Inclusive Democracy Secures Rights,” pp. 56–71. The quotation from Arthur Lewis appears on p. 56.21 Freedom House, “Freedom in the World 2017: Populists and Autocrats, the Dual Threat to Global Democracy,” at http://freedomhouse.org. See also: “How Stable Are Democracies? ‘Warning Signs Are Flashing Red,’” The New York Times, November 29, 2016.

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the most important of which is the Universal Declaration of Human Rights of 1948.22 The second half of the 20th century was a period of great advances in human rights in many regions, and over half of the world’s nations have now ratified all of the United Nations’ human right covenants. Nonetheless, many human rights problems remain. Consider the following examples:

∙ More than 5 million children die each year before their fifth birthday. Most of these deaths are due to diseases such as pneumonia, diarrhea, and malaria, which are prevent-able with proper vaccinations, nutrition, and basic medical care. Although this number has fallen by more than half since 1990, it is still tragically high.23

∙ Gross violations of human rights have not been eliminated. Genocide, mass murder of innocent civilians, has occurred all too recently in Syria, Rwanda and Burundi, Iraq, Bosnia and Herzegovina, Democratic Republic of the Congo, Somalia, East Timor, and Sudan.

∙ The International Labor Organization estimated in 2017 that 25 million people world-wide were victims of forced labor, trafficking, and human slavery. Their labor generated annual profits of $150 billion. (The topic of forced labor is further explored in Chapter 17.) More than half of them were women and girls, who had been forced into prostitution or domestic work.24 The efforts of a major hotel chain, The Carlson Companies, to prevent the use of their facilities for prostitution or child trafficking is described in a case at the end of this book.

∙ Minority groups and indigenous peoples in many nations still lack basic political and social rights. In Nepal, the life expectancy of “untouchables,” the lowest caste, is fully 15 years less than that of Brahmins, the highest caste.

The absence of key human rights in many nations remains a significant issue for com-panies transacting business there.

Another dimension of difference among nations today is how economic assets are con-trolled, that is, the degree of economic freedom. On one end of the continuum are societies in which assets are privately owned and exchanged in a free and open market. Such free enterprise systems are based on the principle of voluntary association and exchange. In such a system, people with goods and services to sell take them voluntarily to the market-place, seeking to exchange them for money or other goods or services. Political and eco-nomic freedoms are related: as people gain more control over government decisions they often press for greater economic opportunity; open markets may give people the resources to participate effectively in politics. But this is not always the case. The special situation of China with respect to political and economic freedom is explored in Exhibit 4.C.

At the other end of the continuum are systems of central state control, in which eco-nomic power is concentrated in the hands of government officials and political authorities. The central government owns the property that is used to produce goods and services. Pri-vate ownership may be forbidden, or greatly restricted, and most private markets are ille-gal. Very few societies today operate based on strict central state control of the economy. More common is a system of mixed free enterprise and central state control in which some industries are state controlled, and others are privately owned. For example, in Nigeria, the

22 For more information on the Universal Declaration of Human Rights and other United Nations agreements on human rights, see the website of the U.N. High Commissioner for Human Rights at www.unhchr.org.23 United Nations Children’s Fund (UNICEF) data on child mortality are available online at https://data.unicef.org.24 ILO and Walk Free Foundation, Global Estimates of Modern Slavery: Forced Labour and Forced Marriage (2017); and ILO, Profits and Poverty: The Economics of Forced Labour (2014).

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oil industry is controlled by a government-owned enterprise that operates in partnership with foreign companies such as Shell and Chevron, but many other industries are privately controlled. In the social democracies of Scandinavia, such as Norway, the government operates some industries but not others. In the United States, the government temporarily took partial ownership in some banks, including Citigroup, as they faltered during the financial crisis.

The Heritage Foundation, a conservative think tank, has scored the nations of the world according to an index of economic freedom defined as “the fundamental rights of every human being to control his or her own labor and property.” In eco-nomically free societies, governments “refrain from coercion or restraint of liberty beyond the extent necessary to protect and maintain liberty itself.” Among the freest nations in 2018, by this measure, were Hong Kong, Singapore, and Canada; among the most repressed were Iran, Venezuela, and—the least free in the world—North Korea. The United States ranked 48th out of 183 countries.25

Global Inequality and the Bottom of the PyramidNations also differ greatly in their overall levels of economic and social development. Ours is a world of great inequalities. Nations themselves differ in economic development, and individual wealth and income varies widely within and among nations.

Inequality may be measured in two ways: by wealth and income.Wealth refers to assets that a person accumulates and he or she owns at a point in time.

Levels of wealth can be expressed as a pyramid, as shown in Figure 4.3. Most of the world’s

25 Available at www.heritage.org.

China: A Case of Authoritarian Capitalism?

Democracy, a political system in which citizens choose their own leaders and may openly express their ideas, and capitalism, an economic system in which the means of creating wealth are privately owned and con-trolled, have historically often developed in tandem. The two are not always coupled, however. During the early years of the 20th century, for example, capitalism coexisted with nondemocratic, fascist governments in Germany, Spain, and Japan. More recently, scholars have coined the term “authoritarian capitalism” to refer to modern states that combine elements of a market economy with political control by nonelected elites. A prime example is China. In its drive for economic development, the Chinese government has granted consid-erable freedom to private individuals to own property, invest, and innovate. The result has been very rapid growth in much of the country over the past two decades. At the same time, the Chinese communist authori-ties have vigorously held onto political power and suppressed dissent. As further explored in Chapter 12, the Chinese government operates one of the most sophisticated systems of Internet censorship in the world, restricting its citizens’ ability to search using Google, connect with friends on Facebook, and access the websites of organizations out of favor with the authorities. It has also held onto ownership of some big companies, such as the China National Petroleum Corporation and China Mobile. In what direction will China and other authoritarian capitalist nations evolve in the future? “Some believe these countries could ultimately become liberal democracies through a combination of internal development, increasing affluence, and out-side influence,” commented the political scientist Azar Gat. “Alternatively, they may have enough weight to create a new nondemocratic but economically advanced Second World.”

Sources: “The Rise of State Capitalism,” The Economist, January 21, 2012; Azar Gat, “The Return of the Authoritarian Capitalists,” International Herald Tribune, June 14, 2007; and “The Return of Authoritarian Great Powers,” Foreign Affairs, July/August 2007.

Exhibit 4.C

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population—about 70 percent—are at the base, or bottom, of the pyramid, owning less than $10,000 worth of assets. They might own some work tools, household furnishings, and a bicycle or used car. More than 90 percent of adults in India and Africa (and only 20 percent of adults in developed countries) are at the bottom of the pyramid. About a fifth of the world’s people are considered middle class, with assets between $10,000 and $100,000. This group is present in all countries, but is growing especially fast in China (whose share of the world’s middle class has more than doubled since 2000). These individuals might have equity in a home and some retirement savings. High wealth individuals, with assets above $100,000, are concentrated in the United States, Europe, Japan, and Australia. At the top of the pyramid—just over one-half of 1 percent of the world’s population—are million-aires. Forty-three percent of these millionaires reside in the United States. Not reported separately in Figure 4.3 are so-called ultra-high net worth individuals, with wealth above $50 million. In 2017, about 148,000 people worldwide were in this category.26

Another way to conceptualize inequality is in terms of income—how much a person earns in a day or a year. Some theorists have defined the bottom of the pyramid as individ-uals who earn below $3,000 a year (or about $8 a day) in local purchasing power. By this measure, about 4 billion people globally are part of this segment.27

Whether measured by assets or income, historically, major multinational corporations have focused most of their attention on the top of the pyramid and, to some extent, the middle. But today, they are increasingly facing the challenge of bringing products, ser-vices, and employment to the many at the bottom of the pyramid. As the scholar C. K. Prahalad argued in his book The Fortune at the Bottom of the Pyramid, this group, while often overlooked, represents an incredible business opportunity. Although the poor earn

26 Data in this paragraph are drawn from Credit Suisse, Global Wealth Report 2017, “The Global Wealth Pyramid,” November 2017.27 This definition was first proposed in World Resources Institute and International Finance Corporation, “The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid,” March 2007, www.wri.org.

FIGURE 4.3The Global Wealth Pyramid

Source: Adapted from Credit Suisse, Global Wealth Report 2017, Figure 1, p. 21.

High Wealth391 million people (8 percent)

$100,000 to $1 million

Middle Class1,054 million people (21%)

Assets $10,000 to $100,000

Base of the Pyramid3,474 million people (70%)Assets less than $10,000

Topof the

Pyramid36 million

people (<1 percent)>$1 million

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little individually, collectively they represent a vast market—and they often pay a “poverty premium,” creating an opening for companies able to deliver quality products at lower prices. The size of this market has been estimated at as high as $5 trillion.28 Many busi-nesses are learning that focusing on the bottom of the pyramid can foster social develop-ment and provide employment in underserved communities—and reap profits.

For example, S.C. Johnson, a global manufacturer of household cleaning supplies and other consumer chemicals, launched a business called WOW in rural Ghana. In partnership with the Gates Foundation and the Center for Sustainable Global Enter-prise, the company developed a packet of products specifically designed to help poor families prevent malaria, an illness spread by mosquitos. Insect repellants and cleaning products were provided in refillable containers and sold by subscription in small amounts to groups of homemakers, village by village. “Since our initial launch of WOW, we’ve learned so much about what consumers in Ghana want and how to construct a sustainable business model in the process,” said the company’s vice president of international markets marketing.29

One product that people in poor countries often desperately need is loans with which to operate or expand their farms or small businesses. Commercial banks have historically been reluctant to make small loans to people with little or no collateral. In response to this need, a new system has emerged called microfinance. This occurs when financial organi-zations provide loans to low-income clients or solidarity lending groups (a community of borrowers) who traditionally lack access to banking or related services.

In Indonesia, a midsized bank called BTPN grew rapidly after it decided in 2008 to expand into microloans to what its executives called the “productive poor.” BTPN set up numerous small branches in rural areas and equipped staff with portable devices that could scan fingerprints, to facilitate doing business with illiterate cus-tomers. Typical loans were for $4,000 or less, with a term of a year or two, made to traders and small shopkeepers. As the economy rebounded from the global finan-cial crisis, many entrepreneurs were eager to grow their businesses. BTPN’s model benefited both these customers and the bank, which by 2011 had become one of the most profitable in Indonesia.30

One of the most recognized microfinance institutions is the Grameen Bank in Bangla-desh. Grameen Bank has had amazing results; by 2018, it had made 1.7 million micro-loans, helping nearly 10 million people. Grameen Foundation and its affiliates and partners have spread this approach to millions more across Asia, Africa, and Latin America.31

Collaborative Partnerships for Global Problem Solving

As the preceding section suggested, doing business in a diverse world is exceptionally challenging for businesses. One solution to the challenging questions facing transnational

28 C.K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia: Wharton School Publishing, 2004). See also C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy + Business, No. 26, 2002.29 “SC Johnson Expands WOW Business Concept in Ghana,” press release, October 8, 2014, and “Reality Check at the Bottom of the Pyramid,” Harvard Business Review, June 2012.30 Gardner Bell, Ryan Nelson, and Carl Zeithaml, “BTPN (A): Banking for the Bottom of the Pyramid in Indonesia,” William Davidson Institute of the University of Michigan, January 26, 2015; and The Economist, “Rich Pickings: Microlending Has Helped Make BTPN One of Asia’s Most Profitable Banks,” April 20, 2011.31 Data available at www.grameen.com and www.grameenfoundation.org.

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corporations is to approach them collectively, through a collaborative process. An emerg-ing trend is the development of collaborative, multisector partnerships focused on specific social issues or problems in the global economy. These partnerships have been termed global action networks (GANs).32 This final section of Chapter 4 describes this approach.

A Three-Sector WorldThe term sector refers to broad divisions of a whole. In this context, it refers to major parts or spheres of society, such as business (the private sector), government (the public sec-tor), and civil society. Civil society comprises nonprofit, educational, religious, community, family, and interest-group organizations; that is, social organizations that do not have a commercial or governmental purpose.

The process of globalization has spurred development of civil society. In recent decades, the world has witnessed the creation and growth of large numbers of nongovernmental organizations (NGOs) concerned with such issues as environmental risk, labor practices, worker rights, community development, and human rights. (NGOs are also called civil society organizations or civil sector organizations.) The number of NGOs accredited by the United Nations has soared in recent years, rising from 1,000 in 1996 to more than 4,500 in 2016. This figure counts just major organizations.33 Worldwide, the total number of international NGOs is estimated to be around 55,000.34 (Many millions more NGOs operate regionally or locally.)

Experts attribute the growth of NGOs to several factors, including the new architec-ture of global economic and political relationships. As the Cold War has ended, with democratic governments replacing dictatorships, greater openness has emerged in many societies. More people, with more views, are free to express their pleasure or displeasure with government, business, or one another. NGOs form around specific issues or broad concerns (environment, human rights) and become voices that must be considered in the public policy debates that ensue.

Each of the three major sectors that participate in global action networks—business, government, and civil society—has distinctive resources and competencies, as well as weaknesses. For example, businesses have access to capital, specialized technical knowl-edge, networks of commercial relationships, and the management skills to get projects completed on time and on budget. On the other hand, the short-term orientation of many businesses may lead them to disregard the long-term impacts of their actions on others. For their part, government agencies have knowledge of public policy, an ability to enforce rules, and revenue from taxation, but are often inflexible, slow to mobilize, and poorly coordinated. Finally, NGOs often enjoy strong community knowledge, volunteer assets, and inspirational leaders, but may lack financial resources and technical skill and may suffer from a narrow, parochial focus.35 One model highlighting various attributes of the business, government, and civil society sectors is presented in Figure 4.4.

Many businesses have realized that these differences across sectors can be a resource to be exploited. In this view, global action networks—alliances among organizations from the

32 Steve Waddell, Global Action Networks: Creating Our Future Together (New York: Palgrave Macmillan, 2011).33 Data available at http://csonet.org/.34 Global Civil Society 2012 (London: Palgrave Macmillan, 2012).35 This paragraph draws on Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collabo-rations,” Journal of Corporate Citizenship, Autumn 2002, pp. 43–56. 

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three sectors—can draw on the unique capabilities of each and overcome specific weak-nesses that each has.

One example of a global action network was the Kimberley Process, an initiative to end the trade in conflict diamonds—gemstones that had been mined or stolen by rebels fighting internationally recognized governments. The problem was that com-batants in civil wars in Africa had seized control of diamond mines in Sierra Leone, Angola, and the Congo, and were selling uncut diamonds to fund their operations. Concerned that the image of diamonds as a symbol of romance would be tarnished, the World Diamond Congress and the international diamond company DeBeers joined forces with the governments of nations with legitimate diamond industries and NGOs campaigning to end civil violence. Together, these parties developed the Kimberley Process, a system for tracking diamonds all the way from the mine to the jewelry shop, so that consumers could be assured that their gem was “conflict-free.”

In this case, although the interests of the parties were somewhat different, they were each able to bring their distinctive capabilities to bear to accomplish a common objec-tive. A similar multiparty effort to ban conflict minerals—ones mined in war-torn areas of the Congo—is profiled in the discussion case at the end of this chapter. Other appli-cations of the principle of cross-sector networks and collaborations are explored in Chapters 10 and 17.

The process of globalization presents today’s business leaders with both great promise and great challenge. Despite periodic global economic downturns and the ever-present threat of war and terrorism, the world’s economy continues to become more integrated and interdependent. Multinational corporations, with their financial assets and technical and managerial skills, have a great contribution to make to human betterment. Yet, they must operate in a world of great diversity, and in which their presence is often distrusted or feared. Often, they must confront situations in which political and economic freedoms are lacking and human rights are routinely violated. The challenge facing forward-looking companies today is how to work collaboratively with stakeholders to promote social and economic justice, while still achieving strong bottom-line results.

Business Government Civil Society

Organizational form For-profit Governmental Nonprofit

Goods produced Private Public Group

Primary control agent Owners Voters/rulers Communities

Primary power form Money Laws, police, fines Traditions, values

Primary goals Wealth creation Societal order Expression of values

Assessment frame Profitability Legality Justice

Resources Capital assets, technical knowledge, production skills

Tax revenue, policy knowledge, regulatory and enforcement power

Community knowledge, inspirational leadership

Weaknesses Short-term focus, lack of concern for external impacts

Bureaucratic, slow-moving, poorly coordinated internally

Amateurish, lack of financial resources, parochial perspective

FIGURE 4.4 Distinctive Attributes of the Three Major Sectors

Source: Adapted from Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collaborations,” Journal of Corporate Citizenship, Autumn 2002, pp. 43–56, Tables 1 and 2.

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∙ Globalization refers to the increasing movement of goods, services, capital, and labor across national borders. Firms can enter and compete in the global marketplace by exporting products and services; locating operations in another country; or buying raw materials, components, or supplies from sellers abroad.

∙ The process of globalization is driven by technological innovation, improvements in transportation, the rise of major multinational enterprises, and social and political reforms.

∙ Globalization brings both benefits and costs. On one hand, it has the potential to pull nations out of poverty, spread innovation, and reduce prices for consumers. On the other hand, it may also produce job loss, reduce environmental and labor standards, and erode national cultures. An ongoing challenge is to extend the benefits of globalization to all, while mitigating its adverse effects.

∙ Multinational enterprises operate in nations that vary greatly in their political, social, and economic systems. They face the challenge of deciding how to do business in other nations, while remaining true to their values.

∙ In a world of great inequalities of wealth and income, businesses are making progress in understanding how to serve the poor to aid social development while earning a profit.

∙ Businesses can work with governments and civil society organizations around the world in collaborative partnerships that draw on the unique capabilities of each to address common problems.

Summary

Internet Resources

www.wto.org World Trade Organizationwww.imf.org International Monetary Fundwww.worldbank.org World Bankwww.ifg.org International Forum on Globalizationwww.globalpolicy.org Global Policy Forumwww.weforum.org The World Economic Forumwww.un.org/en/sections/resources-different- audiences/civil-societyx United Nations and Civil Society

Key Terms multinational enterprise (MNE), 73nongovernmental organizations (NGOs), 87race to the bottom, 80tariff, 77World Bank (WB), 75World Trade Organization (WTO), 76

anti-Americanism, 81bottom of the pyramid, 85central state control, 83civil society, 87debt relief, 76democracy, 82foreign direct investment (FDI), 74free enterprise system, 83

global action network (GAN), 87globalization, 72international financial and trade institution (IFTI), 75International Monetary Fund (IMF), 76microfinance, 86

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Discussion Case: Intel and Conflict MineralsIn 2017, Intel joined more than two dozen other companies, nongovernmental organiza-tions, and government entities in launching the second phase of the Public-Private Alliance for Responsible Minerals Trade (PPA). The company had been an early leader in the effort to bring social responsibility to its minerals supply chain: in 2014, Intel had become the first electronics firm to announce that its products would be certified as conflict-free. This meant they would contain no conflict minerals—tantalum, tungsten, tin, or gold sourced from mines that financed horrific civil conflict in the Democratic Republic of the Congo (DRC) and nearby countries. “The solution isn’t easy,” Intel’s CEO had noted at the time. “But nothing worthwhile ever is.”

Of the four conflict minerals, the one most important to Intel and other electronics com-panies is tantalum. Columbite-tantalite, commonly known as “coltan,” is a black metallic ore. When refined, it produces tantalum, which is used to regulate electricity in portable con-sumer electronics, such as smartphones, laptops, play stations, and digital cameras. The larg-est share of coltan comes from Africa; other sources include Australia, Brazil, and Canada.

In the late 2000s, a common goal to ban conflict minerals emerged among members of an oddly matched group—the electronics industry, the United Nations, governments, and human rights organizations. Their efforts led, ultimately, to a set of international guidelines, national laws, and voluntary initiatives whose goal was to keep the electronics industry and its customers from inadvertently supporting killing, sexual assault, and labor abuses.

The Democratic Republic of the Congo is a nation of 79 million people in central Africa, covering a vast region the size of Western Europe. Since the late 1990s, the DRC has been the site of a brutal regional conflict, in which armed militias, including some from neighboring states, have fought for control. Despite the presence of United Nations troops, as many as 5 million people have died—the most in any conflict since World War II. Warring groups have used sexual assault as a weapon to control the population; an estimated 200,000 Congolese women and girls have been raped, often in front of their husbands and families.

The United Nations and several NGOs reported that militias had systematically looted coltan and other minerals from eastern Congo, using the profits to fund their operations. According to the human rights group Global Witness:

In the course of plundering these minerals, rebel groups and the Congolese army have used forced labor (often in extremely harsh and dangerous conditions), carried out systematic extortion, and imposed illegal “taxes” on the civilian population. They have also used violence and intimidation against civilians who attempt to resist working for them or handing over the minerals they produce.

Said a representative of The Enough Project, another human rights group, “In eastern Congo, you see child miners [with] no health or safety standards. Minerals are dug by hand, traded in sacks, smuggled across borders.”

Once mined—whether in the Congo or elsewhere—raw coltan made its way through a complex, multistep global supply chain. Local traders sold to regional traders, who shipped the ore to processing companies such as H.C. Starck (Germany), Cabot Corporation (United States), and Ningxia (China). Their smelters produced refined tantalum powder, which was then sold to parts makers such as Kemet (United States), Epcos (Germany), and Flextronics (Singapore). They sold, in turn, to original equipment manufacturers such as Dell (United States), Sony (Japan), and Nokia (Finland).

By the time coltan reached the end of this convoluted supply chain, determining its source was nearly impossible. Steve Jobs, then the CEO of Apple, commented in an e-mail in 2010, “We require all of our suppliers to certify in writing that they use conflict-free

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materials. But honestly there is no way for them to be sure. Until someone invents a way to chemically trace minerals from the source mine, it’s a very difficult problem.”

As public awareness of atrocities in the Congo grew, governments began to act. The Organization for Economic Cooperation and Development, an alliance of mostly European nations, issued guidance for companies that wished to responsibly source min-erals. In 2010, the U.S. Congress passed the Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act, and further discussed in Chapters 7 and 13). This law included a provision, Section 1502, which required companies to disclose whether tan-talum, tin, tungsten, and gold used in their products had come from the DRC or adjoining countries. Although the Securities and Exchange Commission (SEC) announced in 2017 that it no longer intended to enforce this provision, the matter remained in legal limbo, and many firms continued to collect and disclose this information.

Along with governments, companies also acted. For its part, Intel sent teams to visit 107 different smelters and refiners in 23 countries, educating their partners about conflict minerals and collecting information about the origin of raw materials they processed. The company collaborated with other companies in the Electronics Industry Citizenship Coali-tion (EICC) to develop a Conflict-Free Smelter Assessment Program, a voluntary system in which an independent third-party auditor evaluated smelters and refiners and designated them as conflict-free. Minerals would be “bagged and tagged” and then tracked through each step of the supply chain. By 2017, this program had certified 247 smelters and refiners.

Intel and other companies in the coalition were particularly concerned that they remove from their products only conflict minerals, not minerals coming from legitimate mines in conflict areas. To this end, they worked with government agencies and civil society organi-zations, including the U.S. State Department and RESOLVE, an NGO working to map the conflict mineral supply chain, to form the Public-Private Alliance for Responsible Miner-als Trade. This multisector initiative worked to support responsible mines and to develop effective chain-of-custody programs in the Congo. Evidence suggested that these collab-orative efforts had enjoyed some success: by 2016, over three-quarters of the tantalum, tungsten, and tin mines in eastern Congo surveyed by the International Peace Information Service were found free of control by armed groups.

Sources: “Intel’s Efforts to Achieve a Conflict-Free Supply Chain,” White Paper, May 2017, www.intel.com; “Conflict Minerals Rule—Will It Stay or Will It Go?” May 11, 2017, www.conflictmineralslaw.com; The Enough Project, Demand the Supply: Ranking Consumer Electronics and Jewelry Retail Companies on Their Efforts to Develop Conflict-Free Minerals Supply Chains from Congo, November 2017, www.enoughproject.org; Peter Eichstaedt, Consuming the Congo (Chicago: Lawrence Hill, 2011); and Michael Nest, Coltan (Cambridge, UK: Polity Press, 2011). More information on the Public-Private Alliance for Responsible Minerals Trade is available at www.resolv.org.

Discussion Questions

1. How do conflict minerals, and in particular, conflict coltan get their name? What groups benefited from the trade in conflict minerals? What groups were hurt by it?

2. Consider the three sectors discussed in this chapter (business, government, and civil society). What were the interests of each, with respect to conflict coltan, and in what ways did their interests converge?

3. Why was Intel unable to eliminate conflict minerals from its supply chain unilaterally, that is, without the help of others?

4. In what ways did Intel collaborate with other sectors (governments and civil society) in its efforts to eliminate conflict minerals from its products? What strengths and weak-nesses did each sector bring to the task?

5. What further steps could be taken by governments, NGOs, and companies to strengthen the process to exclude conflict minerals from the global supply chain?

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P A R T T W O

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Business and Ethics

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C H A P T E R F I V E

Ethics and Ethical ReasoningPeople who work in business frequently encounter and must deal with on-the-job ethical issues. Being ethical is important to the individual, the organization, and the global marketplace in today’s business climate. Managers and employees alike must learn how to recognize ethical dilemmas and know why they occur. In addition, they need to be aware of the role their own ethical character plays in their decision-making process, as well as the influence of the ethical character of others. Finally, managers and employees must be able to analyze the ethical problems they encounter at work to determine an ethical resolution to these dilemmas.

This Chapter Focuses on These Key Learning Objectives:

LO 5-1 Defining ethics and business ethics.

LO 5-2 Evaluating why businesses should be ethical.

LO 5-3 Knowing why ethical problems occur in business.

LO 5-4 Identifying managerial values and people’s spirituality as influences on ethical decision making.

LO 5-5 Understanding stages of moral reasoning.

LO 5-6 Analyzing ethical problems using generally accepted ethics theories.

LO 5-7 Understanding how moral intensity affects ethical decision-making.

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Qualcomm, the U.S.–based multinational communication giant, was fined $853 million by a South Korean regulator for alleged antitrust violations, the high-est penalty ever imposed on any company operating in South Korea. The three-year investigation by the Korea Fair Trade Commission claimed that Qualcomm used its dominant market position as leverage in negotiations with mobile-phone makers to force them to accept unfair contractual terms. The commission stated that Qual-comm’s contracts were unfair because it required mobile-phone makers to purchase comprehensive wireless-technology licenses, including ones they would never use. The agreements also required these makers to provide their patents to Qualcomm free of charge.1

The former owner of the Peanut Corporation of America, Stewart Parnell, was sentenced to 28 years in prison when found guilty of multiple felony counts for conspiring to hide that his company’s products had salmonella contamination. Over a two-year period, nine people died and 700 customers became seriously ill from consuming the company’s food. Under Parnell’s direction, Peanut Corporation executives falsified lab test results on their products, explicitly stating that the food was safe to eat. In a shortsighted effort to save the company, Parnell caused injury or death to hundreds of people, violated customers’ right to safety, and breached their trust in the company. The severity and breadth of the effects of Parnell’s deci-sions contributed to his long prison sentence.2

Certainly, the actions taken by executives at Qualcomm and the Peanut Corporation were highly unethical. What does it mean for an action to be ethical or unethical? This chapter explains the meaning of ethics, explains why businesses and managers should be ethical, and identifies the different types of ethical problems that occur in business. It also presents several ethical decision-making frameworks and shows how decisions are influ-enced both by the core elements of an individual’s ethical character and the moral intensity of the dilemma. Then, Chapter 6 builds on this foundation with a discussion of how ethical performance in business can be improved by strengthening the organization’s culture and climate and by providing organizational safeguards, such as policies, training, and report-ing procedures.

The Meaning of Ethics

Ethics is a conception of right and wrong conduct. It tells us whether our behavior is moral or immoral and deals with fundamental human relationships—how we think and behave toward others and how we want them to think and behave toward us. Ethical principles are guides to moral behavior. For example, in most societies lying, stealing, deceiving, and harming others are considered to be unethical and immoral. Honesty, keeping promises, helping others, and respecting the rights of others are considered to be ethically and mor-ally desirable behavior. Such basic rules of behavior are essential for the preservation and continuation of organized life everywhere.

These notions of right and wrong come from many sources. Religious beliefs are a major source of ethical guidance for many. The family institution—whether two parents, a single parent, or a large family with brothers and sisters, grandparents, aunts, cousins, and

1 “Qualcomm Faces $853 Million Fine from South Korea over Alleged Antitrust Violations,” The Wall Street Journal, December 28, 2016, www.wsj.com.2 “Ex-Peanut Executive Sentenced to 28 years in Prison for Salmonella Coverup,” Wall Street Journal, September 21, 2015, www.wsj.com.

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other kin—imparts a sense of right and wrong to children as they grow up. Schools and schoolteachers, neighbors and neighborhoods, friends, admired role models, ethnic groups, and the ever-present electronic media and the Internet influence what we believe to be right and wrong in life. The totality of these learning experiences creates in each person a con-cept of ethics, morality, and socially acceptable behavior. This core of ethical beliefs then acts as a moral compass that helps guide a person when ethical puzzles arise.

Ethical ideas are present in all societies, organizations, and individual persons, although they may vary greatly from one to another. Your ethics may not be the same as your neigh-bor’s; one particular religion’s notion of morality may not be identical to another’s; or what is considered ethical in one society may be forbidden in another society. These differences raise the important and controversial issue of ethical relativism, which holds that ethical principles should be defined by various periods of time in history, a society’s traditions, the special circumstances of the moment, or personal opinion. In this view, the meaning given to ethics would be relative to time, place, circumstance, and the person involved. In that case, the logical conclusion would be that there would be no universal ethical stan-dards on which people around the globe could agree. However, for companies conducting business in several societies at one time, whether or not ethics is aligned can be vitally important; we discuss these issues in more detail in Chapter 6.

For the moment, however, we can say that despite the diverse systems of ethics that exist within our own society and throughout the world, all people everywhere do depend on ethical systems to tell them whether their actions are right or wrong, moral or immoral, approved or disapproved. Ethics, in this basic sense, is a universally common human con-dition, found everywhere.

Are ethics the same as laws? In other words, can we determine what is right or moral by asking what is legal? Some people have argued that the best way to assure ethical business conduct is to insist that business firms obey society’s laws. However, laws and ethics are not quite the same. Laws are society’s formal written rules about what constitutes right and wrong conduct in various spheres of life. For example, hydraulic fracturing in oil drilling operations is legal in many communities but some argue it is unethical due to its potential for destroying the environment. While it may be illegal for environmentalists to attempt to stop work operations by blockading a drilling location, they believe they are acting ethi-cally by protecting the environment.

Laws are similar to ethics because both define proper and improper behavior. Yet, eth-ical concepts—like the people who believe in them—are more complex than written rules of law. As we see in the Qualcomm and Peanut Corporation examples at the beginning of this chapter, both cases involved legal violations. However, they also involved ethical issues concerning the proper treatment of organizational stakeholders. Ethics deal with human dilemmas that frequently go beyond the formal language of law and the meanings given to legal rules.

What Is Business Ethics?Business ethics is the application of general ethical ideas to business behavior. Business ethics is not a special set of ethical ideas different from ethics in general and applicable only to business. If dishonesty is considered to be unethical and immoral, then anyone in busi-ness who is dishonest with stakeholders—employees, customers, suppliers, shareholders or competitors—is acting unethically and immorally. If protecting others from harm is con-sidered to be ethical, then a company that recalls a dangerously defective product is acting in an ethical way. To be considered ethical, business must draw its ideas about what is proper behavior from the same sources as everyone else in society. Business should not try

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to make up its own definitions of what is right and wrong. Employees and managers may believe at times that they are permitted or even encouraged to apply special or weaker eth-ical rules to business situations, but society does not condone or permit such an exception.

How common are such exceptions? The Ethics and Compliance Initiative has tracked observations of unethical behavior in the workplace since 2000. Its reports show that consis-tently about half of all employees’ surveyed report observing unethical practices at work, year after year. In 2017, employees stated that lying to employees and external stakeholders was the most common unethical practice they observed (26%), followed by abusive behavior (21%), Internet abuse (16%), and conflicts of interest and health violations (each at 15%). This report implies that pressure on managers to act unethically remains a serious problem for businesses. The Institute for Leadership and Management reported that 63 percent of managers said they were expected to behave unethically at some point in their careers.3

Why Should Business Be Ethical?Why should business be ethical? What prevents a business firm from piling up as much profit as it can, in any way it can, regardless of ethical considerations? Figure 5.1 lists the major reasons why business firms should promote a high level of ethical behavior.

Enhance Business Performance

Some people argue that one reason for businesses to be ethical is that it enhances the firm’s performance, or simply: ethics pays.

Empirical studies have supported the economic benefits of being perceived as an ethical company. Ethisphere also found a strong link between ethics and financial performance. Companies that were on Ethisphere’s 2017 list of the World’s Most Ethical Companies outperform the Standard and Poor’s 500 by 3.3 percent with five-year annual returns exceeding 16 percent.4 This positive relationship between ethics and profits can be seen in Figure 5.2.

Businesses increasingly are recognizing that ethics pays and are encouraging ethi-cal behavior by their employees. Business executives recognize that ethical actions can directly affect their organization’s bottom line.

Costs to business of unethical behavior go far beyond government fines. News reports of a company’s ethical or unethical behavior has been shown to affect its share price in either direction, respectively. According to the Ethical Investment Research Service, such reports influence a firm’s share price between 0.5 percent and 3 percent.5

3 See the Ethics Resource Center’s studies, such as “The 2013 National Business Ethics Survey of the U.S. Workforce,” Ethics Resource Center, Washington, D.C., 2014, and “Three Out of Five Managers Pressured to Behave Unethically at Work, According to New Research,” Institute of Leadership and Management, June 10, 2013, press release.4 “A Clear Correlation: Ethical Companies Outperform,” Ethisphere, June 9, 2017, insights.ethisphere.com.5 “How Do Ethics Affect the Financial Results of a Company?” Chron, n.d., smallbusiness.chron.com.

To enhance business performance.

To comply with legal requirements.

To prevent or minimize harm.

To meet demands of business stakeholders.

To promote personal morality.

FIGURE 5.1Why Should Business Be Ethical?

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Companies with bad reputations face increased recruiting costs, especially when recruiting women and more experienced employees. According to a survey by Career Builder, 71 percent of United States workers claim they would not apply for a job at a com-pany with a bad reputation.6 By contrast, companies with good reputations find it easier to recruit desirable employees, enjoy lower costs to bring these candidates on board, and have greater retention among employees, according to a report by Alexander Mann Solutions, a leader of talent acquisition and management services.7

Comply with Legal Requirements

Doing business ethically is also often a legal requirement. Two legal requirements, in par-ticular, provide direction for companies interested in being more ethical in their business operations. Although they apply only to U.S.–based firms, these legal requirements also provide a model for firms that operate outside the United States.

The first is the U.S. Corporate Sentencing Guidelines, which provide a strong incentive for businesses to promote ethics at work.8 The sentencing guidelines come into play when a firm has been found guilty of criminal wrongdoing and is facing sentencing for the crim-inal act. To determine the sentencing, the judge computes a culpability (degree of blame) score using the guidelines, based on whether or not the company has:

1. Established standards and procedures to reduce criminal conduct.2. Assigned high-level officer(s) responsibility for compliance.3. Not assigned discretionary authority to “risky” individuals.4. Effectively communicated standards and procedures through training.

6 “71 Percent of U.S. Workers Would Not Apply to a Company Experiencing Negative Publicity,” Career Builder, July 20, 2017, press.careerbuilder.com.7 “The Cost of Bad Reputation,” Corporate Responsibility Magazine, October 2014.8 For a thorough discussion of the U.S. Corporate Sentencing Guidelines, see Dan R. Dalton, Michael B. Metzger, and John W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-Up Call for Corporate America,” Academy of Management Executive, 1994, pp. 7–13; and Jillian Hewitt, “Fifty Shades of Gray: Sentencing Trends in Major White-Collar Cases,” The Yale Law Journal, Feb 2016, pp. 1018–71.

FIGURE 5.2World’s Most Ethical Index versus S&P 500 and FTSE 100, 2006–2017

Source: The pre-2012 financial data was from www.ethisphere.com/2011-worlds-most-ethical-companies. Additional data collected from publicly available financial data sources.

S&P 500

WME IndexFTSE 100

–20%

–10%

0%

10%

20%

30%

40%

50%

60%

70%

2006 2008 2010 2012 2014 2016

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5. Taken reasonable steps to ensure compliance—monitor and audit systems, maintain and publicize reporting system.

6. Enforced standards and procedures through disciplinary mechanisms.7. Following detection of offense, responded appropriately and prevented reoccurrence.

The U.S. Sentencing Commission reviewed and made important revisions to the Sen-tencing Guidelines in 2004 and each year from 2010 through 2016, yet the “seven steps” described above remain the blueprint for many businesses in designing their ethics and compliance program.9

Another legal requirement imposed upon U.S. businesses is the Sarbanes-Oxley Act of 2002 (often referred to as SOX).10 Born from the ethics scandals at Enron, WorldCom, Tyco, and others, this law seeks to ensure that firms maintain high ethical standards in how they conduct and monitor business operations. For example, the Sarbanes-Oxley Act requires executives to vouch for the accuracy of a firm’s financial reports and requires them to pay back bonuses based on earnings that are later proved fraudulent, called claw-back. The act also established strict rules for auditing firms.11

Fifteen years after its creation, some financial experts questioned if SOX was effective or not. Some pointed to the fact that the Act has not totally eliminated fraudulent financial reports since the Enron and Arthur Andersen debacles that gave rise to SOX in 2002. Other experts found, however, that many corporations had become more committed to enhancing their corporate culture, which better guaranteed that employees did the right thing, treated customers fairly, and did not take short cuts.12

Prevent or Minimize Harm

Another reason businesses and their employees should act ethically is to prevent harm to the general public and the corporation’s many stakeholders. One of the strongest ethical principles is stated very simply: Do no harm. The notorious examples of outright greed and other unethical behavior by managers in the financial community contributed in part to the long-lasting Great Recession in the United States and around the world. These manag-ers’ unethical actions were responsible for significant harm to many stakeholders in soci-ety. Investors’ portfolios dropped in value, retirees saw their nest eggs dwindle, hundreds of thousands of employees lost their jobs, and many small businesses failed. The “do no harm” principle encompasses more than economic consequences to stakeholders. The loss of salary, retirement funds, and investment value indeed generate significant economic harm to the employees and investors affected by organizational indiscretions. But, research has shown that psychological and emotional harm is likely to manifest as well.

According to a 2013 Gallup poll, the longer an individual is unemployed, the more likely that person is to experience poor psychological well-being.13 In a 2014 meta-analysis of studies examining the effects of unemployment on mental health,

9 For a discussion of the most recent sentencing guidelines amendments, see www.ussc.gov.10 Banerjee Gaurango and Halil D. Kaya, “Short-Term and Long-Term Impact of Sarbanes-Oxley Act on Director Commitment and Composition of Corporate Board Committees,” Journal of Financial Management & Analysis, January–June 2017, pp. 1–11, and Matthew Hoag, Mark Myring and Joe Schroeder, “Has Sarbanes-Oxley Standardized Audit Quality? American Journal of Business, 2017, pp. 2–23.11 See www.sarbanes-oxley-association.com/Sarbanes_Oxley_News.12 “Law’s Big Weapon Sits Idle,” The Wall Street Journal, July 29, 2012, online.wsj.com and “Sarbanes-Oxley: 14 Years On,” International Banker, June 30, 2016, internationalbanker.com.13 “In U.S., Depression Rates Higher for Long-Term Unemployed,” Gallup, 2013, news.gallup.com.

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it was found that an average of 34 percent of unemployed workers experienced psy-chological problems compared to 16 percent among employed workers.14

Another workplace behavior that exemplifies physical, economic, and psychological harm in organizations is sexual harassment. This issue has received increased attention in the press due to the allegations of sexual harassment and assault by executives and super-visors in many business corporations. Recently, the car-share company, Uber, for example, fired 20 employees for sexual harassment amidst a probe over 200 employees alleged to be involved in sexist behavior in the organization. The increased attention to the harms caused by sexual harassment focuses on not only the economic harm to the victims but also the physical and psychological damage to those harassed. This issue is discussed in greater detail in Chapter 16.15

Meet Demands of Business Stakeholders

Another reason businesses should be ethical is that stakeholders demand it. As discussed in Chapter 3, organizational stakeholders expect that companies will exhibit high levels of ethical performance and social responsibility. If employees view their company as ethical, they likely take greater pride in working there, have higher overall work satisfaction, and are willing to recommend the company as a good place to work. Scholars reviewing work in this field found that consumers who considered companies as being ethical or involved in socially responsible programs are more inclined to purchase these companies’ products.16

Promote Personal Morality

A final reason for promoting ethics in business is a personal one. Most people want to act in ways that are consistent with their own sense of right and wrong. It shows how a lack of personal morality by the firm’s leader can adversely affect employees. Being pressured to contradict their personal values creates emotional stress. Knowing that one works in a supportive ethical climate contributes to one’s sense of psychological security.

According to a 2015 report by the Institute for Business Ethics, British employees have a negative perception of corrupt business practices they saw at work–ranging from the misuse of company resources to cheating on travel expenses to nepotism. More than 50 percent of the employees surveyed considered these workplace prac-tices unacceptable. The survey found that since 2005, British workers had devel-oped attitudes increasingly critical of work actions that appeared to be unethical.17

The Ethics and Compliance Initiative, cited earlier in this chapter, stated in their 2017 report that “employees are reporting misconduct at the highest rates ever,” noting that 69 percent of employees responding to their survey indicated they had reported the mis-conduct they had observed at work. Some of the most common types of misconduct reported included misuse of confidential information, giving or accepting bribes or kick-backs, stealing company property, and sexual harassment.18

14 Paul Karsten and Klaus Moser, “Unemployment Impairs Mental Health: Meta-Analyses,” Journal of Vocational Behavior, 2014, pp. 264–82.15 Michelle Paludi and Richard Barickman, “Definitions and Incidence of Academic and Workplace Sexual Harassment,” Aca-demic and Workplace Sexual Harassment: A Resource Manual (Albany, New York: SUNY Press. 1991), pp. 2–5, and “Uber Fires 20 Employees in Sexual Harassment Probe,” CNN Tech, June 6, 2017, money.cnn.com.16 Omer Farooq, Marielle Payaud, Dwight Merunka, and Pierre Valette-Florence, “The Impact of Corporate Social Responsibil-ity on Organizational Commitment: Exploring Multiple Mediation Mechanisms,” Journal of Business Ethics, 2014, pp. 563–80.17 “Surveys on Business Ethics, 2017,” Institute for Business Ethics, February 8, 2018, www.ibe.org.uk.18 Ibid., “The State of Ethics and Compliance in the Workplace, 2018, p. 7.

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Why Ethical Problems Occur in Business

If businesses have so many reasons to be ethical, why do ethical problems occur? Although not necessarily common or universal, ethical problems occur frequently in business. Find-ing out what causes them is one step toward minimizing their impact on business opera-tions and on the people affected. Some of the main reasons are summarized in Figure 5.3 and are discussed next.

Personal Gain and Selfish InterestDesire for personal gain, or even greed, causes some ethics problems. Businesses sometimes employ people whose personal values are less than desirable, who will put their own welfare ahead of all others, regardless of the harm done to other employees, the company, or society.

A manager or employee who puts his or her own self-interest above all other consider-ations is called an ethical egoist.19 Self-promotion, a focus on self-interest to the point of selfishness, and greed are traits commonly observed in an ethical egoist. The ethical egoist tends to ignore ethical principles accepted by others, believing that ethical rules are made for others. Altruism—acting for the benefit of others when self-interest is sacrificed—is seen to be sentimental or even irrational. “Looking out for number one” is the ethical ego-ist’s motto, as demonstrated by the Parnell example at the beginning of this chapter and the following story:

Former Fiat Chrysler Automobiles executive, Alphons Iacobelli, was indicted in 2017 on charges that he used millions of dollars of company money designated for a union account to pay for his own lavish expenses. Iacobelli diverted funds earmarked for a union training center to purchase a $350,000 Ferrari and two gold Montblanc pens worth over $70,000 for himself. Additionally, during this period, he remodeled his kitchen and built a swimming pool for his home.20

19 For a compact discussion of ethical egoism, see Denis G. Arnold, Tom L. Beauchamp, and Norman E. Bowie, Ethical Theory and Business, 9th ed. (Upper Saddle River, NJ: Pearson, 2012), pp. 12–17; and Laura P. Hartman, Joe DesJardins, and Chris MacDonald, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, 4th ed. (New York: McGraw-Hill, 2017), p. 70.20 “Ex-Fiat Chrysler Executive Accused of Siphoning Millions with Union Leader.” The New York Times, July 26, 2017, www.nytimes.com.

FIGURE 5.3Why Ethical Problems Occur in Business

ReasonNature of Ethical Problem Typical Approach Attitude

Personal gain and selfish interest

Selfish interest versus others’ interests

Egotistical mentality “I Want it!”

Competitive pressures on profits

Firm’s interest versus others’ interests

Bottom-line mentality “We have to beat the others at all costs!”

Conflicts of interest Multiple obligations or loyalties

Favoritism mentality “Help yourself and those closest to you!”

Cross-cultural contradictions

Company’s interests versus diverse cultural traditions and values

Ethnocentric mentality “Foreigners have a funny notion of what’s right and wrong.”

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Competitive Pressures on ProfitsWhen companies are squeezed by tough competition, they sometimes engage in unethical activities to protect their profits. This may be especially true in companies whose financial performance is already substandard. Research has shown that managers of poor financial performers and companies with financial uncertainty are more prone to commit illegal acts. In addition, intense competitive pressure in the global marketplace has resulted in unethical activity, such as price fixing, falsifying documents, or the use of kickbacks or bribes.

In a misguided and unethical effort to boost sales, Tenet Healthcare Corporation gave kickbacks to hospitals and medical clinics for obstetric referrals in its hospital network. In 2016, the hospital chain pleaded guilty to criminal fraud and bribery charges also involving two of their subsidiaries, Atlanta Medical Center and North Fulton Medical Center, and agreed to pay $524 million to the states of Georgia and South Carolina and to the federal government. Georgia Attorney General Olens claimed that the company took advantage of vulnerable pregnant women by push-ing for these referrals to be brought into their hospital network.21

Conflicts of InterestEthical challenges in business often arise in the form of conflicts of interest. A conflict of interest occurs when an individual’s self-interest conflicts with acting in the best interest of another, when the individual has an obligation to do so.22 For example, if a purchasing agent directed her company’s orders to a firm from which she had received a valuable gift, regardless if this firm offered the best quality or value, she would have acted unethically because of a conflict of interest. In this situation, she would have acted to benefit herself, rather than in the best interests of her employer. A failure to disclose a conflict of interest may represent deception in and of itself and may hurt the person or organization on whose behalf judgment has been exercised. Many ethicists believe that even the appearance of a conflict of interest should be avoided, because it undermines trust.

Many cases of unethical activity illustrate conflicts of interest, in which opportunities for organizational self-enrichment conflict with the long-term viability of the firm and the best interests of employees, customers, suppliers, and stockholders. The situation at Peanut Cor-poration, introduced at the beginning of this chapter, describes an organizational conflict of interest where executives falsified lab test results on their products that exposed its con-sumers to salmonella contamination in order to maintain short-term company profitability. Many firms seek to guard against the dangers inherent in conflicts of interest by including prohibitions of any such practices in their codes of ethics, as discussed in Chapter 6.

Cross-Cultural ContradictionsSome of the knottiest ethical problems occur as corporations do business in other societies where ethical standards differ from those at home. Today, policymakers and strategic plan-ners in all multinational corporations, regardless of the nation where they are headquar-tered, often face this kind of ethical dilemma. Consider the following situation:

For decades the Great Britain-based pesticide manufacturer, Syngenta, has produced a lethal weed killer, Paraquat. Only one sip of Paraquat can cause death.

21 “Tenet Healthcare to Pay $515 Million to Settle Kickback Allegations.” The Wall Street Journal, October 3, 2016, www.wsj.com.22 Based on John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ: Pearson, 2016).

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The product is banned in the European Union, China, and many other countries—but not the United States. In 2016, the U.S. Environmental Protection Agency reported that the pesticide was linked to Parkinson’s disease, resulting in a further review of its use. But according to the U.S. Department of Agriculture, the use of this chemical remains widespread in the United States because paraquat is highly successful at killing and preventing the spread of weeds in agricultural applications. Syngenta’s decision to continue its production and sale in the United States is cer-tainly linked to economic benefits for the company.23

This episode raises the issue of ethical relativism, which was defined earlier in this chapter. Although the sale of the pesticide paraquat in the United States was still legal, was it ethical? Is the selling of unsafe products by any measure ethical if it is not forbidden by the receiving nation, especially if the company knows that the products are exported to another country where others are exposed to serious health risks?

As business becomes increasingly global, with more and more corporations penetrating overseas markets where cultures and ethical traditions vary, these cross-cultural questions will occur more frequently.

The Core Elements of Ethical Character

The ethical analysis and resolution of ethical dilemmas in the workplace significantly depend on the ethical character and moral development of managers and other employees. Good ethical practices not only are possible, but also become normal with the right com-bination of these components.

Managers’ ValuesManagers are key to whether a company and its employees will act ethically or unethically. The values held by managers, especially the top-level managers, serve as models for others who work at the company. Unfortunately, according to a 2017 survey Americans hold a dim view of business executives’ and managers’ values. Forty-five percent of those polled believe that corporate CEOs should be fired for unethical transgressions in their compa-nies. In this same survey, the public shared that a violation of trust between a company and its customers is the most serious ethical offense, with 61 percent indicating that the CEO should be terminated for such behavior.24

In an annual Gallup poll that rated 22 occupations for honesty and ethics, nurses—for the sixteenth straight year—came out on top. In 2017, only 16 percent of those surveyed saw business executives as having “very high” or “high” ethical standards or honesty. This placed executives below clergy, lawyers, and bankers on this list. Advertising practitioners ranked lower than business executives, with car salespeo-ple, members of Congress, and lobbyists at the bottom of the list.25

How do executives view their own values? Studies generally show that most U.S. man-agers focus on themselves and place importance on values such as having a comfortable and exciting life. Researchers also found that new CEOs tend to be more self-interested and

23 “This Pesticide Is Prohibited in Britain. Why Is It Still Being Exported?” The New York Times, December 20, 2016, www.nytimes.com.24 “Punishing CEOs for Bad Behavior: 2017 Public Perception Survey,” Rock Center for Corporate Governance, Stanford Uni-versity, February 2017, www.gsb.stanford.edu.25 “Honesty/Ethics in the Professions,” Gallup Poll, December 4–11, 2017, www.gallup.com.

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short-term focused, possibly in an effort to immediately drive up company profits, rather than valuing long-term investments in research and development or capital expenditures. However, a recent study found that today’s managers place slightly more importance on moral values, such as honesty and forgiveness, than managers did in the 1980s, who focused more on competency values, like capability and independence. Interestingly, the study also compared the personal values orientations of managers from the 1980s and today to those of Millennials (individuals born between 1980 and 2000). While generally, Millennials’ personal values orientations were discovered to be consistent with those of managers from the 1980s and 2010s, they did indicate a greater self-focused preference than managers from previous research.26

Spirituality in the WorkplaceA person’s spirituality—that is, a personal belief in a supreme being, religious organiza-tion, or the power of nature or some other external, life-guiding force—has always been a part of the human makeup. In 1953, Fortune published an article titled “Businessmen on Their Knees” and claimed that American businessmen (women generally were excluded from the executive suite in those days) were taking more notice of God. More recently, cover stories in Fortune, Bloomberg Businessweek, and other business publications have documented a resurgence of spirituality or religion at work.

As far back as 1976, scholars have found a positive relationship between an organi-zation’s economic performance and attention to spiritual values. They have shown that spirituality positively affects employee and organizational performance by enhancing intu-itive abilities and individual capacity for innovation, as well as increasing personal growth, employee commitment, and responsibility. Spirituality also helps employees who are deal-ing with workplace stress. In a study on workplace spirituality in the United States and Mexico, meaningful work was found to be directly related to reduced workplace stress.27

Organizations have responded to the increased attention to spirituality and religion at work by acting to accommodate their employees’ spiritual needs.

The chief diversity officer at PricewaterhouseCoopers found office space in their Asia-Pacific region facility to provide a prayer room for their Muslim employees. In the United States, employers are required by law to make substantial accommo-dations for their employees’ religious practices, as long as it does not create major hardships for the organization. Ford’s Interfaith Network, a group of employees focusing on religious issues, successfully lobbied the company to install sinks designed for the religious washings that Muslim employees perform.28

However, others disagree with the trend toward a stronger presence of religion in the workplace. They hold the traditional belief that business is a secular—that is,

26 James Weber, “Discovering the Millennials’ Personal Values Orientation: A Comparison to Two Managerial Populations,” Journal of Business Ethics, 2017, 4, 143, pp. 517–29.27 For a study establishing a link between spirituality and economic performance, see Christopher P. Neck and John F. Milliman, “Thought Self-Leadership: Finding Spiritual Fulfillment in Organizational Life,” Journal of Managerial Psychology, 1994, pp. 9–16; and for studies showing how promoting spirituality as a way to reduce workplace stress, see Amal Altaf and Mohammad Atif Awan, “Moderating Effect of Workplace Spirituality on the Relationship of Job Overload and Job Satisfac-tion,” Journal of Business Ethics, 2011, pp. 93–99; and “Workplace Spirituality and Stress: Evidence from Mexico and US,” Management Research Review, 2015, pp. 29–43.28 “When Religious Needs Test Company Policy,” The New York Times, February 25, 2007, www.nytimes.com; and “More Businesses Turning to Workplace Chaplains,” PilotOnline.com, October 30, 2011, pilotonline.com.

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nonspiritual—institution. They believe that business is business, and spirituality is best left to churches, synagogues, mosques, and meditation rooms, not corporate boardrooms or shop floors. This, of course, reflects the separation of church and state in the United States and many other countries.

Beyond the philosophical opposition to bringing spirituality into the business environ-ment, procedural or practical challenges arise. Whose spirituality should be promoted? The CEO’s? With greater workplace diversity comes greater spiritual diversity, so which organized religion’s prayers should be cited or ceremonies enacted? How should busi-nesses handle employees who are agnostics or atheists (who do not follow any religion)?

Just as personal values and character strongly influence employee decision making and behavior in the workplace, so does personal spirituality, from all points on the religious spectrum, impact how businesses operate.

Managers’ Moral DevelopmentPeople’s values and spirituality exert a powerful influence on the way ethical work issues are treated. Since people have different personal histories and have developed their values and spirituality in different ways, they are going to think differently about ethical prob-lems. This is as true of corporate managers as it is of other people. In other words, the managers in a company are likely to be at various stages of moral development. Some will reason at a high level, others at a lower level.

A summary of the way people grow and develop morally is diagrammed in Figure 5.4. From childhood to mature adulthood, most people move steadily upward in their moral reasoning capabilities from stage 1. Over time, they become more developed and are capa-ble of more advanced moral reasoning, although some people never use the most advanced stages of reasoning in their decision processes.

At first, individuals are limited to an ego-centered focus (stage 1), fixed on avoiding punishment and obediently following the directions of those in authority. (The word ego means “self.”) Slowly and sometimes painfully, the child learns that what is considered to be right and wrong is pretty much a matter of reciprocity: “I’ll let you play with my toy if I can play with yours” (stage 2). At both stages 1 and 2, however, the individual is mainly

Age GroupDevelopment Stage and Major Ethics Referent Basis of Ethics Reasoning

Mature adulthood Stage 6 Universal principles: justice, fairness, universal human rights

Principle-centered reasoning

Mature adulthood Stage 5 Moral beliefs above and beyond specific social custom: human rights, social contract, broad constitutional principles

Principle-centered reasoning

Adulthood Stage 4 Society at large: customs, traditions, laws

Society- and law-centered reasoning

Early adulthood, adolescence

Stage 3 Social groups: friends, school, coworkers, family

Group-centered reasoning

Adolescence, youth Stage 2 Reward seeking: self-interest, own needs, reciprocity

Ego-centered reasoning

Childhood Stage 1 Punishment avoidance: avoid harm, obedience to power

Ego-centered reasoning

FIGURE 5.4Stages of Moral Development and Ethical Reasoning

Source: Adapted from Lawrence Kohlberg, The Philosophy of Moral Development (New York: Harper & Row, 1981).

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concerned with his or her own pleasure. The self-dealings of Alphons Iacobelli, described earlier in this chapter, exemplify ego-centered reasoning. By taking money from his com-pany for personal use, he personally benefited, without apparent concern for others.

In adolescence the individual enters a wider world, learning the give-and-take of group life among small circles of friends, schoolmates, and similar close-knit groups (stage 3). Studies have reported that interaction within groups can provide an environment that improves the level of moral reasoning. This process continues into early adulthood. At this point, pleasing others and being admired by them are important cues to proper behav-ior. Most people are now capable of focusing on other-directed rather than self-directed perspectives. When a manager “goes along” with what others are doing or what the boss expects, this would represent stage 3 behavior. On reaching full adulthood—the late teens to early 20s in most modern, industrialized nations—most people are able to focus their reasoning according to society’s customs, traditions, and laws as the proper way to define what is right and wrong (stage 4). At this stage, a manager would seek to follow the law; for example, he or she might choose to curtail a chemical pollutant because of government regulations mandating this.

Stages 5 and 6 lead to a special kind of moral reasoning. At stage 5, individuals apply their moral beliefs above and beyond specific social custom and consider changing law based on rational reflection of social utility. Stage 6 emphasizes ethical reasoning using broad principles and relationships, such as human rights and constitutional guarantees of human dignity, equal treatment, and freedom of expression. For example, at this stage, an executive might decide to pay wages above the minimum required by law, because this is the morally just thing to do.29

Researchers have consistently found that most managers typically rely on criteria asso-ciated with reasoning at stages 3 and 4, although some scholars argue that these results may be slightly inflated.30 Although they may be capable of more advanced moral reason-ing that adheres to or goes beyond society’s customs or law, managers’ ethical horizons most often are influenced by their immediate work group, family relationships, or compli-ance with the law.

The development of a manager’s moral character can be crucial to a company. Some ethics issues require managers to move beyond selfish interest (stages 1 and 2), beyond company interest (stage 3 reasoning), and even beyond sole reliance on society’s customs and laws (stage 4 reasoning). Needed is a manager whose personal character is built on a caring attitude toward all affected, recognizing others’ rights and their essential humanity (a combination of stage 5 and 6 reasoning). The moral reasoning of upper-level manag-ers, whose decisions affect companywide policies, can have a powerful and far-reaching impact both inside and outside the company.

Analyzing Ethical Problems in Business

Underlying an ethical decision framework is a set of universal ethical values or principles, notions that most people anywhere in the world would hold as important. While a list of ethical principles may be exhaustive, these values seem to be generally accepted: do no

29 For details and research findings, see Lawrence Kohlberg, The Philosophy of Moral Development (San Francisco: Harper & Row, 1981); and Anne Colby and Lawrence Kohlberg, The Measurement of Moral Judgment, Volume I: Theoretical Founda-tions and Research Validations (Cambridge: Cambridge University Press, 1987).30 James Weber and Janet Gillespie, “Differences in Ethical Beliefs, Intentions, and Behaviors,” Business & Society, 1998, pp. 447–67; and James Weber and David Wasieleski, “Investigating Influences on Managers’ Moral Reasoning,” Business & Society, 2001, pp. 79–111.

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harm; be compassionate, fair, and just, and honest; respect others’ rights; and do your duty/act responsibly.31 Business managers and employees need a set of decision guidelines that will shape their thinking when on-the-job ethics issues occur. The guidelines should help them (1) identify and analyze the nature of an ethical problem and (2) decide which course of action is likely to produce an ethical result. The following four methods of ethical rea-soning can be used for these analytical purposes, as summarized in Figure 5.5.

Virtue Ethics: Pursuing a “Good” LifeSome philosophers believe that the ancient Greeks, specifically Plato and Aristotle, devel-oped the first ethical theory, which was based on values and personal character. Commonly referred to as virtue ethics, it focuses on character traits that a good person should possess, theorizing that moral values will direct the person toward good behavior. Aristotle argued, “Moral virtue is a mean between two vices, one of excess and the other of deficiency, and it aims at hitting the mean in feelings, desires, and action.”32 A variety of people have sug-gested lists of moral values over the years as shown in Figure 5.6.

As indicated by the different views expressed in Figure 5.6, to some extent what counts as a moral virtue depends on one’s personal beliefs and is often influenced by an organi-zation or society.

When placing virtue ethics in a business context, ethicist Robert Solomon explains, “The bottom line of the Aristotelian approach to business ethics is that we have to get away from ‘bottom line’ thinking and conceive of business as an essential part of the good life, living well, getting along with others, having a sense of self-respect, and being a part of something one can be proud of.”33

However, others argue that virtue ethics is not a thoroughly developed ethical system of rules and guidelines, but rather a system of values that form good character. Scholars posit that virtue ethics emphasizes how a person lives. This notion is centered on the character-istics of the person committing the action. If an agent is virtuous, then the actions that

31 See Rushworth Kidder, Moral Courage (New York: HarperCollins, 2005).32 For discussions of virtue ethics, see Laura P. Hartman, Joe DesJardins, and Chris MacDonald, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, 4th ed. (New York: McGraw-Hill, 2017), pp. 85–89.33 Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (New York: Oxford University Press, 1992), p. 104.

FIGURE 5.5Four Methods of Ethical Reasoning

MethodCritical Determining Factor

An Action Is Ethical When . . . Limitations

Virtues Values and character It aligns with good character

Subjective or incomplete set of good virtues

Utilitarian Comparing benefits and costs

Net benefits exceed net costs

Difficult to measure some human and social costs; majority may disregard rights of the minority

Rights Respecting entitlements

Basic human rights are respected

Difficult to balance conflicting rights

Justice Distributing fair shares

Benefits and costs are fairly distributed

Difficult to measure benefits and costs; lack of agreement on fair shares

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individual takes should be acceptable.34 Yet, virtue ethics also suffers from this challenge: whose values? Does a set of values provide a sufficient framework to resolve the most complex ethical dilemmas found in global business? Does a manager sometimes have to be or seem to be “the bad person” or do or seem to do “a bad thing” for the sake of some ulti-mate ethical good? Would this be virtuous or vicious?35

Utility: Comparing Benefits and CostsAnother approach to ethics emphasizes utility, or the overall amount of good that can be produced by an action or a decision. This ethical approach is called utilitarian reasoning. It is often referred to as cost–benefit analysis because it compares the costs and benefits of a decision, a policy, or an action, as shown in Figure 5.5. These costs and benefits can be economic (expressed in dollar amounts), social (the effect on society at large), or human (usually a psychological or emotional impact). After business managers add up all the costs and benefits and compare them with one another, the net cost or the net benefit should be apparent. For a utilitarian, the alternative where the benefits most outweigh the costs is the ethically preferred action because it produces the greatest good for the greatest number of people in society.

The main drawback to utilitarian reasoning is the difficulty of accurately measuring both costs and benefits. Some things can be measured in monetary terms—goods pro-duced, sales, payrolls, and profits—but others that are less tangible, such as employee morale, psychological satisfaction, or the worth of a human life, are trickier. Human and social costs are particularly difficult to measure with precision. But unless they can be measured, the cost–benefit calculations will be incomplete, and it will be difficult to know whether the overall result is good or bad, ethical or unethical. Another limitation of utili-tarian reasoning is that the majority may override the rights of those in the minority. Since utilitarian reasoning is primarily concerned with the end results of an action, managers

34 Miguel Alzola, “Virtuous Persons and Virtuous Actions in Business Ethics and Organizational Research,” Business Ethics Quarterly, 2015, pp. 287–318.35 For a critique of virtue ethics, see John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ: Pearson, 2016).

FIGURE 5.6Lists of Moral Values across Time

Plato and Aristotle, 4th century BC

St. Thomas Aquinas, 1225–1274

Benjamin Franklin, 1706–1790

Robert Solomon, 1942–2007

• Courage• Self-control• Generosity• Magnificence• High-mindedness• Gentleness• Friendliness• Truthfulness• Wittiness• Modesty

• Faith• Hope• Charity• Prudence• Justice• Temperance• Fortitude• Humility

• Cleanliness• Silence• Industry• Punctuality• Frugality

• Honesty• Trust• Toughness

Sources: Plato and Aristotle’s values are from Steven Mintz, “Aristotelian Virtue and Business Ethics Education,” Journal of Business Ethics, 1996; St. Thomas Aquinas’s values are from Manuel G. Velasquez, Business Ethics: Concepts and Cases, 9th ed. (Upper Saddle River, NJ: Pearson, 2012); Benjamin Franklin’s values, from the American Industrial Revolution era, are from Peter McMylor, Alisdair MacIntyre: Critic of Modernity (London: Routledge, 1994); and Robert Solomon’s moral values can be found in Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (New York: Oxford University Press, 1992).

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using this reasoning process often fail to consider the means taken to reach the end. Some of these challenges are evident in Exhibit 5.A.

Despite these drawbacks, cost–benefit analysis is widely used in business. Because this method works well when used to measure economic and financial outcomes, business managers sometimes are tempted to rely on it to decide important ethical questions with-out being fully aware of its limitations or the availability of still other methods that may improve the ethical quality of their decisions.

Rights: Determining and Protecting EntitlementsHuman rights are another basis for making ethical judgments. A right means that a person or group is entitled to something or is entitled to be treated in a certain way, as shown in Figure 5.5. The most basic human rights are the rights to life, safety, free speech, freedom, being informed, due process, and property, among others. Denying those rights or failing to protect them for other persons and groups is normally considered to be unethical and is the core of the debate over the “Right to Try” controversy profiled in Exhibit 5.A. This approach to ethical reasoning holds that individuals are to be treated as valuable ends in themselves just because they are human beings. Using others for your own purposes is unethical if, at the same time, you deny them their goals and purposes.

Do Patients Have the “Right to Try”

By 2018, 38 states had enacted “Right to Try” laws and more were considering such legislation. These efforts catapulted this ethical question into national prominence and touches on some of the methods for ethical reasoning discussed in this chapter. At the core of this debate is whether or not terminally ill patients have the ethical right to try therapy or experimental drugs that are still in the testing phase at pharmaceutical companies in the hope of stopping the spread of their disease or possibly saving their lives. Patients were often naturally focused on the potential benefits of using these drugs, even if they were still under development and might be risky or ineffective. An executive at The Goldwater Institute, a libertarian group supporting Right to Try laws, explained, “The goal is for terminally ill patients to have choice when it comes to end-stage disease. Right to Try is something that will help terminally ill people all over the country.” These sentiments were echoed by Larry Kutt, a 65-year-old man with an advanced blood cancer hoping to gain access to a therapy currently being tested by several pharmaceutical companies, who said, “It’s my life and I want the chance to save it.” Critics have called efforts to create a federal Right to Try statue “a cruel shame,” causing more harm than good by creating false hope. Dr. David Gorski, a Michigan surgeon, argued that releasing unapproved therapies could cause untold pain in a person’s final days, even hastening death. Focusing on a benefits- versus-harms perspective, Dr. Gorski explained, “They are far more likely to harm patients than to help them.” The formal legal position in the United States was based on a 2007 court ruling that stated patients did not have a constitutional right to medicines that were not federally approved. The Food and Drug Admin-istration had a program under which terminally ill patients, who had exhausted their treatment options, could try to obtain therapies that had passed at least the first of three FDA investigation phases. But, the law did not require pharmaceutical companies to provide the treatment, nor did it mandate that insur-ance companies cover these therapies. Also, the law did allow insurance companies to deny coverage to patients while they use drugs under investigation. In 2015, Johnson & Johnson created a panel of bioeth-icists to study patients’ requests for potentially lifesaving medicines and make recommendations to the pharmaceutical firm.

Sources: “Patients Seek ‘Right to Try’ New Drugs,” The New York Times, January 10, 2015, www.nytimes.com; “Federal ‘Right to Try’ Bill: Wrong on the Law, and Wrong for Patients,” The Hill, June 28, 2016, thehill.com; and, “U.S. Senator Introduces a ‘Right to Try’ Bill for Desperate Patients,” Stat, May 10, 2016, www.statnews.com.

Exhibit 5.A

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The main limitation of using rights as a basis of ethical reasoning is the difficulty of balancing conflicting rights. For example, an employee’s right to privacy may be at odds with an employer’s right to protect the firm’s assets by testing the employee’s honesty. Rights also clash when U.S. multinational corporations move production to a foreign nation, causing job losses at home but creating new jobs abroad. In such cases, whose job rights should be respected?36

Despite this kind of problem, the protection and promotion of human rights is an important ethical benchmark for judging the behavior of individuals and organizations. Surely most people would agree that it is unethical to deny a person’s fundamental rights to life, freedom, privacy, growth, and human dignity. By defining the human condition and pointing the way to a realization of human potentialities, such rights become a kind of common denominator of ethical reasoning, setting forth the essential conditions for ethical actions and decisions.

Justice: Is It Fair?A fourth method of ethical reasoning concerns justice. As shown in Figure 5.5, a common question in human affairs is, Is it fair or just? Employees want to know if pay scales are fair. Consumers are interested in fair prices when they shop. When new tax laws are pro-posed, there is much debate about their fairness—where will the burden fall, and who will escape paying their fair share?37 After the U.S. government bailed out several big banks and insurance companies in 2008–9, many people wondered if it was fair that some of their top executives continued to receive big bonuses while their employees, shareholders, and bondholders suffered—and taxpayers absorbed the cost.

Justice, or fairness, exists when benefits and burdens are distributed equitably and according to some accepted rule. For society as a whole, social justice means that a society’s income and wealth are distributed among the people in fair proportions. A fair distribution does not necessarily mean an equal distribution. Most societies try to consider people’s needs, abilities, efforts, and the contributions they make to society’s welfare. Since these factors are seldom equal, fair shares will vary from person to person and group to group.

Justice reasoning is not the same as utilitarian reasoning. A person using utilitarian reasoning adds up costs and benefits to see if one is greater than the other; if benefits exceed costs, then the action would probably be considered ethical. A person using justice reasoning considers who pays the costs and who gets the benefits; if the shares seem fair (according to society’s rules), then the action is probably just.

Applying Ethical Reasoning to Business ActivitiesAnyone in the business world can use these four methods of ethical reasoning to gain a better understanding of ethical issues that arise at work. Usually, all four can be applied at the same time. Using only one of the four methods is risky and may lead to an incomplete understanding of all the ethical complexities that may be present. It also may produce a lopsided ethical result that will be unacceptable to others.

Once the ethical analysis is complete, the decision maker should ask this question: Do all of the ethics approaches lead to the same decision? If so, then the decision, policy, or activity is probably ethical. If the application of all ethics theories result in a “no, this is not ethical,” then it is probably unethical. The reason you cannot be absolutely certain is

36 For a discussion of ethical rights, see John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ: Pearson, 2016); and Velasquez, Business Ethics: Concepts and Cases, pp. 90–98.37 For an interesting discussion of “what is fair?” see Patrick Primeaux and Frank P. LeVeness, “What is Fair: Three Perspec-tives,” Journal of Business Ethics 84 (2009), pp. 89–102.

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that different people and groups (1) may honestly and genuinely use different sources of information, (2) may rely on different values or definitions of what is a virtuous character, (3) may measure costs and benefits differently, (4) may not share the same meaning of justice, or (5) may rank various rights in different ways. Nevertheless, any time an analyst obtains a consistent result when using all of the approaches, it indicates that a strong case can be made for either an ethical or an unethical conclusion.

What happens when the application of the four ethical approaches does not lead to the same conclusion? A corporate manager or employee then has to assign priorities to each method of ethical reasoning. What is most important to the manager, to the employee, or to the organization—virtue, utility, rights, or justice? What ranking should they be given? A judgment must be made, and priorities must be determined. These judgments and prior-ities will be strongly influenced by a company’s culture and ethical climate. Some will be sensitive to people’s needs and rights; others will put themselves or their company ahead of all other considerations.

The Moral Intensity of an Ethical Issue

Studies have shown that individuals make decisions differently based on the characteristics or type of ethical dilemma they face. Moral intensity refers to a person’s perception of how mor-ally severe an ethical issue is.38 This simple insight appears to profoundly affect individuals’ decisions and actions. Generally, issues that have high moral intensity evoke greater ethical attention and consideration by the decision maker than issues with low moral intensity.

Several factors contribute to the moral intensity of an issue.

∙ The magnitude of consequences. For example, issues that involve a life-or-death com-ponent, where serious physical harm could result from a decision that is made (such as Parnell’s decision involving salmonella described at the beginning of this chapter) would normally be thought of as having higher moral intensity than an issue involving minor economic harm (such as stealing paper clips from the company supply closet).

∙ Issues are also different based on how close the decision maker feels to the people affected by the decision—the issue’s proximity. Proximity refers to the social, physical, and psychological distance decision makers perceive themselves to have from those affected by the decision. Alphons Iacobelli’s decision to use millions of dollars of com-pany money designated for a union account to pay for his own lavish expenses would be considered an issue with very high moral intensity.

∙ Social consensus refers to the degree of social agreement that a proposed act is either acceptable or unacceptable. For example, the social consensus that sexual harassment is unacceptable has increased because of the “#MeToo” social movement, discussed earlier in this chapter.

∙ Moral intensity is also influenced by the probability that a decision maker’s action will lead to the consequences predicted. The likelihood that people will die if they ingest paraquat is very high. But, the chance that they will contract Parkinson’s disease from long-term exposure is still not verified by scientific research. Thus, the moral intensity of the former situation is higher than the latter.

∙ Finally, ethical issues vary in terms of how quickly the effects of the consequences of the decision take effect. Temporal immediacy refers to the length of time that the predicted

38 This notion was first introduced by Thomas Jones in “Ethical Decision Making by Individuals in Organizations: An Issue- Contingent Model,” Academy of Management Review, 1991, 16, pp. 366–95.

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consequences will occur from the present moment of the decision. As discussed in the “Right to Try” example, terminally ill patients feel a greater temporal immediacy given the short time they have left to live. Decisions that involve immediate consequences are more morally intense than decisions where the effects will occur in the distant future.

Research has shown that the moral intensity characteristics of an ethical issue influence the entire ethical decision-making process, from moral sensitivity and awareness to moral intention and judgment. Managers and business students alike show that their ethical rea-soning is strongly influenced by the moral intensity of the ethical dilemmas they face.39

39 James Weber, “Influences Upon Managerial Moral Decision Making: Nature of Harm and Magnitude of Consequences,” Human Relations, 1996, pp. 1–16; Tara J. Shawver and William F. Miller, “Moral Intensity Revisited: Measuring the Benefit of Accounting Ethics Interventions,” Journal of Business Ethics, 2017, pp. 587–603; and Robert E. Crossler, James H. Long, Tina M. Loraas, and Brad S. Trinkle, “The Impact of Moral Intensity and Ethical Tone Consistency on Policy Compliance,” Journal of Information Systems; pp. 49–64.

∙ Ethics is a conception of right and wrong behavior, defining for us when our actions are moral and when they are immoral. Business ethics is the application of general ethical ideas to business behavior.

∙ Ethical business behavior enhances business performance, complies with legal require-ments, prevents or minimizes harm, is demanded by business stakeholders, and pro-motes personal morality.

∙ Ethics problems occur in business for many reasons, including the selfishness of a few, competitive pressures on profits, the clash of personal values and business goals, and cross-cultural contradictions in global business operations.

∙ Managers’ on-the-job values tend to be company-oriented, assigning high priority to company goals. Managers often value being competent and place importance on having a comfortable or exciting life, among other values. In addition, individual spirituality can greatly influence how a manager understands ethical challenges; increasingly, it is rec-ognized that organizations must acknowledge employees’ spirituality in the workplace.

∙ Individuals reason at various stages of moral development, with most managers focus-ing on personal rewards, recognition from others, or compliance with company rules as guides for their reasoning.

∙ People in business can analyze ethics dilemmas by using four major types of ethical reasoning: virtue ethics, utilitarian reasoning, rights reasoning, and justice reasoning.

∙ The perceived moral intensity of an issue, as determined by the issue’s characteristics, affects how individuals make ethical decisions.

Summary

Key Terms stages of moral development, 105U.S. Corporate Sentencing Guidelines, 98utilitarian reasoning, 108virtue ethics, 107

business ethics, 96conflict of interest, 102ethical egoist, 101ethical principles, 95ethical relativism, 96ethics, 95

human rights, 109justice, 110laws, 96moral intensity, 111Sarbanes-Oxley Act, 99spirituality, 104

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Internet Resources

www.ethics.org Ethics and Compliance Initiativewww.ibe.org.uk Institute for Business Ethicswww.business-ethics.org International Business Ethics Institutewww.soxlaw.com Sarbanes-Oxley Actwww.sarbanes-oxley-association.com Sarbanes Oxley Compliance Professionals Associationwww.oge.gov United States Office of Government Ethicswww.ussc.gov United States Sentencing Commissionwww.cfsaw.org Center for Spirituality at Work

Chapter 5 Ethics and Ethical Reasoning 113

Discussion Case: LafargeHolcim and ISIS in SyriaIn 2017, French authorities investigated and indicted several former executives of the world’s largest cement manufacturer, LafargeHolcim (Lafarge), for paying the Islamic State terrorist group to protect their factory in Syria and its workers. The indictment charged Bruno Lafont and Eric Olsen—two former CEOs—and the former senior exec-utive of Syrian operations, Christian Herrault, with financing a terrorist organization and endangering the lives of others.

Lafarge was a major multinational cement company based in France, employing 81,000 workers at 2,300 sites in 80 countries around the world. The company had maintained operations in Syria since 2010, after investing more than $708 million to refurbish a fac-tory in Jalabiyeh, a town near the Turkish border. This plant created hundreds of jobs for local residents, generated thousands of tons of cement every day, and supported other businesses nearby.

Just a year after Lafarge started operations in Jalabiyeh, civil war broke out between President Bashar al-Assad’s government and various rebel factions. Between 2011 and 2013, the area near the factory was occupied by a succession of armed military groups before the Islamic State (also known as ISIS) seized control. During this period, militants intercepted and detained Lafarge employees as they came and went from work, making it dangerous for employees and difficult for managers to run the plant efficiently.

In 2011, Lafarge management started paying the militants through intermediaries, essentially to leave the company alone and allow it to operate. The company’s subsidiary in Syria, Lafarge Cement Syria (LCS), paid about $15.2 million for this purpose between 2011 and 2014; a large part of this money went directly to ISIS. Herrault admitted that Lafarge was involved in a “racket,” but said that he regularly informed top managers of the company and that everything was under control.

In an official statement justifying management’s decision to pay off the militant groups, the company stated, “Very simply, chaos reigned, and it was the task of local management to ensure that the intermediaries did whatever was necessary to secure its supply chains and the free movement of its employees.” Lafarge said that they did not think they had any other options to keep the plant operational and minimize risks to their employees.

The company also took other steps to protect its workers and keep the militants at bay. After militant forces kidnapped nine Lafarge employees and transferred them to local mili-tia camps, local managers spent more than $200,000 to secure their release. Lafarge also attempted to ease tensions by purchasing raw materials from ISIS-held areas to support the region’s economy. In 2013, a Lafarge memo emphasized the threat posed by terrorists. “It becomes more and more difficult to operate without being required to directly or indirectly

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negotiate with these [ISIS] networks classified as terrorists’ networks by international organizations and the USA,” the memo concluded.

Despite the company’s efforts, workers continued to be at risk. French courts reviewed charges submitted by 11 Lafarge workers through Sherpa, a French law association whose primary mission was the protection of workers, that Lafarge placed them in a high-risk environment and put their lives in danger. “Lafarge acted as if it was above the law,” said Marie-Laure Guislain, the head of litigation at Sherpa. “But it played a role in an armed conflict, as well as in the violation of human rights, and must be held accountable.”

Olsen resigned as CEO amidst an internal investigation of the firm’s top management that found that the money funneled to the terrorist groups was used, in part, to permit factory workers to move to and from the facility. This inquiry also found that Olsen was not responsible for, or aware of, the activity. According to extensive testimony and eyewit-ness accounts of former and current employees as well as a review of internal company correspondence, the payments to the militant groups did not guarantee the safety of plant employees. More than twelve workers were kidnapped between 2012 and 2014. There were multiple accounts of employees being held at gunpoint on their way to and from work.

In 2014, ISIS forces declared a caliphate, asserting their control over a region, includ-ing parts of Syria. Within weeks, as the fighting for territory continued, air strikes were heard outside the Lafarge plant. When ISIS militants claimed responsibility for the truck bombing at a Turkish-owned cement plant nearby, Lafarge temporarily halted production and told its workers to stay home. Some workers, considered nonessential by manage-ment, were ferried by bus to operations in Manbji, a city in northern Syria. Yet, managers ordered about 30 workers to report to work to keep the Jalabiyeh plant operating.

Ultimately, in 2015, as a team of employees and managers gathered for work one morning outside the plant, the factory’s doctor warned that ISIS had just captured a nearby village. “You’ve got to get out of here,” he warned. “ISIS is coming!” When the workers discov-ered that evacuation buses promised by management were not there, they escaped in their own vehicles. ISIS captured the factory that evening. “What I want to know,” Mostafa Haji Mohamad, a medical worker at the Syrian factory, said of Lafarge in an interview, “is why did they leave us there to face our deaths? The factory was the only thing they cared about.”

Sources: “France Investigates Lafarge Executives for Terrorist Financing,” The New York Times, December 8, 2017, www.nytimes.com; “Former LafargeHolcim CEO Charged with Syria Terrorism Funding,” Bloomberg, December 8, 2017, www.bloomberg.com; “Top Lafarge Executives, Including Former CEO, Indicted on Terror Financing Charges,” France24, December 9, 2017, www.france24.com; and, “Lafarge Paid 13 Million Euros to Armed Groups to Keep Operating in Syria,” Reuters, December 12, 2017, www.reuters.com; and “‘ISIS Is Coming!’ How a French Company Pushed the Limits in War-Torn Syria,” The New York Times, March 10, 2018, www.nytimes.com.

Discussion Questions

1. Do you agree with the French government’s charges against Lafarge and its managers? Why or why not?

2. What arguments did Lafarge managers make to justify their decision to pay terrorist groups in Syria? Do you believe that these were their real reasons?

3. Do you believe that Lafarge’s actions in Syria were ethical or unethical? Use the four methods of ethical reasoning (see Figure 5.5) to support your view.

4. Evaluate the moral intensity of the decision Lafarge managers made, based on the dimensions of moral intensity.

5. Is there anything Lafarge could have done to protect its employees adequately without paying terrorists?

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C H A P T E R S I X

Organizational Ethics

Faced with increasing pressure to create an ethical environment at work, businesses can take tangible steps to improve their ethical performance. The organization’s culture and ethical work climate play a central role in promoting ethics at work. Ethical situations arise in all areas and func-tions of business, and often professional associations seek to guide managers in addressing these challenges. Corporations can also implement ethical safeguards to create a comprehensive ethics program. This can become a complex challenge when facing different customs and regulations around the world.

This Chapter Focuses on These Key Learning Objectives:

LO 6-1 Classifying an organization’s culture and ethical climate.

LO 6-2 Recognizing ethics challenges across the multiple functions of business.

LO 6-3 Creating effective ethics policies and identifying responsible individuals to become the organization’s ethics and compliance officer.

LO 6-4 Constructing successful ethics reporting mechanisms, ethics training programs, and similar safeguards.

LO 6-5 Understanding how to conduct business ethically in the global marketplace.

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In 2016, British regulators fined the U.S. pharmaceutical giant Pfizer $107 million for overcharging 48,000 patients in their national health care system for the generic version of the epilepsy drug phenytoin sodium. Pfizer had worked with the drug distribution com-pany, Flynn Pharma Limited, to de-brand the drug in 2012 in order to raise the price to insurers. Generic drugs are not normally subject to government—pharmaceutical com-pany negotiations, so the prices could be freely determined by Pfizer. The drug company charged wholesalers and pharmacies a price 17 times higher than the amount it had charged before 2012.1

In 2016, Wells Fargo, a global banking and financial giant, was fined $185 million for issuing credit cards to consumers without their consent. Over a period of five years, Wells Fargo employees opened around 1.5 million unauthorized bank accounts and issued over half a million credit cards fraudulently. Over time, consumers started to accumulate banking fees for accounts they did not want or know about. Some of the victims were even contacted by debt collectors for not paying their fees. Wells Fargo refunded approximately $2.6 million to the affected consumers, but the damage to these individuals’ credit ratings lingered on. Over 5,300 Wells Fargo employees and managers involved in the scandal were fired as the firm cited major weaknesses in the company’s corporate culture.2

Pfizer and Wells Fargo are just two of many companies from around the world that over the years have been charged with excessive pricing, defrauding their customers, lying about their finances, mishandling investors’ funds, jeopardizing the safety of consumers, and many other illegal and unethical activities. Why are business executives, managers, and employees repeatedly being caught conducting illegal and unethical activities? What can firms do to minimize or prevent the unethical activities perpetrated by their executives and employees? Can companies set in place systems or programs to monitor workplace activities to detect illegal or unethical behavior?

Corporate Ethical Climates

Personal values and moral character play key roles in improving a company’s ethical per-formance, as discussed in Chapter 5. However, they do not stand alone, because personal values and character can be affected by a company’s culture and ethical climate.

The terms culture and climate are often used interchangeably and, in fact, are highly interrelated. Corporate culture is a blend of ideas, customs, traditional practices, company values, and shared meanings that help define normal behavior for everyone who works in a company. Culture is “the way we do things around here.” Erica Salmon Byrne, executive vice president, governance and compliance for The Ethisphere Institute, warns businesses and the public:

“This is a lesson we have learned, re-learned, and will likely learn again. Regulators around the globe are increasingly calling on organizations to examine their cul-ture. From Enron to Volkswagen, the Challenger to WorldCom, there are multiple examples of organizations with formal systems that say one thing and cultures that promote another. When those kinds of alignment gaps are allowed to persist, you eventually have a failure of one variety or another: ethics, quality, safety, or a combination of all three .”3

1 “Pfizer Fined $107 Million for Overcharging U.K. for Epilepsy Drug,” The Wall Street Journal, December 7, 2016, www.wsj.com.2 “Wells Fargo Fined $185 Million for Fraudulently Opening Accounts,” The New York Times, September 8, 2016, Page B1, www.nytimes.com.3 Erica Salmon Byrne, “Culture Matters,” Ethikos, September–October 2016, pp. 1–2.

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The Ethics Resource Center (ERC) observed that a “strong ethical culture in a company has a profound impact on the kinds of workplace behavior that can put a business in jeop-ardy.” Weak ethical cultures can foster ongoing bad behavior. In a national business ethics survey conducted by the Ethics and Compliance Initiative, 26 percent of employees reported that misconduct they had observed in their companies was part of an ongoing pattern. Forty-one percent claimed that the unethical behavior was repeated a second time, indicating a weak ethical work culture.4

Most companies have a kind of moral atmosphere. People can feel which way the ethi-cal winds are blowing. They pick up subtle hints and clues that tell them what behavior is approved and what is forbidden. The ethical climate represents an unspoken understanding among employees of what is and is not acceptable behavior based on the expected stan-dards or norms used for ethical decision making. It is the part of broader corporate culture that sets the ethical tone in a company. One way to view ethical climates is diagrammed in Figure 6.1. Three distinct ethical criteria are egoism (self-centeredness), benevolence (con-cern for others), and principle (respect for one’s own integrity, for group norms, and for society’s laws). (These parallel the levels of moral development developed by Lawrence Kohlberg that are discussed in Chapter 5.) These ethical criteria can be used to describe how individuals, a company, or society at large approach various moral dilemmas.

For example, if a company approaches ethics issues with benevolence in mind, it would emphasize friendly relations with its employees, stress the importance of team play and coop-eration for the company’s benefit, and recommend socially responsible courses of action. However, a company using egoism would be more likely to think first of promoting the company’s profit and striving for growth at all costs, as illustrated by the following example:

A Brazilian meat company, JBS, lost many of its customers and business partners amid a bribery scandal in 2017. The company admitted to bribing almost 2,000 politicians in exchange for subsidies that helped make JBS the largest meat-packer in the world. Restaurants and supermarkets in Brazil, including Domino’s Pizza Brasil and Subway, stopped buying JBS meats because of the corrupt behavior. The backlash against JBS even reached the United States, as Walmart publicly stated that they would not tolerate unethical behavior by their suppliers and would monitor the situation at JBS closely. Its shortsighted, self-focused actions had very high reputational costs to the company.5

Researchers have found that multiple ethical climates, or subclimates, may exist within one organization. For example, one company might include managers who often interact with the public and government regulators, using a principle-based approach, compared to

4 “National Business Ethics Survey 2013,” Ethics and Compliance Initiative, 2013, www.ethics.org.5 “Business Partners Back Away from JBS amid Bribery Scandal,” The Wall Street Journal, June 8, 2017. www.wsj.com.

Ethical Criteria Focus of Individual Person Organization Society

Egoism (self-centered approach)

Self-interest Company interest Economic efficiency

Benevolence (concern-for-others approach)

Friendship Team interest Social responsibility

Principle (integrity approach)

Personal morality Company rules and procedures

Laws and professional codes

FIGURE 6.1The Components of Ethical Climates

Source: Adapted from Bart Victor and John B. Cullen, “The Organizational Bases of Ethical Work Climates,” Administrative Science Quarterly 33 (1988), p. 104.

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another group of managers, whose work is geared toward routine process tasks and whose focus is mainly egoistic—higher personal pay or company profits.6

Corporate ethical climates can also signal to employees that ethical transgressions are acceptable. By signaling what is considered to be right and wrong, corporate cultures and ethical climates can pressure people to channel their actions in certain directions desired by the company. This kind of pressure can work both for and against good ethical practices.

Business Ethics across Organizational Functions

Not all ethics issues in business are the same. Because business operations are highly spe-cialized, ethics issues can appear in any of the major functional areas of a business firm. Accounting, finance, marketing, information technology, supply chain, and other areas of business all have their own particular brands of ethical dilemmas. In many cases, profes-sional associations in these functional areas have attempted to define a common set of ethical standards, as discussed next.

Accounting EthicsThe accounting function is a critically important component of every business firm. By law, the financial records of publicly held companies are required to be audited by a cer-tified professional accounting firm. Company managers, external investors, government regulators, tax collectors, and labor unions rely on such public audits to make key deci-sions. Honesty, integrity, transparency, and accuracy are absolute requirements of the accounting function, and the impact can be devastating for organizations when these val-ues are absent.

In 2016, the United Kingdom established a new regulatory body, the Financial Reporting Council (FRC), to monitor auditing firms and investigate questionable financial statements. This action was in response to a $5.5 billion lawsuit against PricewaterhouseCoopers LLC for the auditing firm’s failure to uncover a mortgage lender fraud scheme. This action was part of a Europe-wide initiative to place audi-tors under greater scrutiny and to ensure they delivered fair and accurate accounting statements to organizational stakeholders.7

Accountants often are faced with conflicts of interest, introduced in Chapter 5, where loyalty or obligation to the company (the client) may be divided or in conflict with self-interest (of the accounting firm) and the interests of others (shareholders and the public). For example, while conducting an audit of a company, should the auditor look for opportunities to recommend to the client consulting services that the auditor’s firm can provide? Sometimes, accounting firms may be tempted to soften their audit of a company’s financial statements if the accounting firm wants to attract the company’s nonaudit busi-ness. For this reason, the Sarbanes-Oxley Act severely limits the offering of nonaudit con-sulting services by the auditing firm.

Examples of the U.S. accounting profession’s efforts promoting ethics are shown in Exhibit 6.A. Spurred by a threat of liability suits filed against accounting firms and a desire

6 James Weber, “Influences upon Organizational Ethical Subclimates: A Multi-departmental Analysis of a Single Firm,” Organization Science 6 (1995), pp. 509–23. For a summary of ethical climate research, see Aditya Simha and John B. Cullen, “Ethical Climates and Their Effects on Organizational Outcomes: Implications from the Past and Prophesies for the Future,” Academy of Management Perspectives, 2012, pp. 20–34.7 “The Morning Risk Report: Auditors under Increased Scrutiny,” The Wall Street Journal, August 16, 2016, blogs.wsj.com.

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to reaffirm professional integrity, these standards go far toward ensuring a high level of honest and ethical accounting behavior.8

In addition, a new international Code of Ethics for professional accountants was unveiled in 2018. According to Kim Gibson, member of the International Ethics Standards Board for Accountants (IESBA), “the new standards are designed to be easier to use, nav-igate, and enforce; be more relevant for professional accountants in business, [and] distin-guish more clearly between requirements and application material.”9

Financial EthicsWithin companies, the finance department and its officers are typically responsible for man-aging the firm’s assets and raising capital—for example, by issuing stocks and bonds. Finan-cial institutions, such as commercial banks, securities firms, and so forth, assist in raising capital and managing assets for both individuals and institutions. Whether working directly for a business or in a firm that provides financial services, finance professionals face a par-ticular set of ethical issues. Consider the following ethical lapses in corporate finance:

∙ Barclays PLC and four of their former top executives were charged with fraud by con-vincing Qatari to make payments to inflate the bank’s financial condition during the financial crisis. The United Kingdom’s Fraud Office filed the criminal suit against

8 For several excellent examples of ethical dilemmas in accounting, see Leonard J. Brooks and Paul Dunn, Business & Profes-sional Ethics for Directors, Executives and Accountants, 8th ed. (Stamford, CT: Cengage Learning, 2017); and Steven M. Mintz and Roselyn E. Morris, Ethical Obligations and Decision-Making in Accounting: Text and Cases, 4th ed. (New York: McGraw-Hill, 2016).9 “5 Things You Need to Know about the New International Ethics Code,” Journal of Accountancy, May 8, 2018, www.journalofaccountancy.com.

Excerpts of the Professional Codes of Conduct in Accounting and Finance

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA)

Code of Professional ConductThese Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethi-cal and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. The Principles include: professional responsibilities, serving the public interest, maintaining integrity, maintaining objectivity and independence, exhibiting due care, and adhering to the Principles when providing services.*

CHARTERED FINANCIAL ANALYST (CFA)®

CFA Institute Code of Ethics and Standards of Professional ConductMembers of CFA Institute (including Chartered Financial Analyst® (CFA®) charterholders) and candidates for the CFA designation (“Members and Candidates”) must act with integrity, competence, diligence, respect, and in an ethical manner, place the integrity of the investment profession and the interests of clients above their own personal interests, exercise independent professional judgment when making decisions, practice in a professional and ethical manner, promote the integrity for the ultimate benefit of society, and maintain their professional competence.†

*Source: AICPA Code of Professional Conduct. American Institute of CPAs. For a full text of the professional code, see www.aicpa.org.†Source: CFA Institute. For full text see www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n6.1.

Exhibit 6.A

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Barclays for conspiracy to commit fraud. Two separate financial capital investments by Qatari financiers raised nearly $15 billion to save the bank from collapse in the 2008 recession. This latest suit came on top of another investigation of Barclays over failures of disclosure linked to Qatar capital investments.10

∙ In 2018, the Royal Bank of Scotland agreed to pay $4.9 billion to settle with the U.S. Justice Department over the sale of toxic mortgage-backed securities during the lead-up to the global financial crisis. This settlement cleared the path for the bank’s privat-ization, ending the long-running probe into the bank’s actions. This settlement was in addition to the bank’s earlier payments involving these securities—$5.5 billion to the Federal Housing Finance Agency, $500 million settlement with the State of New York, and $125 million agreed to be paid to two large California pension funds.11

These and other lapses in ethical conduct occurred despite efforts by the finance profes-sions to foster an ethical environment. As shown in Exhibit 6.A, the highly regarded Char-tered Financial Analyst Institute, which oversees financial executives performing many different types of jobs in the financial discipline, emphasizes self-regulation as the best path for ethical compliance.12

Marketing EthicsMarketing refers to advertising, distributing, and selling products or services. Within firms, the marketing department is the functional area that typically interacts most directly with customers. Outside the firm, advertising agencies and other firms provide marketing services to businesses. The complex set of activities involved in marketing generates its own distinctive ethical issues.

One issue in marketing ethics emphasizes honesty and transparency in advertising and data about advertising.

In 2017, a tech start-up, Outcome Health, which installed and ran video monitors in physicians’ offices to show pharmaceutical advertising to patients, misled their corporate customers. Outcome Health inappropriately charged pharmaceutical com-panies for the placement of their ads on video screens that were never installed. The company even inflated data about how well the ads were performing and manipulated reports of third-party analyses of the success of the marketing strategy. The deceit also impacted the company’s investors, as Outcome Health overestimated its revenue by including the false data. These allegations were still being investigated in 2018.13

In addition to the general ethical questions that surround the marketing or advertising of products to consumers, consumer health and safety are another key ethics issue in mar-keting. Chapter 14 discusses several other issues in marketing ethics, including deceptive advertising, firm liability for consumer injury, and a firm’s responsibility for the unethical use of products by buyers.

To improve the ethics of the marketing profession, the American Marketing Association (AMA) has adopted a code of ethics for its members, as shown in Exhibit 6.B. The AMA

10 “Barclays, Four Former Top Executives Charged with Fraud over Fundraising with Qatari Investors,” Wall Street Journal, June 20, 2017, www.wsj.com.11 “RBS in $4.9 Billion U.S. Settlement Over Mortgage-Backed Securities,” The Wall Street Journal, May 10, 2018, www.wsj.com.12 For a good example of other financial ethics issues, see John B. Boatright, Ethics in Finance, 3rd ed. (Malden, MA: Wiley-Blackwell, 2014).13 “Outcome, A Hot Tech Startup, Misled Advertisers with Manipulated Information, Sources Say,” The Wall Street Journal, October 13, 2017, www.wsj.com.

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Excerpts of the Professional Codes of Conduct in Marketing and Information Technology

AMERICAN MARKETING ASSOCIATION (AMA)

Statement of EthicsThe American Marketing Association commits itself to promoting the highest standard of professional ethical norms and values for its members (practitioners, academics, and students). As Marketers, we must do no harm, avoiding harmful actions or omissions by embodying high ethical standards and adhering to all applica-ble laws and regulations; foster trust in the marketing system, striving for good faith and fair dealing as well as avoiding deception in product design, pricing, communication, and delivery of distribution; and, embrace ethical values, building relationships and enhancing consumer confidence by affirming these core values: honesty, responsibility, fairness, respect, transparency, and citizenship. We expect AMA members to be courageous and proactive in leading and/or aiding their organizations in the fulfillment of the explicit and implicit promises made to those stakeholders.*

ASSOCIATION OF INFORMATION TECHNOLOGY PROFESSIONALS (AITP)

Code of Ethics and Standards of ConductThis code begins with a commitment by each association’s member to promote the understanding of informa-tion processing methods and procedures, an obligation to fellow members to uphold the ideals of AITP and cooperate with my fellow members and treat them with honesty and respect at all times, an obligation to society to the dissemination of knowledge pertaining to the general development and understanding of infor-mation processing, an obligation to employers to discharge this obligation to the best of my ability, to guard my employer’s interests and to advise him wisely and honestly, an obligation to my country to uphold my nation and shall honor the chosen way of life of my fellow citizens, and to accept these obligations as a per-sonal responsibility and as a member of this Association.**

*Source: American Marketing Association’s Statement of Ethics, 2017, as it appears in www.marketing.com.

**Source: Association of Information Technology Professionals, 2011–16. A full text of the AITP code of ethics can be found at www.aitp.org.

Exhibit 6.B

code advocates professional conduct guided by ethics, adherence to applicable laws, and honesty and fairness in all marketing activities. The code seeks to help marketing profes-sionals translate general ethical principles into specific working rules.14

Information Technology EthicsOne of the most complex and fast-changing areas of business ethics is in the field of informa-tion technology. Ethical challenges in this field involve invasions of privacy; the collection and storage of, and access to, personal and business information, especially through e-commerce transactions; confidentiality of electronic mail communication; copyright protection regard-ing software, music, and intellectual property; cyberbullying; and numerous others.

VTech, an electronics toymaker, agreed to pay a $650,000 penalty in 2018 for col-lecting personal information from hundreds of thousands of U.S. children without obtaining consent from their parents in violation of child privacy law. The Federal Trade Commission also required the Hong Kong-based company and its U.S. sub-sidiary to strengthen its data security measures and conduct external security audits of its operations as a part of the settlement. VTech’s actions were exposed after a

14 “Statement of Ethics,” American Marketing Association, n.d., www.ama.org.

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cyberattack incident in 2015, which revealed more than 6 million children’s per-sonal information, including name, gender, and birth date. Additionally, nearly 5 million parents’ personal information was breached.15

As discussed in later chapters of this book, the explosion of information technology has raised serious questions of trust between individuals and businesses. In response to calls by businesspeople and academics for an increase in ethical responsibility in the information technology field, professional organizations have developed or revised professional codes of ethics, as shown in Exhibit 6.B.16

Supply Chain EthicsProduction and operations functions are part of an organizations’ supply chain and have also been at the center of some ethics storms.

Kobe Steel Limited, a Japanese metals manufacturer, admitted to misleading 500 companies about the quality of the copper the firm shipped to its customers for over 10 years. Japan’s Quality Assurance Organization is responsible for certifying that the quality of products meets Japanese and international standards. This agency investigated Kobe’s alleged manipulation of quality reports in 2017. The company admitted to falsifying quality documents on tens of thousands of metal orders involving copper piping and later to covering up evidence. Breaches in the failure to report accurate information expanded to include other manufacturing facilities owned by Kobe, violating laws, regulatory standards, and customers’ trust.17

Similar to other professional associations, supply chain managers also are guided by a professional code of ethics, shown in Exhibit 6.C.

Efforts by professional associations to guide their members toward effective resolution of ethical challenges make one point crystal clear: All areas of business, all people in busi-ness, and all levels of authority in business encounter ethics dilemmas from time to time. Ethics issues are a common thread running through the business world. Specific steps that businesses can take to make ethics work are discussed next.

15 “Electronic Toymaker VTech Reaches $650K FTC Settlement Over Child Privacy Rule Violations,” USA Today, January 8, 2018, www.usatoday.com.16 For further discussion of ethics in information technology, see Sara Baase, A Gift of Fire: Social, Legal, and Ethical Issues for Computing and the Internet, 5th ed. (Upper Saddle River, NJ: Pearson, 2017); and Richard A. Spinello, Cyberethics: Morality and Law in Cyberspace, 6th ed. (Burlington, MA: Jones & Bartlett Learning, 2016).17 “Kobe Steel Admits 500 Companies Misled in Scandal,” The Wall Street Journal, October 13, 2017, www.wsj.com; “Kobe Steel Finds More Products Shipped with Quality Issues,” The Wall Street Journal, October 20, 2017, www.wsj.com.

Professional Code of Conduct in Supply Chain Management

Similar to the other professional associations, whose codes of ethical conduct are presented in Exhibits 6.A and 6.B, the Institute for Supply Management (ISM) developed its Principles and Standards of Ethical Supply Chain Management Conduct with Guidelines that emphasize integrity, value, and loyalty across 10 main prin-ciples. The specific principles are avoid impropriety, conflict of interest, and negative influences; be responsi-ble to your employer, suppliers and customers, and social responsibility and sustainability practices; protect confidentiality; avoid reciprocity; follow applicable laws, regulations, and trade agreements; and exhibit pro-fessional competence.

Source: Institute for Supply Management’s Principles and Standards of Ethical Supply Management Conduct with Guidelines from www.instituteforsupplymanagement.org.

Exhibit 6.C

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Making Ethics Work in Corporations

Any business firm can improve the quality of its ethical performance. Doing so requires a company to build ethical safeguards into its everyday routines. This is sometimes called institutionalizing ethics. The percentage of the world’s largest firms (the Fortune 500 or 1000 as reported in Fortune magazine each year) that have adopted these safeguards since the 1980s is shown in Figure 6.2.

A 2015 Ethics Research Center study found that employees in large organizations with an effective ethics and compliance program were less likely to feel pressure to compromise their ethical standards (3 percent), compared to those without effective programs (23 percent). They were also less likely to observe misconduct (33 percent versus 62 percent) and less likely to experience retaliation (4 percent versus 59 percent). Employees at organizations with an effective ethics program were nearly three times more likely to report observed misconduct at work (87 percent versus 32 percent).18

Building Ethical Safeguards into the CompanyManagers and employees need guidance on how to handle day-to-day ethical situations; their own personal ethical compass may be working well, but they need to receive direc-tional signals from the company. Several organizational steps can be taken to provide this kind of ethical awareness and direction.

Lynn Sharp Paine, a Harvard Business School professor, has described two distinct approaches to ethics programs: a compliance-based approach and an integrity-based approach. A compliance-based program seeks to avoid legal sanctions. This

18 “The State of Ethics in Large Companies,” Ethics Research Center, 2015, www.ethics.org.

FIGURE 6.2Percentage of Firms Reporting They Have the Ethical Safeguard

Sources: Center for Business Ethics, “Are Corporations Institutionalizing Ethics?” Journal of Business Ethics 5 (1986), pp. 85–91; Center for Business Ethics, “Instilling Ethical Values in Large Corporations,” Journal of Business Ethics 11 (1992), pp. 863–67; Ethics Resources Center, Ethics in American Business: Policies, Programs and Perceptions (Washington, DC, Ethics Resource Center, 1994); Ethics Resource Center, National Business Ethics Survey: How Employees View Ethics in Their Organizations 1994–2005, (Washington, DC, Ethics Resource Center, 2005); and James Weber and David Wasieleski, “Corporate Ethics and Compliance Programs: A Report, Analysis and Critique,” Journal of Business Ethics 112 (2013), pp. 609–26.

Developed codeof ethics

O�ered ethicstraining

Created ethicso�ce/o�cer

Established ethicshotline

0%

20%

40%

60%

80%

100%

Center for Business Ethics, 1986

Center for Business Ethics, 1992

Ethics Resource Center, 1994

Ethics Resource Center, 2005

Weber and Wasieleski, 2013

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approach emphasizes the threat of detection and punishment in order to channel employee behavior in a lawful direction. Paine also described an integrity-based approach to ethics programs. Integrity-based ethics programs combine a con-cern for the law with an emphasis on employee responsibility for ethical conduct. Employees are told to act with integrity and conduct their business dealings in an environment of honesty and fairness. From these values a company will nurture and maintain business relationships and will be profitable.19

Researchers found that both approaches lessened unethical conduct, although in some-what different ways. Compliance-based ethics programs increased employees’ willingness to seek ethical advice and sharpened their awareness of ethical issues at work. Integrity-based programs, for their part, increased employees’ sense of integrity, commitment to the orga-nization, willingness to deliver bad news to supervisors, and their perception that better decisions were made.20

Top Management Commitment and Involvement

Research has consistently shown that the “tone at the top”—the example set by top executives—is critical to fostering ethical behavior. As Dan Amos, CEO and Chairperson for Aflac states, “Ethics is a mindset, not an option.”21 When senior-level managers and directors signal employees, through their own behavior, that they believe ethics should receive high priority in all business decisions, they have taken a giant step toward improving ethical performance throughout the company.

Whether the issue is sexual harassment, honest dealing with suppliers, or the reporting of expenses, the commitments (or lack thereof) by senior management and the employees’ immediate supervisor and their involvement in ethics as a daily influence on employee behavior are the most essential safeguards for creating an ethical workplace.

Ethics Policies or Codes

As shown in Figure 6.2, many U.S. businesses, especially large firms, have ethics policies or codes. An example of a corporate ethics code is shown in Exhibit 6.D. The purpose of such policies and codes is to provide guidance to managers and employees when they encounter an ethical dilemma. Research has shown significant differences among coun-tries. In the United States and Latin America, ethics policies were found to be primarily instrumental—that is, they provided rules and procedures for employees to follow in order to adhere to company policies or societal laws. In Japan, most policies were a mixture of legal compliance and statements of the company’s values and mission. Values and mission policies were also popular with European and Canadian companies.22 Despite some differ-ences in orientation, codes of ethics are clearly becoming more common.

Typically, ethics policies cover issues such as developing guidelines for accepting or refusing gifts from suppliers, avoiding conflicts of interest, maintaining the security of proprietary information, and avoiding discriminatory personnel practices. Yet, researchers have found that a written ethics policy, while an important contributor, is insufficient by itself to bring about ethical conduct. Companies must circulate ethics policies frequently and widely among employees and external stakeholder groups (for example, customers,

19 Lynn Sharp Paine, “Managing for Organizational Integrity,” Harvard Business Review, March–April 1994, pp. 106–17.20 Gary R. Weaver and Linda Klebe Trevino, “Compliance and Values Oriented Ethics Programs: Influences on Employees’ Attitudes and Behavior,” Business Ethics Quarterly 9 (1999), pp. 315–35.21 “Top CEOs Place High Value on Corporate Ethics and Social Responsibility to Drive Business,” Forbes, September 11, 2017, www.forbes.com.22 Ronald C. Berenbeim, Global Corporate Ethics Practices: A Developing Consensus (New York: Conference Board, 1999).

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3M’s Code of Conduct

Named one of the world’s most ethical companies in 2018 for the fifth straight year by Ethisphere Institute, 3M maintains its reputation for its personal integrity, shared values, and ethical business practices around the world. Their code of conduct emphasizes six main principles:

1. Be Good. Obey the law and 3M’s Code of Conduct.2. Be Honest. Act with uncompromising honesty and integrity.3. Be Fair. Play by the rules, whether working with government, customers, or suppliers.4. Be Loyal. Protect 3M’s interests, assets, and information.5. Be Accurate. Keep complete and accurate business records.6. Be Respectful. Respect one another and our social and physical environment around the world.23

Source: www.3m.com

23 “3M Recognized by Ethisphere Institute as a World’s Most Ethical Company for 5th Consecutive Year,” 3M News Center, Press Release, February 12, 2018, news.3m.com; and 3Msource.mmm.com/businessconduct.24 “The 2014 Ethics and Compliance Program Effectiveness Report,” LRN, 2014, pp. 30–31.25 “Getting Ahead of the Watchdogs: Real-Time Compliance Management, 2018 State of Compliance,” PricewaterhouseCoopers, 2018, www.pwc.com/us/stateofcompliance.

Exhibit 6.D

suppliers, or competitors). Many companies use posters, quick reference guides, and bro-chures to raise awareness and importance of their code.24

Ethics and Compliance Officers

Ethical lapses in large corporations throughout the 1980s prompted many firms to create a new position: the ethics and compliance officer (ECO), or sometimes called the chief compli-ance officer (CCO) or the chief integrity officer (CIO). A second surge of attention to ethics and the creation of ethics offices came in response to the 1991 U.S. Corporate Sentencing Guidelines, discussed in Chapter 5. The wave of corporate ethics scandals in the early 2000s and the passage of the Sarbanes-Oxley Act once again turned businesses’ attention toward entrusting ethical compliance and the development and implementation of ethics programs to an ethics or compliance officer. From 2000 to 2004, the number of members in the Ethics Officer Association doubled from 632 to more than 1,200 members and continued to grow to approximately 1,300 members representing over 400 organizations in over 50 countries by 2015. In 2015, the Ethics and Compliance Officer Association (ECOA), having renamed itself to reflect the growing number of managers charged with both compliance and ethics issues, and the Ethics Resource Center, America’s oldest non-profit organization advancing high ethical standards and practices in public and private institutions, merged into the Ethics and Compliance Alliance. One member of the ECOA is profiled in Exhibit 6.E.

A PricewaterhouseCoopers 2018 global compliance survey reported that 30 percent of the company’s ethics and compliance officers annually review the company’s code of con-duct and 49 percent update their firm’s compliance training and communication programs. Technology also plays a larger role for ethics officers. Half of the ethics and compliance officers surveyed reported they used technology to monitor employees’ compliance with ethics and compliance-related policies and procedures. “To prevent blind spots and flag exceptions as they occur, we must look to automation and technology to conduct real-time data mining and analytics,” explained Karen Griffin, executive vice present and chief com-pliance officer at Mastercard.25

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Meet Brad Smith, Microsoft’s Chief Compliance Officer

Brad Smith serves as Microsoft’s chief compliance officer, as well as its president and chief legal officer. He is responsible for the company’s corporate, external, and legal affairs, leading a team of more than 1,400 busi-ness, legal, and corporate affairs professionals working in 55 countries. These teams are responsible for the company’s legal work, its intellectual property portfolio, patent licensing business, corporate philanthropy, government affairs, public policy, corporate governance, and social responsibility work. Smith plays a key role in representing the company externally and in leading the company’s work on a number of critical issues including privacy, security, accessibility, environmental sustainability, and digital inclusion. Smith joined Microsoft in 1993 before becoming general counsel in 2002. Previously, he spent three years leading the legal and corporate affairs team in Europe and five years serving as the deputy general counsel responsible for legal and corporate affairs outside of the United States.

Sources: From the Leadership page in the Microsoft website, news.microsoft.com.

Exhibit 6.E

Ethics Reporting Mechanisms

In most companies, when employees are troubled about some ethical issue they seek out their immediate supervisor or someone else in senior management. But what if the employee is reluctant, for whatever reason, to raise the issue with their immediate supervi-sor? In that case, they can turn to their company’s ethics reporting mechanisms and call a “helpline” or send an e-mail expressing their concerns, anonymously if they wish. Ethics reporting systems typically have three uses: (1) to provide interpretations of proper ethical behavior involving conflicts of interest and the appropriateness of gift giving, (2) to create an avenue to make known to the proper authorities allegations of unethical conduct, and (3) to give employees and other corporate stakeholders a way to discover general informa-tion about a wide range of work-related topics.

A 2014 study found that 87 percent of firms made at least substantial progress on pro-viding employees with a secure and anonymous channel for reporting concerns. Another study found that more than one-third of the firms surveyed reported that the volume of calls to the organization’s reporting mechanism increased somewhat or a great deal in the last two years and only 12 percent of firms reported a decline in calls.26

While more and more employees are willing to use their companies’ ethical reporting mechanisms, a number of challenges remain. Executives tend to use the helpline more often than those farther down the organizational chart. The Ethics Resource Center study found that middle managers were “an area of vulnerability within companies” since they were less likely to use the helpline. The report also discovered that rates of helpline usage were lower in foreign-owned companies than in their U.S. counterparts. Yet, many busi-nesses described greater success when employees use the company’s helpline/hotline and were better able to avoid more serious ethical violations. Technology seemed to be the key.

A recent trend in corporate governance involves the use of ethics ambassadors, or liaisons, whose role is to promote and spread compliance and ethics messages throughout an organization. Most liaison programs focus on risk assessment and encouraging employees to communicate ethical infractions when they take place. New liaison programs go beyond this approach and try to design ways to better com-municate the ethics message to employees despite various competing sub-cultures within a given organization.27

26 “2014 LRN Study,” Ibid., p. 30; and “Helpline Calls and Incident Reports,” Society of Corporate Compliance, 2014.27 “A Different Approach to Ethics Liaison Programs,” Ethikos, May/June 2016, pp. 1–4.

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But no matter how advanced the technology used in an ethics and compliance program, the ethics and compliance officer never really knows what to expect when monitoring calls to the helpline, as the following example showed:

“Oh, boy, this is one of those days,” thought the ethics officer at a midsized manu-facturing firm when she received a call on the ethics helpline that a toilet in the com-pany’s administration building was overflowing. She called maintenance and they found that someone had clogged up the toilet drain. When the same call was received a week later, the ethics officer knew she had to investigate. Through interviews with personnel who worked on that floor, she discovered that the supervisor had refused to allow workers to take bathroom breaks when needed, and an employee had boasted that “he was going to get even with his supervisor and plug up the toilet” to attract attention to unsafe working conditions. The call about the overflowing toilet and sub-sequent investigation allowed the ethics officer to address the real issue, counsel the supervisor, and repair the deteriorating working conditions at her company.28

Ethics Training Programs

Another step companies can take to build in ethical safeguards is to offer employee ethics training. This is generally the most expensive and time-consuming element of an ethics pro-gram. Studies have shown that only 20 to 40 percent of small businesses formally offer ethics training to their employees, often using less formal ways to communicate ethical values and procedures. Larger businesses, by contrast, usually conduct regular ethics training. As shown in Figure 6.3, businesses have several motivations for developing employee ethics training programs. In general, larger and more mature organizations are more inclined to believe that a culture of ethics encourages employees to speak up; whereas, small- and medium-size organizations are more likely to define training as an alignment with regulatory guidelines.29

As shown in Figure 6.3, most ethics and compliance training programs focus on making sure employees know what the law requires and the company expects. Some firms have gone further, exploring how individuals can contribute to strengthening the firm’s ethical culture.

An ethics training seminar sponsored by the Italian Cultural Institute in Copenhagen focused on the importance of individual creativity in making company cultures more ethical. Speakers at this cross-country congress of corporate governance professionals championed the great capacity of human ingenuity to facilitate ethical behavior in orga-nizations. For example, sessions at this conference included “The Responsibility of Indi-viduals and Organizations for Community Development and Progress” and “Innovative Approaches to Sustainable Development: From the Education of New Generations to the Processes for the Integration of Social Responsibility into Business Models.”30

One approach to ethics training in organizations that has become increasingly popular is known as “giving voice to values.” This approach is described in Exhibit 6.F.

The effectiveness of the ethics and compliance program is important to executives. Companies used to conduct formal ethics audits to ensure the quality of these programs, but today most firms have turned to a company-wide risk assessment audit to determine

28 Based on an interview with an ethics and compliance officer who requested that her firm and her identity remain anonymous.29 See “Is Your Ethics and Compliance Training Really Preparing Your Employees?” Compliance and Ethics Professional, March–April 2012, www.corporatecompliance.org; and “2017 Ethics & Compliance Training Benchmark Report,” NAVEXGlobal (Lake Oswego, OR: NAVEXGlobal, 2017).30 “Culture and Creativity as Key to Development Danish and Italian Applications: Ideas that Change the World,” conference sponsored by the Italian Cultural Institute in Copenhagen, www.fiveonlus.eu.

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Giving Voice to Values

Giving Voice to Values (GVV) was created Mary Gentile as an innovative approach to values-driven leadership development in business education and the workplace. As Gentile explained, “Rather than a focus on ethical analysis, the Giving Voice to Values curriculum focuses on ethical implementation and asks the questions: “What if I were going to act on my values? What would I say or do? How could I be most effective?” By 2018, this program was piloted in over 1,000 schools, companies, and other organizations on every continent. The GVV curriculum offers practical exercises, cases, modules, scripts, and teaching plans for handling a wide range of ethical conflicts in the workplace. The challenge for many moral managers is acting effectively on their beliefs in the day-to-day life of their organizations. Educator Mary Gentile tries to empower business leaders and managers by enabling them to give voice to—and to act on—their values at work. Gentile’s Giving Voice to Values program believes that the key is knowing how to act on your values despite opposing pressure. “GVV starts from the premise that most of us already want to act on our values, but that we also want to feel that we have a reasonable chance of doing so effectively and successfully. This pedagogy and curriculum are about raising those odds,” said Gentile.

Source: From www.darden.virginia.edu/ibis/initiatives/giving-voice-to-values.

Exhibit 6.F

FIGURE 6.3Objectives and Motivations for Employee Ethics Training Programs

Source: “2017 Ethics & Compliance Training Benchmark Report,” NAVEXGlobal, 2017, Lake Oswego, OR: NAVEXGlobal).

0 10 20 30 40 50 60 70

Create a culture of ethics and respect

Improve employee understanding ofcompliance priorities and obligations

Prevent future issues or misconduct

Meet audit or certification requirements

Keep information secure and protected

Improve the skills of seniorleaders and managers

Reinforce tone at the top

Improve training e�ectiveness bydeploying courses that are higher quality

Establish strong legal defenses

Comply with laws and regulations 59%

57%

47%

39%

21%

20%

14%

14%

13%

8%

the effectiveness of the ethics program along with other risks. Experts believe that inte-grating various ethics safeguards into a comprehensive program is critically important and minimizes the firm’s risk. When all five components discussed in this chapter—top management commitment, ethical policies or codes, compliance officers, reporting mech-anisms, and training programs—are used together, they reinforce each other and become more effective.

As seen in Chapter 5, Ethisphere’s “The World’s Most Ethical Companies” financially outperformed the S&P 500 and FTSE 1000 every year since 2005. Figure 6.4 shows the 13 companies that have made the World’s Most Ethical Companies list each year from 2007–2017.

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Ethics in a Global Economy

Doing business in a global context raises a host of complex ethical challenges. One exam-ple of unethical activity is bribery, a questionable or unjust payment often to a government official to ensure or facilitate a business transaction. The act of bribery introduces an eco-nomic force that is not based on the product or service’s quality or other sales characteris-tics, therefore the element of bribery corrupts the economic exchange.

Bribery is found in nearly every sector of the global marketplace, but is more common in some countries than others.

A Berlin-based watchdog agency, Transparency International, annually publishes a sur-vey that ranks countries by their level of corruption, as perceived by executives and the public. In the 2017 survey, countries where having to pay a bribe was least likely included New Zealand, Denmark, Finland, Norway, and Switzerland. At the other end of the index, Syria, South Sudan, and Somalia were considered the world’s most corrupt countries, along with Afghanistan, Yemen, Sudan, Libya, and North Korea. The United States was tied for 16th on the list of 180 countries, with Canada 8th, Singapore and Sweden tied for 6th, the United Kingdom tied for 8th with the Netherlands, India tied for 81st with Ghana, China tied for 77th with Serbia and Suriname, and Russia tied for 135th.31

In some settings, corruption is so common as to be almost unavoidable. Transparency International interviewed over 160,000 adults from 119 countries around the globe from March 2014 to January 2017, to discover regional differences in corruption. This study found that one in four people claim to have paid a bribe when accessing public services in the 12 months prior to the survey. On average, the European Union had the lowest reported bribery rate at 9 percent compared to an average rate of 30 percent in the Middle East, North Africa, and the Commonwealth of Independent States in Eurasia. Latin American

31 For a complete list of all countries according to their perceived level of corruption, see https://www.transparency.org/news/feature/corruption_perceptions_index_2017.

These firms were ranked among the highest ethical firms each year from 2007 through 2017.

AFLAC (insurance)

Deere and Company (industrial manufacturing)

Ecolab (chemicals)

Fluor Corporation (engineering)

General Electric (diversified)

International Paper (paper products)

Kao Corporation (consumer products)

Milliken & Company (industrial manufacturing)

PepsiCo (food & beverage)

Starbucks Coffee Company (restaurants)

Texas Instruments (computers)

UPS (transportation)

Xerox (computers)

FIGURE 6.4The World’s Most Ethical Companies and Their Industries, According to Forbes Magazine

Source: “The World’s Most Ethical Companies, Forbes, March 14, 2017, www.forbes .com.

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and Asia Pacific regions were close behind with average bribery rates up to 29 percent. A survey in Nigeria found that Nigerians paid about $4.6 billion in bribes each year. Accord-ing to a 2017 study by the Prosecutor General’s Office in Russia, 25 percent of Russians admitted to having paid a bribe in the prior year.32

Bribery has significant economic, as well as ethical, consequences. Mythili Raman, a former senior executive at the Department of Justice explained,

“Our fight against foreign corruption is critical for so many reasons. The corrosive effects of transnational corruption are felt not just overseas, but also here in the United States. Although we may not experience as acutely, or as personally, some of the consequences of foreign bribery, such as hospitals or roads that go unbuilt because infrastructure funds are siphoned off by a corrupt official, American com-panies are harmed. They are denied the ability to compete in a fair and transparent marketplace. Instead of being rewarded for their efficiency, innovation and honest business practices, U.S. companies suffer at the hands of corrupt governments and lose out to corrupt competitors.”33

The following examples further demonstrate the harmful effects of bribery.

∙ Brazilian state-run oil company Petroleo Brasileiro SA announced that their corrup-tion scandal contributed to their stock shares dropping 6.2 billion reais ($2.1 billion) in value and led to a revised accounting charge of 44.6 billion reais ($14.8 billion) for 2014 after determining that assets were overvalued on its balance sheet.

∙ Alstom, a French conglomerate, plead guilty and paid $772 million to the United States for bribing Indonesian government officials with more than $4 billion to win power contracts from 2000 to 2011. Since Alstom has U.S. affiliate companies that are head-quartered in Connecticut, it is governed by United States laws, specifically the Foreign Corrupt Practices Act (the FCPA is introduced later in the chapter).

∙ Rolls-Royce, the luxury automobile, jet and marine engine manufacturer, settled a long-term corruption investigation by agreeing to pay U.S. and British government authori-ties more than $800 million in penalties. The company admitted in 2017 to engaging in corrupt business dealings overseas years earlier.34

Efforts to Curtail Unethical PracticesDespite the prevalence of bribery, both companies and countries have taken a strong stand against it.

Huguette Labelle, the chair of Transparency International, stated, “People believe they have the power to stop corruption, and the number of those willing to combat the abuse of power, secret dealings, and bribery is significant.” Seventy-one percent of respondents to a

32 “People and Corruption: Citizens’ Voices from Around the World,” Transparency International, 2017, www.transparency .org; “Corruption Currents: Study Says Nigerians Pay $4.6 Billion in Bribes Per Year,” The Wall Street Journal, August 17, 2017, www.wsj.com; and “A Quarter of Russians Pay Bribes, Anonymous Survey Says,” Moscow Times, December 11, 2017, www.moscowtimes.com.33 “Acting Assistant Attorney General Mythili Raman Speaks at the Global Anti-Corruption Compliance Congress,” Ethikos, May/June 2014, pp. 1–2.34 “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges,” The Wall Street Journal, April 22, 2015, www.wsj.com; “Alstom to Pay U.S. Record $772 Million in Fine in Bribery Scheme,” The New York Times, December 22, 2014, www.nytimes.com; and, “Rolls-Royce to Pay More than $800 Million to Settle Corruption Probe,” The Wall Street Journal, January 14, 2017, www.wsj.com.

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Dow Jones Anti-Corruption survey said their companies had delayed or stopped activities with business partners over concerns about breaking anti-corruption regulations.

In 2017, Samsung Electronics’ vice-chairman, Lee Jae-yong, was convicted of brib-ery and sentenced to a five-year jail sentence. Lee was found guilty of bribing South Korea’s president and of involvement in a corruption scandal that had com-promised the previous government regime in his country. Allegedly, Lee had attempted to bribe President Park Geun-hye to get her to support business deals important to Samsung. The company admitted that it was complicit in the agree-ment to pay a close friend of Park $38 million. Prosecutors claimed that some of the payments made by Samsung were to guarantee that certain business deals were made for Samsung’s benefit. Park was later removed from political office and was tried and convicted of bribery and coercion. This bribery scandal spanned both cor-porate and political boundaries.35

Numerous efforts are under way to curb unethical business practices throughout the world. The most common method is government intervention and regulation.

Since 1977, the U.S. Foreign Corrupt Practices Act (FCPA) has prohibited executives of U.S.-based companies or businesses operating in the U.S. from paying bribes to govern-ment officials, political parties, or political candidates. To achieve this goal, the FCPA requires U.S. companies with foreign operations to adopt accounting practices that ensure full disclosure of the company’s transactions. In 2014, companies paid $1.56 billion to resolve FCPA cases. In 2015, companies paid $133 million; in 2016, $2.48 billion; and, in 2017, $1.92 billion.36

The United Kingdom’s Bribery Act was passed in 2010. Some believed it was even more stringent than the U.S.’s FCPA. The U.K. Bribery Act differs from the FCPA in that it

∙ prohibits the bribery of another person and receiving or accepting a bribe, whereas the FCPA only prohibits bribery of government officials. Bribery of a private business executive would be illegal under British, but not U.S., anticorruption law.

∙ does not require that the improper offer, promise, or payment be made “corruptly,” as the FCPA does require evidence of the intent to corrupt.

∙ does not provide exemptions for “facilitating payments” or the defense that there are reasonable and bona fide contractual or promotional expenses, as the FCPA does.

∙ contains a strict liability offense for failure to prevent bribery by commercial organiza-tions; the FCPA does not.37

Other governments have drafted and passed new legislation to combat corruption and bribery. In 2013, Brazil, one of the world’s top 10 largest economies, approved an anti-bribery law that imposed civil and criminal penalties on firms for acts committed against local and foreign government officials. Fines can be as high as 20 percent of the compa-ny’s annual gross revenues. India joined Brazil in 2014 by passing its own anticorruption legislation.

The Mexican government approved a major anticorruption reform bill in 2016 that revised 14 constitutional articles, creating two new laws and changing five others. Backed by civil society groups, this reform represented the largest and broadest attempt to address

35 “Samsung Heir Lee Jae-yong Convicted of Bribery, Gets Five Years in Jail,” The Wall Street Journal, August 25, 2017, www.wsj.com.36 “2017 FCPA Enforcement Index,” The FCPA Blog, January 2, 2018, www.fcpzblog.com.37 Bribery Act 2010, 2010, www.legislation.gov.uk/ukpga/2010/23/contents.

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rampant corruption in the country. Among the areas addressed by the new measures, dec-laration of assets by public contractors is now mandatory.38

While enforcement is often spotty, some countries have enforced their bribery laws aggressively. China imposed a $487 million fine on British pharmaceutical GlaxoSmith-Kline (GSK) for bribery, after Glaxo reportedly used payoffs to persuade hospitals and doctors to administer or sell Glaxo pharmaceuticals to their patients.39

While governmental efforts continue to emerge, a business scholar argued that “a legalistic approach, by itself, is unlikely to be effective in curbing bribery,” since culture has such a strong influence. Most effective in combating bribery may be an integrative approach of economic development, social investment in education, and business-friendly policies, in addition to anticorruption laws and punishments to combat bribery.40

Businesses of all sizes and from many diverse industries around the world have attempted to respond to the increasing pressure to create an ethical environment at work. As discussed, the organization’s culture and ethical work climate play a central role in pro-moting ethics at work and encouraging employees to act ethically. Businesses have imple-mented many ethical safeguards to create effective ethics programs. Challenges remain as organizations expand their operations globally and encounter a complex network of different customs and regulations.

38 “Mexico Wins: Anti-Corruption Reform Approved,” Forbes, July 18, 2016, www.forbes.com.39 “Finally, Companies in Brazil Can Be Prosecuted for Corruption,” Transparency International, July 8, 2013, blog.transparency.org; “Indian: New Anti-Corruption Law,” The Law Library of Congress, January 8, 2014, www.loc.gov; and “China Fines GlaxoSmithKline Nearly $500 Million in Bribery Case,” The New York Times, September 19, 2014, www.nytimes.com.40 Rajib Sanyal, “Determinants of Bribery in International Business: The Cultural and Economic Factors,” Journal of Business Ethics 59 (2005), pp. 139–45.

∙ A company’s culture and ethical climate tend to shape the attitudes and actions of all who work there, sometimes resulting in high levels of ethical behavior and at other times contributing to less desirable ethical performance.

∙ Not all ethical issues in business are the same, but ethical challenges occur in all major functional areas of business. Professional associations for each functional area often attempt to provide a standard of conduct to guide practice.

∙ Companies can improve their ethical performance by creating a values-based ethics program that relies on top management leadership and organizational safeguards, such as ethics policies or codes, ethics and compliance offices and officers, ethics reporting mechanisms, and ethics training programs.

∙ Companies that have a comprehensive, or multifaceted, ethics program often are better able to promote ethical behavior at work and avoid unethical action by employees.

∙ Ethical issues, such as bribery, are evident throughout the world, and many international agencies and national governments are actively attempting to minimize such unethical behavior through economic sanctions and international codes.

Summary

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Key Terms ethics reporting mechanisms, 126U.S. Foreign Corrupt Practices Act, 131

bribery, 129corporate culture, 116employee ethics training, 127ethical climate, 117

ethics and compliance officer, 125ethics policies or codes, 124

Internet Resources

thecro.com CR: Corporate Responsibility Magazinewww.dii.org Defense Industry Initiative on Business Ethics and Conductecoaconnects.theecoa.org Ethics and Compliance Initiative Connects (Ethics and

Compliance Officer Association)www.ethicaledge.com Ethics and Policy Integration Centreethisphere.com Ethisphere Institutewww.ethics.org Ethics and Compliance Initiative Connects (Ethics Resource

Center)www.globalethics.org Institute for Global Ethicswww.saiglobal.com SAI Globalwww.business-ethics.org International Business Ethics Institutewww.corporatecompliance.org Society of Corporate Compliance and Ethicswww.transparency.org Transparency International

Discussion Case: Equifax’s Data BreachThe credit reporting company Equifax was at the center of a massive data breach affecting over 145 million customers. In 2017, hackers took advantage of a vulnerability in Equi-fax’s website software and stole the personal information, including names, addresses, and Social Security numbers, of as many as 145 million Americans. A separate but related incident at Equifax involved 15 million British citizens who had their records violated from 2011 to 2016. The failure of Equifax’s internal reporting and control measures led to a widespread violation of peoples’ rights to the privacy of their personal information and became a huge public relations crisis for the company.

Equifax’s top lawyer, John Kelley, was investigated by the board of directors for his pos-sible involvement in a cover-up of the hack and his mishandling of the situation. Kelley was responsible for approving the sales of company stock by executives after the breach was dis-covered, but before it had been revealed to the public. Upon the disclosure of the breach, company stock price fell 14 percent. Investors sold approximately $4.5 billion (25 percent) of the company’s market value after the hack was made public.

More than 10 million Americans had their driver’s license data exposed during the hack. Many people who had provided their driver’s license information to the company were simply verifying their information in order to receive credit reports and ratings from Equifax. Some had entered their information on the company’s web page in an effort to settle credit report disputes. The credit report dispute web page had been particularly vul-nerable to security breaches. Equifax CEO Richard Smith admitted during congressional

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hearings that he and other executives had been aware of the security weaknesses, but that a single employee at the firm had not properly heeded security warnings and did not ensure the implementation of software fixes. Smith added that there was a failure in their software systems designed to scan for the absence of “patches” necessary to protect pri-vate information.

Other internal control mechanisms at Equifax appeared to have been either ignored or dysfunctional. Frederick Lemieux, director of Georgetown University’s graduate pro-gram in Applied Intelligence, blamed the breach on what he called “passive complicity” in the firm’s culture. (Complicity means being involved in wrongdoing; passive complicity implies that executives were guilty of wrongdoing by not actively preventing it.) That top executives seemed to worry more about their own stock portfolios than the security of their customers’ personal information was troubling to many ethics experts. Observers also crit-icized the company for its delay in going public about the breach. Finally, it appeared that knowledge of the potential for hacking was isolated to only one employee. A more robust system where multiple individuals were responsible for preventing a problem might have avoided the hack.

Unlike banks, credit reporting agencies are relatively lightly regulated, and they typi-cally rely on internal systems to maintain security. Lemieux stated, “there is no incentive to comply with the best industry practices and no incentives to spend [funds on these pro-grams] because you’re not accountable for it.” He noted that credit reporting agencies did not face the same financial or legal consequences that banks or other businesses, like Tar-get or Home Depot, encountered when hacked. Pamela Pressman, president of the Center for Responsible Enterprise and Trade, said that the breach should remind Equifax and other firms to train their employees and raise awareness about proper “cyber hygiene . . . ensur-ing that your employees, your contractors, your vendors—those people that have access to your network and your data—understand their role in protecting the network and protect-ing the data.”

The cyberattack on Equifax was potentially more dangerous than other hacks in recent history because credit-reporting agencies played a significant role in determining who received financing and ultimately, how much credit they received. The data collected by these agencies was needed for applying for credit cards, loans, and background checks. The attack was conducted in one major maneuver, which facilitated the hackers’ ability to use the data for their own purposes.

This breach could lead to problems for small financial institutions, like community banks and credit unions, which typically relied on information collected by the credit-reporting firms to determine their loan decisions. Larger financial institutions were more likely to collect additional information from applicants, which made them less vulnerable.

Days after the company discovered the breach, CFO John Gamble and two other top Equifax executives reportedly sold a combined $1.8 million worth of shares of the com-pany, but all three denied knowing of the hack when they made the transactions, despite evidence to the contrary. CEO Smith stepped down from his post following these events. Smith had been in charge since 2005. The Federal Bureau of Investigation investigated Equifax’s handling of the situation as well as the actions of the top executives. When testi-fying before Congress, Smith downplayed the severity of the situation and the factors that facilitated the breach. He repeatedly blamed an IT worker who did not implement software remedies after Equifax executives had been warned of possible holes in Equifax’s website security by the U.S. Department of Homeland Security.

Equifax hired FireEye’s Mandiant group to investigate the breach. The Mandiant report determined that approximately 2.5 million additional U.S. consumers were potentially

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impacted, for a total of 145.5 million. Mandiant did not identify any evidence of additional or new attacker activity or any access to new databases or tables. Instead, this additional population of consumers was confirmed during Mandiant’s completion of the remaining investigative tasks and quality assurance procedures built into the investigative process. The review also has concluded that there is no evidence the attackers accessed databases located outside of the United States.

Equifax claimed they learned of hacking activity in May 2017, but the Mandiant report said the hack started two months earlier. Company executives did not formally disclose the breach until September 2017, however. They admitted that the hack was conducted from May through July 2017. The identity of the hackers was never disclosed.

Sources: “The Morning Risk Report: Equifax Breach Could Spur New Round of Training,” The Wall Street Journal, September 11, 2017, www.wsj.com; “How to Explain the Equifax Breach? Start with the Culture,” Georgetown University, September 15, 2017, ses.georgetown.edu; “Equifax CEO Richard Smith to Exit Following Massive Data Breach,” The Wall Street Journal, September 26, 2017, www.wsj.com; “At the Center of the Equifax Mess: Its Top Lawyer,” The Wall Street Journal, October 1, 2017, www.wsj.com; “2.5 Million More People Potentially Exposed in Equifax Breach,” The New York Times, October 2, 2017, www.nytimes.com; “Equifax Announces Cybersecurity Firm Has Concluded Forensic Investigation Of Cybersecurity Incident,” Equifax website, October 2, 2017, investor.equifax.com; and “Equifax Breach Caused by Lone Employee’s Error, Former CEO Says,” The New York Times, October 4, 2017, www.nytimes.com.

Discussion Questions

1. Do you think the company reacted appropriately upon learning about the breach?2. What could Equifax have done differently to prevent the cyberattack?3. What type(s) of ethical climate existed at Equifax, and did this contribute to the hacking

issues there?4. What changes should managers and the board of directors make now to reduce to likeli-

hood of an incident like this from occurring in the future?5. What types of ethics training would you recommend for Equifax employees in the future

to prevent such corrupt behavior?

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P A R T T H R E E

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Business and Public Policy

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C H A P T E R S E V E N

Business–Government RelationsGovernments seek to protect and promote the public good and in these roles establish rules under which business operates in society. Therefore, a government’s influence on business through pub-lic policy and regulation is a vital concern for managers. Government’s relationship with business can be either cooperative or adversarial. Various economic or social assistance policies significantly affect society, in which businesses must operate. Many government regulations also impact business directly. Managers must understand the objectives and effects of government policy and regulation, both at home and abroad, in order to conduct business in an ethical and legal manner.

This Chapter Focuses on These Key Learning Objectives:

LO 7-1 Understanding why sometimes governments and business collaborate and other times work in opposition to each other.

LO 7-2 Defining public policy and the elements of the public policy process.

LO 7-3 Explaining the reasons for regulation.

LO 7-4 Knowing the major types of government regulation of business.

LO 7-5 Identifying the purpose of antitrust laws and the remedies that may be imposed.

LO 7-6 Comparing the costs and benefits of regulation for business and society.

LO 7-7 Examining the conditions that affect the regulation of business in a global context.

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Uber Technologies, a U.S.–based international transportation network company founded in 2009, developed a mobile app that allowed consumers to submit a trip request, which was then routed to one of its drivers. By 2018, the service was available in 84 countries and nearly 800 cities worldwide. Yet, Uber encountered serious opposition when it attempted to expand into the European Union. The Employment Appeal Tribunal ruled in 2017 that the 50,000 Uber drivers in the United Kingdom must be considered employees, not indepen-dent contractors, as Uber had argued. This ruling meant that the drivers qualified for vari-ous employee rights such as paid vacations. Experts stated that this decision could serve as a bellwether for other employment lawsuits against Uber in the United States, Canada, and other countries, potentially jeopardizing the company’s business model globally.1

In 2016, the U.S. Food and Drug Administration (FDA) created tough regulatory standards for the e-cigarette industry, including banning all sales to anyone under 18 years of age, requir-ing package-warning labels, and making all products—even those currently on the market— subject to government approval. This was seen as a devastating blow to the fast-growing $3.5 billion e-cigarette industry, which was largely unregulated and dominated by small man-ufacturers and vape shops. Most experts predicted that this was only the first step and that the FDA would soon move to regulate the e-cigarette industry further, targeting advertising and e-cigarette flavors, such as cotton candy and watermelon, which may appeal to youth.2

What prompted or compelled governments to become more involved in the status of employees or the sale of a consumer product? How do these governments’ actions affect businesses and what they are permitted to do? How did these actions affect competition or society and the public’s health? Did governments’ involvement promote or harm compa-nies or allow other firms to maintain their competitive advantage? Were these efforts by the governments necessary and effective, or can this only be answered in time?

Governments create the conditions that make it possible for businesses to compete in the modern economy. As shown in the opening examples, governments can act in dramatic ways to provide or limit opportunities for businesses and control business activities to better ensure the public’s health. In good times and bad, government’s role is to create and enforce the laws that balance the relationship between business and society. Governments also hold the power to grant or refuse permission for many types of business activity. Even the largest multinational companies, which operate in dozens of countries, must obey the laws and public policies of national governments.

This chapter considers the ways in which government actions impact business through the powerful twin mechanisms of public policy and regulation. The next chapter addresses the related question of actions business may take to influence the political process.

How Business and Government Relate

The relationship between business and government is dynamic and complex. Understand-ing the government’s authority and its relationship with business is essential for managers in developing their strategies and achieving their organization’s goals.

Seeking a Collaborative PartnershipIn some situations, government may work closely with business to build a collaborative partnership and seek mutually beneficial goals. They see each other as key partners in the relationship and work openly to achieve common objectives.

1 “Uber Suffers Setback as U.K. Court Rules Its Drivers Should Have Workers’ Rights,” The Wall Street Journal, November 10, 2017, www.wsj.com.2 “FDA to Regulate E-Cigarettes, Ban Sales to Minors,” The Wall Street Journal, May 5, 2016, www.wsj.com.

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The basis for this cooperation may be at the core of the nation’s societal values and customs. In some Asian countries, society is viewed as a collective family that includes both government and business. Thus, working together as a family leads these two powers to seek results that benefit both society and business. In Europe, the relationship between government and business often has been collaborative. European culture includes a sense of teamwork and mutual aid. Unions, for example, are often included on administrative boards with managers to lead the organization toward mutual goals through interactive strategies. One example of government–business collaboration is shown next.

While many businesses were requesting and supporting While House directives to eliminate or decrease regulatory control, quite the contrary drone makers and opera-tors were clamoring for more federal rules. They envisioned an increase in the regula-tory climate as an opportunity to open up the skies for unmanned aircraft. These businesses pledged to cooperate with regulators to make that happen. In response to these pressures, the Federal Aviation Administration gave approval for small, remotely piloted aircraft weighing up to 55 pounds to operate during daylight hours, up to an altitude of 400 feet and within sight of operators on the ground. Drone maker and operators took this opportunity to expand their operations. Unlike some other businesses that did not welcome government oversight, “we want and need rules and regulations to understand how we can fly drones commercially for expanded opera-tions,” said Gretchen West, a senior legal advisor to the drone industry.3

In this instance, both the Federal Aviation Administration and drone makers agreed on the need for regulation, leading to collaboration between the government and business.

Working in Opposition to GovernmentIn other situations, government’s and business’s objectives are at odds, and these conflicts result in an adversarial relationship where business and government tend to work in oppo-sition to each other.4

On three difference occasions, Tesla released relevant information to the National Transportation Safety Board (NTSB) to assist the government agency in its investi-gation of the cause of a crash of its semiautonomous driving Tesla Model S vehicle. But a few weeks later, the company withdrew from its formal agreement to cooper-ate with the NTSB after the preliminary investigation appeared to target the driver in the car, who died from injuries sustained in the accident. “Today, Tesla withdrew from the party agreement with the NTSB because it requires that we not release information about Autopilot to the public, a requirement which we believe funda-mentally affects public safety negatively,” explained a Tesla company press release. Tesla seemed upset that it could be a year or longer before the government investi-gators reached their conclusions, and meanwhile the company would be subject to negative publicity without an opportunity to respond with their side of the story.5

In this instance, a business concluded that cooperation with the government was not in its best interest.

3 “Unlike Most Industries, Drone Makers and Operators Clamor for Federal Regulation,” The Wall Street Journal, September 17, 2017, www.wsj.com.4 The “collaborative partnership” and “in opposition” models for business–government relations is discussed in “Managing Regulation in a New Era,” McKinsey Quarterly, December 2008, www.mckinseyquarterly.com.5 “Tesla Withdraws Formal Cooperation with Probe of Fatal Crash, Will Still Assist Investigators,” The Wall Street Journal, April 12, 2018, www.wsj.com.

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Why do businesses sometimes welcome government regulation and involvement in the private sector, and other times oppose it? Companies often prefer to operate without gov-ernment constraints, which can be costly or restrict innovation. But regulations can also help business, by setting minimum standards that all firms must meet, building public con-fidence in the safety of a product, creating a fair playing field for competition, or creating barriers to entry to maintain a business’s competitive advantage. How a specific company reacts to a specific government policy often depends on their assessment of whether they would be helped or hurt by that rule.

In short, the relationship between government and business can range from one of coop-eration to one of conflict, with various stages in between. Moreover, this relationship is constantly changing. A cooperative relationship on one issue does not guarantee coopera-tion on another issue. The stability of a particular form of government in some countries may be quite shaky, while in other countries the form of government is static but those in power can change unexpectedly or government leaders can change on a regular basis. The business–government relationship is one that requires managers to keep a careful eye trained toward significant forces that might alter this relationship or to promote forces that may encourage a positive business–government relationship.6

Legitimacy IssuesWhen dealing with a global economy, business may encounter governments whose author-ity or right to be in power is questioned. Political leaders may illegally assume lawmaking or legislative power, which can become economic power over business. Elections can be rigged, or military force can be used to acquire governmental control.

Business managers may be faced with the dilemma of whether to do business in such a country, where their involvement would indirectly support this illegitimate power. Some-times, they may choose to become politically active, or refuse to do business in this coun-try until a legitimate government is installed.

Businesses can also influence the ability of a government leader or group of leaders to maintain political power. For example, companies can decide to withdraw operations from a country, as many U.S. firms did from South Africa in the 1970s to protest the practice of apartheid (institutionalized racial segregation). Some believe that the economic isolation of South Africa contributed to the eventual collapse of the apartheid regime. Governments may also order companies not to conduct business in another country because of a war, human rights violations, or lack of a legitimate government. These orders are called eco-nomic sanctions. As of 2018, the United States had imposed economic sanctions on the Balkans, Belarus, Myanmar, Cote D’Ivoire (Ivory Coast), Cuba, Democratic Republic of Congo, Iran, Iraq, Liberia, North Korea, Sudan, Syria, and Zimbabwe.7

Government’s Public Policy Role

Government performs a vital and important role in modern society. Although vigorous debates occur about the proper size of programs government should undertake, most peo-ple agree that a society cannot function properly without some government activities. Cit-izens look to government to meet important basic needs. Foremost among these are safety and protection provided by the military, homeland security, police, and fire departments.

6 See George Lodge, Comparative Business–Government Relations (Englewood Cliffs, NJ: Prentice Hall, 1990) and Tom Leh-man, “Six Arguments against Government Regulations,” www.capitalism.com.7 See the Treasury Department’s Office of Foreign Asset Control, www.treasury.gov.

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These are collective or public goods, which are most efficiently provided by government for everyone in a community. In today’s world, governments are also expected to provide economic security and essential social services, and to deal with the most pressing social problems that require collective action, or public policy.

Public policy is a plan of action undertaken by government officials to achieve some broad purpose affecting a substantial segment of a nation’s citizens. Public policy, while differing in each nation, is the basic set of goals, plans, and actions that each national government follows in achieving its purposes. Governments generally do not choose to act unless a substantial segment of the public is affected and some public purpose is to be achieved. This is the essence of the concept of governments acting in the public interest.

The basic power to make public policy comes from a nation’s political system. In dem-ocratic societies, citizens elect political leaders who can appoint others to fulfill defined public functions ranging from municipal services (e.g., water supplies, fire protection) to national services, such as public education or homeland security. Democratic nations typi-cally spell out the powers of government in the country’s constitution.

Another source of authority is common law, or past decisions of the courts, the original basis of the U.S. legal system. In nondemocratic societies, the power of government may derive from a monarchy (e.g., Saudi Arabia), a military dictatorship (e.g., Eritrea), or reli-gious authority (e.g., the mullahs in Iran). These sources of power may interact, creating a mixture of civilian and military authority. The political systems in Russia, Libya, Tuni-sia, and other nations have undergone profound changes in recent times. And democratic nations can also face the pressures of regions that seek to become independent nations exercising the powers of a sovereign state, as has Canada with the province of Quebec.

Elements of Public PolicyThe actions of government in any nation can be understood in terms of several basic ele-ments of public policy. These are inputs, goals, tools, and effects. They will be illustrated using the example of distracted driving.

Public policy inputs are external pressures that shape a government’s policy decisions and strategies to address problems. Economic and foreign policy concerns, domestic politi-cal pressure from constituents and interest groups, technical information, and media atten-tion all play a role in shaping national political decisions. For example, a growing recognition of the dangers of distracted driving has pressured many state and local governments to ban or regulate the use of various electronic devices by drivers. Distracted driving may occur when a driver’s attention is diverted by personal grooming tasks, adjusting music or naviga-tion settings, eating, reading, and assorted other activities. It has become an even greater threat to driver and passenger safety as technologies have advanced. More and more drivers are now able to make or receive calls, send text messages, and even browse the Internet—all while driving a car at high speeds, in heavy traffic, or during bad weather conditions.8

According to an annual National Safety Council study, for the first time since 2007 more than 40,000 people died in motor vehicle crashes in a single year. Experts point to numerous causes for this record-breaking data, but typically focus on one important potential contributor: distracted driving. According to a national Consumer Reports survey of 622 licensed drivers, 52 percent admitted to engaging in distracting activities while driving, even though they knew it was wrong. Of those drivers surveyed, 41 percent admitted using their hands to send a text, 37 percent to playing music on a smartphone, and 8 percent to watching videos on

8 “Windshield Devices Bring Distracted Driving Debate to Eye Level,” The New York Times, May 29, 2015, www.nytimes.com.

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their phone while driving. Teens were particularly vulnerable. According to data from the Insurance Institute for Highway Safety, 60 percent of teen drivers involved in fatal crashes were distracted immediately before the accident. In a survey con-ducted by Zendrive Research of 3 million drivers globally, they found that drivers used their phones during 88 percent of their trips. An Erie Insurance study found that 15 percent of drivers admitted they had engaged in “romantic encounters” while behind the wheel and 9 percent said they had changed clothes while driving.9

In response to this growing epidemic, government bodies—legislatures, town councils, regulatory agencies—need to consider all relevant inputs in deciding whether or not to act, and if so, how.

Public policy goals can be broad (e.g., full employment) and high-minded (equal oppor-tunity for all) or narrow and self-serving. National values, such as freedom, democracy, and a fair chance for all citizens to share in economic prosperity, have led to the adoption of civil rights laws and economic assistance programs for those in need. Narrow goals that serve special interests are more apparent when nations decide how legislation will allocate the burden of taxes among various interests and income groups, or when public resources, such as oil exploration rights or timber cutting privileges, are given to one group or another. Whether the goals are broad or narrow, for the benefit of some or the benefit of all, most governments should ask, “What public goals are being served by this action?” For example, the rationale for a government policy to regulate distracted driving has to be based on some definition of public interest, such as preventing harm to others, including innocent drivers, passengers, and pedestrians.

The goal of distracted driving regulation is to prevent deaths and serious injuries resulting from drivers being distracted while driving. The factual data appears to be overwhelming. However, some members of the public have insisted on their right to use their phones for texting and other activities in their vehicles. Traveling sales-persons, for example, depend on their phones as an important tool of the job. Some regulations have addressed this by permitting drivers to use hands-free devices that permit them to keep their hands on the wheel. But some government safety experts have disagreed, saying, “When you are on a call, even if both hands are on the wheel, your head is in the call, and not your driving.”

The issue of banning the use of cell phones, hand-held or hands-free, for the sake of making our roads a little safer for all, remains at the forefront, but new technology has created even greater distractions. Devices can project information and data streamed from a smartphone onto the car’s windshield. Maps, speed, incoming texts, caller identification, and even social media notifications can be projected just above the dashboard of a car for the driver to read. The game Pokémon Go prompts drivers to search for virtual creatures on the highways or country roads. So, the goals of saving lives, reducing injuries, and eliminating health care costs are increasingly more urgent and the demand for regulation even more critical.

Governments use different public policy tools to achieve policy goals. The tools of pub-lic policy involve combinations of incentives and penalties that government uses to prompt

9 “Rise in U.S. Traffic Deaths Reported for a Second Year,” The New York Times, February 15, 2017, www.nytimes.com; “Consumer Reports Tackles Distracted Driving and Calls Traffic Deaths a Public Health Epidemic,” Forbes, November 19, 2017, www.forbes.com; “Zendrive Research: Largest Distracted Driving Behavior Study,” The Fiscal Times, April 18, 2017, www.thefiscaltimes.com; and “Study Asks Just How Distracted Are Motorists?” Pittsburgh Post-Gazette, March 30, 2015, www.post-gazette.com. For updated information on distracted driving, see www.distraction.gov and the Insurance Institute for Highway Safety’s website at www.iihs.org.

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citizens, including businesses, to act in ways that achieve policy goals. Governmental reg-ulatory powers are broad and constitute one of the most formidable instruments for accom-plishing public purposes.

Federal action limiting cell phone use in the United States stalled, so state and local governments stepped in to ban the use of cell phones by drivers while operating their vehicles. By 2018, 16 states had completely banned the use of cell phones while driving unless using a hands-free device, 38 had banned cell phone use by novice drivers, and 47 had banned text messaging for all drivers. And this was not just a public policy issue for Americans. More than 45 nations, including Australia, China, France, Germany, India, Israel, Japan, Russia, Spain, Taiwan, and the United Kingdom, have banned calling while driving.10

Public policy effects are the outcomes arising from government regulation. Some are intended; others are unintended. Because public policies affect many people, organiza-tions, and other interests, it is almost inevitable that such actions will please some and displease others. Regulations may cause businesses to improve the way toxic substances are used in the workplace, thus reducing health risks to employees. Yet other goals may be obstructed as an unintended effect of compliance with such regulations. For example, when health risks to pregnant women were associated with exposure to lead in the work-place, some companies removed women from those jobs. This action was seen as a form of discrimination against women that conflicted with the goal of equal employment oppor-tunity. The unintended effect (discrimination) of one policy action (protecting employees) conflicted head-on with the public policy goal of equal opportunity.

Different groups disagreed over the possible effects of distracted driving laws. Proponents obviously argued that the ban on cell phone use reduced accidents and saved lives. In fact, from 2012 to 2013, the number of deaths attributed to distracted driving nationwide declined nearly 7 percent, possibly due to the bans enacted by many states. Yet, these gains were short-lived as estimated deaths attributed to dis-tracted driving rose 14 percent in 2014 and another 6 percent in 2016. Opponents pointed to numerous other distractions that were not banned, such as drivers read-ing the newspaper, eating, putting on makeup, or shaving. “People have been driv-ing distracted since cars were invented. Focusing on mobile phones isn’t the same as focusing on distracted driving. Distraction is what has always caused car crashes and mobile phones don’t appear to be adding to that,” said a spokesperson for the Insurance Institute for Highway Safety.11

As the distracted driving examples illustrate, managers must try to be aware of the pub-lic policy inputs, goals, tools, and effects relevant to regulation affecting their business. As public issues emerge with significant negative consequences, such as death and injuries due to distracted driving, businesses should look for solutions. The automobile industry has increasingly done so, by introducing technologies that enable drivers to converse by phone or receive GPS directions and other notifications without removing their hands from the steering wheel or taking their eyes off the road.

10 For a complete listing of states that have regulated cell phone use while driving see the National Conference of State Legislators at www.ncsl.org.11 Statistical information from “U.S. Motor Vehicle Deaths Surged 6% in 2016, NSC Says,” The Wall Street Journal, February 15, 2017, www.wsj.com; and “Study: No Evidence Cell Phone Bans Reduce Crashes,” Fox News, July 7, 2011, www.foxnews.com. 

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Types of Public PolicyPublic policies created by governments are of two major types: economic and social. Sometimes these types of regulation are distinct from each another and at other times they are intertwined.

Economic Policies

One important kind of public policy directly concerns the economy. The term fiscal policy refers to patterns of government collecting and spending funds that are intended to stim-ulate or support the economy. Governments spend money on many different activities. Local governments employ teachers, trash collectors, police, and firefighters. State gov-ernments typically spend large amounts of money on roads, social services, and parkland. National governments spend large sums on military defense, international relationships, and hundreds of public works projects such as road building. During the Great Depression of the 1930s, public works projects employed large numbers of people, put money in their hands, and stimulated consumption of goods and services. Today, fiscal policy remains a basic tool to achieve prosperity, as the following example illustrates.

In 2015, Chinese government leaders and economists were surprised by the coun-try’s sharp economic decline and were increasingly worried about the potential risk of job losses throughout the country. The world’s second largest economy grew at 7 percent in the first quarter of 2015, the lowest rate since the global financial crisis in 2008–9. The leaders turned to fiscal stimulus to revive the growth of the country. The National Development and Reform Commission, China’s top planning agency, infused large amounts of funding in an attempt to speed up investment projects in several key sectors, including water conservation, environmental protection, power grids, and health care. In explaining this government spending, the chairman of China’s National Development and Reform Commission said, “China was on track to achieve its economic growth, employment, inflation, fiscal revenue as well as imports and exports targets, but the country was falling behind in its goals for investment and wooing foreign investors.”12

Another important kind of economic policy is trade policy, the rules that govern imports from and exports to foreign countries. Governments sometimes favor free-trade policies, allowing the relatively unrestricted flow of goods and services across national borders, and at other times erect various barriers to this flow, such as tariffs and duties. In early 2018, President Trump reported that he was considering imposing widespread tariffs on imports of various goods in an effort to help protect ailing U.S. industries. While many U.S. manufacturers hailed these actions as necessary, other business groups in the U.S. were opposed. Forty-five trade associations, representing a wide range of the U.S. economy, petitioned Trump’s administration to halt its plans to levy tariffs on China and to work instead with other nations to pressure China to end their trade restrictions. For the United States to impose heavy tariffs, said a letter written by the trade groups, “would trigger a chain reaction of negative consequences for the U.S. economy, provoking retalia-tion; stifling U.S. agriculture, goods, and service exports; and raising costs for businesses and consumers.”13

12 “China Hints at More Government Spending to Shore Up Economic Growth,” South China Morning Post, August 30, 2017, www.scmp.com.13 “Trade Associations to Petition Trump Administration to Halt China-Tariff Plans,” The Wall Street Journal, March 19, 2018, www.wsj.com.

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By contrast, the term monetary policy refers to policies that affect the supply, demand, and value of a nation’s currency. The worth, or worthlessness, of a nation’s currency has serious effects on business and society. It affects the buying power of money, the stabil-ity and value of savings, and the confidence of citizens and investors about the nation’s future. This, in turn, affects the country’s ability to borrow money from other nations and to attract private capital. In the United States, the Federal Reserve Bank—known as the Fed—plays the role of other nations’ central banks. By raising and lowering the interest rates at which private banks borrow money from the government, the Fed influences the size of the nation’s money supply and the value of the dollar. During the Great Recession, the Fed’s action to lower interest rates nearly to zero—an example of a monetary policy—was intended to stimulate borrowing and help the economy get moving again.

Other forms of economic policy include taxation policy (raising or lowering taxes on business or individuals), industrial policy (directing economic resources toward the devel-opment of specific industries), and trade policy (encouraging or discouraging trade with other countries).

Spurred by the president of the United States, Congress passed a $1.5 trillion tax cut in 2017. The most sweeping U.S. tax bill since 1986 cut the corporate tax rate from 35 to 21 percent, with the intent of stimulating the economy. In the first quar-ter of 2018, 108 of the nation’s largest companies reported saving almost $13 bil-lion in taxes, with nearly a third of the savings going to financial firms. AT&T and Comcast applauded the tax relief and promised to share the windfall by paying $1,000 bonuses to their more than 300,000 workers. Wells Fargo and Fifth Third Bancorp said they would raise their employees’ minimum wage to $15 an hour. However, Michael Dell, CEO of Dell Technologies, discovered that the new tax bill would prevent his company from deducting nearly $2 million it pays annually in interest on the company’s debt.14

Some thought that the tax reform would stimulate the economy, create jobs, and raise wages, but others cautioned that it would increase the national deficit, and that companies would be more likely use their windfalls to increase executive pay and shareholder divi-dends than to create jobs or pay workers more. According to economist Paul Krugman, while it is quite early to tell if the tax cut has been successful, “most voters say they haven’t seen any boost to their paychecks. To deliver on [the tax cut] backers’ promises, the tax cut would have to produce a huge surge in business investment—not in the long run, not five or 10 years from now, but more or less right away. And there’s no sign that anything like that is happening.”15 Yet, both critics and supporters say it will take months or years to draw conclusions on the law’s effects.

Social Assistance Policies

The last century produced many advances in the well-being of people across the globe. The advanced industrial nations have developed elaborate systems of social services for their citizens. Developing economies have improved key areas of social assistance (such as health care and education) and will continue to do so as their economies grow. International

14 “Trump Cheers GOP Tax Overhaul, Slams Democrats Who Opposed It,” The Wall Street Journal, December 20, 2017, www.wsj.com; “Thankful for Massive Tax Cut, AT&T, Wells Fargo Promise to Share the Wealth,” The Wall Street Journal, Decem-ber 21, 2017, www.wsj.com; “For Heavily Indebted Firms Like Dell, Tax Bill Delivers a Downside,” The Wall Street Journal, December 21, 2017, www.wsj.com; and “Corporate America Is Saving Boatloads on Trump Tax-Cut Windfall,” Bloomberg, April 30, 2018, www.bloomberg.com.15 “How’s That Tax Cut Working Out?” The New York Times, April 30, 2018, www.nytimes.com.

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standards and best practices have supported these trends. Many of the social assistance pol-icies that affect particular stakeholders are discussed in subsequent chapters of this book.

One area often addressed by social assistance policies is housing. Many govern-ments have programs that subsidize rent payments, guarantee home loans, or pro-vide housing directly for low-income citizens or military veterans. For example, Brazil’s Minha Casa, Minha Vida (“My House, My Life”) program has invested R$300 billion ($80.27 billion U.S.) in mortgages, provided by a government- affiliated bank, resulting in more than 4.2 million housing units authorized for construction and 2.6 million units delivered to low-income families since the pro-gram began in 2009. Many of the first units built by the program were intended to house families displaced by development for the World Cup and Olympic Games in Rio de Janeiro.16

One particularly important social assistance policy—health care—has been the focus for concern on the international front and for national and state lawmakers. As discussed later in this chapter, the United States government has wrestled with the need for better health care for its citizens and the challenge of how to pay for this care.

Government Regulation of Business

Societies rely on government to establish rules of conduct for citizens and organiza-tions called regulations. Regulation is a primary way of accomplishing public policy, as described in the previous section. Because government operates at so many levels (federal, state, local), modern businesses face complex webs of regulations. Companies often require lawyers, public affairs specialists, and experts to monitor and manage the interaction with government. Why do societies turn to more regulation as a way to solve problems? Why not just let the free market allocate resources, set prices, and constrain socially irresponsible behavior by companies? There are a variety of reasons.

Market FailureOne reason is what economists call market failure, that is, the marketplace fails to adjust prices for the true costs of a firm’s behavior. For example, a company normally has no incentive to spend money on product safety or pollution control equipment if customers do not demand it. The market fails to incorporate the cost of product safety or environmental harm into the business’s economic equation, because the costs are borne by someone else. In this situation, government can use regulation to force all competitors in the industry to adopt a minimum safety or pollution standards. Companies that want to act responsibly often welcome carefully crafted regulations, because they force competitors to bear the same costs. This behavior is seen in the following example.

In 2008, the European Union set regulatory standards for certain contaminants in foods, including maximum levels for lead, cadmium, and mercury. The EU explained, “in order to protect public health, to keep contaminants at levels which do not cause health concerns, maximum levels for lead, cadmium and mercury must be safe and as low as reasonably achievable based upon good manufacturing and agricultural/fishery practices.” These new regulatory standards affected food com-panies around the world that have business with or in Europe. Nestlé Purina

16 “Minha Casa Minha Vida Housing Program to Expand in Brazil,” The Rio Times, February 6, 2017, riotimesonline.com.

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Petcare, a pet food subsidiary of Nestlé, the Swiss-based and world’s largest food and beverage company, welcomed these new standards, believing it provided them with a competitive advantage. The company released the following statement: “We use science to make quality and safe pet foods … We test for well over 150 sub-stances, including arsenic, pesticides, lead, mercury and cadmium. … We do make an effort to source ingredients that contain lower levels of heavy metals. … We are committed to providing our consumers with accurate and transparent nutrition labelling based on sound science, regulation and law in a format that best helps them make informed, balanced and mindful product choice.”17

Negative ExternalitiesGovernments also may act to regulate business to prevent unintended adverse effects on others. Negative externalities, or spillover effects, result when the manufacture or distri-bution of a product gives rise to unplanned or unintended costs (economic, physical, or psychological) borne by workers, consumers, competitors, neighboring communities, or other business stakeholders. To control or reverse these costs, government may step in to regulate business action.

In 2014 U.S. government regulators announced new rules to fight an increase in black lung disease, caused by breathing coal dust. These new regulations were the first major efforts since the 1969 Coal Mine Health and Safety Act, which estab-lished modern health and safety requirements in mines nationwide. Government health officials attributed increasing rates of the disease to new machinery that gen-erated more dust, longer shifts for younger workers, and an increase in silica dust churned up when thinner coal seams were tapped after many years of mining at the same location.18

Natural MonopoliesIn some industries, natural monopolies occur. The electric utility industry provides an example. Once one company has built a system of poles and wires or laid miles of under-ground cable to supply local customers with electricity, it would be inefficient for a sec-ond company to build another system alongside the first. But once the first company has established its natural monopoly, it can then raise prices as much as it wishes because there is no competition. In such a situation, government often comes in and regulates prices and access. Other industries that sometimes develop natural monopolies include cable TV, broadband Internet service, software, and railroads.

Ethical ArgumentsThere is often an ethical rationale for regulation as well. As discussed in Chapter 5, for example, there is a utilitarian ethical argument in support of safe working conditions: It is costly to train and educate employees only to lose their services because of prevent-able accidents. There are also fairness and justice arguments for government to set stan-dards and develop regulations to protect employees, consumers, and other stakeholders. In debates about regulation, advocates for and against regulatory proposals often use both

17 The European Commission legislation on heavy metals can be found at ec.europa.eu/jrc/en/eurl/heavy-metals/legislation and Nestlé Purina Petcare statement can be found at wjla.com, a report on company responses to the Washington, DC, ABC television station’s report on heavy metals in foodstuff.18 “Black Lung Disease Spurs New Coal-Mine Rules,” The Wall Street Journal, April 23, 2014, online.wsj.com.

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economic and ethical arguments to support their views. Some issues have consequences that are so devastating that the government needs to step in and impose controls, as shown in the following example.

In 2015 the U.K. government passed the Modern Slavery Act, the first piece of U.K. legislation focusing on the prevention and prosecution of modern slavery and the protection of victims. According to the International Labour Organisation (ILO), 25 million people around the world were trapped in some form of forced labor, including trafficking, debt bondage, and child labor. In the United Kingdom, instances of slavery were found in nail salons, the fishing industry, two London medical professional offices, and cannabis farms. The new law made businesses accountable for slavery and labor abuses occurring along their supply chain of oper-ations. The goal was to ensure that there were no instances of slavery linked to any British products or services.19

Whether the actions are self-imposed by a company or forced on businesses by the gov-ernment, the protection of the public is often the motivation for regulatory action.

Types of RegulationGovernment regulations come in different forms. Some are directly imposed; others are more indirect. Some are aimed at a specific industry (e.g., banking); others, such as those dealing with job discrimination or pollution, apply to all industries. Some have been in existence for a long time—for example, the Food and Drug Act was passed in 1906—whereas others, such as the Wall Street Reform and Consumer Protection (or Dodd-Frank) Act of 2010, are of much more recent vintage. Just as public policy can be classified as either economic or social, so regulations can be classified in the same fashion.

Economic Regulations

The oldest form of regulation is primarily economic in nature. Economic regulations aim to modify the normal operation of the free market and the forces of supply and demand. Such modification may come about because the free market is distorted by the size or monopoly power of companies, or because the consequences of actions in the marketplace are thought to be undesirable. Economic regulations include those that control prices or wages, allocate public resources, establish service territories, set the number of partic-ipants, and ration resources. The decisions by the Federal Trade Commission (FTC) to prevent anticompetitive business practices illustrate one kind of economic regulation.

The U.S. Congress responded to the global recession, in part, by passing the Dodd-Frank Act in 2010. This legislation was heralded as the most comprehensive financial reg-ulatory reform measure since the Great Depression and intended to revolutionize many business activities. Among other things, the Dodd-Frank Act affected the oversight and supervision of financial institutions, created a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduced more stringent regu-latory capital requirements, and implemented changes to corporate governance and execu-tive compensation practices.20 In 2017, President Trump signed two executive actions that scaled back some provisions of the Dodd-Frank Act with the intention of making it easier for businesses to borrow money.

19 “The U.K.’s New Slavery Laws Explained: What Do They Mean for Business?” The Guardian, December 14, 2015, www.theguardian.com.20 “The Dodd-Frank Act: A Cheat Sheet,” Morrison & Foerster, n.d., www.mofo.com.

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Antitrust: A Special Kind of Economic Regulation

One important kind of economic regulation occurs when government acts to preserve com-petition in the marketplace, thereby protecting consumers. Antitrust laws prohibit unfair, anticompetitive practices by business. (The term antitrust law is used in the United States; most other countries use the term competition law.) For example, if a group of companies agreed among themselves to set prices at a particular level, this would generally be an antitrust violation. In addition, a firm may not engage in predatory pricing, the practice of selling below cost to drive rivals out of business. If a company uses its market dominance to restrain commerce, compete unfairly, or hurt consumers, then it may be found guilty of violating antitrust laws.

The two main antitrust enforcement agencies in the United States are the Antitrust Divi-sion of the U.S. Department of Justice and the Federal Trade Commission. Both agencies may bring suits against companies they believe to be guilty of violating antitrust laws. They also may investigate possible violations, issue guidelines and advisory opinions for firms planning mergers or acquisitions, identify specific practices considered to be illegal, and negotiate informal settlements out of court. Antitrust regulators have been active in prosecuting price fixing, blocking anticompetitive mergers, and dealing with foreign com-panies that have violated U.S. laws on fair competition. In Europe, the European Commis-sion investigates antitrust violations for the European Union who may act to enforce EU laws, as seen in the Qualcomm example that follows.

One example of the European Union’s antitrust regulatory oversight was evident when they imposed a €997 million ($1.23 million) antitrust fine on the U.S.-technology giant Qualcomm. The EU antitrust regulators accused Qualcomm of paying Apple billions of dollars over a five-year span, from 2011 to 2016. These payments were made to restrict Apple from purchasing from Qualcomm’s rivals, those firms that sold chips that connected smartphones and tablets to cellular networks. “These pay-ments were not just reductions in price—they were made on the condition that Apple would exclusively use Qualcomm’s baseband chipsets in all its iPhones and iPads,” said Margrethe Vestager, EU antitrust chief.21

If a company is found guilty of antitrust violations, what are the penalties? The govern-ment may levy a fine—sometimes a large one, as the EU did against Qualcomm. In the case of private lawsuits, companies may also be required to pay damages to firms or indi-viduals they have harmed. Sysco and U.S. Foods Holdings, two of the largest U.S. food dis-tribution companies, joined retailer Winn-Dixie Stores, in filing lawsuits for undisclosed damages against the chicken industry, accusing Tyson Foods, Pilgrim’s Pride, Sanderson Farms, and other poultry suppliers of manipulating wholesale chicken prices.22 In addition, regulators may impose other, nonmonetary remedies. A structural remedy may require the breakup of a monopolistic firm; this occurred when (the old) AT&T was broken up by gov-ernment order in 1984. A conduct remedy, more commonly used, involves an agreement that the offending firm will change its conduct, often under government supervision. For example, a company might agree to stop certain anticompetitive practices. Finally, an intel-lectual property remedy is used in some kinds of high-technology businesses; it involves disclosure of information to competitors. All these are part of the regulator’s arsenal.

Antitrust regulations cut across industry lines and apply generally to all enterprises. Other economic regulations, such as those governing stock exchanges, may be confined to

21 “Qualcomm Is Slapped with $1.23 Billion EU Fine for Illegal Payments to Apple,” The Wall Street Journal, January 24, 2018, www.wsj.com.22 “U.S. Food Distributors Allege Tyson Foods, Rivals Fixed Chicken Prices,” Reuters, January 31, 2018, www.reuters.com.

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specific industries and companies. One recent example of a conflict over the application of antitrust laws to a proposed merger is discussed in Exhibit 7.A.

Social Regulations

Social regulations are aimed at such important social goals as protecting consumers and the environment and providing workers with safe and healthy working conditions. Equal employment opportunity, protection of pension benefits, and health care for citizens are other important areas of social regulation. Unlike the economic regulations mentioned above, social regulations are not limited to one type of business or industry. Laws concerning pollu-tion, safety and health, health care, and job discrimination apply to all businesses; consumer protection laws apply to all relevant businesses producing and selling consumer goods.

The Chilean government declared war on obesity in 2018. “They killed Tony the Tiger. They did away with Cheetos’ Chester Cheetah. They banned Kinder Surprise, the chocolate eggs with a hidden toy,” accounts The New York Times article. The Chilean government imposed multiple marketing restrictions, mandatory packaging redesigns, and labeling rules on the nation’s food producers and retailers aimed at transforming the eating habits of 18 million Chilean residents. Nutrition experts said this was the world’s most ambitious attempt to remake a country’s food culture and could be a model for how to turn the tide on a global obesity epidemic that researchers say contributed to 4 million premature deaths a year.23

23 “In Sweeping War on Obesity, Chile Slays Tony the Tiger,” The New York Times, February 7, 2018, www.nytimes.com.

The AT&T–Time Warner Merger of 2018

In 2018, a federal judge handed down what many economists believed to be a sweeping victory against governmental antitrust regulation by approving AT&T’s $85 billion acquisition of Time Warner. Judge Richard Leon ruled that the government—which had tried to block the merger—had failed to prove that the telecom company’s acquisition of Time Warner would violate antitrust law by leading to fewer choices for consum-ers and higher prices for television and internet services. With this final roadblock removed, the merger was expected to create a media and telecommunications powerhouse, reshaping the landscape of those industries. The combined company would join Time Warner’s library, including HBO’s hit “Game of Thrones” and channels like CNN, with AT&T’s vast distribution reach through wireless and satellite television services across the country. Media executives supported the AT&T–Time Warner merger deal, arguing that content creation and distri-bution had to be combined to compete successfully against technology companies like Amazon and Netflix. Although those companies had just started producing their own shows during the past several years, they were now spending billions of dollars a year on original programming. Their users could stream the video on apps in homes and on mobile devices, putting pressure on traditional media businesses. Yet, Makan Delrahim, the top antitrust official at the Justice Department said, “We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner.” Antitrust experts predicted that the court ruling would lead to a flood of new merger proposals. Just days after the AT&T–Time Warner decision, Comcast bid to acquire 21st Century Fox, challenging Disney, which pre-viously had bid for 21st Century Fox’s assets. In response, Disney increased their offer to acquire 21st Century Fox. Both Comcast and 21st Century Fox made bids on acquiring Sky, a European media company.

Sources: “AT&T Wins Approval for $85.4 Billion Time Warner Deal in Defeat for Justice Department,” The New York Times, June 12, 2018, www.nytimes.com; and “Judge Approves $85 Billion AT&T–Time Warner Deal,” CNNMoney, June 13, 2018, money.cnn.com.

Exhibit 7.A

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The most significant social regulation in the United States since the 1960s was the comprehensive reform of health care coverage passed by Congress in 2009. It is described in Exhibit 7.B.

Who regulates? Normally, for both economic and social regulation, specific rules are set by agencies of government and by the executive branch, and may be further interpreted by the courts. Many kinds of business behavior are also regulated at the state level. Gov-ernment regulators and the courts have the challenging job of applying the broad mandates of public policy.

Figure  7.1 depicts these two types of regulation—economic and social—along with the major regulatory agencies responsible for enforcing the rules at the federal level in the United States. Only the most prominent federal agencies are included in the chart. Individ-ual states, some cities, and other national governments have their own array of agencies to implement regulatory policy.

There is a legitimate need for government regulation in modern economies, but regu-lation also has problems. Businesses feel these problems firsthand, often because the reg-ulations directly affect the cost of products and the freedom of managers to design their

The Affordable Care Act: Health Care Coverage Mandated for Americans

In 2010, led by President Obama, Congress passed the Affordable Care Act, often referred to as “Obamacare.” The basic purpose of the law was to hold insurance companies accountable for their costs and services to their customers, lower the rising health care costs, provide Americans with greater freedom and control over their health care choices, and ultimately improve the quality of health care in America. Its provisions would be rolled out over 10 years. In 2010, the government began giving subsidies to small businesses that offered health coverage to employees, insurance companies were barred from denying coverage to children with preexisting illnesses, and children were permitted to stay on their parents’ insurance policies until age 26. The health care reform law aroused strong passions on both sides. Proponents of the law argued that the more than 5.1 million people on Medicare would save over $3 billion in prescription drugs costs, 105 million Americans would no longer have lifetime dollar limits on their health care coverage, and approximately 54 million Americans would receive greater preventative medical coverage. Health care fraud would decline by $4.1 billion annually due to new fraud detection measures, and 2.5 million young adults would retain health care coverage under their parents’ plan. Most importantly, most Americans would now have health insurance coverage. But, opponents challenged the new law as filled with myths, untruths, and harmful consequences. Some believed that the act would do nothing to bring down the cost of health care. Business leaders worried that the burden of providing their employees with health care insurance would result in bankruptcy or cause employers to reduce the level of health care coverage for their employees. Many worried that the mandate infringed on individual rights—including the right to go without health insurance if they chose. Several states sued, saying the law violated the constitution. In 2017, repeated attempts by Congress to repeal all or part of the Affordable Care Act failed. By 2018, 11.8 million Americans had selected marketplace plans or been automatically enrolled under the act. Under the act, millions more Americans received preventive services, such as vaccines, cancer screenings, and annual wellness visits at no out-of-pocket cost, than ever before. In addition, Americans could no longer be denied or dropped from coverage because of preexisting conditions or because they hit an annual or lifetime cap in benefits. Josh Peck, co-founder of the pro-ACA group Get America Covered, said, “While enrollment remained steady because of high consumer satisfaction and more affordable premiums for those who qualify for tax credits, enrollment would have outpaced previous years’ if the administration had focused on signing people up instead of derailing open-enrollment efforts.”

Sources: “What’s in the Bill,” The Wall Street Journal, March 22, 2010, online.wsj.com; “Get the Facts Straight on Health Reform—A More Secure Future,” The White House, n.d., www.whitehouse.gov; and “The Affordable Care Act Is Working,” Department of Health and Human Services, www.hhs.gov. The quote by Josh Peck is from “Nearly 12 Million People Enrolled in 2018 Health Coverage under the ACA,” The Washington Post, April 3, 2018, www.washingtonpost.com.

Exhibit 7.B

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FIGURE 7.1 Types of Regulation and Regulatory Agencies

Economic regulatory agenciesNRCFAAFCCFERCFRBCFTCFREDDIE MACDOTUSDADOJDOLFLRA

Nuclear Regulatory CommissionFederal Aviation AdministrationFederal Communications CommissionFederal Energy Regulatory CommissionFederal Reserve BoardCommodity Futures Trading CommissionFederal Home Loan Mortgage CorporationDepartment of TransportationDepartment of AgricultureDepartment of JusticeDepartment of LaborFederal Labor Relations Authority

Social regulatory agenciesEEOCOSHAMSHAFTCHHS

Equal Employment Opportunity CommissionOccupational Safety and Health AdministrationMine Safety and Health AdministrationFederal Trade CommissionDepartment of Health and Human Services

CPSCFDAEPANHTSACFPB

Consumer Product Safety CommissionFood and Drug AdministrationEnvironmental Protection AgencyNational Highway Tra�c Safety AdministrationConsumer Financial Protection Bureau

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Social regulation

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business operations. In the modern economy, the costs and effectiveness of regulation, as well as its unintended consequences, are serious issues that cannot be overlooked. Each is discussed below.

The Effects of RegulationRegulation affects many societal stakeholders, including business. Sometimes the conse-quences are known and intended, but at other times unintended or accidental consequences emerge from regulatory actions. In general, government hopes that the benefits arising from regulation outweigh the costs.

The Costs and Benefits of Regulation

The call for regulation may seem irresistible to government leaders and officials given the benefits they seek, but there are always costs to regulation. An old economic adage says, “There is no free lunch.” Eventually, someone has to pay for the benefits created.

An industrial society such as the United States can afford almost anything, including social regulations, if it is willing to pay the price. Sometimes the benefits are worth the costs; sometimes the costs exceed the benefits. The test of cost–benefit analysis helps the public understand what is at stake when new regulation is sought.

Figure  7.2 illustrates the increase in costs of federal regulation in the United States since 1960. Economic regulation has existed for many decades, and its cost has grown more slowly than that of social regulation. Social regulation spending reflects growth in such areas as environmental health, occupational safety, and consumer protection. A rapid growth of social regulation spending occurred in the 1960s and again in the 2000s, but has slowed somewhat recently. The cost of regulation has its critics, especially when the costs to small businesses or manufacturing firms are considered.

In addition to paying for regulatory programs, it takes people to administer, monitor, and enforce these regulations. Although the numbers have gone up and down, depending on the approach of various administrations, the overall trend has been toward growth of the regulatory apparatus of government. In 1960, fewer than 60,000 federal employees moni-tored and enforced government regulations; by 2015, this number had grown to more than 277,000 employees. John J. DiIulio Jr., of the University of Pennsylvania and the

FIGURE 7.2Budgetary Costs of Federal Regulation, 1960–2018

Source: Susan Dudley and Melinda Warren, “Regulators’ Budget Increases Consistent with Growth in Fiscal Budget,” Regulatory Studies Center, The George Washington University and Weidenbaum Center, Washington University in Saint Louis, May 2015, regulatorystudies.columbian.gwu.edu; and regulatorystudies.columbian.gwu.edu.

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Brookings Institution, criticized the size of government regulation when he said, “Today’s government is indeed big—3.5 times bigger than five and a half decades ago, but dispersed to disguise its size.”24

Continuous Regulatory Reform

The amount of regulatory activity often is cyclical—historically rising during some peri-ods and declining during others. Businesses in the United States experienced a lessening of regulation in the early 2000s—deregulation, then experienced a return of regulatory activ-ity in the late 2000s and early 2010s—reregulation. The cycle continued as the pendulum swung back to deregulation in the late 2010s under the Trump administration.

Deregulation is the removal or scaling down of regulatory authority and regulatory activities of government. Deregulation is often a politically popular idea. President Ronald Reagan strongly advocated deregulation in the early 1980s, when he campaigned on the promise to “get government off the back of the people.” Major deregulatory laws were enacted off and on in the United States from the 1980s to today, mostly dependent upon whether there was a Republican administration in power. Recently efforts to promote deregulation in the United States are described in Exhibit 7.C.

Proponents of deregulation often challenge the public’s desire to see government solve problems. This generates situations in which government is trying to deregulate in some areas while at the same time creating new regulation in others. Reregulation is the increase or expansion of government regulation, especially in areas where the regulatory activities had previously been reduced. The scandals that rocked corporate America in

24 ‘Big Government’ Is Ever Growing, On the Sly,” National Review, February 25, 2017, www.nationalreview.com.

Deregulation in the United States, Starting in 2017

In 2017, the Trump Administration began a policy toward deregulation across many industries.

• The Office of Management and Budget suspended a rule that required wage reporting broken down by ethnicity and gender, claiming it was too costly to companies.

• The lessening of the Volcker Rules that restricted banking activities. This change permitted banks to con-duct fewer audits of individual securities and derivative transactions, and generally to have more freedom to buy and sell securities.

• The Dodd-Frank Act of 2010, which attempted to guard against another financial crisis, had its restrictions seriously minimized when about two-dozen regional banks were released from strict rules requiring them to maintain large capital reserves.

• Under the leadership of the White House, the Republican-led Congress reversed a rule that made it easier for consumers to bring class action lawsuits against banks by requiring that consumers use arbitration to resolve disputes.

• President Trump froze the implementation of a rule that said contract poultry and livestock farmers would be able to sue dealers without having to prove that a practice harmed the entire industry, just showing harm to their specific business.

• The Transportation Department withdrew a rule proposed by the Obama Administration that would require airlines to disclose baggage fees to consumers along with fare and schedule information.

• The Labor Department froze a rule that would tighten standards for workplace exposure to beryllium, a light-weight metal used in manufacturing that is dangerous if inhaled via dust or fumes or if it is exposed to the skin.

Source: “How Donald Trump Has Remade the Rules for Business,” The Wall Street Journal, January 17, 2018, www.wsj.com.

Exhibit 7.C

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the 2000s—and the failure or near-failure of a number of big commercial and investment banks in the late 2000s—brought cries from many stakeholder groups for reregulation of the securities and financial services industries.

Regulation in a Global Context

International commerce unites people and businesses in new and complicated ways, as described in Chapter 4. U.S. consumers routinely buy food, automobiles, and clothing from companies located in Europe, Canada, Latin America, Australia, Africa, and Asia. Citizens of other nations do the same. As these patterns of international commerce grow more complicated, governments recognize the need to establish rules that protect the inter-ests of their own citizens. No nation wants to accept dangerous products manufactured elsewhere that will injure its citizens, and no government wants to see its economy dam-aged by unfair competition from foreign competitors. These concerns provide the rationale for international regulatory agreements and cooperation. At times, the issues themselves cut across national borders, so international regulation is needed.

In 2016, the International Civil Aviation Organization, representing more than 190 countries, adopted The Aviation Plan, designed to reduce the climate impact of international jet travel, which accounted for about 2 percent of the world’s emis-sions of greenhouse gases. The measure would require air carriers to take major steps to improve fuel economy in their routes and fleets, very likely accelerating the purchase of newer, more efficient planes. The plan was scheduled to take effect in 2021. “This measure addresses a growing source of global emissions, demonstrates the international community’s strong and growing support for climate action in all areas and helps avoid a patchwork of potentially costly and overlapping regional and national measures,” said John Kerry, then the U.S. Secretary of State.25

At other times, political conflicts spill over into economic regulatory actions, as described next.

In 2017, Iran, a long-time adversary of the United States, sanctioned 15 American companies in retaliation for restrictions imposed by the Trump administration on companies and people allegedly connected with Iran’s ballistic-missile program. Iran’s sanctions targeted American defense companies, including defense contractor Raytheon, and two firearms manufacturers, Magnum Research and Lewis Machine and Tool, for allegedly helping Israel and contributing to regional instability, according to the Islamic Republic News Agency. Future business dealings with these companies were prohibited by the Iranian government and their assets in the Islamic Republic were frozen, a common tactic used by the United States against companies from doing business with Iran.26

Whether at the local, state, federal, or international levels, governments exert their control seeking to protect society through regulation. The significant challenge involves balancing the costs of this form of governance against the benefits received or the prevention of the harms that might occur if the regulation is not in place and enforced. Businesses have long under-stood that managing and, if possible, cooperating with the government regarding regulation generally leads to a more productive economic environment and financial health of the firm.

25 “EU Halts Carbon Emission Fees for Airlines,” The Hill, November 12, 2012, www.thehill.com; and “Over 190 Countries Adopt Plan to Offset Air Travel Emissions,” The New York Times, October 6, 2016, www.nytimes.com.26 “Iran Slaps Sanctions on 15 U.S. Companies as Animosity Grows,” The Wall Street Journal, March 26, 2017, www.wsj.com.

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∙ Government’s relationship with business ranges from collaborative to working at arm’s length. This relationship often is tenuous, and managers must be vigilant to anticipate any change that may affect business and its operations.

∙ A public policy is an action undertaken by government to achieve a broad public purpose. The public policy process involves inputs, goals, tools or instruments, and effects.

∙ Regulation is needed to correct for market failure, overcome natural monopoly, and protect stakeholders who might otherwise be hurt by the unrestricted actions of business.

∙ Regulation can take the form of laws affecting an organization’s economic operations (e.g., trade and labor practices, allocation of scarce resources, price controls) or focus on social good (e.g., consumer protection, employee health and safety, environmental protection).

∙ Antitrust laws seek to preserve competition in the marketplace, thereby protecting con-sumers. Remedies may involve imposing a fine, breaking up a firm, changing the firm’s conduct, or requiring the disclosure of information to competitors.

∙ Although regulations are often very costly, many believe that these costs are worth the benefits they bring. The ongoing debate over the need for and effectiveness of regula-tion leads to alternating periods of deregulation and reregulation.

∙ The global regulation of business often occurs when commerce crosses national borders or the consequences of unregulated business activity by a national government are so large that global regulation is necessary.

Summary

Key Terms regulation, 147reregulation, 155social assistance policies, 147social regulation, 151trade policy, 145

antitrust laws, 150cost–benefit analysis, 154deregulation, 155Dodd-Frank Act, 149economic regulation, 149fiscal policy, 145

market failure, 147monetary policy, 146natural monopoly, 148negative externalities, 148predatory pricing, 150public policy, 142

Internet Resources

www.cato.org Cato Institutewww.consumerfinance.gov U.S. Consumer Financial Protection Bureauwww.economywatch.com Economy Watchwww.federalreserve.gov Board of Governors of the Federal Reserve Systemwww.ftc.gov U.S. Federal Trade Commissionwww.mercatus.org Mercatus Center, George Mason Universitywww.reginfo.gov U.S. Office of Information and Regulatory Affairswww.regulations.gov Regulations.govwww.un.org/en/law International Law, United Nationswww.usa.gov Online Guide to Government Information and Services

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Discussion Case: Should Facebook Be Regulated?In 2018, Facebook, the social media behemoth, faced public outrage over breaches of its users’ privacy. A British political consulting firm hired by the Trump campaign, Cambridge Analytica, was accused of accessing the private data of 87 million Facebook users in an attempt to influence the 2016 presidential election. The consultants had partnered with a psychology professor at Cambridge University, who developed a Face-book app that offered a personality survey. When people responded, the app harvested private information from their profiles and those of their friends. The professor then shared this information with Cambridge Analytica, which used it to target political ads to Facebook users.

In the wake of these revelations, the U.S. Congress and European Parliament both held hearings on how to better protect the personal information of social media users. These hearings raised the question: Should Facebook, and other social media platforms, be more strictly regulated by the government to prevent future breaches of this kind?

While it was not publicly known how much revenue online political advertisements generated for Facebook in 2018, the firm made it clear that Facebook was spending so much money hiring moderators to review political ads that it would cancel out the revenue those ads were expected to generate in the 2018 election cycle. CEO Mark Zuckerberg explained, “We’re essentially going to be losing money on running political ads, because the company is hiring ‘thousands’ in advance of the 2018 elections. … That cost is going to be greater than the money that we make.”

Zuckerberg responded to the growing social outcry by making himself publicly avail-able to legislators in both the United States and Europe. Zuckerberg was questioned for almost 10 hours by U.S. senators of the commerce and judiciary committees over the com-pany’s privacy and data mining policies. Zuckerberg explained,

“I believe it’s important to tell people exactly how the information that they share on Facebook is going to be used. … Every single time, there’s a control right there about who you’re going to be sharing it with. … It was my mistake, and I’m sorry. I started Facebook, I run it, and I’m responsible for what happens here. It’s clear now that we didn’t do enough to prevent these tools from being used for harm.”

Two weeks later Zuckerberg appeared before the European Parliament, pledging to be more diligent in protecting his users’ individual information. He explained, “Europeans make up a large and incredibly important part of our global community. Many of the val-ues Europeans care most deeply about are values we share: from the importance of human rights and the need for community to a love of technology, with all the potential it brings.” As in his congressional testimony, Zuckerberg admitted to making mistakes that needed to be corrected, but again argued against government regulation of the industry, claiming that companies could effectively address any problems themselves. “I believe deeply in what we’re doing. And when we address these challenges, I know we’ll look back and view helping people connect and giving more people a voice as a positive force here in Europe and around the world,” stated Zuckerberg.

In response to the Cambridge Analytica incident, Facebook introduced a centralized system that enabled its users to control their privacy and security settings. The system, available globally, provided users with a single location where they could change their settings, rather than the old system, which was spread out across 20 separate locations on

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the social media platform. Facebook’s chief privacy officer said, “We’ve heard loud and clear that privacy settings and other important tools are hard to find, and that we must do more to keep people informed.” Facebook also announced that it would curb information that it exchanged with companies that collected and sold consumer data for advertisers. It ended an ad-targeting option called Partner Categories that allowed data brokers to target specific groups of Facebook users—people who had bought a certain product, for example—on behalf of their ad clients. Graham Mudd, product marketing director at Facebook, posted that shutting that system down would “help improve people’s privacy on Facebook.”

Many thought Zuckerberg’s pledge to do better was not enough and legislation was required. This was not the first time in recent years that the public turned to the govern-ment to protect their privacy. In 2010, the Do Not Track Bill, intended to give American consumers more control over what personal details companies collected from them and how the data was used, was introduced in Congress. In addition, in 2012 then-President Obama unveiled a comprehensive Consumer Privacy Bill of Rights, which would empower consumers to know what personal information was collected, stored, and possibly sold to other businesses. Neither of these efforts generated sufficient political support to become law.

In 2018, the European Union passed the General Data Protection Regulation. This regu-lation defined personal data as proprietary—that is, owned by the individual—and required that any use of that data by other parties had to be authorized by permission. A consumer would have to affirmatively “opt in” (rather than “opt out”), after receiving a request writ-ten in clear language, not legalese, from a business seeking to use their information.

In response to the Facebook-Cambridge Analytica incident, calls for new legislation in the United States appeared. Some of the potential legislative and regulatory strategies considered included

∙ Legislation could be passed to protect the data of individuals. These laws would focus on how companies collect, share, and use user data, like the European Union’s 2018 General Data Protection Regulation.

∙ New regulation could restrict how consumer data was used, including the sale of this information to other businesses. It could require social media sites, like Facebook, to provide the government, or its users, with additional information on who purchased users’ information. These steps would increase the transparency regarding the sale of consumers’ information.

∙ New regulation might also target how the consumers’ information in used for online political advertising. Facebook said it would support legislation to require large digital platforms to keep a public library of paid political ads that had appeared on their sites. Proposals suggested that tech companies be required to confirm the identities and loca-tions of the sponsors of political advertisements on their sites.

∙ Facebook, Google, and other technology firms could be held responsible for the unethi-cal or illegal behavior of those who used their platforms. This effort targeted the actions by organizations like Cambridge Analytica—or even foreign governments—that might try to influence political elections through advertisements on social media.

∙ Governmental investigations, likely by the nation’s chief privacy regulator, the Federal Trade Commission (FTC), could be conducted, with the FTC given sweeping access and enforcement powers.

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How did the public feel about these proposals? In a 2018 survey, only 37 percent of Americans said that Facebook, Twitter, and other social platforms were not regulated enough, and 14 percent of those polled said they were already regulated too much. While many were worried that a Cambridge Analytica-type incident might occur again, and that personal information was not well protected, they were uncertain if governmental regula-tion was the right answer.

Sources: “How Calls for Privacy May Upend Business for Facebook and Google,” The New York Times, March 24, 2018, www.nytimes.com; “Facebook Introduces Central Page for Privacy and Security Settings,” The New York Times, March 28, 2018, www.nytimes.com; “Facebook Limiting Information Shared with Data Brokers,” The Wall Street Journal, March 28, 2018, www.wsj.com; “As Mark Zuckerberg Prepares to Testify, Here’s How Washington Could Regulate Silicon Valley,” The Wall Street Journal, April 9, 2018, www.wsj.com; “The Key Moments from Mark Zuckerberg’s Testimony to Congress,” The Guardian, April 11, 2018, www.theguardian.com; “No Overwhelming Support for More Online Regulation, Poll Finds,” The Wall Street Journal, April 16, 2018, www.wsj.com; “Facebook Gears Up to Lose Money on Political Ads,” Ad Age, May 2, 2018, adage.com; “Read Mark Zuckerberg’s Prepared Remarks for his Meeting with EU Lawmakers,” CNBC, May 22, 2018, www.cnbc.com; and “Facebook and Cambridge Analytica: What You Need to Know as Fallout Widens,” The New York Times, March 19, 2018.

Discussion Questions

1. Do you believe the government (in the United States and other countries) should regu-late Facebook to protect its users’ privacy? Why or why not?

2. Do you believe that Facebook’s actions so far exemplify working in collaboration with, or in opposition to, government? Why?

3. What elements of the public policy process are seen in this case: public policy inputs, goals, tools, and effects?

4. Of the reasons described in this chapter to justify government regulation: market fail-ure, negative externalities, natural monopolies, and ethical arguments, which reasons are relevant in this case?

5. Since Facebook and other social media platforms are global in nature, is there a need for international regulation to protect consumers’ privacy worldwide? If so, what organiza-tion could provide this global regulatory protection?

6. What level of responsibility do individuals who use Facebook and other social media sites have to protect their own personal information?

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C H A P T E R E I G H T

Influencing the Political EnvironmentBusinesses face complicated issues in managing their relationships with politicians and government regulators. Managers must understand the political environment and be active and effective par-ticipants in the public policy process. They need to ensure that their company is seen as a rele-vant stakeholder when government officials make public policy decisions and must be familiar with the many ways that business can influence these decisions. The opportunities afforded businesses to participate in the public policy process differ from nation to nation. Sound business strategies depend on an understanding of these differences, enabling businesses to manage worldwide business–government relations effectively.

This Chapter Focuses on These Key Learning Objectives:

LO 8-1 Understanding the arguments for and against business participation in the political process.

LO 8-2 Knowing the types of corporate political strategies and the influences on an organization’s devel-opment of a particular strategy.

LO 8-3 Assessing the tactics businesses can use to be involved in the political process.

LO 8-4 Examining the role of the public affairs department and its staff.

LO 8-5 Recognizing the challenges business faces in managing business–government relations in different countries.

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In 2018, a group of U.S. senators proposed the Honest Ads Act. The proposal quickly gained bipartisan traction, and corporate executives, including as Mark Zuckerberg, also voiced support for this new proposed law. The goal of the Honest Ads Act was to provide more transparency for online political advertisements. This concern was sparked by revelations that Russian nationals had purchased political ads on social media networks, including Facebook, to attempt to influence voters in the 2016 presi-dential election.

The Honest Ads Act would require digital platforms with more than 50 million unique monthly visitors to maintain a complete record of advertisers who had spent more than $500 on ads during the previous year. These records would be available to the public and include a digital copy of the ads, as well as a description of the target audience—for exam-ple, women over 25 who were likely to vote Republican. The report would also include the ad rate, the name of the candidate or office that the ad was supporting, and the contact information of the ad’s purchaser. Facebook and other digital platforms would make a rea-sonable effort to ensure that foreign nationals did not buy ads that attempted to influence elections. This last condition was something that Zuckerberg said in Congressional testi-mony that Facebook was already doing.1

The National Cannabis Industry Association (NCIA), a trade group for legal marijuana businesses, hired two Washington lobbying firms, Heather Podesta + Partners, a firm with ties to the Democratic Party, and Jochum Shore & Trossevin, a firm with strong rela-tionships with Republican lawmakers, to push for legislation to allow its members better access to banks. “We’ve gone from simply seeking to have our industry’s issues taken seri-ously to bipartisan legislation introduced in both chambers,” said Aaron Smith, the NCIA’s executive director. By 2018, 29 states and the District of Columbia had legalized marijuana for medical use and nine states had passed laws permitting personal, recreational use. Yet, marijuana-related businesses were often forced to deal in cash-only business transactions because most banks refused to deal with them out of fear of federal prosecution, since mar-ijuana possession was still illegal under federal law.2

As the first example above demonstrates, government and business must carefully mon-itor online political advertisements to ensure that the public is protected from deception, and information is transparently available. In the other opening example, businesses or an industry sometimes solicit lobbying firms to argue their case for a change in practices due to conflicting state and federal laws. In general, business recognizes the necessity of monitoring the political environment and addressing political issues as they arise. This is a constant challenge for businesses entrusted with managing the political environment, because new issues emerge and warrant intervention.

This chapter focuses on managing business–government relations and political issues. Businesses do not have an absolute right to exist and pursue profits. The right to conduct commerce depends on compliance with appropriate laws and public policy. As discussed in Chapter 7, public policies and government regulations are shaped by many actors, includ-ing business, special interest groups, and government officials. The emergence of public issues often encourages companies to monitor public concerns, respond to government proposals, and participate in the political process. This chapter discusses how managers can ethically and practically meet the challenge of managing the business–government relationship.

1 “Facebook: What Is the Honest Ads Act?” CBS News, April 11, 2018, www.cbsnews.com.2 “Marijuana Industry Hires Lobbyists to Ease Bank Access,” The Wall Street Journal, July 28, 2015, www.wsj.com.

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Participants in the Political Environment

In many countries the political environment features numerous participants. These partici-pants may have differing objectives and goals, varying access to political tools, and dispa-rate levels of power or influence. The outcomes sought by businesses may be consistent, or at odds, with the results desired by interest groups. Participants may argue that their needs are greater than the needs of other political actors, or that one group or another group does not have the right to be involved in the public policy process. To better understand the dynamic nature of the political environment, it is important to explore who participates in the political process and their claims of legitimacy.

Business as a Political ParticipantThere is a serious debate between those who favor and those who oppose business involve-ment in governmental affairs. This debate involves the question of whether, and to what extent, business should legitimately participate in the political process. As shown in Figure 8.1, some people believe business should stay out of politics, while others argue that business has a right to be involved.

Proponents of business involvement in the political process often argue that since other affected groups (such as special interest groups) are permitted to be involved, it is only fair that business should be, too. This justice and fairness argument becomes even stronger when one considers the significant financial consequences that government actions may have on business.

An Irishman walks into a bar. This may sound like the opening line of a joke, but it actually is the beginning of a television advertisement about responsible drinking, developed by British beverage maker Diageo. The company-sponsored ads promot-ing moderation in drinking, the first of their kind in the United Kingdom, were aired during prime time to maximize their impact. A Diageo spokesperson admitted that while the company wanted to discourage binge drinking by young people, a growing concern, it also hoped its campaign would help Diageo avoid possible governmental regulation of their product and its advertisements.3

Businesses see themselves as countervailing forces in the political arena and believe that their progress, and possibly survival, depends on influencing government policy and regulations. But sometimes efforts to do so can become controversial.

In early 2017, several dozen CEOs joined two advisory councils established as part of the White House’s “Open Door” policy for the country’s top business leaders.

3 “Promoting Moderation,” Ethical Performance Best Practices, Winter 2007/2008, p. 8.

Why Business Should Be Involved Why Business Should Not Be Involved

A pluralistic system invites many participants. Managers are not qualified to engage in political debate.

Economic stakes are high for firms. Business is too big, too powerful—an elephant dancing among chickens.

Business counterbalances other social interests.

Business is too selfish to care about the common good.

Business is a vital stakeholder of government. Business risks its credibility by engaging in partisan politics.

FIGURE 8.1The Arguments for and against Political Involvement by Business

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They were the Manufacturing Jobs Initiative and the Strategic Policy Forum, both established to advise President Trump on economic growth and job creation. But the two advisory councils were short-lived. Trump’s comments regarding a violent conflict between white supremacist groups and counterprotesters in Charlottesville, Virginia—in which he said there were “some very fine people on both sides”—offended some of the executives. Under pressure from many of the companies’ stakeholders, top executives at J.P. Morgan Chase, IBM, PepsiCo, Walt Disney, Uber, Merck, Tesla, 3M, and others resigned from the two councils. Douglas McMillon, Walmart’s CEO, expressed many of their concerns when he said, “As we watched the events and the response from President Trump over the weekend, we too felt that he missed a critical opportunity to help bring our country together by unequivocally rejecting the appalling actions of white supremacists.” A few minutes later Trump posted on Twitter that he had dissolved the councils: “Rather than put-ting pressure on the businesspeople of the Manufacturing Council & Strategy & Policy Forum, I am ending both. Thank you all!”4

Although the debate continues over whether businesses should be involved in politics, and if so how, the facts are that in many countries businesses are permitted to engage in political discussions, influence political races, and introduce or contribute to the drafting of laws and regulations, as discussed later in this chapter. (Some of these organizations are mentioned later in Figure 8.4.)5

Influencing the Business–Government Relationship

Most scholars and businesspeople agree: Business must participate in politics. Why? Quite simply, the stakes are too high for business not to be involved. Government must and will act upon many issues, and these issues affect the basic operations of business and its pursuit of eco-nomic stability and growth. Therefore, businesses must develop a corporate political strategy.6

Corporate Political StrategyA corporate political strategy involves the “activities taken by organizations to acquire, develop, and use power to obtain an advantage.”7 These strategies might be used to further a firm’s economic survival or growth. Alternatively, a corporate political strategy might target limiting a competitor’s progress or ability to compete. Strategies also may be devel-oped simply to exercise the business’s right to a voice in government affairs, as intended by participation in the presidential advisory councils discussed earlier. Organizations differ in how actively they are involved in politics on an ongoing basis. Some companies essentially wait for a public policy issue to emerge before building a strategy to address that issue. This is likely when they believe the threat posed by unexpected public issues is relatively small.

4 “Trump’s Business Councils Disband after CEOs Defect,” The Wall Street Journal, August 16, 2017, www.wsj.com; and “Morning Agenda: Trump Bites Back against C.E.O.s Who Rebuked Him,” The New York Times, August 16, 2017, www.nytimes.com.5 All data from OpenSecrets.org.6 For a contrarian view, see Miguel Alzola, “Corporate Dystopia: The Ethics of Corporate Political Spending,” Business & Soci-ety, 52 (2013), pp. 388–426.7 The quotation is from John F. Mahon and Richard McGowan, Industry as a Player in the Political and Social Arena (Westport, CT: Quorum Press, 1996), p. 29. Also see Jean-Philippe Bonardi, Amy J. Hillman, and Gerald D. Keim, “The Attractiveness of Political Markets: Implications for Firm Strategy” Academy of Management Review 30 (2005), pp. 397–413, for a thorough discussion of this concept.

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On the other hand, other companies develop an ongoing political strategy, so that they are ready when various public issues arise. Firms are most likely to have a long-term polit-ical strategy if they believe the risks of harm from unexpected public issues are great, or when the firm is a frequent target of public attention. For example, firms in the technology industry realized that online political advertising created a new challenge and might require them to support passage of the Honest Ads Act, as discussed at the beginning of this chapter.

Political actions by businesses often take the form of one of the following three strategic types, also shown in Figure 8.2:

∙ Information strategy (where businesses seek to provide government policymakers with information to influence their actions, such as lobbying).

∙ Financial-incentives strategy (where businesses provide incentives to influence govern-ment policymakers to act in a certain way, such as supporting a political action commit-tee that contributes to a policymaker’s campaign).

∙ Constituency-building strategy (where businesses seek to gain support from other affected organizations to better influence government policymakers to act in a way that helps them).

The various tactics used by businesses when adopting each of these political strategies are discussed next in this chapter.

Political Action Tactics

The tactics or tools used by business to influence the public policy process are often sim-ilar to those available to other political participants. Sometimes business may have an advantage since it might have greater financial resources, but often it is how tactics are used—not the amount of money spent—that determines their effectiveness. This section

FIGURE 8.2Business Strategies for Influencing Government

Source: Adapted from Amy J. Hillman and Michael A. Hitt, “Corporate Political Strategy Formulation: A Model of Approach, Participation, and Strategy Decisions” Academy of Management Review 24 (1999), Table 1, p. 835.

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Constituency-building Strategy

• Stakeholder coalitions• Advocacy advertising• Public relations• Legal challenges

Information Strategy

• Lobbying• Direct communication• Expert witness testimony

Financial-incentives Strategy

• Political contributions• Economic leverage• Political consulting aid• O�ce personnel

Bu

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will discuss tactics used by business in the three strategic areas of information, financial incentives, and constituency building.

Promoting an Information StrategyAs shown in Figure 8.2, some firms pursue a political strategy that tries to provide govern-ment policymakers with information to influence their actions. Lobbying is the political action tool most often used by businesses when pursuing this type of political strategy, but some firms also use various forms of direct communication with policymakers. These various information-strategy approaches are discussed next.

Lobbying

An important tool of business involvement in politics is lobbying. Many companies hire full-time representatives in Washington, DC, state capitals, or local cities (or the national capital in other countries where they operate) to keep abreast of developments that may affect the company and, when necessary, to communicate with government officials. These individuals are called lobbyists. Their job is to represent the business before the people and agencies involved in determining legislative and regulatory outcomes. Lobbying involves direct contact with a government official to influence the thinking or actions of that person on an issue or public policy. Lobbyists communicate with and try to persuade others to support an organization’s interest or stake as they consider a particular law, policy, or reg-ulation. Google and Alphabet, created when Google was restructured, spent more than $18 million on lobbying activities and hired more than 110 lobbyists in 2018.8 One example of businesses engaging a lobbyist is discussed in Exhibit 8.A.

8 “Growing Persuasion,” The Wall Street Journal, June 21, 2018, www.wsj.com; data from Center for Responsive Politics.

Lobbyist for Hire: Access to the President

In 2017, as President Trump was sworn into office, Trump’s personal attorney Michael Cohen saw an opportu-nity. Cohen pitched his close association with Trump to potential corporate clients. He showed photos of himself with Trump, mentioned how frequently they spoke, and inferred that he was the president’s “fixer.” Through his personal business, Essential Consultants, Cohen was seeking to sell his services to companies eager to gain insights in how to navigate the new Trump administration. A rapid flow of millions of dollars to Cohen’s consult-ing firm suggested that some corporations no longer wished to rely on traditional lobbying tactics when dealing with the new “outsider” president, and rather sought an “inside” tack through Trump’s personal attorney. A Korean defense company, competing for a U.S. government contract, paid Cohen $150,000 to advise it on accounting practices. Novartis AG, a global pharmaceutical company, paid Cohen $1.2 million to provide insights into health care policy. Later the firm realized that it had “made a mistake,” according to its CEO, since Cohen “had little to offer the firm,” but allowed Cohen to retain the consulting fee. AT&T’s CEO Randall Ste-phenson also recognized that “the company made a mistake” after hiring Cohen to provide advice on federal policy, including how the administration might view the telecommunication giant’s deal to buy Time Warner. Eventually Cohen’s business activities came under investigation by special counsel Robert Mueller and the U.S. attorney for the Southern District of New York, resulting in raids on Cohen’s office, home, hotel room and safe-deposit box. Cohen would not comment on the investigation, but his friends said that he had so many potential clients after Trump’s election that he had to turn many down. “An entrepreneur always under-stands their opportunities. And Michael has always been an entrepreneur,” explained a friend who spoke to The Washington Post under the condition of anonymity.

Source: “I’m Crushing It: How Michael Cohen, Touting His Access to President Trump, Convinced Companies to Pay Millions,” The Washington Post, May 9, 2018, www.washingtonpost.com; “Novartis CEO Calls Hiring of Trump Lawyer Michael Cohen a ‘Mistake’,” The Wall Street Journal, May 10, 2018, www.wsj.com; and “AT&T Chief Says It Made a ‘Big Mistake’ Hiring Michael Cohen,” The New York Times, May 11, 2018, www.nytimes.com.

Exhibit 8.A

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Businesses, trade associations, and other groups spend a great deal on lobbying. Figure  8.3 shows the total number of lobbyists and the amount spent on lobbying activ-ity from 1998 to 2017. As illustrated, the number of lobbyists peaked in 2010 and has held relatively constant since then. Similarly, the amount spent on lobbying rose to more than $3 billion annually by 2008 and has declined slightly since that time. The organi-zations spending the most on lobbying in 2018 were the U.S. Chamber of Commerce ($23,095,000), the National Association of Realtors ($13,085,136), and the Pharmaceu-tical Research and Manufacturers of America ($10,073,750). Corporations also spent money on lobbying, as indicated by the following information from the 2018 election cycle: Alphabet ($5,100,000), Pfizer ($4,650,000), DowDuPont ($4,496,570), Northrop Grumman ($4,400,000), Comcast ($4,242,000), and AT&T ($4,140,000).9

Under U.S. law and EU directive (and in other nations as well), lobbying activities are severely limited and must be disclosed publicly.10 Lobbying firms and organizations employing in-house lobbyists must register with the government. They must also file regu-lar reports on their earnings (lobbyists) or expenses (organizations), and indicate the issues and legislation that were the focus of their efforts. These rules are supposed to guarantee that politicians are free from undue influence and represent the public interest. However, they are not always effective, as the following report indicates.

The Transparency International’s report entitled “Lobbying in Europe: Hidden Influence, Privileged Access” reported that in most European countries, the

9 For a complete listing of lobbyists and their expenses by organization and by industry, see www.opensecrets.org/lobby.10 For a detailed account of lobbying regulations in the United States, see Lobbying Disclosure Act Guidance at lobbyingdisclosure.house.gov, and for a description of rules governing the EU, see “Regulation of Lobbying across the EU,” European Parliament, December 2016, www.europarl.europa.eu.

FIGURE 8.3Total Federal Lobbying Spending and Number of Lobbyists, 1998–2017, by U.S. Business

Source: Center for Responsive Politics at www.opensecrets.org.

Total Lobbying Spending ($ in billions) Number of Lobbyists

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

$1.44

$1.44

$1.56

$1.64

$1.81

$2.04$2.18

$2.42

$2.61

$2.85$3.30

10,684

12,936

12,535

11,838

12,125

12,920

13,167

14,066

14,514

14,840

14,154

2009$3.50 13,672

2010$3.54 12,931

2011$3.32 12,655

2012$3.31 12,185

2013$3.24 12,109

20142015

2016

2017

$3.24

$3.22

$3.15

$3.37

11,80011,544

11,175

11,529

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influence of lobbyists was shrouded in secrecy and lacked the overall transparency founds in other countries. This European practice led to a major cause for concern among its citizens. When political lobbying activities are undertaken with integrity and transparency, lobbying was viewed by the citizenry as a legitimate avenue for special interest groups to be involved in the deliberative process of lawmaking. Yet, when lobbying was not transparent and unregulated, concerns rose over the poten-tial for political corruption. The lobbying activities conducted by businesses, in par-ticular, raised serious concerns among Europeans. They were fearful of the vast sums at their disposal of large companies and how these resources could be used to develop close relationships with lawmakers, and thus gain undue political influ-ence. A Eurobarometer report revealed that 81 percent of Europeans agreed that overly close links between business and politics in their country had led to corrup-tion, and more than half believed that the only way to succeed in business in their country was through political connections.11

Businesses sometimes hire former government officials as lobbyists and political advi-sors. These individuals bring with them their personal connections and detailed knowledge of the public policy process. This circulation of individuals between business and gov-ernment is often referred to as the revolving door. Some examples of this revolving door phenomenon are shown in Exhibit 8.B.

While it is perfectly legal for government officials to seek employment in industry, and vice versa, the revolving door carries potential for abuse. Although it may be praised as an act of public service when a business executive leaves a corporate position to work for a regulatory agency, that executive may be inclined to act favorably toward his or her former employer. Such favoritism would not be fair to other firms also regulated by the agency. Businesses can also seek to influence public policy by offering jobs to regulators in exchange for favors, a practice that is considered highly unethical. “Is it any wonder that the public holds such a low esteem for Congress?” said Joel Hefley, who served as chairman of the House ethics committee before he retired from Congress. “You can dance around these rules in so many ways it really does not accomplish much of anything.”12

Despite the public’s strong concerns, lobbying—as well as hiring former government officials for positions in the corporate world—is normally legal, but great care must be exercised to act ethically.

Direct Communications

Businesses can also promote an information strategy through direct communication with policymakers, another kind of information strategy.

Democracy requires citizen access and communication with political leaders. Businesses often invite government officials to visit local plant facilities, give speeches to employees, attend awards ceremonies, and participate in activities that will improve the officials’ under-standing of management and employee concerns. These activities help to humanize the dis-tant relationship that can otherwise develop between government officials and the public.

One of the most effective organizations promoting direct communications between business and policymakers is The Business Roundtable. Founded in 1972, the Roundtable is an organization of chief executive officers (CEOs) of leading corporations representing $7.2 trillion in annual revenues and more than 16 million employees. The organization studies various public policy issues and advocates for laws that it believes “foster vigorous

11 “Lobbying in Europe: Hidden Influence, Privileged Access,” Transparency International, 2014, www.transparency.org.12 “Law Doesn’t End Revolving Door on Capitol Hill,” The New York Times, February 1, 2014, dealbook.nytimes.com.

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economic growth and a dynamic global economy.” Some issues the Roundtable has taken a position on in recent years include corporate governance, job creation and training, sus-tainability, health care, international trade, immigration, and cybersecurity.13

Expert Witness Testimony

A common method of providing information to legislators is for CEOs and other execu-tives to give testimony in various public forums. Businesses may want to provide facts, anecdotes, or data to educate and influence government leaders. One way that government officials collect information in the United States is through public congressional hearings, where business leaders may be invited to speak. These hearings may influence whether legislation is introduced in Congress, or change the language or funding of a proposed piece of legislation, or shape how regulation is implemented. In some cases, the very future of the firm or industry may be at stake. An example of this political activity is pro-vided in the discussion case at the end of Chapter 7, which describes the 2018 testimony of Facebook CEO Mark Zuckerberg before the U.S. Congress and the European Parliament. Another example is provided next.

The top executives of five of the nation’s largest prescription drug distributors, McKesson, Cardinal Health, AmerisourceBergen, Miami-Luken, and H.D. Smith, all testified before a Congressional committee investigating the opioid crisis. The investigation targeted the massive amounts of opioid painkillers shipped to small-town pharmacies in southern West Virginia. Joseph Mastandrea, CEO of Miami-Luken, told the committee that his company played a role in the opioid crisis, but executives from the other four drug distributors downplayed their responsibility arguing that drug prescribers and pharmacists were to blame. Carinal Health CEO George Barrett apologized for not doing more to stop large shipments of prescrip-tion painkillers from flooding into rural communities in West Virginia. “I want to express my personal regret for our judgements that we’d make differently today, with regard to two pharmacies. With the benefit of hindsight I wish we would have

13 More information about the Business Roundtable is available at www.businessrountable.org.

The Revolving Door of Political Influence

What job opportunities are available for politicians after they decide to retire from Congress or lose a reelec-tion campaign? Lucrative positions await many of them just months after leaving Congress.

• Charlie Dent served seven years in the Pennsylvania House of Representatives and six years in the Penn-sylvania State Senate before moving on to the U.S. Congress for 14 years in the House of Representa-tives. Immediately after retiring from Congress, Dent was hired as a senior policy advisor by DLA Piper, a lobbying firm. DLA had over 40 clients; among its largest were Brookfield Asset Management, Booz Allen Hamilton, Discover Financial Services, Coca-Cola, and Comcast.

• Lawrence Linden was a White House staffer before serving in the U.S. House of Representatives for six years. After his political career, Linden was hired as the senior manager of federal government affairs by Walmart.

Of the 61 members of the 114th Congress who stepped down from their political offices in January 2017, 26 had found new employment within a year, most serving their new employer as a lobbyist on Capitol Hill. Of the 75 members of the 113th Congress who did not return, 41 found employment as lobbyists.

Source: See OpenSecrets.org/revolving.

Exhibit 8.B

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moved faster and answered a different set of questions. … today I am confident we would have reached different conclusions.”14

The role of drug distributors in the opioid crisis is further discussed in a case that appears at the end of this book.

Promoting a Financial-Incentive StrategyA major method businesses use to influence government policymakers is to provide finan-cial incentives. They can do this by contributing to a politician’s election campaign, in order to persuade him or her—once in office—to support certain policies or to vote in a manner favorable to the firms’ interests. In recent years, a series of Supreme Court and lower court decisions have dramatically expanded the ability of corporations to make campaign contributions. This section will describe the various mechanisms businesses can now use to influence the outcome of elections, including political action committees, Super PACs, tax-exempt organizations, and direct contributions by both corporations and their executives and employees. While most examples and data in this section are from the United States, Exhibit 8.C describes political campaign funding in Malaysia.

Political Action Committees

One of the oldest political action tools used by business is to form and support political action committees (PACs), independently incorporated organizations that can solicit con-tributions and then channel those funds to candidates seeking public office. Since the mid-1970s, companies have been permitted to spend company funds to organize and administer political action committees. (They cannot give directly to PACs, however.)

14 “Major Drug Distributors Downplay Contribution to Opioid Crisis in Testimony before Congress,” CBS News, May 8, 2018, www.cbsnews.com.

Campaign Finances in Malaysia

In 2015 Malaysian Prime Minister Najib was fighting for his political life. The media revealed that almost $700 million from an undisclosed source were in Najib’s personal bank accounts. While not initially proven to be illegal, this flood of money raised many ethical questions. Najib explained that the funds were not used for his personal enrichment. They were, instead, channeled to politicians or into spending on projects aimed at helping the country and the ruling party (of which he was a member) win elections. It was never revealed where the $700 million came from or where it went, even after a six-month Wall Street Journal investigation. The investigation concluded that the payments were not illegal but did represent a new chapter in Malaysia’s “freewheeling electoral system.” The prime minister justified the contributions since the money boosted Malaysia’s economy by attracting foreign capital necessary to offset the more than $11 billion in government debt. Najib reported he funneled at least $140 million to charity projects, such as schools and low-income housing. He also admitted to writing checks from his personal bank accounts to lawmakers, who used the money as they saw fit. Although investigations revealed nothing illegal, Najib did pledge to change the system, setting up a bipartisan panel to look at campaign financing and possible reforms. “There is an urgent need to regulate political financing to ensure accountability and transparency,” said Najib. But by the time the 2018 elections were held in Malaysia, no new campaign financing laws had been passed. Shortly after Najib’s surprising election defeat, Najib was arrested on anticorruption charges.

Sources: “1MDB and the Money Network of Malaysian Politics,” The Wall Street Journal, December 28, 2015, www.wsj.com; “Your Guide to Malaysia’s Upcoming General Election,” Bloomberg, May 7, 2018, www.bloomberg.com; and “Najib Razak, Malaysia’s Fallen Leader, Is Arrested in 1MDB Corruption Scandal,” The Wall Street Journal, July 3, 2018, www.wsj.com.

Exhibit 8.C

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PAC contributions to political campaigns are limited to certain amounts per candidate and per election. Multicandidate PACs could give up to $5,000 per candidate per election and $15,000 per national party per calendar year; for non-multicandidate PACs, these lim-its were $2,700 and $33,900, respectively. The amounts that could be donated to a PAC were also limited.

PACs are particularly active in industries that are highly regulated or are the target of proposed regulations, such as the telecommunications, financial services, and defense contractors industries. Figure 8.4 lists the top political action committees by contribution, comparing data from different time periods. It shows that the labor unions that dominated the top 10 PAC list in 2007–2008 (with four of the top ten spots) have been replaced by a growing number of business organizations and business trade groups in 2017–2018.

Business PACs have recently favored Republican candidates. For example, the follow-ing companies, through political action committee contributions, have generally supported Republican candidates over Democrat candidates: AT&T (62%–38%), Lockheed Martin (62%–37%), Northrup Grumman (57%–43%), Honeywell International (58%–42%), United Parcel Service (67%–33%), Boeing Company (64%–36%), Comcast (61%–38%), and Deloitte LLP (61%–39%).15

15 For a more comprehensive listing of business contributions by political party, see www.opensecrets.org/pacs.

PAC Name 2007–2008 PAC Name 2011–2012* PAC Name 2017–2018

1. AT&T Inc. $1,911,500 National Association of Realtors

$4,020,900 Honeywell International $1,768,562

2. National Beer Wholesalers Association

$1,911,000 International Brotherhood of Electrical Workers

$3,344,650 National Beer Wholesalers Association

$1,491,500

3. National Air Traffic Controllers Association

$1,804,000 AT&T, Inc. $3,108,200 AT&T Inc. $1,360,000

4. Lockheed Martin $1,783,500 American Bankers Association

$2,918,143 American Association for Justice

$1,298,500

5. Prosperity Action $1,740,000 National Beer Wholesalers Association

$2,869,000 International Brotherhood of Electrical Workers

$1,293,150

6. American Crystal Sugar $1,583,500 National Auto Dealers Association

$2,864,000 Lockheed Martin $1,271,500

7. Northrup Grumman $1,553,000 International Association of Fire Fighters

$2,734,900 American Bankers Association

$1,182,750

8. Operating Engineers Union

$1,483,925 Operating Engineers Union

$2,704,067 Credit Union National Association

$1,168,000

9. Honeywell International $1,466,127 American Association for Justice

$2,700,500 Every Republican Is Crucial PAC

$1,101,000

10. American Association for Justice

$1,433,500 Laborers Union $2,555,850 Boeing $1,069,000

FIGURE 8.4 Political Action Committee Activity

Sources: “Top PACs” for 2007–2008, 2011–2012, and 2017–2018, Center for Responsive Politics, www.opensecrets.org.

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Although companies have continued to operate PACs, this mechanism has some dis-advantages, from a business perspective. Contributions to candidates are capped at fairly low levels, and companies cannot give money directly to their affiliated PACs. For these reasons, companies have turned increasingly to other mechanisms of political influence that have recently become available, as described next.

Super PACs

In 2010, a federal district court ruling in a lawsuit filed by SpeechNow.org opened the door for the creation of another mechanism of political influence. The court ruled that as long as PACs did not contribute directly to candidates, parties, or other PACs, they could accept unlimited contributions from individuals, unions, or corporations. This decision led the rise of super PACs, technically known as independent expenditure-only committees. Because contri-bution limits had been removed by the court, these organizations were able to raise and spend vast amounts of money, so long as they were not actually affiliated with any campaigns.

By 2018, nearly 2,400 groups had organized as super PACs. They reported total contri-butions of nearly $1.8 billion during the last president election cycle of 2015–2016 and over $420 million in the 2017–2018 election cycle. Super PACs spent more than $1 billion during the 2016 presidential election cycle and nearly $100 million during the 2017–2018 election cycle. Although super PACs were technically independent, they often worked to support par-ticular candidates or parties, such as the two largest super PACs, the Senate Majority PAC, with strong ties to the Democratic Party and spending nearly $16 million in 2017–2018, and the Congressional Leadership Fund, which generally supported conservative candidates and causes and contributed nearly $13 million in 2017–2018. But many super PACs repre-sented a group of potential voters or a political stance, such as the Club for Growth Action, a free-enterprise advocacy group, and Women Vote!, in support of electing female candidates.

While some individuals and companies were eager to take advantage of the new oppor-tunity to be involved in super PACs, others found that doing so could be risky.

With John Bolton set to officially become President Trump’s national security adviser (in March 2018), two government watchdog groups filed a criminal com-plaint demanding an investigation into whether Bolton’s Super PAC wittingly con-spired with the scandal-ridden British data firm, Cambridge Analytica, to commit “very serious” violations of U.S. election laws. The complaint calls for a Justice Department probe and argued that Bolton’s Super PAC violated federal laws pro-hibiting foreign nationals from “directly or indirectly” participating in the decision-making process of American political campaigns. “What’s worse than the fact that it apparently happened in this case is that the people involved apparently knew they were breaking the law and continued to do it anyway,” said Noah Book-binder, executive director at the Citizens for Ethics and Responsibility.16

Tax-Exempt Organizations

A third mechanism businesses can use to direct money to election campaigns is tax-exempt organizations, such as 527, 501(c)4, or 501(c)6 organizations, each named after the rele-vant section of the tax code. These organizations are political campaign groups officially unaffiliated with individual parties or candidates, and therefore not liable for campaign spending restrictions. 527 committees may raise unlimited money for general political

16 “Alleging ‘Very Serious’ Violations, Groups File Complaint against John Bolton Super PAC over Ties to Cambridge Analytica,” Common Dreams, March 30, 2018, www.commondreams.org.

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activities, such as voter mobilization efforts, but are prohibited from directly supporting or opposing a specific candidate. They gained prominence after the passage of the Bipartisan Campaign Reform Act (BCRA) of 2002, which prohibited soft money —unlimited contri-butions to the national political parties by individuals or organizations for party-building activities. As a way to get around these restrictions, some companies turned to tax-exempt organizations as vehicles for their political contributions. In the 2016 and 2018 election cycle, Act Blue was one of the most active 527 organizations.

Act Blue, headquartered in Massachusetts, is considered a liberal 527 organization. During the 2016 and 2018 election cycles, Act Blue raised more than $56 million and nearly $16 million, respectively, and spent $45 million and $14.5 million during these election cycles. Two of its largest contributors in 2016 were Bernie 2016, with nearly $48 million, and the Democratic Congressional Campaign Committee, with more than $3 million.17

The term dark money was used to describe contributions made to 527 organizations since the donors’ names and amount of their contributions were not reported to the Fed-eral Election Commission. Contributions to these organizations are often used for various advocacy tactics, such as telephone calls, television or radio announcements, and social media messages to bring attention to a political issue. These types of organizations have no contribution or spending limits.

Direct Contributions by Corporations

Until 2010 corporations were not permitted by law to make direct contributions to political candidates for national and most state offices. As noted above, companies could organize PACs and contribute to super PACs or tax-exempt organizations, but they could not simply write a check from their own corporate treasuries to support a candidate, say, for president. But that all changed with the 2010 Supreme Court ruling in Citizens United v. the Federal Election Commission. As further explained in Exhibit 8.D, this decision allowed compa-nies for the first time to contribute directly to political campaigns.

In 2012, the first full election cycle after the Citizens United decision, outside spend-ing for all political campaigns tripled from the previous four-year cycle to more than $1 billion. Super PACs accounted for more than $600 million of that spending. In 2014, the Supreme Court, in a separate case called McCutcheon v. Federal Election Commis-sion, abolished all limits on election spending by corporations, as well as other organi-zations such as unions. The amount of campaign contributions continued to rise, as seen in the 2016 presidential races. Hillary Clinton had raised more than $563 million from traditional sources—the Democratic Party, established PACs, and individual donors—and an additional $231 million from other sources, generally considered “dark money.” Donald Trump had raised $333 million from the Republican Party, established PACs, and donors, and an additional $75 million from dark money sources.18

Executive and Employee Personal Contributions

A final way that companies can influence elections is by encouraging their executives or employees to make personal contributions to the campaigns of candidates whose views they feel are aligned with their interests. The McCutcheon v. Federal Election Commission decision, mentioned earlier, also struck down the cap on the total amount any individual

17 See Opensecrets.org/527s and the Center for Responsive Politics.18 See opensecrets.org/pres16 and the Center for Responsive Politics.

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The Citizens United Case

In a 5-to-4 decision in 2010 the U.S. Supreme Court upheld the argument made by Citizens United, a conser-vative nonprofit political organization, that its First Amendment right to free speech was violated by the Fed-eral Election Commission’s restrictions on campaign contributions. Justice Anthony Kennedy wrote for the majority opinion, “if the First Amendment has any force, it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.” Republican campaign consultant Ed Rollins stated that the decision added transparency to the election process and would make it more competitive. The Citizens United decision sent shock waves through the world of campaign financing since it allowed corporations, and also labor unions, for the first time in the history of the United States to directly contribute to candidates for public office. Critics said it would “corrupt democracy” by allowing corporate funds to flow directly into campaigns. At the time of the decision, 80 percent of Americans surveyed opposed the Citizens United ruling, and 65 percent strongly opposed it. Nearly three out of four Americans supported an effort by Congress to reinstate limits on corporate and union spending on election campaigns. In 2015, the End Citizens United PAC was established, funded by grassroots donors dedicated to coun-tering what they call the disastrous effects of Citizens United and reforming the American campaign finance system. The End Citizens United PAC’s mission was “To end Big Money in politics and fix our rigged political system by electing campaign finance reform champions, passing state ballot measures, and elevating this issue in the national conversation.” Those running the PAC were committed to working in partnership with others to overturn Citizens United and end undisclosed money in politics. They sought to do this by electing pro-reform candidates, raising the issue of money in politics as a national priority, working with ballot mea-sure campaigns to pass pro-reform laws in the states, and using grassroots membership to demonstrate political power on the issue of money in politics.

Sources: “Summary Citizens United v. Federal Election Commission (Docket No. 08-205),” Cornell University School of Law, n.d., topics.law.cornell.edu/supct/cert/08-205; “Money Grubbers: The Supreme Court Kills Campaign Finance Reform,” Slate, January 21, 2010, www.slate.com; “Justices, 5–4, Reject Corporate Spending Limit,” The New York Times, January 21, 2010, www.nytimes.com; “Citizens United v. Federal Election Commission,” IIT Chicago—Kent College of Law, June 1, 2012, www.oyez.org; and End Citizens United website, endcitizensunited.org. Also see David Silver, “Business Ethics after Citizens United: A Contractualist Analysis,” Journal of Business Ethics 127 (2015), pp. 385–97.

Exhibit 8.D

can contribute to federal candidates in a two-year election cycle. Given the multiple mech-anisms for campaign financing and the lack of caps on the amount contributed, individuals are able to significantly influence the political process if they have enough money. One example of the potential for political power through contributions is described next.

By June 2015, fewer than 400 families were responsible for almost half of the money raised for the 2016 presidential campaign, a concentration of political donors that was unprecedented in the modern era. The vast majority of the $388 million backing presidential candidates by these families was channeled to groups that could accept unlimited contributions in support of candidates from almost any source. The concentration of donors was greatest on the Republican side, according to a New York Times analysis of Federal Election Commission reports. Just 130 families and their businesses provided more than half of the money raised through June 2015 by Republican candidates and their super PACs to support their presidential campaigns bids. “In the donor world, it is primarily a love of economic freedom,” said Chart Westcott, a Dallas private equity investor. “That’s the biggest drive for most donors—more prosperity for the country as a whole, as well as for themselves.”19

19 “Small Pool of Rich Donors Dominates Election Giving,” The New York Times, August 1, 2015, www.nytimes.com.

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Generally, recent court decisions have expanded the mechanisms available to corpora-tions, as well as labor unions, other organizations, and individuals to use their resources to influence politics. To some, these developments represent a confirmation of individual or organizational free speech rights. To others, they represent a distortion of the political process in favor of organizations and individuals with money to spend.

Economic Leverage

Another political action tool often used by businesses when pursuing a financial incen-tive strategy is to use their economic leverage to influence public policymakers. Economic leverage occurs when a business uses its economic power to threaten to leave a city, state, or country unless a desired political action is taken. Economic leverage also can be used to persuade a government body to act in a certain way that would favor the business, as seen in the following story.

When the state of Pennsylvania was considering legalizing slot machines at race-tracks, the owners of a National Hockey League team located in the state, the Pitts-burgh Penguins, were lobbying for a new ice hockey arena to be built with public funds. Government leaders were hesitant to use public funds for a new arena unless substantial private funds were also available. Ted Arneault, owner of the Mountaineer Racetrack and Gaming Resort and part owner of the Pittsburgh Penguins, offered a deal. He said his company would contribute $60 million to build the new ice hockey arena if the state would approve the use of slot machines at Pennsylvania racetracks, including his proposed racetrack facility near Pittsburgh. Legislators agreed.20

In this example, the business owner successfully used economic leverage. By commit-ting his own private money to help support the construction of a new ice hockey arena, he was able to persuade politicians to vote in favor of legislation to approve the use of slot machines at racetracks in the state.

Promoting a Constituency-Building StrategyThe final strategy used by business to influence the political environment is to seek sup-port from organizations or people who are also affected by the public policy or who are sympathetic to business’s political position. This approach is sometimes called a grass-roots strategy, because its objective is to shape policy by mobilizing the broad public in support of a business organization’s position, or a grasstops strategy, because its objective is to influence local opinion leaders. Firms use several methods to build support among constituents. These include advocacy advertising, public relations, and building coalitions with other affected stakeholders. Increasingly, firms have turned to social media as a grass-roots tool, as the following example shows.

During the 2016 presidential elections, politicians and their staffers used Twitter messages, Facebook posts, Instagram photos, and Snapchats that steadily flowed into voters’ inboxes and social media feeds in the digitized, pixelated, endlessly streaming election world. Yet, most avoided using text messages until Senator Ber-nie Sanders, a candidate in the Democratic presidential primary, directed his digital organizing director, Claire Sandberg, to ask each of his more than 100,000 follow-ers to send a quick text. Over a video hookup, Sandberg told Sanders’ supporters, “Everyone, please, take out your smartphones right now and text the word ‘work’.”

20 “Penguins, Arneault Make $107 Million Private Funding Proposal for New Arena Project,” Pittsburgh Post-Gazette, June 24, 2003, p. A1.

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Within hours, the Sanders campaign received nearly 50,000 responses. Other presi-dential hopefuls quickly followed, asking voters to text them during speeches. Republican presidential candidate Rand Paul texted his supporters, encouraging them to sign petitions and support him online. “A text is almost a sacred thing,” said Vincent Harris, digital director for Paul’s campaign. “This space is reserved for your closest friends, your family, people who know you well enough to have your number and bypass a voice mail or email. I think it’s taken several years for the electorate to warm up to this.”21

Stakeholder Coalitions

Businesses may try to influence politics by mobilizing various organizational stakeholders—employees, stockholders, customers, and the local community—to support their political agenda. If a political issue can negatively affect a business, it is likely that it also will negatively affect that business’s stakeholders. If pending regulation will impose substantial costs on the business, these costs may result in employee layoffs, or a drop in the firm’s stock value, or higher prices for the firm’s customers. Businesses may use a variety of tac-tics to appeal to a wide range of stakeholder groups, as described next.

As the 2016 election primaries approached, Patagonia wanted to remind their custom-ers, employees, and the communities to exercise their right to vote on election day. Patagonia contributed $200,000 to nonprofit advocacy groups NextGen Climate and HeadCount, hosted a series of educational events in its apparel stores, and launched the “Vote Our Planet” online campaign to encourage everyone to vote and to educate potential voters on issues important to the company. “We are very concerned that the ugliness and the divisiveness of this election has left voters feeling disenfranchised with politics, and they might sit this one out,” said Patagonia’s vice president of envi-ronmental activism Lisa Pike Sheehy. “It’s imperative that this doesn’t happen.”22

Thus, businesses have an opportunity to build partnerships with various stakeholder groups, encourage them to vote, and hopefully support the causes important to the busi-nesses in elections.

Advocacy Advertising and Public Relations

A common method of influencing constituents is advocacy advertising. Advocacy ads focus not on a particular product or service, like most ads, but rather on an organiza-tion’s or company’s views on controversial political issues. Advocacy ads, also called issue advertisements, can appear in newspapers, on television, or in other media outlets. They have been legal in the United States since 1978, but greater involvement by businesses and other nonprofit (advocacy) organizations in the political process resulted in their use to dramatically increase after the Citizens United v. FEC U.S. Supreme Court decision, dis-cussed earlier. A media expert reported that since the Citizens United decision, television and radio stations revenue each year from issue advertisements has nearly tripled. (Exam-ples of advocacy advertisements are provided in Chapter 19.)

Another constituency-building tactic is the use of public relations firms to promote the company’s message to various stakeholders.

In 2016, the American Petroleum Institute (API), which represents more than 650 oil and gas companies accounting for 9.8 million jobs in the United States and

21 “Presidential Campaigns See Texting as a Clear Path to Voters,” The New York Times, August 18, 2015, www.nytimes.com.22 “Big Corporate Ad Campaigns Promote Voting,” NPQ, September 27, 2016, nonprofitquarterly.org.

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8 percent of the U.S. economy, launched a multi-faceted Renewable Fuel Standard advocacy campaign program in anticipation of the 2016 elections. The program included television and online advertising focusing on how higher ethanol man-dates can hurt consumers and threaten to reverse America’s energy renaissance, where the United States had become the number one oil and gas producer in the world. A poll taken at the time of this advertising campaign showed that 77 percent of registered voters were concerned about government requiring increased amounts of ethanol in gasoline and 73 percent agreed that federal regulations could contrib-ute to increase costs at the gasoline pump. “These new ads will help further inform voters about the potential dangers of the broken ethanol mandate, and increase calls on Congress to fix the RFS [Renewable Fuel Standard],” said Frank Macchiarola, API executive.23

However, this political tactic can also be a high-risk strategy, as described next.

In 2017, marketing consultants warned business that diving into the political fray with their messaging was risker than ever, given widespread political upheaval or uncertainty in the United States and Europe. Many marketing experts provided a single, clear message: steer clear of politics altogether. While they acknowledged that it was tempting for companies to weigh in on political issues, they also pointed out that the Internet backlash against possible missteps was quicker and fiercer than ever. “The implications for corporations that get sucked into this are not good. You want to stay as far removed from politics as possible,” said Mark Penn, a market researcher.24

Trade Associations

Many businesses work through trade associations—coalitions of companies in the same or related industries—to coordinate their grassroots mobilization campaigns, such as the National Realtors Association (real estate brokers), National Federation of Independent Businesses (small businesses), the National Association of Manufacturers (manufacturers only), or the U.S. Chamber of Commerce (broad, diverse membership).25

The U.S. Chamber of Commerce represents more than 3 million businesses of all sizes, sectors, and regions. The chamber has a multimillion-dollar budget, publishes a widely circulated magazine, and operates a satellite television network to broad-cast its political messages. Its agenda includes advocating for pro-business policies that create jobs and grow our economy, and to support smart tax policy, regula-tory relief, legal reform, and trade promotion to the benefit of all U.S. businesses. The U.S. Chamber of Commerce organization has one overarching mission—to strengthen the competitiveness of the U.S. economy.26

Businesses focus on various trade associations for promoting their political activities. The Center for Public Integrity reported that trade associations spent more than $16 million on political campaigns in 2016, compared to only $5 million in 2014 and $3.2 million in

23 “API Launces New RFS Advocacy Campaign Focused on Consumers,” API, August 9, 2016, www.api.org.24 “Marketing Experts to Advertisers: Steer Clear of Politics,” The Wall Street Journal, June 20, 2017, www.wsj.com.25 The classic discussion of corporate political action can be found in Edwin Epstein, The Corporation in American Politics (Englewood Cliffs, NJ: Prentice Hall, 1969). A more recent handbook of current strategies in American political activity is in Kenneth A. Gross, Lawrence M. Noble, Ki P. Hong, and Patricia M. Zweibel, Corporate Political Activities Deskbook (New York: Practicing Law Institute, 2014).26 See the U.S. Chamber of Commerce website, www.uschamber.com.

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the previous presidential election cycle. This spending was decidedly biased, with 92 percent of the contributions supporting Republican candidates or conservative issues.27

Activities of trade associations may include letters, telephone calls, tweets, blogs, e-mails, and other Internet communications to register approval or disapproval of a gov-ernment official’s position on an important issue.

Legal Challenges

A political tactic available to businesses (and other political participants) is the use of legal challenges. In this approach, business seeks to overturn a law or portions of a law after it has been passed or threatens to challenge the legal legitimacy of the new regulation in the courts. Such an approach is shown in the following example.

A few years after Congress passed the Affordable Care Act, many organizations legally challenged the provision that required employers to provide employees with contraceptive coverage in their health plans. Many of those filing lawsuits were churches and religious-affiliated businesses, like Hobby Lobby and its owners David and Barbara Green. The Greens argued that the contraceptive requirement directly challenged their faith, which was the foundation of their business. Based on strong, traditional Christian values, Hobby Lobby stores were not open on Sunday, and the owners and employees supported various Christian charities with their time and financial contributions. Hobby Lobby’s owners also were strongly opposed to any form of birth control based on their religious convictions. According to CEO David Green, “Our family is now being forced to choose between following the laws of the land that we love or maintaining the religious beliefs that have made our business successful and have supported our family and thousands of our employees and their families.” In 2014, the U.S. Supreme Court ruled, in a 5 to 4 decision, in favor of Hobby Lobby, exempting the company from the Affordable Care Act requirements and citing the legal principle that one can maintain their religious beliefs even when acting as a business owner.28

Levels of Political Involvement

Business executives must decide on the appropriate level of political involvement for their company. As shown in Figure 8.5, there are multiple levels of involvement and many ways to participate. To be successful, a business must think strategically about objectives and how specific political issues and opportunities relate to those objectives.

Organizations often begin at the lowest level of political participation, limited organiza-tional involvement. Here managers of the organization are not ready or willing to become politically involved by giving their own time or getting their stakeholders involved, but they want to do something to influence the political environment. Organizations at this level may show their political interest, for example, by writing out a check to a trade association to support an industry-backed political action, such as hiring a lobbyist on a specific issue.

When the organization is ready for moderate political involvement, managers might directly employ a lobbyist to represent the company’s political strategy in Washington or the state capital to push the firm’s political agenda. This is a more active form of political involvement since the lobbyist is an employee of the organization. Getting the organization’s

27 For more information, see OpenSecrets.org or the Center for Public Integrity, www.publicintegrity.org.28 “Businesses Sue Government over Birth Control Mandate,” National Public Radio, January 11, 2013, www.npr.org; and for a detailed timeline and analysis of the lawsuit see www.hobbylobbycase.com.

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stakeholders involved is another way a firm can increase its political involvement. Employ-ees can write letters or send e-mails or tweets to their congressperson or become involved in a political campaign. Senior executives might communicate with stockholders or customers on particular issues that might affect the firm and its stakeholders and encourage them to write letters, blog, or otherwise voice their concerns. Some firms have sent letters to their shareholders soliciting their political contributions for a particular candidate or group of candidates but have asked that the contributions be sent to the company. Then the company takes all of the contributions to the candidate or candidates, clearly indicating that the con-tributions are from the firm’s shareholders. This technique is called bundling.

The most direct and personal involvement in the political environment is achieved at the third level—aggressive organizational involvement—where managers become personally involved in developing public policy. Some executives are asked to sit on important task forces charged with writing legislation that will affect the firm or the firm’s industry. When state legislatures were writing laws limiting the opportunities for corporate raiders to acquire unwilling companies in their states, the legislators turned to corporate general counsels, the company attorneys, to help draft the laws. Another example of aggressive organizational involvement is provided by The Business Roundtable, described earlier in this chapter.

Managing the Political Environment

In many organizations, the task of managing political activity falls to the department of public affairs or government relations. The role of the public affairs department is to man-age the firm’s interactions with governments at all levels and to promote the firm’s inter-ests in the political process. (Public relations, discussed in Chapter 19, is a different business function.) The creation of public affairs units is a global trend, with many compa-nies in Canada, Australia, and Europe developing sophisticated public affairs operations.29 As shown in Exhibit 8.E, nearly all of the most frequently performed activities by public affairs officers or departments involve a political action tactic and the use of most of these tactics has remained relatively stable since 2005.

29 The global patterns of public affairs practice are documented in Journal of Public Affairs, published by Henry Stewart Pub-lishing beginning in 2001. For a practical guide to public affairs, see Public Affairs in Practice: A Practical Guide to Lobbying, Stuart Thomson and Steve John (London, U.K.: Kogan Page, 2007).

Level 3 Aggressive Organizational Involvement—direct and personal

• Executive participation

• Involvement with industry working groups and task forces

• Public policy development

Level 2 Moderate Organizational Involvement—indirect yet personal

• Organizational lobbyist

• Employee grassroots involvement

• Stockholders and customers encouraged to become involved

Level 1 Limited Organizational Involvement—indirect and impersonal

• Contribution to political action committee

• Support of a trade association or industry activities

FIGURE 8.5Levels of Business Political Involvement

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Most companies have a senior manager or executive to lead the public affairs depart-ment. This manager is often a member of the company’s senior management committee, providing expertise about the company’s major strategy and policy decisions. The size of the department and the support staff varies widely among companies, but more than half have reported an increase in budget and staffing since 2011. Many companies assign employees from other parts of the business to work on public affairs issues and to help plan, coordinate, and execute public affairs activities. In this way, the formulation and implementation of the policies and programs developed by a company’s public affairs unit are closely linked to the primary business activities of the firm.

Over one-third of the heads of public affairs departments report directly to the CEO, chairperson, or president of the company, while others report to the firm’s general counsel. Most work out of company headquarters; most of the rest—particularly those whose work focuses on government relations—work in Washington, DC. Eighty-five percent of those leading the public affairs department are typically an executive vice president, senior vice president, or vice president. The typical public affairs executive spends most of the day direct lobbying with federal or state politicians, hosting visits by politicians to the company’s locations, attending funding raising activities, or participating in coalition building. Over 56 percent of the public affairs officers reported that funding for public affairs activities increased over the past three years, with 44 percent of the companies reporting an increase in funding for international public affairs.30

Business Political Action: A Global Challenge

Most of the discussion so far in the chapter has focused on business political activity in the United States. As more companies conduct business abroad, it is critical that managers

30 Foundation for Public Affairs, The State of Corporate Public Affairs, 2017–2018 (Washington, DC: Foundation for Public Affairs, 2017).

Corporate Public Affairs Activities

Source: Foundation for Public Affairs, The State of Corporate Public Affairs, 2017–2018 (2017), based on a survey of 105 companies.

Exhibit 8.E

Activities Conducted within the Public Affairs Department

Percent of Companies, 2005

Percent of Companies, 2017

Federal government relations 95% 93

State government relations 85 89

Issues management 82 94

Local government relations 79 81

Business/trade association oversight

75 96

Political action committee 83 74

Coalitions 71 92

Grassroots/grasstops 75 76

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be aware of the opportunities for and restrictions on business involvement in the political processes in other countries. Other societies and governments also struggle with issues of participation in the political environment, campaign financing, and maintaining a fair ethical climate throughout the public policy process. The following example focuses on lobbying and constituency-building tactics.

In 2015, Google was embroiled in an escalating EU antitrust case and the “right to be forgotten” controversy (the subject of a case study at the end of this book and also discussed in Chapter 12). The firm doubled its direct lobbying expenditures in Europe in 2013 to nearly €4 million (about $4.3 million). By comparison, Google spent $16.8 million lobbying in the United States. Other U.S. technology firms also increased their political activities in Europe. Microsoft belonged to 33 European trade associations. By comparison, Deutsche Telekom, a German telecommunica-tions company, maintained 13 trade association memberships, while Axel Springer, the leading digital publisher in Europe, belonged to only four.

StandWithUs, a pro-Israel American advocacy group closely tied to the Israeli govern-ment, opened up an office in China in 2015. Announcing that China was “a country in which we can make a difference,” StandWithUs set about correcting what it characterized as “misinformation in the Chinese media about Israel.” Their approach was focused on “utilizing social media, university programs, and networking events” to better connect with the next generation of Chinese political leadership and the Chinese media.31

In contrast to China, Japan has a more pluralistic public policy process. The major actors in the Japanese political environment are representatives of big business, agri-culture, and labor, which are quite powerful and influential. Some of the largest interest groups support hundreds of candidates in each important election and provide them with large financial contributions. The Kiedanren, or federation of economic organizations, is mostly concerned with big business, but other interest groups promote the concerns of small and medium-sized businesses, such as barbers, cosmeticians, dry cleaners, inn-keepers, and theater owners. Some political influence is in the hands of smaller groups, such as the teachers’ union (Nikkyoso), Japan Medical Association, employers association (Nikkeiren), and a labor union (Rengo).32

Although political alliances and favoritism appears around the world, in varying degrees, some have made efforts to promote fairness in the electoral process, control the rapid rise in the costs of campaigning, enhance the role of political parties in elections, and encourage grassroots participation by various societal groups.

Since 1999, the Global Electoral Organization (GEO) has brought together more than 300 of the world’s top election officials and democracy advocates to celebrate “transparency in the election process.” The GEO-7 meeting, held in 2016, focused on the use of data and technology to improve transparency and accountability in elections. GEO partners included the Association of European Election Officials, the International Foundation for Electoral System, the International Institute for Democracy and Electoral Assistance, the Electoral Institute for Sustainable Democ-racy in Africa, Mexico’s National Electoral Institute, the United Nations Electoral Assistance Division, and the United Nations Development Programme. One

31 “U.S. Tech Firms Increase EU Lobbying Efforts,” The Wall Street Journal, April 29, 2015, www.wsj.com; and “An Israeli Lobby in China?” The Diplomat, April 30, 2015, thediplomat.com.32 Ryan Beaupre and Patricia Malone, “Interest Groups and Politics in Japan,” alpha.fdu.edu/~ woolley/JAPANpolitics/Beaupre.htm.

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conference delegate explained, “I think standards are changing and politicians will have to recognize this—that as we are now in the 21st century, public opinion is applying different standards to politics, to politicians, to political parties. They’re not allowed to do things they were doing in the 19th and 20th centuries. People have high expectations, high demands, and they will keep politicians accountable.”33

Political action by business—whether to influence government policy or the outcome of an election—is natural in a democratic, pluralistic society. In the United States, business has a legitimate right to participate in the political process, just as consumers, labor unions, environmentalists, and others do. One danger arising from corporate political activity is that corporations may wield too much power. As businesses operate in different commu-nities and countries, it is important that ethical norms and standards guide managers as they deal with political issues. If corporate power tips the scales against other interests in society, both business and society may lose. Whether it is in the media-rich arena of elec-toral politics or the corridors of Congress where more traditional lobbying prevails, busi-ness leaders must address the issues of how to manage relationships with government and special interests in society in ethically sound ways. Ultimately, business has an important long-term stake in a healthy, honest political system.

33 See “The Seventh Global Elections Organization Conference (GEO-7)” at ifes.org/GEO. The quote is from “Credible Elec-tions for Democracy,” Institute for Democracy and Electoral Assistance, www.idea.int.

∙ Some believe that businesses should be involved in politics because their economic stake in government decisions is great and they have a right to participate, just as do other stakeholders in a pluralistic political system. But others believe that businesses are too big, powerful, and selfish, and that they wield too much influence in the political arena.

∙ There are three political strategies: information, financial incentives, and constituency- building. Some firms implement strategies as needed, on an issue-by-issue basis, while other firms have a long-term, ongoing political strategy approach.

∙ Some of the political action tactics available for business include lobbying, direct communications, expert witness testimony, political action committee contributions, economic leverage, advocacy advertising and public relations, trade association involvement, legal challenges, and encouraging the involvement of other stakehold-ers. Businesses are increasingly turning to social media to promote their political strategies.

∙ Businesses manage their government interactions through a public affairs department. Most public affairs officers report to the CEO, chairperson, or president of the com-pany, although how these departments are structured is widely varied.

∙ The differing national rules and practices governing political activity make business’s political involvement complex in the global environment. Many governments have debated whether to restrict lobbying or political contributions or to make the political process more transparent.

Summary

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Discussion Case: Political Action by the U.S. Steel Industry, 2015–2018

Often regarded as the backbone of American manufacturing, the steel industry is essential to the world’s water and food supply, energy generation, and national security. The U.S. military uses steel extensively, in applications including aircraft carriers, nuclear subma-rines, missiles, armor plate, and every major military aircraft. There are many reasons to be concerned with the health of the U.S. steel industry. However, in the 2010s, the American steel industry began to suffer from an unprecedented surge of foreign-produced steel flooding into the United States. In many cases, these imports were nearly 50 percent cheaper than U.S.–made steel, since the Chinese and some other governments subsidized their steel industries, and foreign steel companies used nonunion, low-wage workers.

Production at domestic steel mills dropped to as low as 60 percent of capacity, an unsus-tainable level for a capital-intensive steel producer. American steel companies began to close down major facilities or reduce production. More than 12,000 steel jobs were lost in 2014 and 2015, as foreign steel imports took a record 29 percent of the U.S. steel manu-facturing market.

Almost one in three tons of steel sold in the United States were produced by foreign companies. The Chinese government owned almost half of the world’s steelmaking capacity. Between 2000 and 2014, Chinese steel production increased an astonishing

Internet Resources

www.businessroundtable.org The Business Roundtablewww.commoncause.org Common Causelobbyingdisclosure.house.gov Lobbying Disclosure, U.S. House of Representativeswww.endcitizensunited.org End Citizens Unitedwww.nfib.com National Federation of Independent Businesseswww.opensecrets.org Opensecrets.orgwww.politico.com Politicowww.politics.co.uk/ Politics.co.ukpac.org Public Affairs Councilwww.pdc.wa.gov Public Disclosure Commissionwww.fec.gov U.S. Federal Election Commission

Key Terms revolving door, 168soft money, 173super PACs, 172The Business Roundtable, 168trade associations, 177

advocacy advertising, 176bundling, 179Citizens United decision, 174corporate political strategy, 164

dark money, 173economic leverage, 175lobbying, 166political action committees (PACs), 170public affairs departments, 179

Chapter 8 Influencing the Political Environment 183

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540 percent, with additional surges in steel production in South Korea and Turkey. With the rising tide of cheap imports entering the U.S. market from these and other coun-tries, the U.S. steel industry knew it had to do something dramatic and quickly.

In 2015, the steel companies launched a multi-faceted and well-funded political strategy to seek governmental protection from the onslaught of cheap steel imports coming into the country. Their main objective was the imposition of import tariffs, or an additional fee or tax, to boost the price of foreign-made steel sold in the United States. Some political activities focused on articulating a clear message to Congress and the White House. Steel executives arranged for opportunities to testify before numerous congressional committees focusing on the economy, trade, and national security. Steel companies provided “white papers,” short briefs emphasizing key points, sent to congressional members and their staff, seeking to ensure that everyone with any political power knew of the steel industry’s policy views.

Other efforts targeted political candidates’ campaigns and funneled significant dollars to key politicians and political parties to gain influence. As shown in Figure 8.6, the American Iron and Steel Institute, the industry’s trade association, and the United States Steel Corpo-ration, a domestic integrated steel producer, increased their levels of political action com-mittee (PAC) campaign contributions, especially during the 2014 political election cycle.

Domestic steel producers sought economic relief by filing a complaint with the U.S. Commerce Department. The steel industry was aware that Congress gave the Commerce Department new tools in 2015 when it enacted legislation that changed the trade rem-edy laws, and steel executives argued that it was critical that the department aggressively use them. The U.S. Steel Corporation turned to the U.S. International Trade Commission (ITC), an independent federal agency with broad investigative responsibilities on matters of trade. The U.S. Steel Corporation filled a complaint with the ITC alleging that Chinese steel producers and distributors conspired to fix prices, stole trade secrets, and falsely label steel products on the market. “We have said that we will use every tool available to fight

FIGURE 8.6PAC Contributions by the Steel Industry, 2012–2018

Source: OpenSecrets.org.

American Iron and SteelInstitute PAC contributions –funds spent

U.S. Steel Corporation PACcontributions – funds spent

0

2012

2014

2016

2018

1,00,

000

2,00

,000

3,00

,000

4,00

,000

5,00

,000

6,00

,000

7,00

,000

$564,210$94,000

$587,911$154,225

$484,990$82,000

$263,183$40,000

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for fair trade. With today’s [ITC] filing, we continue the work we have pursued through countervailing and antidumping cases and pushing for increased enforcement of existing laws,” said U.S. Steel Corporation CEO Mario Longhi.

The steel industry also worked in coalition with others to promote their interests. It joined with other manufacturers from the aluminum, textile, fabric, fiber, and resin indus-tries to form the Manufacturers for Trade Enforcement coalition to raise awareness of their concerns about China’s market status. Company executives encouraged their employees to sign petitions calling on Congress to protect the steel industry by enacting tariffs, an additional fee imposed on all tonnage of steel coming into the country. Not all other manu-facturers agreed to join this effort, however. For example, Daniel Cosio of Ball Metal Food Container said that restricting Chinese steel imports would “lead to short supplies, higher prices and fewer alternatives for companies like ours. The products we buy from China are not available from U.S. producers in the quality and quantity provided by the Chinese. The level of service that Chinese producers provide is superior to the service provided by domestic steel producers.”

Some steel executives launched publicity campaigns to educate Americans about the industry’s economic crisis. Lakshmi Mittal, CEO of ArcelorMittal, the world’s leading integrated steel and mining company, said that he “was counting on tariff protection to help save his U.S. [steel] mills, heavily concentrated in northern Indiana. [This protection] will help prices.” ArcelorMittal announced that it would lay off 150 of the 207 workers at its Philadelphia plant early the following year. Kimberly Allen, a steelworker and single parent who had worked at the ArcelorMittal plant for more than 22 years, said, “I told my son, ‘Christmas is going to be kind of severe, because Mommy’s going to lose her job soon.’”

The steel industry’s multi-faceted political strategy seemed to pay off in 2017 when President Trump announced he would impose steep—25 percent—global tariffs on steel imports, making good on his campaign promise to aggressively pursue his “America First” trade policy. “You’re going to see a lot of good things happen. You’re going to see expansion of the [domestic steel] companies,” said Trump. However, countries impacted by these tariffs were expected to bring complaints before the World Trade Organization (WTO), discussed in Chapter 4, saying the tariffs violated WTO rules prohibiting protec-tive tariffs under most circumstances.

News of the tariffs caused a negative reaction on Wall Street, where investors fled stocks following Trump’s announcement. The Dow Jones Industrial Average declined 264 points, or 1.1 percent, the Standard and Poor’s 500 fell 0.5 percent, and the Nasdaq Composite dropped 0.4 percent. Analysts argued that the new tariffs on imports would boost steel prices in the United States, offering a lifeline to beleaguered American steel makers, but also raising costs for manufacturers of goods made from steel, ranging from oil pipes to factory equipment to automobiles. Steve Handschuh, head of the Motor Equip-ment Manufacturers Association, said, “Tariffs limit access to necessary specialty prod-ucts, raise the cost of motor vehicles to consumers, and impair the industry’s ability to compete in the global marketplace.”

Sources: “The Crisis Facing the U.S. Steel Industry,” CNN, March 23, 2016, www.cnn.com; “U.S. Steel Fires New Salvo in War against Chinese Imports,” Pittsburgh Business Times, April 26, 2016, www.bizjournals.com; “U.S. Steel Complaint Opposed by Steel Users,” Pittsburgh Post-Gazette, May 14, 2016, www.post-gazette.com; “U.S. Steel Tariffs Create a Double-Edged Sword,” The Wall Street Journal, May 31, 2016, www.wsj.com; “Trump Promised to Protect Steel, Layoffs Are Coming Instead,” The New York Times, December 22, 2017, www.nytimes.com; “Trump Will Approve Aluminum, Steel Tariffs Next Week,” The Wall Street Journal, March 1, 2018, www.wsj.com; and “U.S. Stocks Trade Sharply Lower,” The Wall Street Journal, March 2, 2018, www.wsj.com.

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Discussion Questions

1. Did the steel industry act appropriately as a participant in the political environment when it sought economic protection from foreign steel imports?

2. What political strategies, as shown in Figure 8.2, did the steel industry use to gain tariff protections?

3. What other political strategies could the steel industry have used to promote their inter-ests and how?

4. What levels of corporate political involvement, as shown in Figure 8.5, are evident in the case?

5. Should Chinese and other country’s steel producers be permitted to engage as a political participant in the U.S. political environment to protect their economic interests?

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P A R T F O U R

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Business and the Natural Environment

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C H A P T E R N I N E

Sustainable Development and Global BusinessThe world community faces unprecedented ecological challenges in the 21st century, including cli-mate change, resource scarcity, and threats to biodiversity. Many political and business leaders have embraced the idea of sustainable development, calling for economic development without depleting the natural capital on which future generations depend. A critical task in coming decades for govern-ment policymakers, civil society organizations, corporate leaders, and entrepreneurial innovators will be to find ways to meet simultaneously both economic and environmental goals.

This Chapter Focuses on These Key Learning Objectives:

LO 9-1 Understanding how business and society interact within the natural environment.

LO 9-2 Defining sustainable development.

LO 9-3 Recognizing the ways in which population growth and economic development interact with the world’s ecological crisis.

LO 9-4 Examining common environmental issues, including climate change, that are shared by all nations and businesses.

LO 9-5 Analyzing the steps both large and small businesses can take globally to reduce ecological dam-age and promote sustainable development.

LO 9-6 Describing the leading global codes of environmental conduct.

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In 2015, representatives of 193 of the world’s nations gathered at the United Nations in New York City to adopt the Sustainable Development Goals, also known as Agenda 2030 because of the deadline for meeting them. The goals were broad and aspirational, covering many aspects of economic and social development. But all shared a vision of a sustainable future in which humanity could thrive without destroying the environmental basis for life on Earth. Agenda 2030 called, for example, for clean drinking water, renewable energy, responsible consumption and production, protecting the oceans, halting deforestation, and aggressive action on climate change. “We are determined,” said the United Nations state-ment, “to take the bold and transformative steps which are urgently needed to shift the world onto a sustainable and resilient path.”1

Meeting these ambitious goals will surely require the involvement of businesses, both large and small, from all over the globe, in the pursuit of sustainability. Companies of all types have embraced the challenges of operating within the limits of the Earth’s natu-ral systems. Many have recognized the cost savings associated with operating more effi-ciently, the opportunities to serve consumer markets in emerging economies, the benefits of reducing regulatory risk, and the competitive advantages of innovation in sustainable technology. Consider the following examples:

∙ In 2018, McDonald’s, the world’s largest restaurant chain, announced that by 2025 one hundred percent of customer packaging—at all locations across the globe—would come from renewable, recycled, or certified sources. It would also offer recycling receptacles for patrons to use at all locations to dispose of their waste. At the time of the announce-ment, about half of the company’s packaging met this standard, and only 10 percent of its locations offered recycling. Because of its enormous size—37,000 restaurants in more than 100 countries—McDonald’s commitment promised a huge impact. “We look forward to doing more and continuing to raise the bar,” said the company’s chief sus-tainability officer.2

∙ Taylor Guitars makes high-end acoustic and electric guitars, played by such well-known musicians as Taylor Swift, Jason Mraz, and Dave Matthews. To assure its supply of ebony, a hardwood that grows in tropical rain forests and is used to make fret boards, the company bought a saw mill in Cameroon, West Africa. Taylor Guitars quickly ended the wasteful practice of cutting down 10 ebony trees to find one with solid black wood, which had stressed the forest and endangered remaining supplies. Instead, they began using all the ebony they harvested, and educated their customers that the wood naturally came in many hues other than black. “Our vision was to transform the way that ebony is harvested, processed, and sold,” said Bob Taylor, the president of the company. “To accomplish this, we assumed the role of guardian of the forest, and we operate with the philosophy to use what the forest gives us.”3

∙ Airbus Group is a European multinational corporation that makes aircraft, including the world’s largest passenger jet. The company has endorsed Agenda 2030 and has pledged to support carbon-neutral growth in the aviation industry. In support of this goal, the company has partnered with farmers, energy companies, and researchers to develop new biofuels that can be “dropped in” to today’s aircraft as part of a fuel blend, cutting

1 “U.N. Adopts Ambitious Global Goals After Years of Negotiations,” The New York Times, September 25, 2015. The full text of the Agenda 2030 is available at https://sustainabledevelopment.un.org/post2015/transformingourworld.2 “By 2025, All of McDonald’s Packaging to Come from Renewable, Recycled, or Certified Sources; Goal to Have Recycling Available in All Restaurants,” January 16, 2018, press release, at http://news.mcdonalds.com.3 “The Crelicam Mill in Cameroon,” www.taylorguitars.com/about/sustainable-ebony; and Bob Taylor, “Remarks at the Remarks at the 15th Annual Awards for Corporate Excellence,” www.state.gov/secretary/remarks/2014/01/220756.htm.

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carbon emissions. Since 2016, Airbus has offered its customers, such as Cathy Pacific Airlines, the option of having their new aircraft delivered from the factory using the sustainable fuel. “This is a major step for Airbus,” said the company’s head of new ener-gies. “It enables us to demonstrate that aviation biofuels are today a reality.”4

These examples suggest some of the great creativity that businesses were bringing to the ecological challenges of the 21st century. Can businesses, governments, and society, working together, put the global economy on a more sustainable course? This chapter will describe the major sustainability challenges facing society and both the risks and opportu-nities these challenges present to businesses globally. The following chapter will focus on specific areas of government regulation and the ways in which businesses, in the United States and other countries, have sought to manage for sustainability.

Business and Society in the Natural Environment

Business, society, and the environment are deeply interrelated. Business and society oper-ate within, and depend on, the natural environment. The extraordinary planet on which we live provides the abundant resources humans use to thrive, but it also imposes con-straints. We have only one Earth, and its resources are finite. Natural capital refers to the world’s stocks of natural assets, including its geology, soil, air, water, and all living things.5 The United Nations has estimated that the value of natural capital to society is as high as $72 trillion per year.6 These assets make human life possible. For human society to survive over time it must operate sustainably, in a way that does not destroy or deplete these nat-ural resources for future generations. This fundamental truth confers on business leaders both great challenges and great opportunities.

Chapter 1 introduced the idea of systems theory and explained how businesses cannot be understood in isolation, but only in relationship to the broader society in which they operate. This idea can be extended to the relationship between business and society, on one hand, and the natural environment, on the other. In this view, business and society can be most fully understood in relationship to the broader natural environment in which they are embedded and with which they interact. This relationship is illustrated in Figure 9.1.

The well-known image of the Earth as seen from space—a blue-and-green globe, gir-dled by white clouds, floating in blackness—dramatically shows us that we share a single, unified natural system, or ecosystem. Preserving our common ecosystem and assuring its continued use is an urgent imperative for governments, business, and society. As KPMG International stated in its report, Expect the Unexpected, “The central challenge of our age must be to decouple human progress from resource use and environmental deterioration.”7

Sustainable DevelopmentThe need for balance between economic progress and environmental protection is captured in the concept of sustainable development. This term refers to development that “meets the needs of the present without compromising the ability of future generations to meet their

4 KPMG (in partnership with the U.N. Global Compact), “Sustainable Development Goals Industry Matrix,” at www.kpmg.com; and “Airbus Demonstrates Regular Customer Delivery Flights with Sustainable Jet Fuel,” June 1, 2017, at www.airbus.com/newsroom.5 “What is Natural Capital,” www.naturalcapitalforum.com. See also Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natu-ral Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999).6 “The State of Green Business Report 2018,” at www.greenbiz.com.7 “Expect the Unexpected: Building Business Value in a Changing World,” KPMG International, 2012.

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own needs” or, more simply, “ensuring a better quality of life for everyone, now and for generations to come.”8 At its core, sustainable development is about fairness—a central tenet of ethics, as explained in Chapter 5. Fairness requires that the benefits and burdens of an action be distributed equitably, according to an accepted rule. Sustainable development requires an equitable distribution of the benefits gained from the use of natural resources for both current generations (the developing world countries should receive its fair share along with the countries in the developed world) and across generations (the present gen-eration should not gain at the expense of future generations). This can only occur if govern-ments and business leaders work to promote economic development that does not further degrade the environment. The very nature of consumption itself will need to change as people come to emphasize the quality of their lives over the quantity of goods they own, and innovation in a dynamic market economy will need to find new ways to meet human aspirations in a more resource-efficient manner.

What would a sustainable society look like? Of course, there are many paths to sustain-ability, and there is no way to know for sure what the future will hold. But, some cities have set out to demonstrate what might be possible. One such city is Curitiba, Brazil, which is profiled in Exhibit 9.A.

Threats to the Earth’s EcosystemHumanity has entered a new geological era, called the Anthropocene (the period in which human activity has been the dominant influence on climate and the environment). Since the Industrial Revolution, humans have become a powerful force, altering the face of the planet and rivaling the forces of nature herself—glaciers, volcanoes, asteroids, and earthquakes—in impact. Human beings have literally rerouted rivers, moved mountains, and burned vast forests. By the early part of the 21st century, human society had trans-formed about half of the Earth’s ice-free surface and made a major impact on most of the rest. In many areas, as much land was used by transportation systems as by agriculture.

8 World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1987), p. 8; “Sustainable Development: The UK Government’s Approach,” http://sd.defra.gov.uk.

FIGURE 9.1Business, Society, and the Natural Environment: An Interactive System

Society Business

Natural Environment

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The climate itself had been profoundly altered by emissions of global warming gases. Although significant natural resources—fresh water, fertile land, and forest—remained, exploding populations and rapid economic development had reached the point where, by most measures, the demands of human society had already exceeded the carrying capacity of the Earth’s ecosystem.

These rapid changes pose severe threats to many businesses. They face limited supplies of critical resources, unpredictable weather changes, and increased political risk, among many other challenges. Yet the environmental problems faced by society also present busi-ness with great opportunities. Established firms and innovative entrepreneurs who can figure out, for example, how to build offices and houses that are more energy-efficient, produce energy without irreversibly altering the climate, or devise systems to recycle and reuse obsolete electronics, can both help society and enjoy great commercial success.

Forces of ChangePressure on the Earth’s resource base is becoming increasingly severe. Two critical factors have combined to accelerate the ecological crisis facing the world community and to make sustainable development more difficult: population growth and the rapid industrialization of many developing nations.

The Population Explosion

A major driver of environmental degradation is the exponential growth of the world’s pop-ulation. A population that doubled every 50 years, for example, would be said to be grow-ing exponentially. Many more people would be added during the second 50 years than during the first, even though the rate of growth would stay the same. Just 10,000 years ago, the Earth was home to no more than 10 million humans, scattered in small settlements. For many thousands of years, population growth was gradual. Around 1950, the world

Curitiba: Brazil’s Sustainable City

The world is becoming increasingly urbanized. By 2050, two-third’s of the world’s people are expected to be living in cities, as rural migrants pore into urban areas from the surrounding countryside. How cities grow will therefore have a great impact on society’s future sustainability. Curitiba, Brazil, has been called the “greenest city on earth.” The capital of the state of Paraná, this city of almost 2 million has long embraced innovation in urban planning. Eighty-five percent of the population uses public transit rather than cars, with speedy buses moving along dedicated express lanes, stopping at tube stations where people can get on and off without using stairs. The city boasts 150 square feet of green space per resident, four times the World Heath Organization standard, and has planted 1.5 million trees. Buildings are repurposed rather than torn down and rebuilt: the planning department, for example, is in an old furniture factory. Nine out of ten residents recycle their paper, metal, glass, and plastic; and many participate in a program in which they can exchange trash for tokens, good for bus tickets and vegetables. “Curitiba is not a paradise,” said the mayor. “But it is a model for many cities in the world.” According to Arcadis, a global design and engineering firm, the most sustainable cities in the world—ranked by their impact on the planet—now include Zurich, Wellington, and Singapore. The factors considered include the use of renewable energy, recycling, clean drinking water, and low air pollution and greenhouse gas emissions.

Sources: “Story of Cities #37: How Radical Ideas Turned Curitiba into Brazil’s ‘Green Capital,’” The Guardian, May 6, 2016; “The Five Greenest Cities in the World,” Huffington Post, August 30, 2016; World Economic Forum, “Inspiring Future Cities and Urban Services,” April, 2016; Bill McKibben, Hope, Human and Wild (Minneapolis, MN: Milkweed Editions, 2007); and Arcardis, Sustainable Cities Index 2016, www.arcadis.com.

Exhibit 9.A

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population reached 2.5 billion. World population crossed the 6 billion mark in 1999 and the 7 billion mark in late 2011. The United Nations estimates that the population will reach slightly more than 11 billion by 2100. To gain some perspective on these figures, consider that a baby born in 2015 who lives to be 85 years old will see the world’s population increase by more than 3 billion people.

Population growth in the coming decades will not be distributed equally. In the indus-trialized countries, especially in Europe, population growth has already slowed. Almost all the world’s population growth over the next century is predicted to be in less developed countries, especially in Africa, as shown in Figure 9.2.

The world’s burgeoning population will put increasing strain on the Earth’s resources. Each additional person uses raw materials and adds pollutants to the land, air, and water. The world’s total industrial production would have to quintuple over the next 40 years just to maintain the same standard of living that people have now, if technology remains unchanged.

Economic Development

A second source of pressure on the Earth’s resource base is the rapid industrialization of many countries. Many parts of Africa, Asia, and Latin America are developing at a rapid pace. This is positive because it is reducing poverty and slowing population growth. But economic development has also contributed to the growing ecological crisis. Industry requires energy, much of which comes from burning fossil fuels, releasing pollutants, and disrupting the climate. The agricultural “green” revolution, although greatly increasing crop yields in many parts of the world, has caused contamination by pesticides, herbicides, and chemical fertilizers. Development is often accompanied by rising incomes, bringing higher rates of both consumption and waste. In many instances, environmental regulations have lagged the pace of development.

China dramatically illustrates the tight connection between rapid economic develop-ment and environmental risk. China is one of the fastest-growing economies in the world, expanding at a rate approaching 10 percent annually on average over the past 30 years (although its economy has recently slowed somewhat). The evidence of industrialization is everywhere, from skyscrapers under construction, to cars crowding

FIGURE 9.2Population of the World and Major Areas, 1950–2100

Source: United Nations Population Division, “World Population Prospects: The 2017 Revision: Key Findings and Advance Tables,” 2017. The projections represent the medium-range scenario. Other estimates are higher and lower. All estimates are available at www.un.org/development/desa.

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1950 1980 2017 2050 2100

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the streets, to factories operating 24/7 to produce goods for export. Yet a major conse-quence has been increased pollution. By the mid-2010s, 90 percent of China’s cities failed to meet air quality standards, and residents routinely wore face masks and stayed indoors to protect themselves from choking smog. In 2013, the government finally changed course, adopting a five-year plan to drastically limit coal burning, car emis-sions, and construction dust. By 2018, most of the plan’s goals had been met, although at the cost of many factory and mine closures. Said the Chinese president Xi Jinping, “Clear waters and green mountains are as good as mountains of gold and silver.”9

China and other fast-growing developing nations challenge business and society to “leapfrog” stages and move directly to cleaner technologies and methods of production.

The Earth’s Carrying CapacityThe Earth’s rapid population growth, together with economic development of many of the world’s poorer nations and people’s rising expectations, are on a collision course with a fixed barrier: the limited carrying capacity of the Earth’s ecosystem. The world’s resource base, the air, water, soil, minerals, and so forth, is essentially finite, or bounded. We have only one Earth; the ecosystem itself is not growing. If human societies use up resources faster than they can be replenished, and create waste faster than it can be dispersed, envi-ronmental devastation will be the inevitable result.10 Human society is already overshooting the carrying capacity of the Earth’s ecosystem. Just as it is possible to eat or drink too much before your body sends you a signal to stop, so too are people and businesses using up resources and emitting pollution at an unsustainable rate. But because of delays in feedback, society may not understand the consequences of its actions until the damage has been done.

One method of measuring the Earth’s carrying capacity, and how far human society has overshot it, is called the ecological footprint. This term refers to the amount of land and water a human population needs to produce the resources it consumes and to absorb its wastes, given prevailing technology. According to the Global Footprint Network, which maintains a public data set that is updated as new information becomes available, for each living human being, the Earth contains 4.2 acres of biologically productive area—farmland, forest, fresh water, and so forth. At the same time, each person has, on average, an ecolog-ical footprint of 7.1 acres. What that means is that human society is using resources and producing waste at a rate greater than one and a half times above what the Earth’s ecosys-tem can sustainably support. (Overshooting the Earth’s carrying capacity is possible in the short run because people can consume resources without allowing them to regenerate, and generate waste at a rate higher than can be absorbed or recycled.) Historical data show that human society first exceeded world ecological capacity in the 1970s, and the gap between the two has been widening steadily since then.

Not surprisingly, some nations and individuals have bigger ecological footprints than oth-ers. For example, in the United States the average citizen has an ecological footprint of about five times his or her share of the world’s resources. By contrast, citizens of Bangladesh use less than half of their share; citizens of Honduras use exactly their share.11 These differences

9 “Why China’s Good Environmental Policies Have Gone Wrong,” The New York Times, January 14, 2018; “China’s Pollution Curbs Hit Growth as Policy Priorities Shift,” Financial Times, December 13, 2017; and “Hundreds of Chinese Cities Not Meet-ing Air Quality Standards,” The New York Times, April 21, 2015.10 James Gustave Speth, The Bridge at the Edge of the World (New Haven: Yale University Press, 2008); and Herman E. Daly, Beyond Growth: The Economics of Sustainable Development (Boston: Beacon Press, 1996).11 The most recent data are available from the Global Footprint Network, www.footprintnetwork.org. Individuals can estimate their own ecological footprint by taking a quiz available at the “personal footprint” link at this website.

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reflect the higher levels of consumption and less efficient use of resources in some coun-tries, relative to others.

Acting together, how can human society bring the Earth’s carrying capacity—and the demands placed on it—back into balance? This is without a doubt one of the great chal-lenges now facing the world’s people. Any solution will require change on many fronts.

∙ Technological innovation. One approach is to develop new technologies to produce energy, food, and other necessities of human life more efficiently and with less waste. Vast solar arrays in the desert, offshore wind turbines, or state-of-the-art utilities could power homes and businesses. For example, an innovative Swiss company called Clime-works partnered with a publicly-owned power plant in Iceland to capture carbon diox-ide and inject it underground, where it was absorbed by rock—trapping emissions for thousands of years.12 Genetic engineering could create more nutritious and productive crops. (Some concerns about genetic engineering are explored in Chapter 11.) Energy-efficient homes and commercial buildings could allow people to go about their lives while using fewer of the Earth’s resources. Technological innovation in support of sustainability is further discussed later in this chapter and in Chapter 10.

∙ Changing patterns of consumption. Individuals and organizations concerned about environmental impact could decide to consume less or choose less harmful products and services, or to buy from companies committed to sustainability in their own opera-tions. Mobile applications, such as those developed by goodguide.com, now allow indi-viduals to scan a product’s barcode in a store with their smartphones and receive instant information on its environmental impact. They can modify their purchasing decisions, based on this knowledge. Light Bulb Finder, named one of the best “green apps” by the U.S. Environmental Protection Agency, enabled users to compare bulbs by energy usage, cost, style, and light quality; create shopping lists; and buy online—making it easy than ever to make an environmentally-informed choice.13 In a consumer society, when many people decide to reduce their personal footprints by shopping thoughtfully for products like light bulbs, society’s overall footprint becomes smaller. Homes, work-places, and places of entertainment could be built closer to each other and to public transit, so people could get where they needed to go with less wasted energy.

∙ “Getting the prices right.” Some economists have called for public policies that impose taxes on environmentally harmful products or activities. For example, when an indi-vidual bought gasoline—or a utility burned coal to make electricity—they would be charged an added carbon tax. Because prices would reflect true environmental costs, individuals and firms would have an incentive to make less harmful choices. For exam-ple, in 2017 the province of Alberta, Canada, levied a tax of $20 a ton on carbon diox-ide emissions from fossil fuels used for heating and transportation. The government returned most of the money raised to households and small businesses in the form of rebates and tax cuts. The objective was to encourage individuals and companies to switch to more efficient vehicles and heating fuels.14

Some contemporary thinkers have gone even further and suggested that what is needed is nothing less than a completely new set of values about what is truly important. In this view, society needs a new narrative in which, as scholar Sandra Waddock has put it, “the

12 “The World’s First ‘Negative Emissions’ Plant Has Begun Operation—Turning Carbon Dioxide into Stone,” October 12, 2017, Quartz, at https://qz.com.13 “The Top Eco-Friendly Smartphone Apps,” The Spruce, June 13, 2017.14 “Here’s How Alberta’s Carbon Tax Increase Will Affect You in 2018,” December 28, 2017, at www.cbc.ca.

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goals shift from wealth creation toward well-being and dignity in an economy that works for all, that is, creating more equity rather than less and fostering sustainability for all liv-ing beings and ecosystems, rather than simply exploiting nature for human gain.”15 Such a narrative would view the quality of life—not the quantity of things—as the worthiest goal of human aspiration.

Technological innovation, smart consumption, and accurate accounting all hold the promise of helping human society realize this vision of the future.

Global Environmental Issues

A commons is a shared resource, such as land, air, or water that a group of people use col-lectively. The paradox of the commons is that if all individuals attempt to maximize their own private advantage in the short term, the commons may be destroyed, and all users, present and future, lose. The only solution is restraint, either voluntary or by mutual agree-ment.16 The tragedy of the commons—that freedom in a commons brings ruin to all—is illustrated by the following parable.

There was once a village on the shore of a great ocean. Its people made a good living from the rich fishing grounds that lay offshore, the bounty of which seemed inexhaustible. Some of the cleverest fishermen began to experiment with new ways to catch more fish, borrowing money to buy bigger and better equipped boats. Since it was hard to argue with success, others copied their new techniques. Soon fish began to be harder to find, and their average size began to decline. Eventually, the fishery collapsed, bringing economic calamity to the village. A wise elder commented, “You see, the fish were not free after all. It was our folly to act as if they were.”17

In a sense, we live today in a global commons, in which many natural resources, like the fishing grounds in this parable, are used collectively. Some environmental problems are inherently global in scope and require international cooperation. Typically, these are issues pertaining to the global commons, that is, resources shared by all nations. Five global prob-lems that will have major consequences for business and society are climate change, ozone depletion, resource scarcity, decline of biodiversity, and threats to the world’s oceans.

Climate ChangeA critically important challenge facing the world community is climate change. This term refers to changes in the Earth’s climate caused by increasing concentrations of carbon dioxide and other pollutants produced by human activity. These have caused the average surface temperature of the Earth to rise over time, a phenomenon known as global warming. But because these gases also have a variety of other complex effects on the climate, scien-tists often prefer the more general term climate change.

The Earth’s atmosphere contains carbon dioxide and other trace gases that, like the glass panels in a greenhouse, prevent some of the heat reflected from the Earth’s surface from escaping into space, as illustrated in Figure  9.3. Without this so-called greenhouse

15 Sandra Waddock, “Beyond CSR to System Change,” in James Weber and David M. Wasieleski (eds.), Stakeholder Manage-ment, Business and Society 360: Volume 2, pages 394–95 (Bingley, United Kingdom: Emerald Publishing Ltd., 2018).16 Garrett Hardin, “Tragedy of the Commons,” Science 162 (December 1968), pp. 1243–48.17 Source: Abridgment of “The Story of a Fishing Village,” from 1994 Information Please Environmental Almanac.

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effect, the Earth would be too cold to support life. Since the Industrial Revolution, the concentration of carbon dioxide in the atmosphere has increased by more than 40 percent, largely due to the burning of fossil fuels such as oil, natural gas, and coal. According to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), a group of the world’s leading atmospheric scientists, since 1880 the Earth has warmed by between 0.7 and 1.1 degrees Celsius. (One degree Celsius equals 1.8 degrees Fahrenheit, the unit commonly used in the United States.) Each of the past three decades has been the warmest of any in the last century and a half. The IPCC found that climatic warming was “unequivocal” and “extremely likely” due to human-generated greenhouse gases, which were at their highest atmospheric levels in at least 800,000 years.18

The possible causes of global warming are numerous. The burning of fossil fuels, which releases carbon dioxide, is the leading contributor. Increased emissions of nitrous oxides, resulting in part from the manufacture and use of synthetic fertilizers, also contributes. But consider the following additional causes.

∙ Black carbon. Recent scientific research has shown that black carbon—the sooty smoke that is created by the incomplete combustion of diesel engines, wildfires, and cookstoves fueled by dung, wood, and charcoal—is the second largest contributor to climate change, responsible for as much as 18 percent of global warming. Black carbon, which can travel thousands of miles in the atmosphere, absorbs heat and settles on glaciers, speeding up melting. A global alliance to reduce black carbon and simultaneously reduce global warming and advance economic development by promoting the use of clean cookstoves in developing nations is described in the discussion case at the end of this chapter.

18 Intergovernmental Panel on Climate Change, “Climate Change 2014: Synthesis Report—Summary for Policymakers,” 2014. A complete set of materials may be found at IPCC’s website, www.ipcc.ch. The next IPCC assessment report is scheduled for release in 2022.

FIGURE 9.3Global Warming

INFRAREDENERGY

Infrared energy from thesun reflects o� theEarth’s surface and istrapped in the atmosphereby greenhouse gases,warming the surface.

ATMOSPHERE

SUN

Greenhouse gases includecarbon dioxide, methane,nitrous oxides, andchlorofluorocarbons (CFCs).

EARTH

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∙ Deforestation. Trees and other plants absorb carbon dioxide, removing it from the atmosphere. Deforestation—cutting down and not replacing trees—thus contributes to higher levels of carbon dioxide. Scientists have estimated that about half of all original forests have already been cut. Burning forests to clear land for grazing or agriculture also releases carbon directly into the atmosphere as a component of smoke. And when trees are removed, their leaves do not shade the ground, leading to still more warming. Large-scale deforestation thus contributes in several ways to climate change.

∙ Beef production. Cattle ranching contributes to global warming in several ways. Meth-ane, a potent greenhouse gas, is produced as a by-product of the digestion of ruminants, and feed production and manure processing have additional climate impacts. According to the Food and Agriculture Organization of the United Nations, livestock are responsi-ble for 15 percent of greenhouse gas emissions, measured in carbon equivalents; beef and dairy production account for three-fifths of this amount. As the world’s economies develop, people tend to eat more meat; the world’s beef consumption is projected to nearly double by 2050.19

If global warming continues, the world may experience extreme heat waves, air pollution crises, violent storms, and damaging wildfires in the 21st century. The polar ice caps may partially melt, raising sea levels and causing flooding in low-lying coastal areas such as Florida, Bangladesh, and the Netherlands. It may become as difficult to grow wheat in Iowa as it is now in arid Utah. Such climate change could harm peoples’ health, leading to breath-ing problems, epidemics of tropical diseases, and injuries from extreme weather events. It could devastate many of the world’s economies and destroy the habitats of many species.20

The most important international treaty on global warming is the Convention on Climate Change, first negotiated in 1992. The United Nations hosts an annual Conference of the Parties (COP), where representatives of virtually all the world’s nations meet to hammer out agreements to cut the fossil fuel emissions that cause global warming. The first major breakthrough occurred in 1997, when the Kytoto Protocol (named after the city in Japan where representatives met) set limits aimed at stabilizing the concentration of greenhouse gases in the atmosphere. In 2015, the COP negotiated a second major breakthrough, known as the Paris Agreement, which aimed to limit the rise in the average global temperature to well below 2 degrees Celsius above preindustrial levels. Individual nations would vol-untarily determine their own contributions to this goal. By late 2017, all of the world’s nations had signed the agreement, although the Trump Administration had announced its intention to withdraw the United States as soon as legally possible.21

Many companies—whether or not required by treaty to do so—have acted to reduce their impact on climate change.

CSX, a railroad, has worked aggressively to reduce its carbon emissions, investing more than $1.5 billion to lower its use of fuel. The company has adopted new tech-nology to provide auxiliary power to its locomotives, allowing their diesel engines to shut down while idling. It has also trained its engineers to use the most fuel- efficient throttle settings and lubricated its rails to reduce friction. These steps, among others, now allow CSX to move a ton of freight 500 miles on just one gallon of diesel fuel. Commented the Carbon Disclosure Project’s CEO, “Business must

19 Tackling Climate Change Through Livestock: A Global Assessment of Emissions and Mitigation Opportunities (Rome: United Nations Food and Agriculture Organization, 2013); and Creating a Sustainable Food Future (World Resources Institute, 2013).20 Photographs of observable evidence of global warming may be found on the website of National Geographic, http://environment.nationalgeographic.com/environment/global-warming.21 “Syria Joins Paris Climate Accord, Leaving Only U.S. Opposed,” The New York Times, November 7, 2017.

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continue to forge ahead, innovate and seek out opportunities by doing more with less. The decisions that perpetuate a legitimate, low carbon and high growth econ-omy will bring considerable value to those that have the foresight to make them.”22

Ozone DepletionAnother global environmental challenge is ozone depletion. Ozone is a bluish gas, com-posed of three bonded oxygen atoms, that floats in a thin layer in the stratosphere between 9 and 28 miles above the planet. Although poisonous to humans in the lower atmosphere, ozone in the stratosphere is critical to life on Earth by absorbing dangerous ultraviolet light from the sun. Too much ultraviolet light can cause skin cancer and damage the eyes and immune systems of humans and other species.

Since the 1970s, scientists have understood that chlorofluorocarbons (CFCs), manu-factured chemicals formerly widely used as refrigerants, insulation, solvents, and propel-lants in spray cans, could react with and destroy ozone in the upper atmosphere. This has caused a thin spot, or hole, in the Earth’s ozone layer, particularly over Antarctica and in the northern latitudes over Europe and North America during the summer, when the sun’s ultraviolet rays are the strongest and pose the greatest danger. In addition to destroying the ozone, CFCs are also greenhouse gases.

In 1987, world leaders negotiated the Montreal Protocol, agreeing to cut CFC pro-duction; the agreement was later amended to ban CFCs, along with several other ozone-depleting chemicals. Participating countries will have until 2030 to phase out chlo-rofluorohydrocarbons (HCFCs), related chemicals also damaging to the ozone layer. As of 2018, 197 countries, all but a tiny handful, had signed the protocol. Scientists believe that if the agreement is honored, the ozone layer will recover by 2050.23

An ongoing problem is that HCFCs, often used as substitutes for CFCs, are themselves powerful greenhouse gases. (In fact, one pound of some HCFCs released into the atmosphere has more than 2,000 times the warming impact as the same amount of carbon dioxide.)

The Coca-Cola Company, PepsiCo, and Red Bull, normally fierce competitors, col-laborated to find a substitute for fluorinated gases, including HCFCs, in refrigeration units such as vending machines and convenience-store coolers. Working in a part-nership called Refrigerants Naturally!, these firms and others experimented with a variety of natural refrigerants, energy-efficient fans, intelligent controllers, and insu-lated glass. By 2016, they had replaced 5.5 million older units with ones using natu-ral refrigerants. “Competitors working together to help address environmental issues is definitely a strong message to the industry,” said a representative of Coca-Cola.24

Resource Scarcity: Water and LandThe Earth also faces serious challenges of resource scarcity involving both fresh water and arable land.

Fresh Water Resources

Only 2.5 percent of the water on the Earth is fresh, and most of this is underground or locked up in ice and snow. Only about one-tenth of 1 percent of the Earth’s water is in

22 Carbon Disclosure Project, CDP Global 500 Report 2011: Accelerating Low Carbon Growth, available online at www.cdproject.net. CSX’s most recent report on its environmental initiatives is at www.csx.com/index.cfm/responsibility.23 The text of the Montreal Protocol and its various amendments and a list of signatories may be found at http://ozone.unep.org.24 The website of the coalition is www.refrigerantsnaturally.org.

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lakes, rivers, and accessible underground supplies, and thus available for human use. Water is, of course, renewable: Moisture evaporates from the oceans and returns to Earth as freshwater precipitation, replenishing used stocks. But in many areas, humans are using up or polluting water faster than it can be replaced or naturally purified, threatening people and businesses that depend on it. In 2018, for example, officials of Cape Town, South Africa, announced they would turn off the water taps on what they called “Day Zero,” leaving its 4 million residents without access. Facing a severe drought, Cape Town—which drew its supplies from local reservoirs fed by rain—had run dangerously low. At the last moment, officials cancelled Day Zero, saying that recent rains had eased the shortage somewhat, but warned that the city could still run out of water if residents did not continue strict conservation practices.25

One step businesses can take to address water scarcity is to institute recycling in their offices and factories. In 2018, Salesforce opened a 61-story office tower in San Francisco, which boasted the largest water recycling system in a commercial high-rise building in the United States. The system was designed to collect “black-water” from the roof, cooling equipment, dishwashers, showers, sinks, and toilets and treat it on-site for reuse as “gray water” in toilets and irrigation, reducing over-all water use by 76 percent and saving enough to supply 16,000 households annually—a welcome move in a chronically drought-stricken area. “Offices can be an expression of our values,” said the director of sustainability for Salesforce.26

All four of the world’s leading irrigators—China, India, Pakistan, and the United States—are using groundwater faster than it is being replenished on crop-producing land.27 By one estimate, if society were able to eliminate all pollution, capture all available fresh water, and distribute it equitably—all of which are unlikely—demand would exceed the supply within a hundred years. By the 2010s, water shortages had already caused the decline of local economies and in some cases had contributed to regional conflicts. In Africa, for example, water disputes had flared among Egypt, Ethiopia, and Sudan, the three coun-tries traversed by the world’s longest river, the Nile. In the Middle East, disagreement over access to water from the River Jordan had exacerbated conflict between Israel and Palestine. By 2030, an estimated 3.9 billion people will be living under conditions of water scarcity.28

Arable Land

Arable (fertile) land is necessary to grow crops to feed the world’s people. Land, if prop-erly cared for, is a renewable resource. Although the productivity of land increased through much of the 20th century, by the 2010s much of the world’s arable land was threatened with decline from soil erosion, loss of nutrients, and water scarcity. Worldwide, one-fifth of irrigated land required reclamation because of salinization (excess salt) or poor drain-age.29 In many areas, overly intensive farming practices and climate change have caused previously arable land to turn into desert (this process is called desertification). The United

25 “On Day Zero, Cape Town Will Run Out of Water,” The Washington Post, February 5, 2018; and “Cape Town Confident of Beating Water Crisis Next Year,” Financial Times, June 28, 2018.26 “Inside Salesforce Tower’s Water Recycling System,” MIT Sloan School of Management, February 12, 2018; and “Sales-force Dives Headfirst into Water Recycling with New HQ,” www.greenbiz.com.27 Sandra Postel, “Sustaining Freshwater and its Dependents,” in WorldWatch Institute, State of the World, 2013: Is Sustainability Still Possible.28 “Increasing Water Stress,” in World Economic Forum, Outlook on the Global Agenda 2015.29 The most recent statistics may be found at the website of the United Nations Environmental Program, www.unep.org.

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Nations has estimated that 12 million hectares of arable land are lost every year to deserti-fication (one hectare equals about two and a half acres).30 This will prompt migration and the potential for civil unrest.

Syngenta, a Swiss company that sells seeds and agricultural chemicals, committed to support the sustainable development goals of Agenda 2030 and set specific tar-gets to rescue farmland from degradation and improve soil fertility. The firm part-nered with the United Nations to launch the Soil Leadership Academy. Together with local nongovernment organizations (NGOs), it trained growers of soybeans in Brazil, wine grapes in Hungary, and maize in Vietnam, among others, to reduce soil erosion by planting cover crops and limiting tillage. In 2016, the company reported in its annual review that its efforts had had a positive impact on 5 million hectares of land, preventing and reversing degradation. “I think sustainability, over time, will be the driving force for everybody’s business,” said Syngenta’s CEO.31

Decline of BiodiversityBiodiversity refers to the number and variety of species and the range of their genetic makeup. To date, approximately 1.7 million species of plants and animals have been named and described. Many scientists believe these are but a fraction of the total. According to recent research, the total number may be closer to 9 million, but no one knows for sure. Scientists estimate that species extinction is now occurring at 100 to 1,000 times the nor-mal, background rate, mainly because of pollution and the destruction of habitat by human society. A 2016 study by the World Wildlife Fund found that populations of vertebrate species (mammals, birds, reptiles, amphibians, and fish) were more than half of what they were in 1970.32 Biological diversity is now at its lowest level since the disappearance of the dinosaurs some 65 million years ago. Genetic diversity is vital to each species’ ability to adapt and survive and has many benefits for human society as well. By destroying this biological diversity, we are undermining our survivability as a species.

A major reason for the decline in the Earth’s biodiversity is the destruction of rain for-ests, particularly in the tropics. They are the planet’s richest areas in terms of biological diversity. Rain forests cover only about 7 percent of the Earth’s surface but account for somewhere between 40 and 75 percent of the Earth’s species. At the rate that the original tropical rain forests are currently being cut, all will be gone or severely depleted within 30 years. The reasons for destruction of rain forests include commercial logging, cattle ranching, and conversion of forest to plantations to produce cash crops such as palm oil and soybeans for export. Overpopulation also plays a part, as landless people clear forest to grow crops, raise livestock, and cut trees for firewood.

The destruction is ironic because rain forests may have more economic value standing than cut. Rain forests are the source of many valuable products, including foods, medi-cines, and fibers. The pharmaceutical industry, for example, each year develops new med-icines based on newly discovered plants from tropical areas. Moreover, rain forests absorb carbon dioxide from the atmosphere, so their destruction worsens climate change.

Some businesses have taken important steps to conserve tropical rain forests. Members of the Consumer Products Forum, an alliance of 400 leading companies

30 The most recent statistics may be found at the website of the United Nations Convention to Combat Desertification, www.unccd.int/en.31 “The Good Growth Plan,” in Annual Review 2016, at www.syngenta.com.32 World Wildlife Fund, Living Planet Report: Risk and Resilience in a New Era (2016).

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including Coca-Cola, Unilever, and Walmart, have adopted a goal of “zero net deforestation” by 2020 and agreed not to buy any raw materials—such as beef, soy-beans, palm oil, timber, and paper—whose production requires the destruction of forest. In another initiative, Archer Daniels Midland (ADM), a major trader of agri-cultural commodities, partnered with the Forest Trust to assure it purchased no soy-beans from threatened ecosystems. This was important because much of the world’s soybean crop came from Brazil, where Amazonian rain forests were being cleared for farming. “We’re at a critical juncture now to break the link between agriculture, especially for soy production, and deforestation in Latin America,” said a represen-tative of the activist group Forest Heroes. “ADM’s announcement is a major step forward for the soy industry.”33

The Convention on Biological Diversity, an international treaty first negotiated in 1992, addresses many of these issues. By 2018 all U.N. member countries except for the United States had ratified it. The treaty commits these countries to draw up national strategies for conservation, to protect ecosystems and individual species, and to take steps to restore degraded areas. It also allows countries to share in the profits from sales of products derived from their biological resources.

Threats to Marine EcosystemsA final issue of concern is threats to the world’s marine ecosystems. This term refers broadly to oceans and the salt marshes, lagoons, and tidal zones that border them, as well as the diverse communities of life that they support. Salt water covers 70 percent of the Earth’s surface and is home to a great variety of species, from tiny plankton to the giant blue whale, from kelp beds to mangrove forests. Marine ecosystems are important to human society in many ways. Fish, marine mammals, and sea plants provide food and other useful products such as fertilizer, animal feed, cooking and heating oil, medicines, clothing, and jewelry. Healthy coastal zones protect coastlines from erosion and filter run-off from the land. Many communities have survived for centuries off the bounty of the sea.

Today, the health of these ecosystems is increasingly threatened. Some of the key issues include the following:

Fish populations. Oceans provide 90 percent of the world’s fish catch. The United Nations has estimated that of the world’s marine fisheries, 90 percent are fully exploited or overexploited, and some fisheries—such as those for cod off the Grand Banks (east-ern United States and Canada) and for anchovies off Peru—have probably been per-manently destroyed by overfishing.34 Active management, such as limiting the number of fishing boats, establishing fish quotas, or banning fishing for periods of time, has allowed fish to regenerate in some areas.Coral reefs. Coral reefs are limestone structures that develop from the skeletons of aquatic life and are host to great biological diversity. Today, however, they are in decline from pollution, oceanic warming, damage from ships, and cyanide and dynamite fish-ing. The Nature Conservancy estimates that at their current rate of decline, 70 percent of coral reefs will be gone by 2050.Coastal development. Much of the world’s population growth is now concentrated in coastal areas, often in ecologically fragile areas. In the United States, for example,

33 “Agribusiness Giant Adopts Historic No-Deforestation Policy,” Climate Progress, April 1, 2015. The commitments of the Consumer Goods Forum are reported at www.theconsumergoodsforum.com.34 “The State of World Fisheries and Aquaculture, 2016,” www.fao.org.

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50 percent of the population lives in counties bordering the ocean—which comprise just 17 percent of the land. Inappropriate development can put pressure on ecologically fragile areas.35

Ocean acidity. One effect of increased concentrations of greenhouse gases in the atmo-sphere has been gradual acidification of the oceans, as seawater has absorbed excess carbon dioxide (which becomes carbonic acid). The result has been the destruction of aquatic life, which is often highly sensitive to acidity.36

A young entrepreneur in Denmark, Boyan Slat, has launched a company called The Ocean Cleanup to remove some of the 8 million tons of plastic waste that enters the oceans every year. Plastics are chemical pollutants; they despoil coastlines and also kill marine life when inadvertently ingested. Slat’s idea was to float solid curved barriers, 60 or more miles long, near enormous accumulations of floating trash such as the Great Pacific Garbage Patch. Boats would then pick up the gathered detritus and ferry it back to land where it could be properly recycled, generating funds to continue the process. By 2018, the Ocean Cleanup had hired more than 70 staff members, raised more than $40 million, and conducted its first rounds of testing in preparation for deploying its barriers and boats in the open ocean.37

Response of the International Business Community

Since so many ecological challenges cross national boundaries, the international business community has a critical role to play in addressing them. This section describes some of the important voluntary initiatives undertaken by companies around the world to put the principle of sustainable development into practice. Other actions by business to address environmental challenges will be explored in Chapter 10.

Life-cycle analysis (LCA), also called life-cycle assessment, involves collecting infor-mation on the lifelong environmental impact of a product, all the way from extraction of raw material to design, manufacturing, distribution, use, and ultimate disposal. The aim of life-cycle analysis is to minimize the adverse impact of a product at all stages, from cradle to grave. Having this information can permit companies to make informed choices about how to reduce a product’s footprint. For example, a Procter & Gamble life-cycle analy-sis of its Tide detergent brand found that its greatest environmental impact occurred in the home—when customers washed their clothes in hot water. The company subsequently introduced Tide Coldwater as a more environmentally friendly alternative. Walmart, Dell, Alcoa, and other companies work through the Sustainability Consortium to advance LCA for thousands of products.38

Industrial ecology refers to designing factories and distribution systems as if they were self-contained ecosystems. For example, businesses can save materials through closed-loop recycling, use wastes from one process as raw material for others, and make use of energy generated as a by-product of production.

An example of industrial ecology may be found in the town of Kalundborg, Denmark, where several companies have formed a cooperative relationship that

35 Pew Charitable Trusts, “Coastal Sprawl: The Effects of Urban Development on Aquatic Ecosystems in the United States,” www.pewtrusts.org.36 “How Will Ocean Acidification Impact Marine Life?” Science Daily, February 3, 2015.37 “It’s Important at Least to Try: Can This 23-Year-Old Clear the Oceans of Plastic Waste?” The Telegraph (U.K.), August 4, 2017. The website of the organization is at www.theoceancleanup.com.38 For more information on the Sustainability Consortium, see www.sustainabilityconsortium.org.

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produces both economic and environmental benefits. The local utility company sells excess process steam, which had previously been released into a local fjord (waterway), to a local pharmaceutical plant and oil refinery. Excess fly ash (fine particles produced when coal is burned) is sold to nearby businesses for use in cement making and road building. Meanwhile, the oil refinery removes sulfur in the natural gas it produces to make it cleaner burning and sells the sulfur to a sulfuric acid plant. Calcium sulfate, produced as a residue of a process to cut smoke emis-sions, is sold to a gypsum manufacturer for making wallboard. The entire cycle both saves money and reduces pollution.39

Extended product responsibility refers to the idea that companies have a continuing responsibility for the environmental impact of their products or services, even after they are sold. This implies, for example, that firms pay close attention to the energy efficiency of their products when used by the consumer. It also implies that companies design prod-ucts for disassembly, that is, so that at the end of their useful life they can be disassembled and recycled. At Renault, the French carmaker, engineers design cars for eventual reuse. At a plant near Paris, the company remanufactures used engines, transmissions, and injection pumps for resale. Other components, such as steel body parts and upholstery fabric, are separated and recycled.40 This is sometimes called cradle to cradle, because materials that are used to create one product are later reused to create another. The efforts of one com-pany, HP, to reduce its carbon impact through extended product responsibility is profiled in Exhibit 9.B.

Recently, the ideas of life-cycle analysis, industrial ecology, and extended product responsibility have been captured by a new concept: the circular economy. The term refers to a production system that is regenerative by design, that is, it restores rather than wastes its inputs. In contrast, with a linear model, where a production system proceeds from raw materials, to product, to use, to disposal, the circular economy uses a circular model, where a production system proceeds after use to recycling and reuse.41

Carbon neutrality is when an organization or individual produces net zero emissions of greenhouse gases. Since virtually all activity produces some atmospheric warming, this is usually accomplished by a combination of energy efficiencies (to reduce their own emis-sions) and carbon offsets (to reduce others’ emissions). Carbon offsets (sometimes called carbon credits) are investments in projects that remove carbon dioxide (or its equivalent in other climate-warming pollutants, such as black carbon) from the atmosphere. This can be done, for example, by paying others to plant trees, produce clean energy, or sequester (bury underground) earth-warming gases. Some organizations now broker carbon offsets to businesses and individuals wishing to reduce their climate impact.

In 2017, the British retailer Marks & Spencer launched the second phase of its ambitious sustainability initiative, Plan A 2025 (so-called because, as their chief executive explained, “there is no Plan B”). The company had already met a prior commitment to become carbon neutral. To achieve this ambitious goal, the com-pany had built an experimental “learning store” in the United Kingdom as well as an “eco-factory” in partnership with a supplier in Sri Lanka, to try out new approaches that could be diffused through its system. It had installed solar panels

39 Information about Kalunborg’s industrial ecology initiative is available at www.symbiosis.dk/en.40 Renault’s environmental report is available at https://group.renault.com.41 “Remaking the Industrial Economy,” McKinsey Quarterly, February 2014. Additional articles on the circular economy may be found at www.ellenmacarthurfoundation.org.

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and radically cut energy use at its stores and warehouses, improved the fuel effi-ciency of its delivery fleet, and reduced the number of business flights taken by employees. It also introduced new products, such as the “first ever carbon neutral bra,” part of its Autumn Leaves lingerie collection. Marks & Spencer offset the remainder of its carbon emission by investing in carbon reduction projects. (Mark’s & Spencer’s partnership to promote less polluting cook stoves— mitigating their climate impacts—is described in the discussion case at the end of this chapter.)42

Other companies that have achieved—or pledged to achieve—carbon neutrality include Salesforce, Nike, News Corporation, Timberland, and Van City.43

Sustainable development will also require technology cooperation through long-term partnerships between companies in developed and developing countries to transfer tech-nology, as shown in the following example.

In 2017, Microsoft invested $50 million in a 5-year program called AI for Earth. The goal was the share the company’s expertise in artificial intelligence with other businesses, governments, and researchers across the world to address a wide variety of environmental problems. These included pollution modeling, crop yield optimi-zation, and animal migration tracking. Microsoft provided support, for example, to the Jane Goodall Institute for its work in chimpanzee conservation and to the Inter-national Centre for Tropical Agriculture in its efforts to predict climate changes

42 “Marks & Spencer Launches Plan A 2025,” press release, June 1, 2017; and Marks & Spencer, Plan A Report 2017, http://planareport.marksandspencer.com.43 A list of companies that have pledged or achieved carbon neutrality may be found in “Who’s Going ‘Carbon Neutral,’” at www.bsr.org.

From Moonshot to The Machine: Reducing Carbon Impact through Extended Product Responsibility

In an analysis of its carbon impact, Hewlett Packard (HP) learned that more than three-fifths of the company’s greenhouse gas emissions were caused by its product portfolio—that is, by its products in use once they were in the customers’ hands. Reducing the climate impacts of its own operations, manufacturing, and trans-portation could only fix part of the problem, the company reasoned. So, in 2014, HP announced a new goal of reducing the emissions intensity in use of all of its high-volume products, including printers, computers, and mobile devices, by 40 percent overall by 2020, compared with 10 years earlier. A major part of this effort was the creation of a new generation of energy-efficient servers—the powerful computers that store, share, and route data on behalf of customers in enormous data centers. Astonishingly, humans today produce more data in 12 hours than they did in all of history up to 2003. Handling and storing this volume of data requires more energy than the entire nations of Germany and Japan combined. HP’s first answer was the Moonshot, a high-volume server that used up to 90 percent less energy. Hewlett Packard Enterprise (which took over HP’s server business after the company split in 2015) followed up in 2017 with another energy-saving innovation: The Machine, a high-efficiency computer capable of using just 1 percent of the energy required per calculation compared with others then available. “We must take swift and bold action to address the root causes of climate change,” said the company’s CEO, Meg Whitman. “This means disrupting the status quo.”

Sources: CDP, Global Climate Change Report 2015, www.cpd.net; “HPE Unveils Computer Built for the Era of Big Data,” HPE press release, May 16, 2017; and “HP Announces Goal to Reduce Greenhouse Gas Emissions of Product Portfolio,” HP press release, September 24, 2014.

Exhibit 9.B

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that could impact food crops in developing countries. “AI is not a panacea for envi-ronmental problems,” said Microsoft’s chief environmental scientist. “But history will judge the success of the Information Age by our ability to deploy its resulting technology in service of the planet.”44

The idea of sustainable development is not only widely accepted in the business com-munity; many firms are increasingly viewing it as a core business issue. A 2017 global survey of almost 3,000 business leaders, for example, reported that six in ten were more engaged with sustainability than they had been two years earlier, and the top reason for doing so was “to align sustainability with [their] goals, mission, or values.” The following chapter explores in more detail the steps companies are taking to do so.45

Codes of Environmental ConductEarlier chapters of this text have discussed the emergence of standards and codes of con-duct in the areas of ethics and global corporate citizenship. Similarly, several national and international organizations have developed standards and codes of environmental con-duct. Some are designed to be universally applicable, while others are tailored to specific industries. All, however, share the characteristic that they are private and voluntary: cor-porations choose to comply with these codes to show customers, investors, regulators, and others that they have met certain environmental standards in their operations.

Some of the leading universal codes and standards include the following:

∙ The International Chamber of Commerce has developed the Business Charter for Sus-tainable Development, eight guiding principles that identify key elements of environ-mental leadership and call on companies to recognize sustainable development as among their highest corporate priorities.46

∙ The CERES Roadmap, developed by the Coalition for Environmentally Responsible Economies (CERES), contains 20 expectations for corporate sustainability leadership, divided into four areas of activity—governance, stakeholder engagement, disclosure, and performance.47

∙ ISO 14000 is a series of voluntary standards developed by the ISO, an international group based in Geneva, Switzerland, that permit companies to be certified as meeting global environmental performance standards.48

∙ The Greenhouse Gas Protocol is a tool developed by the World Resources Institute and the World Business Council for Sustainable Development to help businesses measure and manage their greenhouse gas emissions.49

Codes of environmental conduct have also been developed by and for specific industries.

A prominent example is the Equator Principles, a set of environmental standards for the financial services industry. Their focus is specific to banking: they commit sig-natories to determine, assess, and manage environmental risk in project financing. In other words, when a bank considers whether to lend money, for example, for the

44 “The Case for Technology Investments in the Planet,” December 19, 2017, www.nature.com.45 “Sustainability’s Deepening Impact,” December 2017, www.mckinsey.com.46 “Inspire and Grow Your Business in the 21st Century: Business Chapter for Sustainable Development, at https://cdn.iccwbo.org/content/uploads/sites/3/2015/01/ICC-Business-Charter-for-Sustainable-Development.pdf.47 “The CERES Roadmap for Sustainability,” www.ceres.org/roadmap.48 www.iso.org.49 www.ghgprotocol.org.

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construction of an oil pipeline, it must examine the environmental impact of the project and whether its sponsors have systems in place to mitigate adverse impacts. If borrowers are unable to comply, the bank will not loan them money. The Equator Principles, launched in 2003 and most recently reviewed in 2013, have spread widely in the financial industry. By 2018, 92 financial institutions around the world had signed on, ranging from huge institutions such as Citigroup to regional banks such as Egypt’s Arab African International Bank, China’s Industrial Bank Com-pany, and Uruguay’s Banco de la Republica Oriental.50

Other industry-specific standards include the Forest Stewardship Council Principles in the forest products industry, the Marine Stewardship Council in the fishing industry, and the Leadership in Energy and Environmental Design (LEED) standards in the commercial and residential construction industry.

Protecting the environment and the well-being of future generations is not only a neces-sity, but also an opportunity for business. Companies operate in a resource-constrained world, where climate change and scarcity of fresh water, arable land, and healthy forests pose pressing challenges. Environmental regulations are getting tougher, consumers want cleaner products, and employees want to work for environmentally responsible companies. Finding ways to reduce or recycle waste saves money. Many executives are championing the idea that corporations have moral obligations to future generations. The most success-ful global businesses in coming years may be those, like the ones profiled in this chapter, that recognize the imperative for sustainable development as an opportunity both for com-petitive advantage and ethical action.

50 The website of the Equator Principles is www.equator-principles.com.

∙ Business and society operate within a finite natural environment. This reality confers constraints but also provides opportunities.

∙ Many world leaders have supported the idea of sustainable development, that is, devel-opment that meets the needs of the present without hurting the ability of future genera-tions to meet their own needs. Governments, businesses, and civil sector organizations are engaged in a range of innovations in an effort to reach this goal.

∙ Population growth and rapid economic development in many parts of the world have contributed to these ecological problems. Human society is now using resources and producing waste at a rate well above what the Earth’s ecosystem can sustainably support.

∙ Five environmental issues—climate change, ozone depletion, resource scarcity, declin-ing biodiversity, and threats to the marine ecosystem—are shared by all nations. Inter-national treaties, including the Paris Agreement, are addressing some of these issues, although more remains to be done.

∙ Global businesses have begun to put the principles of sustainable development into action through such innovative actions as life-cycle analysis, extended product respon-sibility, carbon neutrality, and technology cooperation.

∙ Nationally and internationally, businesses and nongovernmental organizations have worked together to develop voluntary codes of environmental conduct to promote sustainability.

Summary

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Discussion Case: Clean CookingIn a small village in rural Kenya, a woman bent over an open fire pit in the center of her hut cooking the evening meal. That morning, she had spent two hours collecting wood, animal dung, and scrap paper to use as fuel. Now, as she stirred the pot, the cook fire gave off a steady stream of sooty, acrid smoke, which filled the room despite a ventilation hole in the roof. The woman’s young son played dangerously close to the open flame, while her daughter, coughing from the smoke, tried to read by the weak light of the fire.

In 2018, a similar scene was repeated in households with around 3 billion people every day across the developing world, with devastating effects on human health, the environ-ment, and economic development.

Indoor air pollution from open cookstoves is a killer. The World Health Organization has estimated that soot, particles, and smoke from cooking is one of the worst risk factors for health in developing countries, causing 4.3 million premature deaths a year, mostly from lung and heart disease. Open cookstoves also lead to disfiguring burns, asthma, eye damage, and pregnancy complications. The effects are greatest on women and young chil-dren, who spend the most time near the hearth.

Women and girls also suffer from head and back injuries, animal attacks, and sexual violence while searching for and carrying heavy loads of fuel, often far from home. Time spent collecting fuel is time not spent attending school, working at a paid job, or running a small business.

Key Terms natural capital, 190ozone, 199Paris Agreement, 198sustainable development, 190technology cooperation, 205

biodiversity, 201carrying capacity, 194carbon neutrality, 204carbon offsets, 204circular economy, 204climate change, 196commons, 196Convention on Climate Change, 198

ecological footprint, 194ecosystem, 190extended product responsibility, 204global warming, 196industrial ecology, 203life-cycle analysis, 203marine ecosystems, 202

Internet Resources

www.ipcc.ch Intergovernmental Panel on Climate Changewww.unep.org United Nations Environmental Programnewsroom.unfccc.int United Nations Framework Convention on Climate Changewww.wbcsd.org World Business Council on Sustainable Developmentwww.iclei.org Local Governments for Sustainabilitywww.triplepundit.com New media company that covers sustainable business practiceswww.worldwatch.org The Worldwatch Institutewww.wri.org World Resources Institute

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Primitive cooking methods also harm the environment. Cutting trees to produce wood or charcoal leads to deforestation, loss of biodiversity, and watershed degradation. More-over, the combustion of biomass in cooking produces more than a quarter of the world’s black carbon, or soot. Scientists now believe that soot is second only to carbon dioxide in its overall contribution to global warming. Policymakers have been intrigued by the fact that while carbon dioxide stays in the atmosphere for decades, black carbon washes out within days or weeks. Reducing soot in the atmosphere would thus have a much more immediate effect on global warming than cutting carbon emissions.

In 2010, the United Nations Foundation, in collaboration with several governments (includ-ing the United States), launched the Global Alliance for Clean Cookstoves, with the ambitious goal of “100 by 20”—that 100 million households worldwide adopt clean and efficient cook-stoves and fuels by 2020. The alliance recognized that reaching this goal would require more than money; it would require technical innovation in fuels and stove design, new mechanisms of financing, and on-the-ground campaigns to engage users from a wide range of cultures and cooking traditions. It would also require the support of businesses—large and small.

Many companies saw an opportunity in the Global Alliance for Clean Cookstoves. CEMEX, a global building products company based in Mexico, developed and con-tributed $2 million worth of clean-burning concrete cookstoves. Marks & Spencer, the British retailer, joined the Alliance and committed to helping employees of its suppliers of products such as coffee and textiles to cook more efficiently; and it had already part-nered with UNICEF (the United Nations Children’s Fund) to install 40,000 clean cook-stoves in Bangladesh. Dow Corning, a Midland, Michigan–based maker of silicon-based materials, donated both money and expertise in manufacturing and material science to the Alliance.

At the same time, motivated by greater attention to the issue, social entrepreneurs across the globe began generating innovative ideas about how to design, manufacture, and finance more efficient and cleaner cookstoves—potentially a “win–win” for the environment and human health and well-being.

For example, in the west African country of Ghana, Suraj Wahab founded a small busi-ness, Toyola Energy Ltd., to produce a cookstove he invented called the gyapa (“good fire”). His company constructed the stove from locally sourced materials—scrap metal from construction sites and fired clay liners. Because it was designed to burn charcoal, a fuel used by 30 percent of Ghanaian households, twice as efficiently as in an open fire, each stove over the course of its life would prevent the release of global-warming emis-sions equivalent to the amount generated by a Honda Civic driven for one year.

Wahab had difficulty obtaining needed capital until he partnered with E+Co, a clean energy nonprofit that invested $270,000. E+Co helped Toyola calculate the carbon offset value of its cookstoves, which was then monetized and sold to the investment banking firm Goldman Sachs. Within a short period, Toyola employed 150 people and had sold more than 150,000 cookstoves to eager Ghanaians, who welcomed the cost savings and health benefits they provided. More than a quarter of the company’s revenue came from the sale of carbon offsets, helping keep the price to consumers as low as $7.

Similar stories of creative partnerships were occurring around the globe.The nonprofit Trees, Water, & People, based in Fort Collins, Colorado, teamed with

local partners to build and distribute 75,000 cookstoves in Guatemala, El Salvador, Hondu-ras, and Nicaragua. Their stove was an insulated combustion chamber topped by a remov-able steel griddle adapted to cooking tortillas and a chimney pipe to vent smoke through a roof hole, reducing indoor air pollution by more than 80 percent. Other organizations, such

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as Solar Cookers International, experimented with ways to harness the power of the sun—a completely renewable, clean, and free source of energy—to boil water and cook food.

By 2017, 80 million cookstoves had been distributed, and the Alliance was closing in on its ambitious goal. “As we build a cookstoves market to the scale necessary to combat and defeat this silent killer,” said its executive director, “the strong support and unique expertise of our partners and champions will be invaluable.”

Sources: Global Alliance for Clean Cookstoves, 2017 Progress Report: Driving Demand, Delivering Impact, at www.cleancookstoves.org; “Putting Clean Cooking on the Front Burner,” December 21, 2017, www.worldbank.org; World Health Organization, “Household Air Pollution and Health,” February 2016, www.who.it; “How Marks & Spencer is Cooking Its Way to a Cleaner Future,” March 30, 2015, www.greenbiz.com; “Forest Saving Stoves Program,” www.treeswaterpeople.org; “Case Study: Toyola Energy Limited, Ghana,” www.cleancookstoves.org; and “Clean Cookstoves: Dow Corning’s Path to Public-Private Partnership,” http://dowcorningcitizenservicecorps.wordpress.com, February 28, 2012; and personal correspondence with staff of Trees, Water, & People.

Discussion Questions

1. In what ways would the widespread adoption of clean cookstoves address the global environmental issues discussed in this chapter?

2. In what ways would the widespread adoption of clean cookstoves address the issues of economic development and poverty discussed in this chapter?

3. Which sectors (e.g., government, business, civil society) would need to be involved in a successful campaign to promote clean cookstoves in the developing world, and what would be the contributions of each?

4. What would be the benefit to multinational corporations, such as CEMEX, Marks and Spencer, and Dow Corning, of participating in this effort? What distinctive contribu-tions can social entrepreneurs make to promoting clean cookstoves?

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C H A P T E R T E N

Managing for Sustainability

Growing public concern about sustainability has prompted political, corporate, and civil society leaders to become increasingly responsive to environmental issues. In the United States and other nations, government policymakers have moved toward greater reliance on economic incentives, rather than command and control regulations, to achieve environmental goals. At the same time, many businesses have become increasingly proactive and have pioneered new approaches to effective sustainability management, sometimes in partnership with advocacy organizations. These actions have often given firms a competitive advantage by cutting costs, gaining public support, and spurring innovation.

This Chapter Focuses on These Key Learning Objectives:

LO 10-1 Knowing the main features of environmental laws in the United States and other nations.

LO 10-2 Understanding the advantages and disadvantages of different regulatory approaches.

LO 10-3 Assessing the costs and benefits of environmental regulation.

LO 10-4 Defining an ecologically sustainable organization and the stages through which firms progress as they become more sustainable.

LO 10-5 Understanding how businesses can best manage for sustainability.

LO 10-6 Analyzing how effective sustainability management makes firms more competitive and improves their financial performance.

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Levi Strauss & Company was widely recognized as a sustainability leader in the apparel industry. The maker of the iconic Levi’s jeans had worked with cotton farmers to reduce their use of water and pesticides, integrated recycled plastic from soda bottles into their fabric, and worked with the World Bank to provide low-cost loans to suppliers that met sustainability goals. The company encouraged its customers to wash their jeans less often and to keep them longer and provided grants to early career designers to help them adopt eco-friendly practices. The company aimed for a day when all Levi’s apparel would be recycled in a closed loop, worn for many years and then returned to be made into new gar-ments. “What would happen if we could change culture in such a way that consumers imagined the end of life of the product they bought?” asked the company’s head of global product innovation.1

Even as the Trump administration in 2017 announced its intention to pull the United States out of the international climate change agreement negotiated in Paris, several Cana-dian provinces and U.S. states were joining forces in their efforts to reduce carbon emis-sions. The Western Climate Initiative (WCI) was a nonprofit corporation that managed a common cap-and-trade market for Quebec, Ontario, British Columbia, and California. These subnational governments had established limits on greenhouse gas emissions and set up a system that allowed companies that had cut their emissions to sell permits to others that had exceeded their quota. This provided these companies with a financial incentive to reduce pollution below their quota. “Having a larger number of emitters, power plants, factories, [and] fuel increases the diversity of opportunities to reduce emissions at a lower cost than [a single province or state] would be able to do on [its] own,” explained a former WCI board member.2

The Environmental Defense Fund (EDF), a leading environmental advocacy organi-zation, has formed partnerships with several companies, including McDonald’s, DuPont, Starbucks, and FedEx, to improve environmental performance and gather information. In its most recent effort, EDF partnered with Google Earth Outreach to find, measure, and map natural gas leaks in selected cities across the United States. Specially equipped Street View cars, which Google uses to photograph streetscapes for its map application, gathered data on even small gas leaks. Escaping gas—mostly from aging pipes—was a problem because it cost customers money, heightened the risks of explosion, and worsened climate change. This information enabled utilities, such as PSE&G of New Jersey and New York, to prioritize the replacement of leaking gas mains, focusing on the worst offenders. The partnership later expanded its scope to create detailed maps of health-damaging pol-lutants such as nitrous oxides and particulates. “Seeing pollution mapped this way makes us better advocates for cleaner air and smart development choices,” said a representative of EDF.3

In the early years of the 21st century, many businesses, governments, and environ-mental advocacy organizations became increasingly concerned that old strategies for promoting environmental protection were failing and new approaches were necessary. Government policymakers moved toward greater reliance on economic incentives to

1 “Levi’s Is Radically Redefining Sustainability,” Fast Company, February 9, 2017. The company’s sustainability initiatives are described at www.levistrauss.com/sustainability. www.levistrauss.com/unzipped-blog.2 “Will Other States Join California’s International Climate Pact?” The Atlantic, August 10, 2017. The website of the Western Climate Initiative is at www.wci-inc.org.3 “Methane to Its Madness,” Fast Company, October 27, 2017. “Google Uses Street View Cars to Collect Pollution Data,” June 5, 2017, at www.money.cnn.com, and “Mapping Pollution with Mobile Sensors.” Google’s efforts are described at www.google.com/earth. The methane maps are available at http://edf.org/methanemaps. More information about EDF’s corporate partnerships is available at www.edf.org/approach/partnerships/corporate.

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achieve environmental goals. Environmentalists engaged in greater dialogue and cooper-ation with industry leaders. Many businesses pioneered new approaches to sustainability, such as developing products with fewer adverse environmental impacts.

The challenge facing government, industry, and environmental advocates alike, as they tried out new approaches and improved on old ones, was how to promote ecologically sound business practices in an increasingly integrated world economy.

Role of Government

In many nations, government is actively involved in regulating business activities to pro-tect the environment. Business firms have few incentives to minimize pollution if their competitors do not. A single firm acting on its own to reduce discharges into a river, for example, would incur extra costs. If its competitors did not do the same, the firm might not be able to compete effectively and could go out of business. Government, by setting a common standard for all firms, can take the cost of pollution control out of competition. It can also provide economic incentives to encourage businesses, communities, and regions to reduce pollution, and offer legal and administrative systems for resolving disputes. Gov-ernment cannot accomplish environmental goals by itself; its role, rather, is to make a critical contribution to a collective effort, together with business and civil society, to move toward sustainability.

In the United States, government has been involved in environmental regulation since the late 19th century, when the first federal laws were passed protecting navigable water-ways. The government’s role began to increase dramatically, however, in 1970, when Congress passed the National Environmental Policy Act (NEPA). The Environmental Protection Agency (EPA), the nation’s main environmental regulatory agency, was created shortly afterwards. Figure 10.1 summarizes the major federal environmental laws enacted by the U.S. Congress since then. It is organized into four categories: air; water; solid and hazardous waste; and cross-media (referring to the regulation of forms of pollution that have multiple impacts on air, water, and land). Various regional, state, and local agencies also have jurisdiction over some environmental issues in their respective areas, as one of the opening examples shows.

Major Areas of Environmental RegulationIn the United States, the federal government regulates in three major areas of environmen-tal protection: air pollution, water pollution, and solid and hazardous waste (land pollu-tion). This section will review the major environmental issues and the U.S. laws pertaining to each, with comparative references to similar initiatives in other nations and examples of how businesses have responded.

Air Pollution

Air pollution occurs when more pollutants are emitted into the atmosphere than can be safely absorbed and diluted by natural processes. Some pollution occurs naturally, such as smoke and ash from volcanoes and forest fires. But most air pollution today results from human activity, especially industrial processes and motor vehicle emissions. Air pollution degrades buildings, reduces crop yields, mars the beauty of natural landscapes, and harms people’s health. The American Lung Association (ALA) estimated in 2017 that 125 million Americans, nearly four in ten people, were breathing unsafe air for at least part of each year. Fully 70 percent of the cancer risk from air pollution is due to diesel exhaust from trucks, farm and construction equipment, marine vessels, and electric generators. People

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living near busy highways and workers in occupations that use diesel equipment are partic-ularly at risk.4

One approach to reducing diesel pollution is a service called IdleAir, operated by Convoy Solutions of Knoxville, Tennessee. IdleAir provides an alternative for long-haul truck drivers who idle their engines at truck stops in order to provide power to the cab during rest breaks. An inexpensive window-mounted adapter allows drivers to hook up to a service module, so they can continue to enjoy heating, cooling, cable TV, and Internet access with their engines off. The solution is less expensive

4 American Lung Association, “State of the Air: 2017,” www.lung.org; and “Health Effects of Diesel Exhaust,” http://oehha.ca.gov.

FIGURE 10.1Leading U.S. Environmental Protection Laws • CLEAN AIR ACT (1970) Established national air quality standards and timetables.

• CLEAN AIR ACT AMENDMENTS (1977) Revised air standards.

• CLEAN AIR ACT AMENDMENTS (1990) Required cuts in urban smog, acid rain, and greenhouse gas emissions; promoted alternative fuels.

• WATER POLLUTION CONTROL ACT (1972) Established national goals and timetables for clean waterways.

• SAFE DRINKING WATER ACT (1974 and 1996) Authorized national standards for drinking water.

• CLEAN WATER ACT AMENDMENTS (1987) Authorized funds for sewage treatment plants and waterways cleanup.

• HAZARDOUS MATERIALS TRANSPORT ACT (1974) Regulated shipment of hazardous materials.

• RESOURCE CONSERVATION AND RECOVERY ACT (1976) Regulated hazardous materials from production to disposal.

• TOXIC SUBSTANCES CONTROL ACT (1976) Established national policy to regulate, restrict, and, if necessary, ban toxic chemicals.

• COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT (SUPERFUND) (1980) Established Superfund and procedures to clean up hazardous waste sites.

• SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT (SARA) (1986) Established toxics release inventory.

• PESTICIDE CONTROL ACT (1972) Required registration of and restrictions on pesticide use.

• POLLUTION PREVENTION ACT (1990) Provided guidelines, training, and incentives to prevent or reduce pollution at the source.

• OIL POLLUTION ACT (1990) Strengthened EPA’s ability to prevent and respond to catastrophic oil spills.

• CHEMICAL SAFETY INFORMATION, SITE SECURITY, AND FUELS REGULATORY RELIEF ACT (1999) Set standards for the storage of flammable chemicals and fuels.

AIR

WATER

SOLID AND HAZARDOUS WASTE

CROSS-MEDIA POLLUTION

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for truckers because it uses one-tenth the energy of idling, and reduces pollution by completely eliminating diesel emissions during rest breaks.5

The major law governing air pollution is the Clean Air Act, passed in 1970 and amended in 1990. The 1990 amendments toughened standards in several areas, including stricter restrictions on emissions of acid rain–causing chemicals.

The EPA has identified six criteria pollutants, relatively common harmful substances that serve as indicators of overall levels of air pollution. These are lead, carbon monoxide, particulate matter, sulfur dioxide, nitrogen dioxide, and ozone. (Ozone at ground level is a particularly unhealthy component of smog.) In addition, the agency also has identified a list of toxic air pollutants that are considered hazardous even in relatively small concen-trations. These include asbestos, benzene (found in gasoline), dioxin, perchloroethylene (used in some dry-cleaning processes), methylene chloride (used in some paint strippers), and radioactive materials. Emissions of toxic pollutants are strictly controlled. In 2014, the Supreme Court ruled that the EPA could regulate emissions of carbon dioxide (one of the main contributors to climate change) at facilities it already regulated for other pollutants.6

In 2017, Volkswagen, the German carmaker, pleaded guilty to charges of violat-ing the Clean Air Act and agreed to pay $4.3 billion in fines. The company had programmed its diesel cars to switch on emissions controls when the vehicle was undergoing smog testing and then switch them off when the vehicle was on the road, to boost performance and gas mileage. The result was that the cars emitted up to 40 times the allowed levels of nitrogen oxides, a toxic mixture including nitrogen dioxide, which causes health problems and contributes to smog.7 (This situation is further discussed in the discussion case at the end of Chapter 14.)

A special problem of air pollution is acid rain. Acid rain is formed when emissions of sulfur dioxide and nitrogen oxides, by-products of the burning of fossil fuels by utilities, manufac-turers, and motor vehicles, combine with natural water vapor in the air and fall to earth as rain or snow that is more acidic than normal. Acid rain can damage the ecosystems of lakes and rivers, reduce crop yields, and degrade forests. Structures, such as buildings and monuments, are also harmed. Within North America, acid rain is most prevalent in New England and eastern Canada, regions that are downwind of coal-burning utilities in the Midwestern states.8

Water Pollution

Water pollution, like air pollution, occurs when more wastes are dumped into waterways, lakes, or oceans than can be naturally diluted and carried away. Water can be polluted by organic wastes (untreated sewage or manure), by chemicals from industrial processes, and by the disposal of nonbiodegradable products (which do not naturally decay). Heavy metals and toxic chemicals, including some used as pesticides and herbicides, can be par-ticularly persistent. Like poor air, poor water quality can harm ecosystems, decrease crop yields, threaten human health, and degrade the quality of life. Failure to comply with clean water laws can be very expensive for business, as the following example shows.

In 2010, a wellhead blowout at a deepwater drilling platform operated on behalf of BP (formerly British Petroleum) in the Gulf of Mexico caused the largest marine

5 The company’s website is www.idleair.com.6 PBS Newshour, “Supreme Court Limits EPS’s Authority to Regulate Carbon Dioxide Emissions,” June 23, 2014, www.pbs.org/newshour.7 “Volkswagen Set to Plead Guilty and to Pay U.S. $4.3 Billion in Deal,” The New York Times, January 10, 2017.8 More information about acid rain may be found at www.epa.gov/acidrain.

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oil discharge in U.S. history. For three months, as crews struggled to cap the well, more than three 3 million barrels of oil gushed into the waters of the Gulf of Mexico, causing extensive damage to marine life and devastating the coastal economies of adjacent states. Subsequent government investigations found that BP’s relentless cost cutting and inadequate safety systems had contributed to the disaster. In 2015, BP agreed to pay more than $20 billion to settle claims by federal, state, and local governments arising from the spill, the largest environmental settlement in U.S. his-tory. BP estimated that the total cost of the spill—including the actual cleanup, pay-ments to individuals and shareholders, criminal fines, and other costs not included in the settlement—would be more than $66 billion.

The impacts of the BP disaster on business, society, and the environment are profiled in a case at the end of this book.

In the United States, regulations address both the pollution of rivers, lakes, and other surface bodies of water and the quality of the drinking water. The main U.S. law governing water pollution is the Water Pollution Control Act, also known as the Clean Water Act. This law aims to restore or maintain the integrity of all surface water in the United States. It requires permits for most point sources of pollution, such as industrial emissions, and mandates that local and state governments develop plans for nonpoint sources, such as agricultural runoff or urban storm water. The Pesticide Control Act specifically restricts the use of dangerous pesticides, which can pollute groundwater. The quality of drinking water is regulated by another law, the Safe Drinking Water Act of 1974, amended in 1996. This law sets minimum standards for various contaminants in both public water systems and aquifers that supply drinking water wells.

The impacts of hydraulic fracturing, a method for extracting natural gas from under-ground shale formations, on the quality of drinking water—and how these impacts should be regulated—is explored in the discussion case at the end of this chapter.

Solid and Hazardous Waste

The third major focus of environmental regulation is the contamination of land by both solid and hazardous waste. The United States produces an astonishing amount of solid waste, adding up to more than four pounds per person per day. Of this, 47 percent is recy-cled, composted, or incinerated, and the rest ends up in municipal landfills.9 Many busi-nesses and communities have tried to reduce the solid waste stream by establishing recycling programs.

Sweden is one of the world’s leaders in reducing solid waste. Astonishingly, less than 1 percent of the country’s household waste ends up in landfills. Swedes sort their trash, separating paper, plastics, metal, glass, food waste, light bulbs, and bat-teries. All residential areas have convenient recycling stations, and special trucks pick up electronics and other hazardous waste. About half of these materials are recycled and reused in some way, and the other half are burned to generate energy. Sweden’s waste incineration plants have become so efficient that the country routinely imports waste from its neighbors. Swedish companies have joined the effort, too; the retailer H&M, for example, accepts used clothing from customers in exchange for coupons. “Zero waste, that’s our slogan,” said the CEO of the Swedish Waste Management and Recycling Association.10

9 Environmental Protection Agency, “Advancing Sustainable Materials Management: 2014 Fact Sheet,” www.epa.gov.10 “The Swedish Recycling Revolution,” March 29, 2017, https://sweden.se/nature/the-swedish-recycling-revolution/.

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The safe disposal of hazardous waste is a special concern. Several U.S. laws address the problem of land contamination by hazardous waste. The Resource Conservation and Recovery Act of 1976 (amended in 1984) regulates hazardous materials from “cradle to grave.” The Toxic Substances Control Act (TSCA) of 1976 (amended in 2016) requires the EPA to inventory the thousands of chemicals in commercial use, identify which are most dangerous, and, if necessary, ban them or restrict their use.

In 2014, an aging and rusty storage tank holding toxic chemicals used to wash coal leaked, spilling 7,500 gallons into the nearby Elk River near Charleston, West Vir-ginia. Three hundred thousand people who relied on the river for their water supply were told not to drink or bathe with it for several weeks afterwards. (The owner of the tank, Freedom Industries, shortly afterwards declared bankruptcy and shut down.) This frightening incident led Congress to strengthen the almost 40-year-old TSCA, and several states, including West Virginia, passed new laws requiring the inspection of chemical storage tanks.11

As this example illustrates, states can pass regulations that are stricter than federal rules. (They can also regulate industries that do not engage in interstate commerce.)

Some studies have suggested that hazardous waste sites are most often located near eco-nomically disadvantaged African American, Hispanic, and Native American communities. Since 1994, the EPA has investigated whether state permits for hazardous waste sites vio-late civil rights laws and has blocked permits that appear to discriminate against minori-ties. The effort to prevent inequitable exposure to risk, such as from hazardous waste, is sometimes referred to as the movement for environmental justice.12 For example, Native American tribes in Utah, Nevada, and New Mexico have organized to block the construc-tion of nuclear waste disposal facilities on their land, saying the facilities would threaten their health, culture, and economic viability.13

The major U.S. law governing the cleanup of existing hazardous waste sites is the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, popularly known as Superfund, passed in 1980. This law established a fund, supported primarily by a tax on petroleum and chemical companies that were presumed to have cre-ated a disproportionate share of toxic wastes. The EPA was charged with establishing a National Priority List of the most dangerous toxic sites; around 1,700 sites were eventually designated as Superfund sites. Where the original polluters could be identified, they would be required to pay for the cleanup; where they could not be identified or had gone out of business, the federal government would pay. One of the largest hazardous waste sites on the Superfund list was an almost 200-mile long stretch of the Hudson River, which GE factories had contaminated with cancer-causing chemicals called PCBs. In 2018, GE said it had completed its cleanup of the site, at a total cost of around $2 billion, but was still awaiting final EPA approval.

The Houston metropolitan area has one of the largest concentrations of Superfund sites in the nation. When Hurricane Harvey devastated the city in 2017, many of these sites flooded, and some were damaged. At the San Jacinto River Waste Pits, for example, toxic waste from a long-since closed paper mill was released when

11 “Obama Set to Sign Bipartisan Update of 1976 Toxic Substance Law,” The New York Times, June 22, 2016; and “A Year after West Virginia Chemical Spill, Some Signs of Safer Water,” National Geographic, January 10, 2015.12 Robert D. Bullard, “Environmental Justice in the 21st Century,” Environmental Justice Resource Center, available at www.ejrc.cau.edu/ejinthe21century.htm; and Christopher H. Foreman, Jr., The Promise and Perils of Environmental Justice (Washington, DC: Brookings Institution, 2000).13 Nuclear Information and Resource Service, “Environmental Racism, Tribal Sovereignty, and Nuclear Waste,” at www.nirs.org.

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floodwaters damaged a concrete cap that had covered the pits. An EPA dive team that visited the site soon afterwards found dioxin, a dangerous carcinogen, in high concentrations, and the agency fast-tracked a $115 million cleanup. But some criticized the agency for its past inaction. “Superfund sites are known to be the most dangerous places in the country,” and they should have been protected against flooding,” said one environmental activist.14

Remarkably, nearly one in six U.S. residents now lives within three miles of a Super-fund site. As of 2016, cleanup had been completed at around 380 of them.15

Since 2000, most changes in federal regulatory oversight have come through agency rulemaking and executive action rather than legislation. In the first year of the Trump administration, the EPA changed or proposed changes to dozens of rules, with the cumu-lative effect of weakening environmental regulations. Some of these changes are described in Exhibit 10.A.

Alternative Policy ApproachesGovernments can use a variety of policy approaches to control air, water, and land pollu-tion. The most widely used method of regulation historically has been to impose environ-mental standards. Increasingly, however, government policymakers have relied more on market-based and voluntary approaches, rather than command and control regulations, to achieve environmental goals. These different approaches are discussed next.

14 “Toxic Waste Sites Flooded in Houston Area,” September 3, 2017, at https://apnews.com; and “EPA Oks Plan to Rid Toxics from Waste Pits,” Houston Chronicle, October 11, 2017.15 “Polluted Sites Linger Under U.S. Cleanup Program,” Chemical and Engineering News, April 3, 2017.

Rule-Making to Weaken Environmental Protections

During the year and a half of the Trump administration, regulators overturned or announced their intention to overturn more than 70 environmental rules. (Some rules were reversed, but then put back in effect after legal challenges.) Among other actions, regulators

• Proposed to open more than 90 percent of offshore areas to oil and gas drilling, giving energy companies access to lease areas off the coasts of California, the Arctic, and the Eastern Seaboard.

• Suspended clean water rules that required farmers, ranchers, and developers to limit pollution in streams running across land they owned that fed larger bodies of water. These bodies of water, such as the Ches-apeake Bay and Puget Sound, provided drinking water for one in three Americans.

• Revoked a rule that prevented coal companies from dumping mining waste into local streams. This rule had made a big impact in Central Appalachia, where debris from mountaintop surface mining often ended up in valleys, where it polluted running water.

• Reversed a ban on the use of lead ammunition and fishing tackle on public lands (lead is toxic to wildlife and humans).

• Proposed changes that would weaken fuel-efficiency standards for cars and trucks made between 2021 and 2025.

• Ended a requirement that oil and gas companies report their emissions of methane (a potent greenhouse gas).

Some welcomed these rollbacks as releasing businesses and individuals from burdensome regulations, but others thought they represented dangerous attacks on protections of the nation’s air, water, and land.

Sources: “Environmental Rules on the Way Out Under Trump,” The New York Times, July 6, 2018; “Trump Moves to Open Nearly All Offshore Waters to Drilling,” The New York Times, January 4, 2018; and “EPA Blocks Obama-Era Clean Water Rule,” The New York Times, January 31, 2018.

Exhibit 10.A

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Command and Control Regulation

The traditional method of pollution control is through environmental standards. Standard allowable levels of various pollutants are established by legislation or regulatory action and applied by administrative agencies and courts. This approach is called command and control regulation, because the government commands business firms to comply with cer-tain standards and often directly controls their choice of technology.

One type of command-and-control regulation is an environmental-quality standard. In this approach a given geographical area is allowed to have no more than a certain amount or proportion of a pollutant in the air. Polluters, such as utilities and factories, are required to control their emissions to maintain the area’s standard of air quality. For example, in 2014, the EPA issued new, more stringent standards for air concentrations of ground-level ozone, which the agency called the “most pervasive and widespread pollutant in the coun-try.”16 A second type is an emission standard. For example, the law might specify that manufacturers could release into the air no more than 1 percent of the ash (a pollutant) they generated. Sometimes, the EPA mandates that companies use the best available technology, meaning a specific process that the agency determines is the best economically achievable way to reduce negative impacts on the environment.

Market-Based Mechanisms

In recent years, regulators have begun to move away from command and control regula-tion, favoring increased use of market-based mechanisms. This approach is based on the idea that the market is a better control than extensive standards that specify precisely what companies must do.

One approach that has become more widely used is to allow businesses to buy and sell the right to pollute, in a process known as cap-and-trade. California’s tradable permit program for carbon emissions, described in one of the opening examples of this chapter, illustrates this approach. The U.S. Clean Air Act of 1990 also incorporated the concept of tradable permits. The law established emission levels (called “caps”) and permitted companies with emissions below the cap to sell (“trade”) their rights to the remaining permissible amount to firms that faced penalties because their emissions were above the cap. Over time, the government would reduce the cap, thus gradually reducing overall emissions, even though individual companies might continue to pollute above the cap. Companies could choose whether to reduce their emissions—for example, by installing pollution abatement equipment—or to buy allowances from others. One study showed that the tradable permit program for acid rain may have saved companies as much as $3 billion per year, by allowing them the flexibility to choose the most cost-effective methods of complying with the law.17

Another market-based type of pollution control is establishment of emissions charges or fees. Each business is charged for the undesirable waste that it emits, with the fee varying according to the amount of waste released. The result is, “The more you pollute, the more you pay.” In this approach, polluting is not illegal, but it is expensive, creating an incentive for companies to clean up. In recent years, governments have experimented with a variety of so-called green taxes or eco-taxes that levy a fee on various kinds of environmentally destructive behavior. In addition to taxing bad behavior, governments may also offer var-ious types of positive incentives to firms that improve their environmental performance. For example, it may decide to purchase only from those firms that meet a certain pollution

16 “E.P.A. Ozone Rules Divide Industry and Government,” The New York Times, November 26, 2014.17 For more on the tradable permit system for acid rain, see www.epa.gov/acidrain.

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standard or offer aid to those that install pollution control equipment. Tax incentives, such as faster depreciation for pollution control equipment, also may be used. Governments may also levy eco-taxes on individuals.

Norway has declared that to meet its obligations under the 2015 Paris climate accord, it will reduce its carbon emissions by 40 percent. One way it has done so is by offering both positive and negative incentives. The government imposes high taxes on new car purchases, except for nonpolluting electric cars. Operators in Norway’s North Sea oil fields are required to capture carbon dioxide discharged during drilling and pump it back underground or pay a stiff fee per ton. Companies have responded by developing technology to do so.18

In short, the trend has been for governments to use more flexible, market-oriented approaches—tradable allowances, pollution fees and taxes, and incentives—to achieve environmental objectives where possible.

Information Disclosure

Another approach to reducing pollution is popularly known as regulation by publicity, or regulation by embarrassment. The government encourages companies to pollute less by publishing information about the amount of pollutants individual companies emit each year. In many cases, companies voluntarily reduce their emissions to avoid public embarrassment.

The major experiment in regulation by publicity has occurred in the area of toxic emis-sions to the air and water. The 1986 amendments to the Superfund law, called SARA, included a provision called the Community Right-to-Know Law, which required manufac-turing firms to report, for a list of specified toxic chemicals, the amount on site, the number of pounds released, and how (if at all) these chemicals were treated or disposed of. The EPA makes this information available to the public in the Toxics Release Inventory, or TRI, pub-lished annually. Evidence shows that at least initially, reporting manufacturers in the United States cut their releases and disposal of these chemicals to the air, water, and land, apparently fearing negative publicity. Recently, however, the TRI numbers have been quite stable.19

The advantages and disadvantages of alternative policy approaches to reducing pollu-tion are summarized in Figure 10.2.

Civil and Criminal Enforcement

Companies that violate environmental laws are subject to stiff civil penalties and fines, and their managers can face prison if they knowingly or negligently endanger people or the environment. Proponents of this approach argue that the threat of fines and even impris-onment can be an effective deterrent to corporate outlaws who would otherwise degrade the air, water, or land. In 2017, the EPA brought criminal charges against 137 defendants. Companies can also be charged, as the following example shows.

Anadarko Petroleum, an oil and gas exploration company, paid more than $5 billion to settle charges of widespread environmental contamination and to pay for cleanup. Anadarko had purchased Kerr-McGee, a company responsible for dumping radioac-tive uranium, rocket fuel, wood creosote, and other contaminants at 2,000 sites in

18 “Sucking Up Carbon, Combatting Climate Change,” The Economist, November 18, 2017; and “Both Climate Leader and Oil Giant? A Norwegian Paradox,” The New York Times, June 17, 2017.19 TRI data are available at www2.epa.gov/toxics-release-inventory-tri-program. Maps showing the geographical distribution of chemical releases reported under TRI are available at http://toxmap.nlm.nih.gov.

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FIGURE 10.2Advantages and Disadvantages of Alternative Policy Approaches to Reducing Pollution

Policy Approach Advantages Disadvantages

Command-and-control regulation

Market-basedmechanisms

Informationdisclosure

Civil and criminalenforcement

Cap-and-tradesystems

• Enforceable in the courts• Compliance mandatory

• Gives businesses more flexibility• Achieves goals at lower overall cost• Saves jobs by allowing some less-e�cient plants to stay open• Permits the government and private organizations to buy allowances to take them o� the market• Encourages continued improvement

• Taxes bad behavior (pollution) rather than good behavior (profits)

• Rewards environmentally responsible behavior• Encourages companies to exceed minimum standards

• Government spends little on enforcement• Companies able to reduce pollution in the most cost- e�ective way

• May deter wrongdoing by firms and individuals

• Across-the-board standards not equally relevant to all businesses• Requires large regulatory apparatus• Older, less-e�cient plants may be forced to close• Can retard innovation• Fines may be cheaper than compliance• Does not improve compliance once compliance is achieved

• Gives business a license to pollute• Permit levels are hard to set• May cause regional imbalances in pollution levels• Enforcement is di�cult.

• Fees are hard to set• Taxes may be too low to curb pollution

• Incentives may not be strong enough to curb pollution

• Does not motivate all companies

• May not deter wrongdoing if penalties and enforcement e�orts are perceived as weak

Emissions feesand taxes

Governmentincentives

11 states over an 85-year period. Kerr-McGee had tried to spin off its environmental liabilities before selling its remaining assets to Anadarko, but the court had rejected that argument. “Today’s settlement is a just resolution of an historic injustice to the American people and our environment,” said one of the prosecutors.20

European regulators and prosecutors have also actively pursued corporate environmen-tal lawbreakers. For example, the EU standardized its laws against marine pollution and

20 “United States Announces $5.15 Billion Settlement of Litigation Against Subsidiaries of Anadarko Petroleum Corp.,” press release, U.S. Department of Justice, April 3, 2014.

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raised maximum penalties after a series of oil tanker wrecks fouled the coasts of France, Spain, and Portugal. Europe is the world’s largest importer of oil, and 90 percent is trans-ported to the continent by seagoing ships.21

The U.S. Sentencing Commission, a government agency responsible for setting uniform penalties for violations of federal law, has established guidelines for sentencing environ-mental wrongdoers. (These guidelines are also discussed in Chapter 5.) Under these rules, penalties would reflect not only the severity of the offense but also a company’s demon-strated environmental commitment. Businesses that have an active compliance program, cooperate with government investigators, and promptly assist any victims would receive lighter sentences than others with no environmental programs or that knowingly violate the law. These guidelines provide an incentive for businesses to develop active compliance programs to protect themselves and their officers from high fines or even prison if a viola-tion should occur.

Costs and Benefits of Environmental Regulation

One central issue of environmental protection is how costs are balanced by benefits. In the four decades or so since the modern environmental era began, the nation has spent a great deal to clean up the environment and keep it clean. Some have questioned the value choices underlying these expenditures, suggesting that the costs—lost jobs, reduced capital investment, and lowered productivity—exceeded the benefits. Others, in contrast, point to significant gains in the quality of life and to the economic payoff of a cleaner environment.

Businesses in the United States have invested heavily in environmental protection. Man-ufacturers have spent billions of dollars on both capital expenditures (e.g., installing pol-lution controls) and operating costs (e.g., paying for wages and supplies) to comply with environmental regulations. Business spending to comply with environmental regulation has diverted funds that might otherwise have been invested in new plants and equipment or in research and development, and strict rules have sometimes led to plant shutdowns and loss of jobs. Some regions and industries have especially been hard hit by environmental regulation, especially those with high abatement costs, such as paper and wood products, chemicals, petroleum and coal, and primary metals. Inevitably, many of these costs are passed on to customers. On the other hand, emissions of nearly all pollutants have dropped significantly since the beginning of the modern environmental era. These improvements have benefited human health and the environment.

For any specific regulation, weighing the costs and benefits—called a regulatory impact analysis—is mandated by law. For example, the EPA estimated that its recent regulations on ozone, mentioned earlier in this chapter, would cost busi-nesses $15 billion in 2025, when the rule would be fully implemented (based on the middle of three possible scenarios). However, the estimated benefits were even big-ger: $19 to $38 billion, the valuation the EPA calculated for fewer premature deaths, heart attacks, asthma attacks, and other adverse impacts on human health. Not surprisingly, reactions differed among stakeholders. “We’re facing a series of regulations, and the cumulative cost of compliance . . . is significant,” said the pres-ident of the American Chemistry Council, which had vigorously opposed the new rules. But the American Lung Association praised them, saying, “The science is

21 “The Community Framework for Cooperation in the Field of Accidental or Deliberate Marine Pollution,” at http://ec.europa.eu/echo/civil_protection/civil/marin/mp01_en_introduction.htm.

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clear. A more protective standard is needed to protect the health of millions of Americans breathing polluted air every day.”22

As this example illustrates, whether a specific regulation is worthwhile depends on the stakeholder’s point of view, since its costs and benefits often accrue to different parties.

More broadly, environmental regulations stimulate some sectors of the economy. While jobs are lost in industries such as forest products and high-sulfur coal mining, others are created in areas like recycling, environmental consulting, wind turbine and solar panel production and installation, waste management equipment, and air pollution control. For example, operators of coal-fired power plants predicted that big required cuts in mercury emissions, adopted in 2012, would cost thousands of jobs. But trade groups said that the regulations could add 300,000 jobs a year through 2017 in companies that make equipment to reduce emissions.23 Jobs are saved or created in industries such as fishing and tour-ism when natural areas are protected or restored. Moreover, environmental regulations can stimulate the economy by compelling businesses to become more efficient by conserving energy, and less money is spent on treating health problems caused by pollution.

Sectors of the economy that produce goods and services with an environmental benefit are known as the clean economy. A 2018 study by the International Labor Organization esti-mated that the clean economy would be a major source of job growth in the future. Although the transition to a more sustainable society would lead to job loss in carbon-intensive indus-tries, these would be more than offset by jobs created in clean sectors such as alternative energy, electric vehicles, and energy-efficient construction. The report concluded that if the long-term goals of the Paris Agreement were reached, the net impact would be the creation of 18 million jobs.24

Because of the complexity of these issues, economists differ on the net costs and bene-fits of environmental regulation. In some respects, government controls hurt the economy, and in other ways they help, as summarized in Figure 10.3. What is clear is that choices in environmental regulation reflect underlying values, expressed in a democratic society

22 EPA, “Regulatory Impact Analysis of the Proposed Revisions to the National Ambient Air Quality Standards for Ground-Level Ozone,” November 2014, www.epa.gov; “Health Professionals across the Nation Urge EPA to Finalize Most Protective Ozone Air Quality Standard,” March 17, 2015, www.lung.org; and “EPA Ozone Rules Divide Industry and Environmentalists,” The New York Times, November 26, 2014.23 “Regulations Create Jobs, Too,” Bloomberg Businessweek, February 9, 2012.24 World Employment Social Outlook 2018: Greening with Jobs (Geneva: International Labour Organization, 2018).

FIGURE 10.3Costs and Benefits of Environmental Regulations

Costs Benefits

• Manufacturers, mining companies, and utilities spend billions of dollars annually to comply with environmental regulations.

• Some jobs are lost in particularly polluting industries.

• Competitiveness of some capital-intensive, “dirty” industries is impaired.

• Consumers pay more when companies passalong increased costs of regulations.

• Emissions of pollutants drop.

• Air and water quality improves; toxic-waste sites are cleaned up; and natural beauty is preserved or enhanced.

• People live longer and healthier lives in less polluted environments.

• Jobs are created in the clean economy sector, such as environmental products and services, alternative energy, and tourism.

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through an open political process. Just how much a society is prepared to pay and how “clean” it wants to be are political choices, reflecting the give and take of diverse interests in a pluralistic society.

Managing for Sustainability

Environmental regulations, such as the laws governing clean air, water, and land described in this chapter, establish minimum legal standards that businesses must meet. Most compa-nies try to comply with these regulations, if only to avoid litigation, fines, and, in the most extreme cases, criminal penalties. But many firms are now voluntarily moving beyond compliance to improve environmental performance in all areas of their operations and to manage proactively for sustainability. This section describes the stages of corporate envi-ronmental responsibility and discusses the organizational approaches companies have used to manage environmental issues effectively. The following section explains why managing for sustainability can improve a company’s strategic competitiveness.

Stages of Corporate Environmental ResponsibilityAlthough environmental issues are forcing all businesses to manage in new ways, not all companies are equally proactive in their response. One widely used model identifies three main stages of corporate environmental responsibility.

According to this model, companies pass through three distinct stages in sustainability management.25 The first stage is pollution prevention, which focuses on “minimizing or elim-inating waste before it is created.” The second stage is product stewardship. In this stage, managers focus on “all environmental impacts associated with the full life cycle of a product,” from the design of a product to its eventual use and disposal. HP, for example, has designed its laser printer ink cartridges so they can be refurbished and reused, and provides a mailing label for customers to return them free of charge. Finally, the third and most advanced stage is clean technology, in which businesses develop innovative new technologies that support sustainability—that provide actual environmental benefits, rather than simply prevent harm.

General Electric, a company long associated with pollution, from building coal-fired power plants to dumping toxic chemicals in the Hudson River, took a dramatic turn in 2005 when it announced a new strategy dubbed “ecomagination.” GE pledged to double its investment in developing renewable energy, fuel cells, efficient lighting, water filtration systems, and cleaner jet engines, which it viewed as a huge commer-cial opportunity. In 2017, a dozen years into the initiative, GE reported that it had invested $20 billion in clean tech research and development and had earned $270 billion in revenues from its ecomagination portfolio of products and services.26

Evidence suggests that many companies are now moving quickly toward the final stage in this model. Surveys of senior executives by McKinsey & Company document a notable shift from 2012, when the main reason cited for addressing sustainability was to “improve operational efficiency and cut costs,” to 2017, when the main reason cited was to “align with [the] company’s business goals, mission, or values.”27

25 Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review, January–February 1997. All quotes in this paragraph are taken from this article. An alternative stage model may be found in Dexter Dunphy, Suzanne Benn, and Andrew Griffiths, Organisational Change for Corporate Sustainability (New York: Routledge, 2003).26 “Ecomagination Progress,” www.gesustainability.com.27 McKinsey & Company, “Sustainability’s Deepening Impact,” December 2017.

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The Ecologically Sustainable Organization

An ecologically sustainable organization (ESO) is a business that operates in a way that is consistent with the principle of sustainable development, as presented in Chapter 9. In other words, an ESO could continue its activities indefinitely, without altering the carrying capacity of the Earth’s ecosystem. Such businesses would not use up natural resources any faster than they could be replenished, or substitutes found. They would make and transport products efficiently, with minimal use of energy. They would design products that would last a long time and that, when worn out, could be disassembled and recycled. They would not produce waste any faster than natural systems could absorb and disperse it. They would work with other businesses, governments, and organizations to meet these goals.28

Of course, no existing business completely fits the definition of an ecologically sustain-able organization. The concept is what social scientists call an ideal type; that is, a kind of absolute standard against which real organizations can be measured. A few visionary businesses, however, have embraced the concept and begun to try to live up to this ideal.

One such business is Interface, a $1 billion company based in Atlanta, Georgia, the world’s largest maker of commercial carpet tiles. In 1994, CEO Ray C. Anderson announced, to many people’s surprise, that Interface would seek to become “the first sustainable corporation in the world.” Anderson and his managers undertook hundreds of initiatives. For example, the company started a program by which customers could lease, rather than purchase, carpet tile. When tile wore out in high-traffic areas, Interface technicians would replace just the worn units, reduc-ing waste. Old tiles would be recycled, creating a closed loop. The company later adopted a goal of “Mission Zero”—no negative impact on the environment—by 2020. Another initiative was to tag all products with a special label called an envi-ronmental product declaration (EPD). Like a nutrition label on packaged food, the third-party verified EPD listed the raw materials, energy use, emissions, and waste generation associated with each product, allowing Interface customers to make environmentally informed decisions. In 2017, Interface was selected by a panel of experts as one of world’s most sustainable companies, the only company to do so for each of the 20 years the survey had been taken.29

No companies, including Interface, have yet become truly sustainable businesses, and it will probably be impossible for any single firm to become an ESO in the absence of supportive government policies and a widespread movement among many businesses and other social institutions. However, many companies are demonstrating leadership in responding to environmental challenges. The next section will describe actions leading companies are taking now to operate their businesses as sustainably as possible.

Sustainability Management in PracticeCompanies that have begun to move toward sustainability have learned that new structures, processes, and incentives are often needed.

An emerging role at many leading firms is the chief sustainability officer (CSO). In 2004, DuPont was the first company to appoint a chief sustainability officer; a 2014 survey found

28 Mark Starik and Gordon P. Rands, “Weaving an Integrated Web: Multilevel and Multisystem Perspectives of Ecologically Sustainable Organizations,” Academy of Management Review, October 1995.29 GlobeScan/SustainAbility, “The 2017 Sustainability Leaders: Celebrating 20 Years of Leadership,” 2017. Interface’s sustain-ability initiatives are described at www.interfaceglobal.com/sustainability. Ray Anderson’s story is told in Ray C. Anderson with Robin White, Business Lessons from a Radical Industrialist (New York: St. Martin’s Press, 2011).

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36 CSOs at large U.S. firms. Most of these CSOs reported directly to the CEO or to an individual who did. They often supervised staffs of specialists and coordinated the work of managers across many functional areas, including research and development, marketing, facilities, and supply chain management, whose work was related to the firm’s sustainabil-ity mission.30

An example is Justin Whitmore, appointed chief sustainability officer at Tyson Foods, the world’s second-largest processor and marketer of chicken, beef, and pork, in 2017. The newly created position reported directly to the CEO. Whitmore quickly set out to establish science-based targets for Tyson in the areas of green-house gas emissions, water conservation, animal welfare, and food transparency. He also worked on ways to reduce meat waste during processing and on the devel-opment of vegetarian meat alternatives. Whitmore described the challenges facing Tyson: “There are more people in the world, and more of them are rising them-selves out of poverty, so that’s driving protein consumption. You have to set targets for companies that will continue to grow.”31

Sustainability managers reported that when they first took the job, they thought that the most important determinant of success would be their subject-matter expertise—how much they knew about pollutants, energy efficiency, regulations, and the like. But after serving in the position, these managers changed their minds, saying that interpersonal skills—being able to work effectively with people across the organization—were the most critical. “[CSOs] must typically work across the organization to implement their change initiatives,” explained the chief sustainability officer for the clothing maker Reformation. “That means they must be very effective at influencing others.”32

Chief sustainability officers may be based in departments with a variety of names, such as sustainability, citizenship, and corporate affairs. But wherever they are located, recent research shows that effective sustainability management shares several common characteristics:33

Top management commitment. The most environmentally proactive companies almost all have CEOs and other top leaders with a strong espoused commitment to sustainabil-ity. Paul Polman, the CEO of Unilever, a firm that was judged the world’s most sustain-able in 2017, told an interviewer that a different executive team could come into the company, shut down all sustainability initiatives, wring out costs, and drive the share price up—at least in the short term. But he favored the long-term view. “I would like to be remembered for leaving the place a little bit better than I found it,” he said. Boards of directors have also become involved, overseeing the implementation of environmental policies and assessing environment-related risks. For example, Prudential Financial, a financial services company that sells insurance as well as other products, now requires candidates for the board to have sustainability expertise.34 Thirty-one percent of firms integrate sustainability into board committee charters.

30 CSO Back Story II: The Evolution of the Chief Sustainability Officer (Weinreb Group, 2014). 31 Meat Industry Must Grow Sustainably, Tyson Executive Says,” February 8, 2018, www.bloomberg.com; and “The Science Behind Tyson’s Meaty New Sustainability Agenda,” February 26, 2018.32 “Who’s in Charge of Sustainability at Your Favorite Brand?” November 23, 2016, www.racked.com.33 Data in this section are drawn from “Turning Point: Corporate Progress on the CERES Roadmap for Sustainability,” February 2018, www.ceres.org, unless otherwise noted. The CERES study was based on a survey of executives of 600 companies, representing 80 percent of the total market capitalization of all publicly traded companies in the United States.34 CERES, “Lead from the Top: Building Sustainability Competence on Corporate Boards,” 2017.

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Clear goals and metrics. Another characteristic of leading companies is that they set measurable, science-based sustainability goals and regularly assess and report their per-formance. A 2017 report by Pivot Goals found that 94 percent of the world’s 200 largest firms had measurable sustainability goals, and 33 percent had adopted science-based goals.35 By setting specific goals, these firms hold themselves accountable (and allow their stakeholders to do so). A particularly dramatic example is the German sportswear firm Puma, one of the first firms to release an environmental profit-and-loss statement, covering all significant environmental impacts from the production of raw materials to the final sale. After the company learned that most adverse impacts occurred during the production of raw materials, it introduced new products made from recycled content or that could themselves be recycled.36

Employee engagement. Sustainability leaders have found they are most effective when they involve line managers and employees from across the organization in the process of change. Thirty-eight percent of large firms engage their employees on sustainability issues. In 2016, for example, Cisco Systems launched an internal engagement platform called GreenHouse, on which employees could learn about ways to reduce their envi-ronmental footprint and inspire others. In its first six months, 1,750 employees had par-ticipated. One group started a “bring your own cup” campaign and gave out Starbucks cards to others who registered their reusable cup. They calculated that this action had diverted 2,900 pounds of waste in one year.37

Alignment of rewards and incentives. Businesspeople are most likely to consider the environmental impacts of their actions when their organizations acknowledge and reward this behavior. The most sustainable organizations tie the compensation of their managers, including line managers, to environmental achievement and take steps to recognize these achievements publicly. In 2018, 24 percent of U.S. companies linked executive compen-sation to sustainability metrics, but only 8 percent of companies linked pay to meeting goals that went beyond legal and regulatory requirements. For example, at Xcel Energy, a utility that is a leading supplier of wind power, a portion of the CEO’s bonus was linked to meeting specific sustainability goals set annually by the board, including reductions in energy use by customers. A study of U.S., Canadian, and German firms found those com-panies that did link pay to sustainability metrics boosted their performance in this area.38

Environmental Auditing and ReportingAs noted earlier, leading companies not only organize themselves to achieve sustainability goals; they also closely track their progress toward meeting them. Chapter 3 introduced the concept of corporate social reporting and presented evidence on what proportion of compa-nies report results to their stakeholders. In the 1990s, in a parallel development, many com-panies began to audit their environmental performance. More recently, many firms have moved to integrate their social and environmental reporting into a single sustainability report. In 2017, as reported in Chapter 3, 93 percent of the world’s largest companies issued a corporate responsibility report; most of these covered both social and environmental issues. A significant trend is toward the inclusion of corporate responsibility data in the

35 “The Rise of Corporate Sustainability Goals: Some Hard Data,” December 1, 2017, www.sustainblebrands.com. The data-set is available at www.pivotgoals.com.36 For information about Puma’s Environmental Profit & Loss Account and other sustainability initiatives, see www.puma.com.37 “A Look Back at Cisco’s Recent Sustainability Accomplishments,” February 13, 2017, at https://blogs.cisco.com; and “Changing the Way We Waste, One Cup at a Time,” September 7, 2016, at http://weare.cisco.com.38 “It’s Time to Tie Executive Compensation to Sustainability,” Harvard Business Review, August 17, 2017.

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annual financial report; this rose from 44 percent of these companies in 2011 to 78 percent in 2017. This is called integrated reporting (also discussed and defined in Chapter 3).39

An example of a company that was an early leader in integrated reporting is Novo-zymes, a Danish biotechnology firm. The company produced its first environmental report in 1993 and its first combined social and environmental report six years later. Since 2002, it has produced a single report to stakeholders that integrates its finan-cial, social, and environmental results. The company acknowledges the challenge of preparing a single report “in accordance with more than one set of rules and guide-lines,” but says that the process improves transparency and accurately reflects its commitment to sustainability.40

As discussed earlier in Chapter 3, the movement to audit and report on social and environ-mental performance—and to integrate these efforts with financial auditing and reporting—has gained momentum in recent years in many regions of the world.

Environmental PartnershipsMany businesses that are seeking to become more sustainable have formed voluntary, col-laborative partnerships with environmental organizations and regulators to achieve spe-cific objectives, as illustrated by the Google Earth Outreach example at the beginning of this chapter. These collaborations, called environmental partnerships, draw on the unique strengths of the different partners to improve environmental quality or conserve resources.

Starbucks Corporation is the largest coffeehouse company in the world, with more than 27,000 stores in 75 countries. For more than 15 years, the company has part-nered with Conservation International (CI) to promote coffee farming methods that protect biodiversity, mitigate climate change, and reduce harm from pesticides and fertilizers. For example, in Chiapas, Mexico, and Sumatra, Indonesia, the partners have worked with local farmers to develop coffee varieties that thrive in the shade of native trees, conserving habitat and sequestering carbon. The company has also worked with CI to develop a set of purchasing guidelines based on sustainability and has committed to paying a premium price to suppliers who meet the standards. The two organizations also joined the Sustainable Coffee Challenge, an industrywide ini-tiative to make coffee the world’s first completely sustainable agricultural product. Conservation International noted that it viewed Starbucks “as a natural partner to our work because of shared geographies: most of the world’s key coffee-growing regions are the same areas where biological diversity is richest and most threatened.”41

Sustainability Management as a Competitive Advantage

Some researchers believe that by moving toward sustainability, business firms gain a com-petitive advantage. That is, relative to other firms in the same industry, companies that proactively manage environmental issues will tend to be more successful than those that do

39 The Road Ahead: The KPMG Survey of Corporate Social Responsibility Reporting 2017, at www.kpmg.com. The figures reported here are for the G250 companies.40 Novozymes’ website and integrated reports are at http://novozymes.com/en. For a full discussion of the movement toward triple bottom line reporting, see Robert G. Eccles and Michael P. Krzus, The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality (Hoboken, NJ: John Wiley & Sons, 2014).41 The partnership’s progress can be followed at www.conservation.org/partners/Pages/starbucks and www.starbucks.com/responsibility/sourcing/coffee.

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not. Effective sustainability management confers a competitive advantage in five different ways, as follows. 42

Cost SavingsCompanies that reduce pollution and hazardous waste, reuse or recycle materials, and operate with greater efficiency can reap significant cost savings. An example is Subaru’s automobile assembly plant in Lafayette, Indiana, which has gone to great lengths to reduce waste, saving a great deal of money in the process.

Subaru’s 3.5 million square foot Indiana factory has achieved its goal of “zero waste”: it sends no waste at all to landfills. The company returns packaging materials—including the Styrofoam used to protect engines in transit—to suppliers, to be used again. Cafeteria scraps go to a nearby waste-to-energy power plant. The company processes and reuses solvent and oil. Dried paint sludge is shipped to other com-panies that use it to make railroad ties, parking lot bumpers, and bicycle helmets. Used lightbulbs are used to make reflective road striping. Leftover metal slag goes to a company that extracts the copper it contains. These initiatives not only reduce the plant’s environmental impact, they also save the company more than $2 million a year.43

Many companies have found they are able to obtain significant cost savings by more efficiently managing their real estate portfolios. How some companies have managed the built environment to save money and improve their environmental performance is described in Exhibit 10.B. One company that has benefited from this trend is Autodesk, a maker of software for architects and other designers. The company has developed special-ized software that enables architects to calculate the energy and water usage of proposed designs, and to make the most efficient use of daylight and shadows. “Autodesk is commit-ted to helping designers and engineers create a future where we all live well and within the limits of our planet,” said the company on its website.44

Brand DifferentiationCompanies that develop a reputation for environmental excellence distinguish their brand and attract like-minded customers. Sustainable products and services can attract environmen-tally aware customers. For example, shoppers might select cell phones with power-saving features, such as “unplug charger” reminders, or cleaning products formulated with ingre-dients that are not environmentally harmful. Services can also be marketed based on their environmental attributes, as the following example illustrates.

One company that has benefited from its reputation for sustainability is Intrepid Travel. Founded in Australia in 1989, the tour operator now offers itineraries for adventurous travelers on seven continents. Early on, Intrepid Travel embraced the principle of sustainable development and committed to reducing its environmental footprint, so its travel destinations could be enjoyed for many generations to come.

42 Daniel C. Esty and Andrew S. Winston, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (New Haven, CT: Yale University Press, 2006); and Sanjay Sharma and J. Alberto Aragon-Correa, eds., Corporate Environmental Strategy and Competitive Advantage (Northampton, MA: Edgar Elgar Academic Publishing, 2005).43 “The Zero-Waste Factory,” Scientific American, July 13, 2017. The website of Subaru Industries of America is at www.subaru-sia.com.44 The Autodesk website is at www.autodesk.com.

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The company employed local guides, used public transit, offset the carbon emis-sions of its air travel, and gave back to local communities through its foundation. In the past 10 years, the company has grown at an annual compound rate of 25 percent. Said one of the company’s founders: “We became known as a responsible company, and responsible travel became a selling feature for Intrepid.”45

In general, promoting specific products or services based on their environmental attributes, a practice sometimes known as green marketing, has not been particularly effective. Evidence shows that most consumers select products and services based on price, convenience, and quality—not “greenness.” However, what consumers do respond to is a company’s overall rep-utation for environmental responsibility and the credibility of its communications with stake-holders. A study of 30,000 consumers in 60 countries found that almost half were more likely to purchase a product or services from a company known as being environmentally friendly. This was especially true of young people. Only ten percent, however, had purchased products specifically labeled as eco-friendly.46 Joel Makower, an expert on environmental marketing, concluded that “It’s at the company or brand level that this [environmental marketing] makes sense: Why offer a few good, eco-labeled products if the organization behind them is headed in the wrong direction?” In his view, consumers generally do not seek out “green” products, but they do buy from companies they perceive as responsible.47

Technological InnovationEnvironmentally proactive companies are often technological leaders, as they seek imagi-native new methods for reducing pollution and increasing efficiency. In many cases, they

45 Geoff Manchester, “Why We Must Act Now on Sustainability,” May 1, 2014 [blog post], at www.travelweekly.com.au. For Intrepid Travel’s reports on its progress on sustainability, see www.intrepidtravel.com/rb-our-progress-sustainability-policy.46 “The Sustainability Imperative: New Insights on Consumer Expectations,” Nielsen, October 2015.47 Joel Makower, “Five Reasons Green Marketing is Going Nowhere,” March 12, 2013, www.linkedin.com.

Greening the Built Environment

For most companies, their buildings—the offices, factories, stores, and warehouses where their employees work—account for a huge share of their overall environmental impact. The U.S. Energy Information Admin-istration has estimated that commercial buildings and industrial facilities together account for slightly more than half of the nation’s energy consumption (most of the rest comes from transportation and residential use). Many companies have realized that improving operating efficiencies in their real estate holdings can yield tremendous savings, as well as reduce their environmental footprint. One approach is to design buildings from the ground up to conserve resources both in their construction and use. The U.S. Green Building Council has developed a certification process called LEED (Leadership in Energy and Environmental Design) for both new and retrofitted buildings. Adopting these standards has brought com-panies many benefits. For example, Adobe, the maker of digital authoring tools, has obtained 25 LEED certifi-cations, including for corporate headquarters in San Jose, California, which was completely retrofitted. Adobe introduced scores of improvements—from motion sensors that turned off lights when people left their offices to landscape irrigation linked to weather satellites, so sprinklers did not operate when it was raining. The improve-ments cost a total of $1.4 million but saved Adobe $1.2 million per year. “I was one of the naysayers saying, no, green costs money, it doesn’t save money. [But] once I started seeing the cost savings, [I jumped] right up on that bandwagon . . . because it works,” said the company’s director of global facilities services.

Sources: Rocky Mountain Institute, “Adobe Systems Corporate Headquarters” [case study], and “Green Building for a Profitable Future.” The website of the U.S. Green Building Council is at www.usgbc.org. Adobe’s sustainable building initiatives are described at www.adobe.com/corporate-responsibility/sustainability/green-building.

Exhibit 10.B

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produce innovations that can win new customers, penetrate new markets, or even be mar-keted to other firms as new regulations spur their adoption.

IBM’s semiconductor chip-making plant in Burlington, Vermont, uses vast quanti-ties of ultrapure water to clean its products. The water bill for this single facility has been as high as $10,000 a day. To reduce costs, IBM managers devised an elaborate system of electronic sensors to track the movement of water at every point and used the data to drive greater efficiencies—nearly doubling the “water productivity” of the plant over 10 years. “We did fifty different things,” reported the plant’s opera-tion manager. “Angles of usage, treatment, energy capture, using less pump capac-ity, capturing internal pressure that comes with the water in the line—fifty different things.” In the process, IBM had the startling revelation that it had done more than save money on water; it had created an entirely new business of consulting with other organizations on how to do the same thing. IBM later created a robust busi-ness called “Intelligent Water,” which helped governments, utilities, and businesses use advanced data analytics to conserve water and save money.48

Reduction of Regulatory and Liability RiskAnother benefit for companies that are proactive with respect to their environmental impacts is that they are often better positioned than their competitors to respond to new government mandates. For example, when new rules went into effect in Europe that banned all electronics products that included six toxic substances, including lead, cadmium, and mercury, companies that had learned how to make their products free of these substances prior to the ban suddenly had a big advantage in winning European accounts. When the United Kingdom announced that all large British companies would be required to report annually on their greenhouse gas emissions, the companies that had taken earlier steps to measure and report on carbon voluntarily were better prepared for compliance. Similarly, proactively managing for sustainability can avoid expensive fines and lawsuits, such as those experienced by Anadarko, in the example mentioned earlier in this chapter.

Strategic PlanningCompanies that cultivate a vision of sustainability must adopt sophisticated strategic plan-ning techniques to allow their top managers to assess the full range of the firm’s effects on the environment. The complex auditing and forecasting techniques used by these firms help them anticipate a wide range of external influences on the firm, not just ecologi-cal influences. Wide-angle planning helps these companies foresee trends—new markets, materials, technologies, and products. For example, Toyota, well known for its ability to anticipate market trends, was among the first to produce a commercially successful hybrid vehicle, the Prius. As U.S. car makers struggled—and some went into bankruptcy—in the deep recession of the late 2000s, Toyota fared relatively well. The same sophisticated planning that enabled Toyota to weather the recession had also contributed to its abil-ity to meet the public’s increased interest in less polluting, more efficient transportation.49 McKinsey & Company found in the survey mentioned earlier in this chapter that 44 percent of companies have formally integrated sustainability into their strategic planning process.50

48 “IBM Intelligent Water,” at www-935.ibm.com/services/multimedia/Intelligent_Water.pdf; and Charles Fishman, The Big Thirst: The Secret Life and Turbulent Future of Water (New York: Free Press, 2011), Chapter 5, “Money in the Pipes.”49 Information on Toyota’s sustainability initiatives is at www.toyota.co.jp/en/environment.50 McKinsey & Company, “Sustainability’s Deepening Impact,” December 2017.

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Figure 10.4 lists the companies viewed by a panel of experts as the world’s leaders in integrating sustainability into their business strategy.

If managing for sustainability confers a competitive advantage, it follows that it should have a measurable impact on financial performance. Scholars have begun to study this relationship. A comprehensive examination of almost two decades of data on U.S. companies by Robert Eccles and colleagues at the Harvard Business School concluded that “high-sustainability firms” significantly outperformed others, as measured by both financial and stock market returns.51 The most recent work on this topic has focused on material sustainability issues. To explain, the term material in financial reporting refers to issues that are relevant to eval-uating a firm’s financial condition; the law requires that firms report to investors and the public not all information, but material information. In the same way, material sustainabil-ity issues refer to those that are particularly relevant to an evaluation of a specific company or industry’s sustainability management. For example, greenhouse gas emissions are highly material in the transportation industry, but of lower materiality in the financial ser-vices industry. Building on this concept, recent research shows that firms with good per-formance on material sustainability issues significantly outperform firms with poor performance on these issues. A 2018 study of large U.S. firms found that 32 percent had conducted a materiality assessment.52

51 Robert G. Eccles, Ioannis Ioannou, and George Serafeim, “The Impact of a Corporate Sustainability on Organizational Pro-cesses and Performance,” Management Science 60(11), 2014.52 Mozaffar Khan, George Serafeim, and Aaron Yoon, “Corporate Sustainability: First Evidence on Materiality,” November 9, 2016, The Accounting Review, Vol. 91, No. 6; and CERES (2018), op. cit.

FIGURE 10.4 Corporate Leaders in Integrating Sustainability into Their Business StrategyQuestion: What specific companies do you think are leaders in integrating sustainability into their business strategy?

Source: Globe Scan/SustainAbility, The 2017 Sustainability Leaders, p. 13. Based on a survey of more than 1,000 qualified sustainability experts from government, NGOs, academia, corporations, and the media from 79 countries. Respondents were asked to list a maximum of three companies. The numbers shown are the percentage of respondents who named that specific company.

0 5 10 15 20 25 30 35 40 45 50

GE

BASF

Nike

Nestle

Tesla

Natura

IKEA

Marks & Spenser

Interface

Patagonia

Unilever

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A theme of this chapter is that achieving a sustainable economy and society will require a collaborative effort among government, business, and civil society. The U.S. government, like that of many other countries, has adopted many environmental laws and regulations constraining business behavior. These are critically important, as they assure that mini-mum standards are met by all. But many proactive companies are moving beyond com-pliance, recognizing that operating sustainably will help them become more competitive in the global marketplace by cutting costs, attracting environmentally aware customers, spurring innovation, reducing regulatory and liability risk, and encouraging long-range strategic planning. Recent research shows that managing for sustainability pays off for companies in the long run.

∙ Government environmental laws and regulations focus on protecting the ecological health of the air, water, and land, and limiting the amount of pollution that companies may emit.

∙ Environmental laws have traditionally been of the command and control type, specify-ing standards and results. New laws, in both the United States and Europe, have added market incentives to induce environmentally sound behavior.

∙ Environmental laws have brought many benefits. Air, water, and land pollution levels are in many cases lower than in 1970. A continuing challenge is to find ways to promote a clean environment and sustainable business practices without impairing the competi-tiveness of the U.S. economy.

∙ Companies pass through three distinct stages in the development of green management practices. Many businesses are now moving from lower to higher stages. An ecologi-cally sustainable organization is one that operates in a way that is consistent with the principle of sustainable development.

∙ Effective environmental management requires an integrated approach that involves all parts of the business organization, including top leadership, sustainability managers, and employees in many functional areas, as well as strong partnerships with stakehold-ers and effective auditing.

∙ Many companies have found that proactive environmental management can confer a competitive advantage by saving money, attracting customers, promoting innovation, reducing regulatory risk, and developing skills in strategic planning. Emerging evi-dence shows a positive relationship between sustainability practices and stock market and financial performance.

Summary

Key Terms market-based mechanisms, 219material sustainability issues, 232Superfund (CERCLA), 217sustainability report, 227

acid rain, 215cap-and-trade, 219chief sustainability officer (CSO), 225clean economy, 223command and control regulation, 219

ecologically sustainable organization (ESO), 225environmental justice, 217environmental partnerships, 228Environmental Protection Agency (EPA), 213

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Discussion Case: Hydraulic Fracturing—Can the Environmental Impacts Be Reduced?

Hydraulic fracturing—or fracking, as it is sometimes known—has been called the gold rush of the 21st century because so many companies and people are rushing to make their fortunes by extracting oil and natural gas from underground shale formations. What are the environmental impacts of fracking, and what can business, government, and society do to reduce them?

In recent years, technology has evolved to make possible the economic extraction of crude oil and natural gas from vast underground shale formations. In hydraulic fracturing, a vertical well is drilled as deep as 7,000 feet before turning horizontally into the oil- or gas-bearing layer. Operators then pump in vast quantities of water, sand, and chemicals under high pressure to break up the shale and release hydrocarbons, which are then brought back up the drill hole. By rotating the horizontal turns in successive passes, a single well can reach a large area underground.

Hydraulic fracturing grew rapidly in the United States in the first two decades of the century. In 2016, more than 1 million oil and gas wells were operating in 31 states. The biggest fracking booms were underway in several shale formations: the Baaken (North Dakota), Marcellus (Pennsylvania, West Virginia, New York, Ohio, and Maryland), Barnett (Texas), and Permian (western Texas and eastern New Mexico).

Hydraulic fracturing has several benefits. In 2012, the United States became the leading natural gas producer in the world, overtaking Russia, and in 2013, became the leading oil producer, overtaking Saudi Arabia. At current rates of growth, the United States will be energy self-sufficient by 2030. The fracking boom has created jobs, tax revenue, and royal-ties to property owners who lease their mineral rights. Natural gas burns cleaner than either coal or oil, providing a possible bridge to a future economy based on renewable energy.

But fracking also carries serious environmental risks. Trucks and heavy equipment cause noise and air pollution in and around drilling sites. The process uses vast quantities of water—at least 239 billion gallons since 2005, according to some estimates—depleting supplies available for drinking and irrigation. Chemicals injected underground include a host of toxins. Fluid that returns to the surface—called flowback—is often further con-taminated by radioactive substances, heavy metals, and volatile organic compounds from deep in the Earth. Improper disposal of this wastewater can contaminate land, wells, and rivers—and even cause earthquakes in such normally quiescent places as Oklahoma and

Internet Resources

www.epa.gov Environmental Protection Agencywww.envirolink.org Environmental organizations and newswww.GreenBiz.com Green Business Networkwww.sustainablebusiness.com Network of sustainable small businesseswww.environmentalleader.com Briefing for executiveswww.sustainability.com SustainAbility (consultancy)www.sustainablog.org Blogs on green and sustainable businesseswww.theguardian.com/us/sustainable-business The Guardian [newspaper] coverage of

sustainable business

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Kansas. Methane can be released at multiple stages in the fracking process, powerfully contributing to climate change. Wildlife habitat is destroyed as forests and fields give way to industrial drilling sites.

In 2017, the Trump administration cancelled federal regulations, issued two years ear-lier, governing hydraulic fracturing on public and tribal lands. These regulations would have required companies to disclose the chemicals they used and set stricter rules for the storage and disposal of wastewater. States, which had jurisdiction over fracking on pri-vate and state-owned land, had taken a wide range of approaches. At one extreme, three states—Vermont, New York, and Maryland—had banned fracking outright; some cities had as well. In announcing the decision, the health commissioner of New York said, “The potential risks are too great. In fact, they are not even known.” At the other extreme, gov-ernment oversight in North Dakota—site of a huge oil boom—was considered highly per-missive; in fact, the state’s top environmental regulator described himself on a radio show as “not a regulations guy.” Some states had charted a middle course; California, for exam-ple, implemented regulations in 2015 that allowed fracking but required strict monitoring of groundwater and air quality near wells. Most states taxed fracking operations.

As the practice of hydraulic fracturing spread, some companies experimented with new technologies to extract oil and gas with less environmental damage. Halliburton devel-oped solar-powered storage silos and natural gas fueled pumps, reducing on-site emissions. Southwestern Energy installed infrared cameras to detect fugitive methane emissions, so leaks could be plugged. General Electric tested a system that enabled water to be treated and reused on site, and GasFrac, a Canadian company, introduced a fracking method that used no water at all.

Said a professor who studied these trends, “[It is] the same as with any industry—if you come out with a game-changing technology, you can get in the market first and ride that.”

Sources: “The World’s Top Oil Producers of 2017,” Investopedia, February 19, 2018; “To Round Out a Year of Rollbacks, the Trump Administration Just Repealed Key Regulations on Fracking,” The Washington Post, December 29, 2017; “Fracking by the Numbers: The Damage to Our Water, Land, and Climate from a Decade of Dirty Drilling,” Environment America, April 2016; “New Federal Rules are Set for Fracking,” The New York Times, March 20, 2015; “Citing Health Risks, Cuomo Bans Fracking in New York State,” The New York Times, December 17, 2014; “The Downside of the Boom,” [series of articles], The New York Times, various dates starting November 22, 2014; “Green Fracking? 5 Technologies for Cleaner Shale Energy,” National Geographic, March 21, 2014. Maps showing the distribution of fracking wells in the United States are available online at www.fractracker.org/map.

Discussion Questions

1. What is hydraulic fracturing, or fracking, and what are its costs and benefits?2. Using the classification system presented in this chapter, what type(s) of pollution is

(are) generated by fracking?3. Using the classification system presented in this chapter, what type(s) of government

regulation has (have) been used to address the concerns you identified in question 1, and which do you think would be most effective?

4. What are the benefits to companies of moving beyond compliance and developing more sustainable methods of fracking?

5. What factors might influence a company to use more or less environmentally responsi-ble methods of fracking?

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P A R T F I V E

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Business and Technology

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C H A P T E R E L E V E N

The Role of Technology

Technology is an unmistakable economic and social force in both business and the world where we live. Global and local communications, business exchanges, the science that affects the quality of our lives, and the simple tasks that make up our daily lives are all significantly influenced by technology. Whether we are at home, in school, or in the workplace, emerging technological innovations have dramatically changed how we live, play, learn, work, and interact with others, raising important social and ethical questions for business.

This Chapter Focuses on These Key Learning Objectives:

LO 11-1 Defining technology and its characteristics.

LO 11-2 Recognizing how technology has evolved throughout history.

LO 11-3 Analyzing and assessing how technology impacts individuals in society.

LO 11-4 Understanding the potential for unwanted threats arising from individuals’ use of the Internet and other social media platforms.

LO 11-5 Examining inequalities in public access to technology.

LO 11-6 Assessing the ethical challenges posed by new technologies.

LO 11-7 Identifying how some governments act to control or censor the use of technology by its citizens.

LO 11-8 Evaluating the benefits and risks of recent breakthroughs in science and medicine.

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Three Russian companies and 25 Russian citizens were indicted on charges of engaging in a widespread effort to interfere in the 2016 U.S. presidential election. The indictment alleged that Russians planted social-media messages, invented fake personas, and staged rallies with the “strategic goal to sow discord in the U.S. political system.” Facebook estimated that 87 million of its users had been targeted to view political ads based on their race, political preference, religion, and personal interests, such as gun ownership. Facebook estimated that 470 Russian-backed accounts connected to a single pro-Kremlin firm, the Internet Research Agency, churned out 80,000 Facebook posts over a 30-month period before the election.1

Imagine taking a pill and information is communicated to your physician. In 2017 the U.S. Food and Drug Administration approved the world’s first digital drug, an anti-psychotic pill that signals smartphones once it reaches the stomach, so doctors can track whether patients are taking their medication. Japan’s Otsuka Pharmaceutical implanted a tiny chip containing minerals, such as silicon, magnesium, and copper, inside tablets of Abilify, used to treat schizophrenia, bipolar disorder, and other mental illnesses. Once swallowed, the chip mixes with stomach acids and sends a heartbeat-like signal to an adhe-sive patch worn on the patient’s torso. The patch records the dosage and time of ingestion and relays this information to a smartphone app for patients to monitor and share with doctors and caretakers. The chip ultimately passes through the digestive tract normally.2

Just a decade earlier, interference by a foreign government in the U.S. elections was considered unlikely. But the use of social media had spread rapidly across the United States, connecting people as never before. Likewise, innovative medical procedures, like a pill communicating with a physician, only imagined until now, have become real. In recent decades, the rate of technology change has been extraordinary, encompassing the wireless revolution, the ability to process enormous amounts of data, and the application of artificial intelligence (discussed in the next chapter) to both manufacturing and service delivery. Today, processing power and data storage are virtually free in the cloud, and a simple handheld iPhone has the same computing power as the room-sized IBM mainframe computer of the 1970s.

Technology is a major factor in our lives, helping us communicate with others around the world and across town, providing new opportunities for business to promote its activi-ties, and improving the quality of our lives. But what are the consequences of the extraordi-narily rapid pace of technological change? Has technology replaced human contact and, if so, what are the consequences of this change in how we relate to others? Who decides what technology should emerge and dramatically affect our lives? Should businesses be allowed to use technology freely or should there be some constraints on its use by business? Who should determine what these constraints are?

Technology Defined

Technology is a broad term referring to the practical applications of science and knowledge to commercial and organizational activities. The dominant feature of technology is change and then more change. As discussed at the beginning of this chapter, new technological breakthroughs are again changing our lives. Sometimes the pace of change is so fast and furious that it approaches the limits of human tolerance, and people lose their ability to cope with it successfully. Although technology is not the only cause of change in society, it

1 “Russians Charged With Interfering in U.S. Election,” The Wall Street Journal, February 16, 2018, www.wsj.com; and “12 Russian Agents Indicted in Mueller Investigation,” The New York Times, July 14, 2018, www.nytimes.com.2 “Digital Pills That Talk to Your Doctor Are Here,” The Wall Street Journal, November 13, 2017, www.wsj.com.

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is a primary cause. It is either directly or indirectly involved in most changes that occur in society, as noted in an article in Foreign Affairs:

“Technology has sped globalization forward, dramatically lowering communication and transaction costs and moving the world much closer to a single, large global market for labor, capital, and other inputs to production. Even though labor is not fully mobile, the other factors increasingly are. As a result, the various components of global supply chains can move to labor’s location with little friction or cost.”3

Another feature of technology is that its effects are widespread, reaching far beyond the immediate point of technological impact in unpredictable ways. Technology ripples through society until every community is affected by it.

A final feature of technology is that it is self-reinforcing. As stated by Alvin Toffler, “Technology feeds on itself. Technology makes more technology possible.”4 This self- reinforcing feature means that technology acts as a multiplier to encourage its own faster development. It acts with other parts of society so that an invention in one place leads to a sequence of inventions in other places. Thus, invention of the microprocessor led rather quickly to successful generations of the modern computer, which led to new banking meth-ods, electronic mail, bar-code systems, global tracking systems, and so on.

Phases of Technology in SocietySeven broad phases of technology have developed, as shown in Figure 11.1. Societies have tended to move sequentially through each phase, beginning with the lowest technology and moving higher with each step, so the seven phases roughly represent the progress of civilization throughout history. The first phase was the nomadic-agrarian, in which people hunted wild animals for meat and gathered wild plants for food. The second was the agrar-ian, corresponding with the domestication of animals and plants. The first two used manual labor exclusively. The third was the industrial, characterized by the development of pow-ered machinery, first in the textile industry and later in many other forms of manufacturing. The fourth was the service phase, marked by the rise of service industries and intellectual labor. The fifth was the information phase. This phase emphasized the use and transfer

3 Erik Brynjolfsson, Andrew McAfee, and Michael Spence, “New World Order: Labor, Capital, and Ideas in the Power Law Economy,” Foreign Affairs, July/August 2014, www.foreignaffairs.com.4 Alvin Toffler, Future Shock (New York: Bantam, 1971), p. 26.

Technology Level

Phases in the Development of Technology

Approximate Period Activity Primary Skill Used

1 Nomadic-agrarian Until 1650 Harvesting Manual

2 Agrarian 1650–1900 Planting and harvesting Manual

3 Industrial 1900–1960 Building material goods Manual and machine

4 Service 1960–1975 Providing services Manual and intellectual

5 Information 1975–2000 Thinking and designing Intellectual and electronic

6 Semantic 2000–today Relevance and context Intellectual and networking

7 Biotechnology 2016–today Application of engineering and biological sciences

Networking and artificial creation

FIGURE 11.1 Phases in the Development of Technology

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of knowledge and information rather than manual skill. Businesses of all sizes, including the smallest firms, explored the benefits of the information age through the availability of nanotechnology and similar inventions. These inventions catapulted societies into cyber-space, where information is stored, ideas are described, and communication takes place in and through an electronic network of linked systems. The technology developed in this age provided the mechanisms for more information to be produced in a decade than in the previous 1,000 years.

The semantic phase, which began around 2000, saw the development of processes and systems to enable organizations and people to navigate through the expanding amount of links and information available on the Internet. Search engines, such as Google, employed massive clusters of computers to analyze the metadata or descriptive information embedded within web pages, documents, and files. A Google search for a specific airline flight, for example, might return links to a flight-tracking website, an estimated time of departure or arrival for that day’s flight, weather forecasts, and airport maps. Social interaction is an important part of the semantic phase. Services such as Facebook, Twitter, and LinkedIn analyzed the transac-tions and metadata from each user’s activity to suggest new contacts, entertainment, and links.

Scientists suggest that society is now in the midst of a seventh, phase dominated by biotechnology. Biotechnology uses biological processes in the development or manufacture of a product or in the technological solution to a problem. While the term biotechnology first appeared in 1919, the principles of engineering and biological sciences have recently been applied in such wide-ranging uses as food alterations, genetic research and cloning, human and animal health care, pharmaceuticals, and the natural environment.5

The Role of Technology in Our Daily Lives

Technology has been intertwined in our daily lives since the Industrial Revolution. The connection between the two became even stronger in the information, semantic, and bio-technology phases. Today, technology has the potential to influence every aspect of every individual’s global activity—driving innovation, affecting collaborative partnerships, and changing business–stakeholder relationships. It has created great opportunities for people— but also serious ethical and social challenges. This section will explore some ways in which major technologies have presented both opportunities and challenges for people in their daily lives.

The Presence of the InternetMore people have more access to technology than ever before. Residents of developing countries increasingly enjoy energy-powered appliances, entertainment devices, and com-munications equipment. Individuals in developed countries in North America, Europe, portions of Asia, and the Middle East more than ever are dependent on electronic commu-nication devices for access to information and for interactions with others and businesses. In today’s environment, nearly every individual in a developed country has a desktop or laptop computer, tablet, mobile phone, and a host of other electronic devices to connect them with others in their family, neighborhood, country, or world and this is becoming true for more and more people in developing countries as well.

One of the most visible and widely used technological innovations over the past decade has been the Internet. Springing to life in 1994, this conduit of information revolutionized

5 For more information see The Industry Handbook: Biotechnology at www.investopedia.com; and Ashish Swarup Verma, Shishir Agrahari, Shruti Restogi, and Anchal Singh, “Biotechnology in the Realm of History,” Journal of Pharmacy and BioAllied Sciences, July–September 2013, pp. 321–3, www.ncbi.nlm.nih.gov/pmc/articles.

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how business was conducted, students learned, and households operated. The Wall Street Journal reported that Generation Z, individuals born after 2000, access most of their video entertainment from Internet streaming services, such as YouTube (34 percent) and Netflix (27 percent), compared to traditional TV (27 percent).6

Any estimate of the number of Internet users is quickly out of date but some important trends have emerged. In 2008, China surpassed the United States with the most Internet users by country. By 2017, India surpassed the United States and Japan to become the country with the second largest number of Internet users. Indonesia, with 50.4 percent of its population using the Internet, moved up from eleventh place to fifth place based on number of Internet users by country by 2017. The top 10 countries by Internet usage in 2017 are shown in Figure 11.2.

This figure also shows the emerging markets for Internet usage: Africa (more than 8,000 percent growth since 2000), the Middle East (more than 4,000 percent growth), and Latin America/Caribbean (more than 2,000 percent growth). Developing countries, especially in the Southern Hemisphere, are catching up with developed countries in the integration of Internet usage into the lives of managers and citizens.

Thousands of new Internet users each day demonstrate the power of this technology as a force in our lives. The Internet is increasingly being used as a place for interpersonal communication, social networking, and shopping, as described later. Yet, technology experts are warning of the potentially negative impacts on our lives of dependence on technology.

Social psychologist Adam Alter warns that many children, teenagers, and adults are behaviorally addicted to modern digital products, indicated by the significant amount of time they are engaged in using their cellphones or other devices. Unlike a physical dependence on a habit-forming chemical substance such as heroin or nicotine, behavioral addiction refers to a compulsion to engage in rewarding behaviors, such as checking one’s Facebook feed, despite negative consequences. Alter says that some teenage boys spend weeks alone in their rooms paying video games, and Snapchat boasted that young users open their app more than 18 times a day.7

Technology manufactures are accused of contributing to the increasing behavioral addic-tion to technology. Some of the games available on an individual’s smartphone require that users pay money as they play. Obviously, the game producers want users to keep playing, and they often pretest different versions of a game before release to see which version is the hardest to resist or will keep users’ attention the longest. South Korea and China are considering legislative proposals, called Cinderella laws, to protect children from playing certain games after midnight. In China, there are camps where parents commit their chil-dren for months so that therapists can treat them for their technology addiction.8

When Facebook founder, Mark Zuckerberg, was challenged with the accusation that Facebook users were spending far too much time on the social network platform, he responded that he wanted his company and its product “to encourage meaningful social interactions.” He added, “time spent is not a goal by itself.”

Yet, a 2017 study conducted by the Royal Society for Public Health in the United Kingdom evaluated five of the most frequently used social networks, (Facebook, Twitter, Snapchat, Instagram, and YouTube), and concluded that all but one, You-Tube, had a negative effect on the user’s mental health. In another study, Tel Aviv

6 “How Gen Z Watches,” The Wall Street Journal, November 27, 2017, www.wsj.com.7 “Why We Can’t Look Away from Our Screens,” The New York Times, March 6, 2017, www.nytimes.com.8 “Why We Can’t Look Away from Our Screens,” The New York Times, March 6, 2017, www.nytimes.com.

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University researchers found that people using Facebook can begin to feel that their own lives do not measure up to those of others, causing depression, especially among young people.9

Unwanted Technology ThreatsThe presence of the Internet in our lives is a welcomed benefit, but it has also opened the door to various threats, such as spam and phishing. Spam refers to unsolicited commercial e-mails (also called junk e-mail) sent in bulk to valid e-mail and mobile accounts. These messages

9 “Zuckerberg’s Dilemma: When Facebook’s Success Is Bad for Society,” The Wall Street Journal, January 7, 2018, www.wsj.com.

FIGURE 11.2 Top 10 Internet Use by Country, 2017, and Growth in World Internet Usage by Region, 2000–2017

Sources: “Top 20 Internet Countries—2017” and “World Internet Usage and Population Statistics June 30, 2017—Update” Internet World Statistics, www.internetworldstats.com.

China

India

United States

Brazil

Indonesia

Japan

Russia

Nigeria

Mexico

Bangladesh

Top 10 Countries

Rest of the World

Co

un

try

0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 900.0 1000.0

Internet Users, June 2017

Millions of users

2,237,370,522

1,648,197,097

0% 1,000% 2,000% 3,000% 4,000% 5,000% 6,000% 7,000% 8,000% 9,000%

North America

Oceania/Australia

Europe

Asia

Latin America/Caribbean

Middle East

Africa

Wo

rld

Re

gio

ns

Millions of users

Internet Usage Growth, 2000–2017

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can vary from harmless advertisements for commercial products to offensive material and finance scams. Spam has created problems for users as it has caused extra network traffic and wasted time sorting through the irrelevant or unwanted e-mails to access desired mes-sages. By the early 2010s, spam began to infiltrate e-mail accounts on mobile or cell phones.

As shown in Figure 11.3, the volume of spam messages around the world, as a percent-age of all e-mail traffic, began to fall somewhat, from nearly 70 percent in July 2014 to around 55 percent in 2017. The main reason was the overall heightened level of antispam protection, according to a spokesperson at Kaspersky Labs, the world’s largest antivirus and Internet security software company. Spam filters are now in place on just about every e-mail system, reducing the amount of spam reaching both personal and corporate user accounts. Also, aggressive action taken by governments, especially in the United Kingdom and United States, have created strong penalties for spammers caught sending out malicious e-mails.

Compounding the problem of spam or unsolicited commercial e-mail is phishing. This involved the practice of stealing consumers’ personal identity data and financial account credentials by using fake e-mails that appeared to be from legitimate businesses to trick users into divulging identifying personal data such as usernames and passwords, or to open attachments that installed viruses or malware (malicious software). A 2017 report from the Anti-Phishing Working Group (APWG), a U.S. industry association, reported a consistent stream of phishing activity, with several hundred companies targeted regularly. Phishing attacks occurred most frequently in the payment, financial, and webmail sectors. Of the nearly 8,000 attacks reported, many were spread via Facebook and half were hosted in the United States.10

Although Internet users were more aware of potential problems that might be encoun-tered when using their e-mail and smartphones and were taking precautions to prevent unwanted spam or phishing, new intrusions emerge, particularly through unwanted solici-tation calls to cell phones. These threats continue, and users need to remain vigilant.

10 “Phishing Activities Trends Report,” Anti-Phishing Working Group, published October 2017, www.antiphishing.org/reports.

FIGURE 11.3Global Spam Volume as Percentage of Total E-Mail Traffic from January 2014 to July 2017

Source: “Global Spam Volume as Percentage of Total E-mail Traffic from January 2014 to July 2017,” The Statistics Portal, accessed February 1, 2017, www.statista.com/statistics/420391/spam-email-traffic-share.

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Public Access to and Use of Technology

Overall, the public has more access to and uses more technology than ever before. Yet, inequalities remain in individuals’ ability to access technology, whether within the United States or around the world. Certain technological devices, including mobile telephones, a new form of currency called bitcoin, and social media platforms, are more readily available to some than others. These issues are discussed in greater depth in this section.

The Digital Divide in the United States and WorldwideThe gap between those who have access to the Internet through technology and those who do not is called the digital divide. Some people have Internet access through computers, cell phones, and other devices; others do not. People in developing countries often have less Internet access than people in developed countries; and within developed countries, persons of color and the less affluent often have less access. The presence of a digital divide is a problem because less advantaged individuals and societies may not enjoy the same benefits of technology as others.

In the United States, the government has acted to break down the digital divide. The U.S. government launched a $7 billion effort to expand access, chiefly thorough grants to build wired and wireless systems in the most technologically neglected areas of the coun-try. This government effort subsidized Internet upgrades for schools and libraries and pro-vided digital textbooks in poor and rural areas.11

By 2013, reports claimed that nearly 98 percent of American homes were able to access the Internet on some sort of high-speed broadband network, either at home or work. Yet, in 2017, the MIT Technology Review pointed out that “the U.S. has ‘a persistent, embarrass-ing digital divide’ that needs to be addressed at the highest levels.” Moreover, the report emphasized that, “mobile broadband access isn’t the same as at-home connectivity,” even though some people in the Federal Communication Commission and the executive branch of the federal government are making that case. Access to high-speed Internet services remains “uneven” for many Americans.12

Microsoft announced plans in 2017 to address the digital divide in the United States by harnessing the unused channels between television broadcasts, known as white spaces, to help get more of rural America online. The initiative targeted twelve states, including Arizona, Kansas, New York, and Virginia, to provide two million rural Americans with access to high-speed Internet by 2022. Microsoft’s president Brad Smith explained, “[white spaces are] the best solution for reaching over 80 percent of people in rural America who lack broadband today.” Microsoft also reached out to federal and state regulators to guarantee the use of unused television channels and investments in promoting the technology in these rural areas.13

The digital divide also persists globally. According to a United Nations report, by 2017, more than 52 percent of people on the planet still did not have Internet access, despite efforts by some technology companies. Many businesses saw providing Internet access at the bottom of the pyramid as a lucrative business opportunity.

11 “F.C.C. Chief Aims to Bolster Internet for Schools,” The New York Times, November 17, 2014, www.nytimes.com.12 “The 2017 Digital Divide,” MIT Initiative on the Digital Economy, September 1, 2017, medium.com.13 “To Close Digital Divide, Microsoft to Harness Unused Television Channels,” The New York Times, July 11, 2017, www.nytimes.com.

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Smartphone maker BlackBerry unveiled a new model, the Aurora, exclusively targeting mobile phone users in Indonesia. Its low-cost touch-screen model retailed for 2.2 million rupiah, or about $190, and contained a number of special applica-tions for Indonesian users, including local banking and travel services and a direc-tory of halal food outlets, critical in the world’s largest Muslim-majority country. A few years later, BlackBerry shifted the manufacturing of the Aurora to Indonesia.14

Despite efforts undertaken by BlackBerry, as well as other programs launched to boost the digitally developing economies around the world, the United Nations reported “mas-sive disparities in connection speeds in different countries.” With average global Internet speeds at 7.7 megabits per second (Mbps), South Korea had an average broadband speed of 28.6 Mbps, but Nigeria had a slow 1.5 Mbps on average. Based on a 40-metric score, the average increase in broadband speed among developed countries was 4.7 points in the last 12 months [2016–2017], but only 2.4 points in developing countries.15

Mobile TelephonesMobile telephones, or cell phones, use radio technology to enable users to place calls from a mobile device, with transmission over a service area divided into small “cells,” each with its own low-power radio transmitter. The first generation of cell phones, introduced in the 1980s, were clumsy analog devices; today’s digital smartphones, by contrast, provide a range of applications, including e-mail and Internet access, voice communications, video recording, and many more.

Coca-Cola and Nokia first installed vending machines in Finland in 1997 that accepted payment via text message, or SMS as it was called then. In North America, mobile phones usage was initially mainly as a communications tool. But American cell phone users, and users in developing countries, have joined Europeans and Asians to embrace using their mobile phones for commerce. M-commerce, commerce conducted via mobile or cell phones, allows consumers to use their mobile phones as an electronic wallet. In a 2017 study conducted in nine countries, Mobile Ecosystem Forum found that 78 percent of the 6,000 individuals surveyed had made M-commerce purchases in the last six months. The report also showed what consumers were purchasing using mobile payments, where mobile payments were being used, and how consumers were using mobile payments, as shown in Figure 11.4.16

Mobile devices can be used for more than making calls or shopping. These devices can run apps and GPS systems, access the Internet, send text messages and photos, and stream music and videos. Use of mobile devices is the norm for the newest generation of consum-ers. Rytis Vitkauskas, founder and CEO of YPlan, said: “There’s an expectation that any transaction will take a minimum amount of effort. The Gen-Y person doesn’t really think about buying something as a transaction any more. It’s an act of consumption where pay-ment is an afterthought and must be seamless.”17 As Rimma Perelmuter, CEO of Mobile Ecosystem Forum, observed,

“The adoption of mobile money continues to advance. In developed markets, mobile payments and banking are driving a revolution in convenience. In growth

14 “BlackBerry Unveils Low-Cost Smartphone with Indonesia in Mind,” The New York Times, May 13, 2014, www.nytimes.com; and “BlackBerry Happy with Indonesian Market,” The Jakarta Post, October 25, 2017, www.thejakartapost.com.15 “The UN Says the Global Digital Divide Could Become a Yawning Chasm,” MIT Technology Review, September 15, 2017, www.technologyreview.com.16 “Mobile Commerce, Payments and Banking: 7 Key Facts,” Wirecard.com, April 27, 2017, blog.wirecard.com.17 “One-click Checkouts and Pay-by-Selfie: The Rise of Mobile Commerce,” The Guardian, June 23, 2016, www.theguardian.com.

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FIGURE 11.4Use of Mobile Payments, by Country, 2017

Source: “Mobile Commerce, Payments and Banking: 7 Key Facts,” Wirecard.com, April 27, 2017, blog.wirecard.com.

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markets, they are giving millions of people access to financial services for the first time. It’s important that the industry builds on this momentum. But overall, the news is good: mobile remains the key driver of online commerce.”18

18 “Mobile Commerce, Payments and Banking: 7 Key Facts,” Wirecard.com, April 27, 2017, blog.wirecard.com.

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The ability of a consumer to pay for products and services continues to be easier and easier, as discussed in Exhibit 11.A, as facial recognition and other technologies surfaced in the world of consumer purchasing.

But with the potential for greater mobile device activity worldwide, some stakeholder groups warned that increased usage would be accompanied by increased frustration. Crit-ics predicted more unwanted and unsolicited mobile text messages and incidents of mal-ware and spyware.

Another emerging technology that more and more people around the world are using in significant numbers is bitcoin. A bitcoin is a digital currency that operates independently of the banking system and uses encryption techniques to verify the transfer of funds. Some believe that the software that brought bitcoin into existence may also enable a fundamen-tally new way of transacting and maintaining records online—allowing people and banks to directly exchange money and assets like stocks and bonds without having to rely on expensive intermediaries. This innovation is discussed in detail in Exhibit 11.B.

Social NetworkingSocial networking, a system using technology to enable people to connect, explore inter-ests, and share activities around the world, exploded onto the technology scene in the 2000s, altering many social and human interactions.

As with estimating the number of Internet users, any estimate on the number of people using social media is quickly outdated the moment the calculations are completed. What is undeniable is that the number of individuals using social media continues to rise, as shown in Figure  11.5. Facebook is the most frequently used social network, with more than 2.1 billion active users by 2018, with YouTube, WhatsUp, Facebook Messenger, and WeChat among the most popular social networks, all with around 1 billion users by 2018.19

19 “Most Popular Social Networks Worldwide as of January 2018, Ranked by Number of Active Users,” The Statistics Portal, accessed January 30, 2017, www.statista.com/statistics/272014.

Want to Pay at KFC? You Don’t Need Cash or a Credit Card

When customers walk into a Kentucky Fried Chicken store in Hangzhou, China, they encounter a modern, high-technology fast-food restaurant. An open design allows customers to look into the kitchen to see how their food is being prepared. Hanging plants create a friendly atmosphere. The expanded menu includes tuna-and-pesto paninis and quinoa-and-corn salads. When customers make their food selections, they have three options for payment: via smartphone, using QR codes printed on tables, or through a facial-recognition system that matches the consumer’s image to their Alipay digital wallets. Muktesh “Micky” Pant, CEO of Yum China, conceded he was skeptical of the emphasis on apps for pay-ment in the store, telling his team they were too complicated. His employees told him to “just hang on, and I’m glad I didn’t interfere. People have far more apps on their phone, and they are able to navigate them effectively.” Yum China collaborated with Alibaba Group Holding, the world’s largest retailer operating in over 200 countries. This partnership helped create a self-serve kiosk for customers to select their food items on a screen and then pay by looking into a camera, provided they have enabled their facial-recognition on their Alipay app. Customers can also use their smartphone to pay for their meal using a variety of apps, including Apple Pay, WeChat, Android Pay, Samsung Pay, and others. Mobile payments at Yum China’s 7,700 KFC and Pizza Hut restaurants represented 45 percent of sales by 2016.

Source: “Fast Food Gets a Reboot in China: Tuna-Pesto Paninis, Paid for by Facial Recognition,” The Wall Street Journal, November 6, 2017, www.wsj.com.

Exhibit 11.A

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Bitcoin: The Currency of the Future?

Initially many people thought a bitcoin was science fiction or something used by drug dealers and shadowy hackers looking to evade authorities. Starting in 2017, bitcoins emerged as a legitimate digital currency and quickly became the darling of Wall Street investors. In less than two days in December 2017, the price of one unit of the digital currency jumped to $16,000, briefly hitting $19,000 on some exchanges. Then, a week later, the value of the bitcoin plummeted 25 percent. By February 2018, bitcoin had plunged below $8,000, and four months later the value of a bitcoin was around $6,500. Peoples’ confidence in the security of bitcoin was shaken when it was reported that nearly $70 million worth of the currency had been stolen from a cryptocurrency-mining service called NiceHash following a security breach. Two weeks later, Korean-based Youbit went out of business after experiencing a second hack where digital thieves stole one-fifth of its clients’ bitcoin holdings. Yet, despite these risks, bitcoins continue to hold considerable potential as a new form of currency. Because bitcoin functions on a technology called blockchain, a relatively secure, non–record-based ledger form of accounting using cryptography, it offers a quicker and cheaper option for processing financial trans-actions. Bitcoin is considered desirable since the blockchain technique protects against things like identity theft and payment fraud more thoroughly than a credit-card transaction ever could. Others argue that bitcoin is riddled with problems, including the potential for tax evasion or to support illegal or unethical transactions. Perhaps the biggest issue with bitcoin is the general lack of understand-ing surrounding the cryptocurrency. Several studies have shown that people, including bitcoin users, do not really understand how bitcoin works and whether or not it is secure, as the incidents of cyberhacking attest.

Sources: “Bitcoin’s Wildest Ride: Up 40% in 40 Hours,” The Wall Street Journal, December 7, 2017, www.wsj.com; “Hackers Steal $70 Million in Bitcoin,” The Wall Street Journal, December 7, 2017, www.wsj.com; “Bitcoin Exchange Goes Bust After Hack,” CNN, December 20, 2017, money.cnn.com; “Bitcoin Is Falling Fast, Losing More Than Half Its Value in Six Weeks,” The Wall Street Journal, February 2, 2018, www.wsj.com; and “The Pros and Cons of Bitcoin,” Investor Place, May 7, 2018, www.investorplace.com.

Exhibit 11.B

FIGURE 11.5Americans with a Social Profile, 2008–2017

Source: Extracted from “Percentage of U.S. Population with a Social Media Profile from 2008 to 2017,” The Statistics Portal, accessed January 30, 2017, www.statista.com/statistics/273476.

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Clearly the dramatic rise in social networking has taken the world by storm and has become a central aspect of individuals’ lives. With these new ways to interact with others comes additional responsibilities to ensure that the interactions are ethical and socially beneficial as individuals and businesses began to realize.

Recently individuals discovered that their social media sites were accessed by various companies, especially when seeking employment. Carnegie Mellon University researchers

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examined Google’s ad-targeting system and found that male web users were six times more likely than female users to be shown ads for high-paying jobs. Veterans learned that they were automatically disqualified for civilian jobs because human resources software used by employers did not recognize the skills they had acquired in the military. Researchers believed that programmers had embedded biases into the software without realizing it.20

As social networking sites become more and more embedded in the lives, businesses and users need to ensure that the social network sites enhance our lives, not lead to serious mental or physical problems.

Ethical Challenges Involving Technology

With each new technological innovation comes the important ethical question: Should we develop and offer the new technological application? At present, many inventors, computer programmers, and business managers appear only to be asking: Can we develop and offer the new technological application? Both questions are paramount as technology continues to influence individuals, businesses, and society interactions in the world in which we live. Some of the most profound ethical issues involve privacy and free speech.

The Loss of PrivacyThe right to privacy, as introduced in Chapter 5 and also discussed in Chapters 14 and 15, refers to a person’s entitlement to protection from invasion of his or her private life by the government, business, or other persons. In many respects, the rise of the Internet and the Information Age have led to a loss of privacy. According to Richard Clarke, former senior White House cybersecurity adviser:

“Over time there will be few people who recall pre-Information Age privacy, more people who will have grown up with few expectations of privacy. While a backlash against the erosion of privacy is possible, it is more likely that people acting on their fear of big government and big corporate data will be a minority.”21

Individuals are indeed under a technology microscope with vast amounts of data col-lected each minute and available to be analyzed in great detail, sometimes by people with the individuals’ interests in mind, such as marketers, job recruiters, and loan grantors, but also by others who have criminal motives. Facebook announced in 2018 a data partnership with four Chinese electronics firms, bringing the number to 60 different data sharing part-nerships since 2007.22

This dramatic increase in data sharing has led to some users to ask: Can what I post online or store on my electronic devices be used against me if accessed by government enforcement agencies? Recently, this issue arose when the FBI sought to compel Apple to unlock the phone of a man involved in a terrorist attack, the focus of the discussion case at the end of this chapter. But online activity can be used as evidence in everyday legal proceedings, too.

According to an online transparency report, Facebook received 14,274 requests involving 21,731 accounts from U.S. law enforcement agencies in just six months. That is far more than companies like Twitter, which received just 1,622 requests

20 “How Social Bias Creeps Into Web Technology,” The Wall Street Journal, August 21, 2015, www.wsj.com.21 “Will Privacy Be a Thing of the Past?” The Wall Street Journal, July 8, 2014, blogs.wsj.com.22 “Facebook Confirms Data-Sharing Deals with Chinese Tech Firms,” The Wall Street Journal, June 5, 2018, www.wsj.com.

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during the same period. Facebook provided information for nearly 80 percent of those requests. Nevertheless, the practice remains controversial, especially when law enforcement casts a wide net.23

Invasions of individual privacy come from many different directions. Automobiles are becoming smarter, with global positioning systems, Internet connections, data recorders, and high-definition cameras. While automakers say they are only responding to consumer demands, these new technologies increase the number of people with access to individu-als’ data. In 2014 a law was introduced in the United States that would enable car owners to control the data collected on the in-car device called the event data recorder, commonly known as a black box. The legislation was spurred by the clash over the use of personal data by law enforcement agencies and insurance companies, seeking to use the information against the car owners.

Ethical challenges on how this information is collected and analyzed, and by whom, are becoming increasingly salient.

Free Speech IssuesAnother important ethical issue posed by advances in technology involves free speech. As discussed in Chapter 5, individuals have certain ethical rights, including the right to free speech. However, this right is not absolute and must be weighed against its consequences for the community. For example, an individual is not permitted to yell “fire” in a crowded movie theater, even though some might see this as an expression of free speech, since the potential harms caused by panicked moviegoers outweighs the right of free expression. The issue of free speech was at the core of Elonis v. United States in 2015.

Anthony Elonis was accused of threatening his estranged wife based on a series of Facebook posts. Elonis likened the posts to Eminem’s Grammy-winning songs “Kim” and “Kill You,” which included threats of violence. He argued that he was only venting frustration after a run of personal setbacks, including the collapse of his marriage and loss of his job. He thought, like the artist Eminem, that he was just expressing his thoughts to a crowd, those accessing his Facebook page, as the singer had to his concert audience. The Justice Department argued that Elonis’s posts indi-cated a “clearly sinister meaning of a threat” and were meant as expressions of his intent to harm his wife. The Supreme Court overturned Elonis’ earlier conviction arguing that criminal threats cannot be based solely on whether a reasonable person would regard communications posted on social media or elsewhere as threatening.24

Other controversial issues involving free speech have appeared recently, such as when Facebook shutdown a popular anonymous discussion board used by Facebook employees in 2016. FB Anon was a discussion forum that featured conservative political views that some claimed generated into racist or sexist comments. Facebook defended their actions by saying, “A cornerstone of our culture is being open. The FB Anon internal Facebook group violated our terms of service, which require people who use Facebook, including our employees, to use an authentic identity on our platform.” Facebook reminded their employees that there were other forums where they could discuss confidential matters, but not anonymously. Some employees disagreed with Facebook’s actions, saying that free

23 “Surveillance Society: Throw the (Face)book at ‘em,” Pittsburgh Post-Gazette, July 20, 2015, www.post-gazette.com.24 “In Social-Media Era, When Is Free Speech Illegal?” The Wall Street Journal, November 23, 2014, online.wsj.com; and “Supreme Court Overturns Conviction for Threats on Facebook,” The Wall Street Journal, June 1, 2015, www.wsj.com. Also see Elonis v. United States at www.scotusblog.com/case-files/cases/elonis-v-united-states.

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speech was paramount and this forum provided “lots of information that you would not have had otherwise.”25

Undoubtedly, the debate over free speech versus censorship will continue and likely inten-sify as the frequency of using public forums on Facebook and other social network mediums also increases. In many countries around the world, the government has stepped in to control the Internet or social media sites under the banner of national security. These actions directly pit government interests against individual rights. This conflict is discussed next.

Government Censorship of Free Speech

Governments play various and sometimes conflicting roles with respect to an individual’s free speech. In some countries, particularly in nondemocratic regimes, governments censor and restrict citizen’s free speech. In democratic countries, the role of government is more likely to look out for the public good and protect intellectual property; that is, the private own-ership of certain kinds of information and a citizens’ right to express themselves. What is the appropriate role of government in controlling use of the Internet and of citizens’ free speech? Does the government overstep its authority, for example, when imposing censorship on social media sites? These various government approaches to free speech are addressed next.

In some nondemocratic or authoritarian societies, governments have attempted to limit their citizens’ access to the Internet based on political, security, and religious grounds. These efforts have become increasingly more common and more sophisticated in recent years.

∙ China. In 2017, China announced it would impose new rules controlling its citizens’ use of instant-messaging apps, video streaming, and other content platforms. The gov-ernment argued that these platforms were being used to engage in illegal behavior and must be stopped. The Cyberspace Administration of China said, “the new technologies can be used by criminals to spread illegal information and undertake criminal activity, harming the lawful interests of citizens, legal persons, and other organizations.”26 These rules affected the 700 million Internet users in China.

∙ Pakistan. During the past decade, the Pakistani government, with the support of con-servative Islamic groups, broadened an existing ban on social networking sites. In 2016, the Pakistani legislature passed the Pakistan Electronic Crimes Act (PECA). PECA allows the government to issue social media takedown notices for any material deemed to be “in the interest of the glory of Islam or the integrity, security or defense of Pakistan . . . or public order, decency or morality.”27 Within a year after the law came into effect, at least 147 people had been arrested and 194 cases registered under the law for various offences, including online sexual harassment, according to the Pakistani interior ministry. Many of those accused were told their social media activities were being closely monitored, leading to their detention or arrest.

∙ Iran. Since 2009, after contentious presidential elections that pitted various religious groups against each other, the elected Iranian government banned Facebook, Twitter, YouTube, and later Instagram. Based on the ruling party’s religious-political stance and the country’s official philosophy: “the media should be used as a forum for healthy encounter of different ideas, but they must strictly refrain from diffusion and propaga-tion of destructive and anti-Islamic practices.” When protests broke out in December

25 “Facebook Shut Down Employee Chat Room Over Harassing Messages,” The Wall Street Journal, August 16, 2017, www.wsj.com.26 “Chinese Internet Regulators Target Social Media Use,” The Wall Street Journal, October 30, 2017, www.wsj.com.27 “Social Media Crackdown Stifles Dissent in Pakistan” Aljazeera, November 24, 2017, www.aljazeera.com.

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2017 in opposition to the government’s economic policies, the regime renewed its ban of mobile Internet access and blocked apps including Telegram and Instagram.28

∙ North Korea. North Korea is one of the world’s most notorious censors of the Internet. In 2013 the Korean government adopted a policy that only foreigners could conduct Inter-net searches on mobile devices and laptops; its citizens could not. In 2016, the North Korean government went further, formally blocking all access by its citizens to Face-book, Twitter, YouTube, and other social media platforms. These actions made it more difficult for its citizens to post real-time information about conditions in North Korea.29

In each of these instances, governments intervened to restrict their citizens’ access to information and various Internet and social media sites, generally to suppress political dissent or to impose particular religious or ideological views. In most democratic, West-ern nations, such interventions would not be tolerated. Sometimes a government accesses information for the public good and limits individual rights; while at other times, govern-ments support individuals’ control over their personal information.

The Impact of Scientific Breakthroughs

Dramatic advances in the biological sciences have propelled the impact of technology on our lives. Recent unprecedented applications of biological science have made possible new, improved methods of agricultural food production as well as medical care, but they have also posed numerous ethical challenges regarding safety and the quality of life. Four of the most profound impacts on our lives come from the scientific breakthroughs in genetically modified (GM) or engineered foods; the sequencing of the human genome and the use of genetic information; the advent of biotechnology and the resulting stem cell research; and the development of radically new medical procedures, delivery, and record keeping. These topics are discussed in this section.

As Bill Joy of Sun Microsystems warns, speaking of biotechnology as well as other innovative applications of science, “21st century technologies . . . are so powerful that they can spawn whole new classes of accidents and abuses. Most dangerously, for the first time, these accidents and abuses are widely within the reach of indi-viduals or small groups. They will not require large facilities or rare raw materials. Knowledge alone will enable the use of them.”30

Genetically Engineered FoodsThe biotechnological revolution resulted in applications for use by the agricultural indus-try and brought promises of larger than ever crop production through advances in genetic engineering of food. Genetic engineering involves altering the natural makeup of a living organism and allows scientists to insert virtually any gene into a plant and create a new crop or a new species.

Genetically modified foods, or GM foods, are foods that are processed from genetically modified crops. The explosion of GM foods into our food chain in just a few decades was remarkable. In 1982 the first tomato plant was genetically engineered. Corn was geneti-cally modified to develop a resistance to insects, and soybeans were genetically modified to resist the weed-killer Roundup, enabling farmers to spray for weeds without harming 28 “Iran Moves to Block Social Media Apps, Mobile Networks as Protests Spread,” Gizmodo, December 31, 2017, gizmodo.com.29 “North Korea Announces Blocks on Facebook, Twitter and YouTube,” The Guardian, April 1, 2016, www.theguardian.com.30 Bill Joy, “Why the Future Doesn’t Need Us,” Wired, April 2000, www.wired.com.

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the crop. At first, expectations were high that these changes would increase crop yields per acre. However, results have been disappointing.

A New York Times report, using United Nations data, reported that there has been no discernable advantage in crop yields in the United States and Canada—measured by food per acre—when measured against Western Europe crop production, where significant genetically modified food controls are in place. A study by the National Academy of Sciences confirmed this finding when it stated that there was little evi-dence that the introduction of genetically modified crops in the United States has led to yield gains beyond those seen in conventional crops.31

Some critics charged that consuming genetically modified crops would harm humans. Despite a lack of scientific evidence that GM foods are harmful to humans, social advo-cates in Europe led the charge against genetically modified foods, calling GM foods “Fran-kenstein foods.”

In the late 2000s, both France and Germany passed national bans on the use of various kinds of GM seeds. Despite French and German farmers’ protests that the ban would inflict great economic harm on them and their countries’ economies, the German agriculture minister said, “The decision is not a political decision, it’s a decision based on the facts.” He affirmed the government’s commitment to protect the safety of consumers and the environment. Austria and Hungary also passed their own national bans on growing GM crops. While Europe continued to allow each nation to decide whether to allow the planting or sale of GM foods, the Euro-pean Union passed a GM food labeling law so that all European consumers can also make their own decisions to purchase this type of food or not.32

By contrast with Europe, GM foods became quite common in grocery stores in the United States. Although most GM corn grown in the United States was made into animal feed or ethanol, it was also processed into food industry staples such as corn syrup or tortilla chips. GM food has its advocates. Over one hundred Nobel laureates, individuals honored for their contributions to science, the arts, or global social issues, drafted a letter in 2016 that touted the value of GM foods for a ballooning global population. This group took specific aim at a global non-profit organization: Greenpeace.

In the Nobel Laureates’ letter, they wrote: “Greenpeace has spearheaded opposition to Golden Rice, which has the potential to reduce or eliminate much of the death and disease caused by a vitamin A deficiency (VAD), which has the greatest impact on the poorest people in Africa and Southeast Asia.” Greenpeace countered by explaining: “Corporations are overhyping ‘Golden’ rice to pave the way for global approval of other more profitable genetically engineered crops.” Dr. Richard J. Rob-erts, a Nobel Prize winner in 1993 for physiology and medicine, replied, “There’s been a tremendous amount of misinformation being put out by Greenpeace.”33

The debate over the human nutritional value of GM foods versus the potential for busi-nesses to profit from their development and distribution of these foods rages on.

It appears that the tide against GMO food in the United States was gaining momentum by the 2010s. In 2013, Ben & Jerry’s Homemade initiated a plan to eliminate GM ingredi-ents from its ice cream. In 2015, Chipotle Mexican Grille became the first major restaurant

31 “Doubts about the Promised Bounty of Genetically Modified Crops,” The New York Times, October 29, 2016, www.nytimes.com.32 “Europe to Allow Two Bans on Genetically Altered Crops,” The New York Times, March 3, 2009, www.nytimes.com.33 “Stop Bashing G.M.O. Foods, More Than 100 Nobel Laureates Say,” The New York Times, June 30, 2016, www.nytimes.com.

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chain to serve only food free of genetically engineered ingredients. Whole Foods stores were on track to be free of all GMO products by 2018, and Walmart vastly expanded its selection of organic foods, free from genetic alternation.34

In contrast, Campbell Soup, makers of Pepperidge Farms, Prego, Plum Organics, and V8, in addition to its well-known soup lines, announced in 2016 that it would become the first major food company to disclose GMO ingredients. Some felt that Campbell’s action would risk a backlash by alienating consumers who believed that GM foods had adverse health effects, while others saw the company bowing to pressure to comply with increasingly popular GM food labeling laws. In July 2016, Vermont required disclosure of genetically engineered ingredients, a measure opposed by most major food companies.35

Sequencing of the Human GenomeWhen Celera Genomics Group announced that it had finished the first sequencing of a human genome, the achievement was hailed as the most significant scientific breakthrough since landing a man on the moon. Strands of human deoxyribonucleic acid, or DNA, are arrayed across 23 chromosomes in the nucleus of every human cell, forming a unique pattern for every human. These strands are composed of four chemical units, or letters, used over and over in varying sequences. These replicated letters total 3 billion and form the words, or genes—our unique human signature—that instruct cells to manufacture the proteins that carry out all of the functions of human life.36 The identification of human genes is critical to the early diagnosis of life-threatening diseases, the invention of new ways to prevent ill-nesses, and the development of drug therapies to treat a person’s unique genetic profile.

Over a decade later, the Human Genome Project had fueled the discovery of more than 1,800 disease genes and more than 2,000 genetic tests for human conditions were ongoing. These tests enabled a countless number of patients to learn their genetic risks for disease and also helped health care professionals to diagnose disease. One major step forward was taken in 2005 with the creation of the HapMap, which catalogs common genetic variation, or haplotypes, in the human genome. By 2010, the third phase of the HapMap project was published, with data from 11 global populations, the largest survey of human genetic variation performed to date.37

However, in addition to the remarkable advances in understanding DNA, touted as one of humanity’s greatest achievements, numerous ethical challenges emerged in private and public research focusing on genetics.

One family, afflicted by a rare genetic heart disease called Brugada syndrome, wondered how others might react if they learned of the family’s medical condition. Would employers want to hire someone who might die prematurely or require an expensive implantable defibrillator? Would they be eligible for individual health care coverage or be able to afford life insurance if their condition were known? The underlying fear for this family and others with genetic conditions was whether they would be treated fairly if their genetic fingerprints became public.

The debate over whether advances in human genome sequencing and genetic research outweigh the risks or harms will continue for years. What is clear is that our scientific

34 “The GMO Fight Ripples Down the Food Chain,” The Wall Street Journal, August 7, 2014, online.wsj.com; and “Chipotle to Stop Serving Genetically Altered Food,” The New York Times, April 26, 2015, www.nytimes.com.35 “Campbell Labels Will Disclose G.M.O. Ingredients,” The New York Times, January 7, 2016, www.nytimes.com.36 “Genetic Secrets of Malaria Bug Cracked at Last” The Wall Street Journal, January 18, 2002, pp. B1, B6.37 Unfortunately, a computer security audit revealed flaws in its site that required it to be taken down.

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understanding of the human body and its makeup has changed, and significant technolog-ical innovations are on the horizon. What is not clear is who, if anyone, can manage these changes to better ensure the improvement of the quality of our lives and society.

Biotechnology and Stem Cell ResearchComplementing the discovery of DNA sequencing were numerous medical breakthroughs in regenerative medicine. Tissue engineering, the growth of tissue in a laboratory dish for experimental research, and stem cell research, research on nonspecialized cells that have the capacity to self-renew and to differentiate into more mature cells, were two such breakthroughs. Both offered the promise that failing human organs and aging cells could be rejuvenated or replaced with healthy cells or tissues grown anew. While the promise of immortality may be overstated, regenerative medicine provided a revolutionary technolog-ical breakthrough for the field of medicine.

Supported by private and government funding, hundreds of biotechnology companies and university laboratories were actively pursuing new approaches to replace or regenerate failed body parts. New discoveries were occurring quickly. Some promising breakthroughs included the following: researchers were able to insert bone growth factors or stem cells into a porous material cut to a specific shape, creating new jaws or limbs; genetically engi-neered proteins were successfully used to regrow blood vessels that might repair or replace heart valves, arteries, and veins; and the process to regrow cartilage was used to grow a new chest for a boy, and a human ear was grown on a mouse. A truly remarkable advance-ment in stem cell research occurred in China in 2018.

Chinese scientists announced they had cloned two monkeys by transplanting donor cells into eggs, an achievement that scientists predicted could lead to genetically engineered primates for drug testing, gene editing, and brain research. The technique used to clone the monkeys was based on the somatic cell nuclear transfer technique pioneered 20 years ago by Scottish scientists to clone a sheep, named Dolly. Qiang Sun, director of the Nonhuman Primate Research Facility said, “For the cloning of a primate species, including humans, the technical barrier is now broken.38

Medical BreakthroughsAs discussed in one of the chapter’s opening examples, breakthroughs in pharmaceutical care and medicine are occurring at a breathtaking pace. Innovations abound and seem lim-ited only by our imagination.

Anita Roy had an impaired blood flow to the left side of her brain. Dr. David Langer, chair of neurosurgery at Lennox Hill Hospital in New York, was about to perform bypass surgery on slender, delicate arteries to restore the circulation and prevent Anita from having a stroke. But, oddly, everyone in the operating room was wearing 3-D glasses and Langer was using a videomicroscope. The images of Anita’s brain were shown on a 55-inch monitor and the scissors and scalpel used by Langer seems extraor-dinarily large and popped out of the screen vividly. The equipment produced magnified, high-resolution, three-dimensional digital images of surgical sites. Dr. Charles Branch, of Wake Forest Baptist Medical Center, praised 3-D surgery: “It’s like being in the Imax [Theatre]. It lets not only the surgeon but everybody else in the room see what’s going on. Instead of having to lean up against the microscope and strain my neck or back, I can stand comfortably, look at the big screen in front of me and work with my hands.”39

38 “China Breaks a Cloning Barrier: Primates,” The Wall Street Journal, January 24, 2018, www.wsj.com.39 “Brain Surgery in 3-D: Coming Soon to the Operating Theatre,” The New York Times, January 8, 2018, www.nytimes.com.

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Medical revolutions are not only occurring in the operating room but in remote villages in Africa. Technology has entered the world of delivering medical supplies using drones, an innovation adopted by UPS, the world’s largest package delivery company employing more than 434, 000 people globally.

In 2016, UPS announced a partnership with drone startup Zipline and Gavi, the Vaccine Alliance, to deliver blood for transfusions by drones throughout Rwanda. While Amazon, Domino’s Pizza, and other businesses speculated about drone delivery systems, UPS was experimenting with drone delivery and took a decidedly humanitarian approach. Piloting a program with the American Red Cross in 2016, UPS discovered that it could provide disaster relief through drone delivery. The new partnership with Zipline and Gavi enabled UPS to deliver life-saving medical supplies in Rwanda. The initial plan was for UPS-Zipline to make 150 blood deliv-eries a day from its central base in western Rwanda to 21 transfusing facilities within a 37-mile radius resulting in a 30-minute delivery commitment. “This is an elegant solution to a difficult problem,” said Dr. Seth Berkley, CEO of Gavi. “This would have been great in the Ebola outbreak, when we actually had a boat deliver-ing vaccines because of the poor road infrastructure.”40

According to the World Health Organization, rural Africa’s two billion people lack adequate access to essential medical care due to challenging terrain and roads. Zipline announced that it had plans to expand its delivery systems into Tanzania and other African nations within the next few years.

Technological breakthroughs in medicine bring challenges as well as benefits. Many in the health care field were overjoyed with the advances in electronic medical records, or EMR. By implementing EMR, patient data can be tracked over an extended period by multiple health care providers. It can help identify patients who are due for preventive checkups and vaccinations, or flag those whose vital signs like blood pressure are out of the normal range. EMRs are designed to help organizations provide efficient and precise care. Perhaps the most significant difference is that EMR records are universal, meaning that instead of having different charts at different health care facilities, a patient will have one electronic chart that can be accessed from any healthcare facility using EMR software.

However, EMRs also offer attractive data appealing to hackers, putting health care systems at the top of the list for cybercriminals. While hacking is discussed in more detail in the next chapter, the hacking of medical records places important infor-mation into the hands of those seeking to make money from their thievery. Hackers often use legitimate-looking e-mail attachments as a common way to acquire a patient’s login name and password information. This enables hackers to acquire sensitive information, such as credit card information, Social Security number, or driver’s license number, leading to identity theft. It is estimated that the average cost of cybercrime in 2017 reached $12.5 million per health care organization, a 69 percent increase from hacking costs reported in 2016.41

The controversies that emerge over scientific breakthroughs from advancements in technology—GM food production, the sequencing of the human genome, stem cell research, and medicine—raise serious ethical and social issues. How to maximize the benefits to individ-uals and society yet minimize or eliminate the negative consequences regarding these techno-logical developments must continue to be addressed, as new innovations appear on the horizon.

40 “UPS Wants To Be a Player in Drone Delivery, Starting in Rwanda,” Marketwatch, May 9, 2016, www.marketwatch.com.41 “Medical Records: The Holy Grail of Data for Cybercriminals,” Pittsburgh Post-Gazette, January 15, 2018, www.post-gazette.com.

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∙ Technology is the practical application of science and knowledge that is rapidly chang-ing and spreading across societies.

∙ Societies have sequentially moved through distinct phases of technology, always incor-porating a greater reliance on technology.

∙ Technology has exponentially increased its potential to influence every aspect of our lives—driving innovation, affecting collaborative partnerships, and changing business–stakeholder relationships. It also has contributed to behavioral addiction among some technology users.

∙ The presence of the Internet is a welcomed benefit, but also has opened the door to various threats, such as spam and phishing.

∙ Gaps between those who have access to the Internet through technology and those who do not is called the digital divide. This is a problem as the less-advantaged individuals and societies do not enjoy the same benefits of technology as others.

∙ With significant advances in technology come numerous ethical challenges, such as the loss of privacy and free speech. Citizens and consumers look to governments and busi-nesses to protect these ethical rights.

∙ Governments play various and sometimes conflicting roles with respect to an individu-al’s free speech.

∙ Genetically modified foods, sequencing the human genome, biotechnology and stem cell research, and other medical breakthroughs carry great promise for individuals in society, but have also raised serious concerns.

Summary

Internet Resources

www.antiphishing.org Anti-Phishing Working Groupwww.monsanto.com/innovations/modern agriculture Monsanto: What Is Modern Agriculture?www.bio.org Biotechnology Industry Organizationwww.digitaldivide.org Digital Divide Institutewww.ecommercetimes.com E-Commerce Timeswww.eff.org Electronic Frontier Foundationgenomics.energy.gov Genome Projects of the U.S. Department

of Energy, Office of Scienceisscr.org International Society for Stem Cell

Researchwww.internetsociety.org Internet Societysocialmediatoday.com Social Media Todaywww.whatissocialnetworking.com Social Networkingwww.statisticbrain.com Statistic Brain Research Institute

Key Terms spam, 243stem cell research, 256technology, 239

behavioral addiction, 242bitcoin, 248biotechnology, 241digital divide, 245genetically modified foods, 253

human genome, 255m-commerce, 246mobile telephones, 246phishing, 244right to privacy, 250social networking, 248

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Discussion Case: To Lock or Unlock Your Phone: Personal Privacy or National Security

In 2015, Syed Rizwan Farook and Tashfeen Malik, a married couple, opened fire at an office party in San Bernardino, California, killing 14 people and injuring 22. Law enforce-ment officials believed these were acts of ideologically motivated terrorism. A few hours later, Farook and Malik died in a shootout with police. The subsequent Federal Bureau of Investigation (FBI) probe led them to Farook’s iPhone 5C, which had been issued by his employer, the county government. Although county officials gave the FBI permission to examine the phone, they did not have Farook’s passcode. The phone had a feature that would automatically erase all stored data after 10 unsuccessful password attempts.

The FBI then asked Apple, maker of the iPhone, to help them circumvent the customer’s data encryption. But the company refused. Apple CEO Tim Cook claimed that consumer privacy must be respected. He argued that compliance with the FBI request “would violate [Apple’s] First and Fifth Amendment rights: it would compel Apple to write computer code that undermines the company’s views on consumer security and privacy.”

The FBI maintained that the government had an overriding interest in obtaining infor-mation on the phone to protect the public from further acts of terrorism. During the Farook investigation, FBI director James Comey explained, “There has to be some solution that will allow us with lawful authority to be able to have the company unlock the device. [W]e have to find a way to help these companies understand what we need, why we need it, and how they can help, while still protecting privacy rights and providing network secu-rity and innovation.” A harsh critic of Apple’s position, Senator Tom Cotton of Arkansas, expressed the opinion that “Apple chose to protect a dead terrorist’s privacy over the secu-rity of the American people.”

Apple’s refusal was based on the opinion that to comply with the FBI’s wishes would require Apple to create a separate operating system for Farook’s phone and all future ver-sions of the iPhones. The new system, which would run parallel with the existing software, would not have the same level of security and privacy protections. Once the parallel oper-ating system was created, contended Apple, criminals and foreign governments could cir-cumvent the security of any phone simply by typing in the device’s identification number. Apple’s CEO (unlike his predecessor Steven Jobs, who had avoided weighing in on polit-ical or controversial issues) said that the company saw privacy as a fundamental human right and one of its core values. “We will not shrink from this responsibility. We need to decide as a nation how much power the government should have over our data and over our privacy,” said Cook.

Nearly all the world’s smartphones run on software developed by Google or Apple. According to court records, Google had been ordered to help federal agents open cell-phones in seven different states. Although the outcomes of these specific cases were not publicly known, federal prosecutors said that until late in 2015, when Apple began resist-ing such efforts, it was routine for judges to approve such requests.

Eventually, the FBI’s request came before the courts. The Justice Department argued that its request was limited to Farook’s phone and it was not trying to set a legal precedent, but it also admitted that there were 13 other pending cases in which the government was seeking court orders to force Apple to help it extract data from iPhones.

In February 2016, a federal judge ordered Apple to help the FBI circumvent the pass-code protection system on Farook’s phone based on a broad application of the All Writs Act of 1789. This act afforded the federal government widespread authority to access information based on national security. Apple’s Cook said the company would oppose the

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order. In a strongly worded letter to Apple customers posted to the company’s website, Cook called the order “an unprecedented step which threatens the security of our custom-ers” with “implications far beyond the legal case at hand.” In a court filing, Apple claimed, “This isn’t a case about one isolated iPhone. No court has ever authorized what the govern-ment now seeks, no law supports such unlimited and sweeping use of the judicial process, and the Constitution forbids it.”

The day before the FBI director and Apple’s top lawyers were to testify before Con-gress, a federal judge in New York sided with Apple in a related case. Magistrate Judge James Orenstein rejected the Justice Department’s argument that the 18th century All Writs Act gave prosecutors the authority to compel Apple to help investigators bypass the passcode-protection system on an Apple iPhone seized in a drug investigation. He said the critical issues of 21st century privacy and technology should be decided by today’s law-makers, rather than by reinterpreting an old law.

Around this time, the media reported that an outside party had demonstrated to the FBI a possible method for unlocking Farook’s iPhone that, if successful, would eliminate the need for assistance from Apple. “This suggests that the very thing that Apple feared already exists in some form and it exists outside the walls of Cupertino [Apple’s home],” said attorney Edward McAndrew.

A month later, the FBI announced that it had cracked Farook’s iPhone and was dropping its legal case against Apple. A Justice Department spokesperson said, “While this particu-lar phone is no longer an issue, the broader fight over encryption-protected technology is likely to continue. It remains a priority for the government to ensure that law enforcement can obtain crucial digital information to protect national security and public safety.”

And the controversy may intensify in the future. FBI director Comey announced in April 2016 that the secret technique used to unlock Farook’s iPhone 5C, for which the FBI reportedly paid more than $1 million, would not work on newer iPhone models. Two years later, Apple announced that it was planning an iPhone update that would effectively disable the phone’s charging and data port—the opening where users plug in headphones, power cables, and adapters—an hour after the phone is locked. This change was seen a direct response to government efforts to unlock phones without the owner’s permission. “If we go back to the situation where we again don’t have access, now we know directly all the evidence we’ve lost and all the kids we can’t put into a position of safety,” said Chuck Cohen of the Indiana State Police task force on Internet crimes against children.

Sources: “FBI Director: Apple, Google Active ‘Above the Law’ By Locking Users’ Phones,” Daily Caller, November 3, 2014, dailycaller.com; “U.S. and Apple Dig In for Court Fight Over Encryption,” The Wall Street Journal, February 17, 2016, www.wsj.com; “Apple Files Motion Opposing Order to Unlock iPhone,” The Wall Street Journal, February 25, 2016, www.wsj.com; “Judge Sides With Apple in N.Y. Drug Case Involving Locked Phone,” The Wall Street Journal, February 29, 2016, www.wsj.com; “U.S. Says ‘Outside Party’ Could Unlock Terrorist’s iPhone,” The Wall Street Journal, March 22, 2016, www.wsj.com; “U.S. to Keep Pushing Apple to Unlock iPhone in New York Case,” The Wall Street Journal, April 8, 2016, www.wsj.com; and “Apple to Close iPhone Security Hole That Police Use to Crack Devices,” The New York Times, June 13, 2018, www.nytimes.com.

Discussion Questions

1. In the dispute between the FBI and Apple, which side do you support and why?2. How would you counter the arguments offered by those on the other side of this debate?3. Are there any circumstances in which you think the government’s right to information

should take precedence over an individual’s right to privacy?4. Should any technology firm be allowed to create a privacy protection system that is so

impenetrable that it could never be overridden, regardless of the government’s need for this information?

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C H A P T E R T W E L V E

Regulating and Managing TechnologyThe rapid advances in technology in just the past few decades have radically changed how business operates. More information than ever before—about individuals, organizations, and governments—is located on servers or in “the cloud,” and businesses increasingly include technology in their daily operations through e-business, robotics, artificial intelligence, and much more. These extraordinary developments challenge businesses and governments to manage information while protecting both data security and individuals’ privacy. What actions have governments and businesses taken, and what are the ethical implications of their actions?

This Chapter Focuses on These Key Learning Objectives:

LO 12-1 Identifying the various interventions undertaken by governments to regulate technology.

LO 12-2 Exploring how business accesses stakeholders’ personal information and understanding possible limits to this access.

LO 12-3 Understanding the increasing role of e-business in the global marketplace.

LO 12-4 Examining challenges businesses face in managing and adopting new technologies, such as the use of robotics and artificial intelligence, in business operations.

LO 12-5 Assessing the emerging role and responsibilities of the organization’s chief information officer and other organizational functions that are responsible to ensure information security and privacy.

LO 12-6 Understanding the threat of cybercrime, and the magnitude of the costs and possible causes of the increase in cybercrime.

LO 12-7 Identifying business responses and government efforts to combat cybercrime.

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Over an 18-month period in 2017 and 2018, at least 15 separate cybersecurity breaches occurred at major retailers in the United States. Many of these attacks were caused by flaws in the company’s payment systems, either online or in stores. According to a KPMG study, 19 percent of consumers said they would completely stop shopping at a retailer after a breach, and 33 percent would take a break from shopping there for an extended period. The retailers hit by a cyberattack during these 18 months were Macy’s, Adidas, Sears, Kmart, Delta, Best Buy, Saks Fifth Avenue, Lord & Taylor, Under Armour, Panera Bread, Forever 21, Sonic, Whole Foods, Gamestop, and Arby’s.1

Many restaurant customers look forward to the creation of their personalized salad at a well-stocked salad bar. Yet, as most nutritionists warn, the food, and even the serving uten-sils, at salad bars are magnets for bacteria and viruses. Chowbotics, a Silicon Valley start-up, devised a partial solution to protect salad-bar customers: Sally the Salad Robot. Customers simply touch a screen to place their orders, choosing from a menu of recipes or designing their own salads. “Sally” calculates the number of calories per salad and drops the selected ingredients into a bowl in less than a minute. Despite “her” critics, Chowbotics’ executives argue that “Sally” will be good for job creation. There is going to be the need for “logistics companies, cleaning companies, service companies, robot repair companies,” said Charlie Ayers, Chowbotics’ executive chef, “Human interaction with Sally is not going away.”2

Who should protect people from attacks on the theft of their personal data, as shown in the example above? How can technology users guard against the inappropriate use of personal information? Are jobs protected as technology takes over more and more activi-ties in the workplace? What role do governments or businesses need to play to protecting individuals’ privacy and job security?

As we experience more and ever-newer technologies in our lives, Elon Musk, CEO of Tesla and SpaceX, warned of the dangers of one such technology, artificial intelligence (AI):

“The least scary future I can think of is one where we have at least democratized AI because if one company or small group of people manages to develop godlike digital superintelligence, they could take over the world. At least when there’s an evil dicta-tor, that human is going to die. But for an AI, there would be no death. It would live forever. And then you’d have an immortal dictator from which we can never escape. If AI has a goal and humanity just happens to be in the way, it will destroy humanity as a matter of course without even thinking about it. No hard feelings.”3

As this quotation implies, developments in technology and innovation need to be care-fully monitored. Artificial intelligence, for example, can be used to free individuals from tedious or dangerous tasks. But, as Musk argued, it also has the potential to turn on and harm humanity.

Government Regulation of Technology

With the increased use of the Internet and cloud storage of personal information, some governments have stepped in to protect their citizens. In 2014, an important legal case in Europe raised the issue of the right to be forgotten, meaning an individual’s right to have their personal information removed from online search results upon request.

1 “If You Shopped at These 15 Stores in the Last Year, Your Data Might Have Been Stolen,” Financial Times, July 10, 2018, www.ft.com.2 “A Robot Makes a Mean Caesar Salad, but Will It Cost Jobs?” The New York Times, October 6, 2017, www.nytimes.com.3 “Elon Musk Warns A.I. Could Create an Immortal Dictator from Which We Can Never Escape,” CNBC, April 6, 2018, www.cnbc.com.

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The right to be forgotten concept was upheld when the European high court ruled against Google in a dispute with an individual user, a Spanish attorney. The attorney had sued, asking that Google remove from its search results some personal information about him that he believed was damaging. The court agreed with the attorney and ordered Google to set up a system to respond to requests from European customers. This case and its ramifications are further explored in a case at the end of this book.

By 2018, the European Union passed the General Data Protection Regulation (GDPR), regulating the processing of personal information of EU residents by an individual, a com-pany, or an organization. It gives people more control over their personal data and forces companies to make sure the way they collect, process, and store data is safe.4

Governments also have protected individuals and companies’ ideas. With advances in technology, protecting the ownership of these ideas have become more challenging than ever. The ideas, concepts, and other symbolic creations of the human mind are often referred to as intellectual property. In the United States, intellectual property is protected through a number of special laws and public policies, including copyrights, patents, and trademark laws. Not all nations have policies similar to those in the United States.

The illegal copying of copyrighted software, or software piracy, is a global problem. According to the Business Software Alliance (BSA), in a survey of more than 20,000 con-sumers and PC users in 110 national and regional economies, 37 percent of the software installed on personal computers around the world in 2018 was not properly licensed. This problem is critical for businesses, who spend nearly $359 billion a year worldwide to pre-vent hacking vulnerabilities due to unlicensed software used by employees.5

In 1998, the United States passed the Digital Millennium Copyright Act, making it a crime to circumvent antipiracy measures built into most commercial software agreements between the manufacturers and their users. In 2015, six people pleaded guilty to charges related to more than $100 million in stolen software, in one of the largest such piracy schemes pros-ecuted by the U.S. government. The theft including about 170,000 access codes for Adobe Systems and Microsoft products, including Windows 7 and Windows XP.6

In China, the government announced that computer makers must ship all their prod-uct with licensed operating systems preinstalled, and inspected all government computer systems for licensed software. To emphasize its commitment to the enforcement of this law, China sent 11 people to prison for manufacturing and distributing pirated Microsoft software throughout the world. Microsoft called the group part of “the biggest software counterfeiting organization we have ever seen, by far” and estimated its global sales at more than $2 billion.7 Laws attempting to stem software piracy and reinforce intellectual property rights exist in many other countries, including Saudi Arabia, the United Arab Emirates, Vietnam, and India.8 As expected, some laws are more rigorously enforced and more successful in stemming the use of pirated software than others.

4 “2018 Reform of EU Data Protection Rules,” European Commission, n.d., ec.europa.eu; and “What Is GDPR? Everything You Need to Know about Europe’s New Data Law,” CNN Tech, May 21, 2018, money.cnn.com.5 “Software Management: Security Imperative, Business Opportunity,” 2018 BSA Global Software Survey, 2018, gss.bsa.org.6 “Six Plead Guilty in $100 Million Software Piracy Case,” The Mercury News, December 18, 2015, www.mercurynews.com.7 “Chinese Court Jails 11 in Microsoft Piracy Ring,” New York Times, January 1, 2009, www.nytimes.com.8 For additional information on the U.S. Digital Millennium Copyright Act, see “About the Digital Millennium Copyright Act,” Knowledge Base, Indiana University, May 14, 2018, kb.iu.edu/d/alik; and, for information on India’s Copyright Amendment Act, see “The Indian Copyright (Amendment) Act, 2012 and Its Functioning So Far,” Intellectual Property Watch, October 23, 2014, www.ip-watch.org.

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Should the government regulate individual access to the Internet and services delivered online? Exhibit  12.A describes government rules on net neutrality, which refers to the principle that Internet service providers should give customers equal access, that is, they should not favor or block particular content and applications.

Next the focus shifts to business organizations and their collection of confidential infor-mation and the potential for invasions of privacy or lack of security measures. How much information about the company’s stakeholders should be acquired or shared? How much protection is necessary to safeguard individual and corporate confidential information?

The Role of Technology in Business

In the course of conducting ordinary business, all companies utilize technology in their operations. Technology provides access to various types of information, the opportunity for electronic transactions, the use of robotics or automation, and the assimilation of artifi-cial intelligence into business practices. Many businesses have designated an information, security, or technology officer to oversee and manage the use of technology in their work-place. The benefits from these technological innovations and their challenges for business are discussed in this section.

Some businesses increasingly acquire large amounts personal information from various stakeholders and are then faced with the challenge of using it appropriately. Technology gives businesses access to a great deal of information-sometimes called big data. Yet, with

Net Neutrality: Repeal or Retain?

Net neutrality rules were created in 2015 under the Obama Administration, when the Democratic-controlled Congress voted to ensure that Internet providers treat all web traffic equally. Regulators, consumer advo-cates, and Internet companies were worried that broadband companies might wield their increasing power by restricting pathways to the Internet—blocking or slowing down apps owned or operated by their Internet providers. For example, under the net neutrality rules, the Internet provider Comcast could not charge Netflix users more for a faster path to Netflix programming than it could charge its own customers. This was gener-ally how the Internet had worked since its inception. In 2017, the Federal Communications Commission, controlled by Republican commissioners, voted 2-to-1 to open debate over the need for net neutrality rules. A few months later, Congress voted along party lines to overturn these rules. Within weeks, the attorneys general for 21 states had filed suits to challenge the FCC and Congress’s decisions launching a legal battle that could go on for years. Two months later, Washington became the first state to enact its own net-neutrality requirements. “We know when D.C. fails to act, Washing-ton state has to do so,” said Governor Jay Inslee. Nearly 800 technology-user companies sent a letter to the FCC challenging its decision and said they were “deeply concerned” about this action. “Our companies should be able to compete . . . on the quality of our products and services, not our capacity to pay tolls to Internet-access providers.” Other businesses, such as Alphabet’s Google and Facebook, supported this regulatory change. These companies’ activities were regulated by the Federal Trade Commission, which imposed less stringent standards. With net neutrality gone, Internet service providers were free to offer a website faster and more reliable delivery of its content in exchange for a fee. A broadband provider could also raise the transmission speed of its own content relative to that of its competitors. Broadband providers would also be free to block sites they find objectionable, which could open them up to political and public pressure.

Sources: “FCC Votes to Scale Down Net Neutrality Rules,” The Wall Street Journal, May 18, 2017, www.wsj.com; “The End of Net Neutrality: What It All Means,” CNN Tech, December 14, 2017, money.cnn.com; “What You Need to Know about Net Neutrality,” Politifact, December 14, 2017, www.politifact.com; “States, Activists Challenge FCC Rollback of Net-Neutrality Rules,” The Wall Street Journal, January 16, 2018, www.wsj.com; and “Tech Firms, Cable Companies Take Sides in Net-Neutrality Battle,” The Wall Street Journal, April 26, 2018, www.wsj.com.

Exhibit 12.A

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large amounts of data come challenges of how to use that data in practical and useful ways. As Victor Nilson, senior vice president of big data at AT&T explains,

“We always start with the customer experience. That’s what matters most. . . . So how do we simplify the process for both the customer-care agent and the customer at the same time, whenever there’s an interaction? We’ve used big data techniques to analyze all the different permutations to augment that experience to more quickly resolve or enhance a particular situation. We take the complexity out and turn it into something simple and actionable.”9

Access to Stakeholders’ Personal InformationTwo major market stakeholders targeted by business organizations for the collection of information are employees and consumers. Examples of many companies’ inability to pro-tect the information about their customers was profiled at the beginning of this chapter.

The employer–employee relationship, discussed in Chapter 15, is changing due to technological advances. Some employees are embracing these changes; others are more hesitant.

More than 50 of the 80 employees at Three Square Market, a technology company in Wisconsin, voluntarily agreed to have the company implant a microchip under their skin between their thumb and index finger. The microchip allowed employees to enter the building by swiping a scanner at the front door or pay for food in the employee cafeteria. Sam Bengston, a software engineer at Three Square, volun-teered because “in the next five to ten years, this is going to be . . . normal. I like to jump on the bandwagon with these kinds of things early, just to say that I have it.” Others at Three Square were more cautious. “Because it’s new, I don’t know enough about it yet,” said Melissa Timmins, Three Square’s marketing director. “I’m a little nervous about implanting something into my body.”10

Is it acceptable for employers to implant microchips into their employees if it is vol-untary? What if it is a mandatory condition for employment? How will this technology be used? A Carnegie Mellon University professor commented, “Companies often claim that these chips are secure and encrypted, but encrypted is a pretty vague term which could include anything from a truly secure product to something that is easily hackable.” Other critics were concerned that this technology, while designed for one thing—such as entrance to a building or payment at the cafeteria—might be used for another. They warned, for example, that the company could begin tracking the length of employee bath-room or lunch breaks without their consent or even knowledge. The Three Square CEO assured critics that “All it is is an RFID chip reader. It’s not a GPS tracking device. It’s a passive device and can only give data when data’s requested.”11

Consumers’ shopping habits are also a rich source of data for businesses. While individ-uals may believe they are just an anonymous or nameless shopper among a pool of millions of shoppers, companies tracking big data, sometimes called metadata, can pick out specific details about an individual’s shopping habits, preferences, or tendencies. Researchers at MIT analyzed credit-card transactions by 1.1 million shoppers and claimed they needed only four bits of secondary information, such as location or time, to identify the unique

9 “How Companies Are Using Big Data and Analytics,” McKinsey & Company Interview, April 2016, www.mckinsey.com.10 “Microchip Implants for Employees? One Company Says Yes,” The New York Times, July 25, 2017, www.nytimes.com.11 Ibid., The New York Times, July 25, 2017, www.nytimes.com.

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individual purchasing patterns of 90 percent of the people involved in their study. Even when the data was cleaned of names, account numbers, and other obvious identifiers, the shoppers’ identity could be found.12

Cybersecurity experts warned Verizon in 2015 that the company was putting the privacy of its customers at risk by using computer codes, called unique ID headers, to tag and follow its mobile subscribers around the web. These codes created databases that could make the consumers more vulnerable to covert tracking and profiling. Johnathan Mayer, a lawyer and computer science graduate student at Standard University, warned that the cybersecurity experts’ fears were valid. He used computer code to track individuals even after they tried to delete their digital footprints. “Verizon is not in a position to control how others use its [ID] headers,” said Mayer. “There is no doubt that this particular approach does introduce new privacy problems.”13

The collection of consumer information raises important ethical issues of privacy and security. (These issues are further explored in Chapter 14.)

The question of how much information companies should collect about their stakeholders and whether the collection of stakeholders’ information benefits these stakeholders or not remain controversial. Whether businesses have adequately built protections against unwanted invasions of stakeholder privacy and breaches of information security remain to be seen.

E-BusinessDuring the most recent phases of technological development, shown in Figure 11.1 in the prior chapter, electronic business exchanges between businesses and between businesses and their customers emerged. These electronic exchanges, generally referred to as e-business, consist of buying and selling goods and services between businesses, organizations, and individuals electronically, that is, via Internet-based systems. During the past decade, global e-business revenue increased at a fast pace, as shown in Figure 12.1, and more than that of traditional, or nonelectronic, business. E-business revenues were predicted to continue to rise signifi-cantly through 2020 and into the next decade, fueled by consumers in emerging markets.

12 “Metadata Can Expose Person’s Identity Even without Name,” The Wall Street Journal, January 2, 2015, www.wsj.com.13 “Verizon’s Mobile ‘Supercookies’ Seen as Threat to Privacy,” The New York Times, January 25, 2015, www.nytimes,com.

FIGURE 12.1Global E-business Sales Growing

Source: “Top E-commerce Trends to Inform your 2017 Marketing Strategy,” Smart Insights, June 7, 2017, www.smartinsights.com.

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In the United States, online sales have consistently been around $300 to $400 billion annually since 2014. E-business sales in China, however, have risen dramatically since 2014, from around $400 billion annually to an estimated $2 trillion by 2019.

Businesses, especially small-sized companies, discovered that adopting new technology and embracing e-business opportunities could save them money in the long run and give them a competitive edge over rivals by enabling them to add new services and operate more efficiently. One United Kingdom website explains these advantages:

Worldwide Presence: The major advantage of engaging business online is to have presence nationwide or worldwide. IBM used e-business to provide services to the customer and was one of the first companies to use this approach. Other firms, such as Dell and Amazon, quickly followed, becoming global leaders in their markets.

Cost Effective Marketing and Promotions: Using the Internet to market products required a very simple strategy but generally guaranteed a worldwide reach. Pay per click advertising, for example, is an effective technique that ensures that a business only pays for advertisements that were actually viewed.

Better Customer Service: Many customers can visit a firm’s website at same time. Some websites have an online chat feature to help the customer to find out more about the product they are interested in. Moreover, orders can be placed online by process-ing payments securely over the Internet and products can be shipped directly to the customer. Online customers do not have to leave the house or workplace to shop.

The U.K. website also warns of the disadvantages of e-business or online transactions. Some consumers prefer to see or touch products physically before buying; maintaining the website can be costly; and consumers may have security concerns regarding their privacy. Yet, it appears that both businesses and consumers have embraced online sales, and e-business’s growth is likely to continue.

These new trends toward greater e-business gave rise to the notion of omnichannel, the idea that every distribution channel must work together to deliver a unified and consistent customer experience. Businesses are adjusting and attempting to serve the multiple needs of their customers.

Amazon is building dozens of “fulfillment centers,” brick-and-mortar stores located in major cities to have high-demand products close enough to consumers for same-day or next-day delivery. Brick-and-mortar stores, such as those operated by Apple or Verizon, understand that customers can find out about inventory on their phones before coming to the store. Retailers are focusing more on providing technical assis-tance for their customers in the stores, equipping employees with tablets or mobile technology to check inventory at other stores, locate complimentary accessories, or enable faster payment of items ordered.14

As technology changes the shopping experiences for customers, businesses, too, must understand how they need to change to accommodate and better serve their customers.

The Use of Robots and Artificial Intelligence at Work

Another area where technology has made a significant impact on business is the develop-ment of robotic engineering and the increased availability of robots. Initially, robots were

14 “Retail in Crisis: These Are the Changes Brick-and-Mortar Stores Must Make,” Forbes, February 12, 2014, www.forbes.com

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used in high-risk situations, such as bomb detection or handling toxic chemicals, but as they have become more affordable and smarter, they have generated new opportunities for businesses. McKinsey and Company, a global management-consulting firm, recog-nized that robotic technology and its next-generation extension, artificial intelligence (AI), the ability of a digital computer or computer-controlled robot to perform tasks commonly associated with intelligent beings, will become pervasive throughout business practice.

“Senior executives need to understand the tactical as well as strategic opportunities, redesign their organizations, and commit to helping shape the debate about the future of work. We are on the cusp of a new age of automation. . . . Robots have long been familiar on the factory floor . . . but rapid strides being made in artificial intelligence and robotics mean machines are now encroaching on activities previously assumed to require human judgment and experience.”15

A new breed of machines, called collaborative machines, were designed to work alongside people in close settings. Many manufacturers, such as toy makers, used these machines—which were priced as low as $20,000—to increase overall productivity and lower labor costs.

Panek Precision, founded in 1945 as a small, precision machine shop in North-brook, Illinois, uses robots to place metal pieces into cutting machines and remove the parts after the cutting is completed. A job difficult for a human employee because of its tediousness, robots can accomplish the tasks quickly, effectively, and less expensively than machine operators paid $16.50 per hour. The robot doubled the output of a human worker “because robots work overnight and don’t take a lunch break and they just keep going,” said Panek Precision’s president.16

Robots have found their way into other type of work. They can replace workers that could be injured from doing the work previously assigned to humans. “It’s gotten easier to substitute machines for many kinds of labor. We should be able to have a lot more wealth with less labor,” explained economist Erik Brynjolfsson.17

However, the spread of robots in the workplace posed a clear threat to workers’ employ-ment. Within two decades, economists at Oxford University forecast, nearly half of the current jobs would be performed by machine technology. In the U.K., economists pre-dicted that 10 million jobs would be taken over by computers and robots over the next 20 years. They said that people earning less than £30,000, or about $46,000, a year, were most likely to see their jobs eliminated. The International Labor Organization estimated that millions of lower-paying jobs in southeast Asia could be displaced by automation during the next two decades.

In the crosshairs are middle-class workers such as clerks and bookkeepers. Today’s computers can conduct legal research, write stock reports and news stories, and translate conversations. At banks, machines can produce government-required documents to flag potential money laundering—all work done by humans a short time ago. Banks using auto-mated teller machines (ATMs) spread quickly throughout the United States from the 1980s to today. In 1985, the United States employed 484,000 bank tellers; by 2014 this number had fallen to 361,000, a drop of more than 25 percent.

Despite these “gloom-and-doom” predictions, some jobs appear to be safe from robotic takeover. McKinsey and Company predicted that jobs that involve managing and developing

15 “A CEO Action Plan for Workplace Automation,” McKinsey Quarterly, July 2017, www.mckinsey.com.16 “Robots Work their Way into Small Factories,” The Wall Street Journal, September 17, 2014, online.wsj.com.17 “What Clever Robots Mean for Jobs,” The Wall Street Journal, February 24, 2015, www.wsj.com.

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people have an only 9 percent automation potential, and work that applies expertise to deci-sion making, planning or creative work has an 18 percent automation potential. Some experts claim, “robots aren’t destroying enough jobs. Too many sectors, such as health care or per-sonal services, are so resistant to automation that they are holding back the entire country’s standard of living.” Others argue that robots and advanced technology might actually increase labor demand, especially for low-skilled laborers. The presence of technology might allow low-skilled workers to perform tasks previously assigned only to high-skilled employees.

So, what role will robots play in the workplace of the future? The 2017 changes to the U.S. tax code provided incentives for businesses to invest in robotics technology, as they could deduct the entire cost of this investment over five years. Yet, no one fully under-stands how robots will influence business in the future. Will robots create more jobs than they replace? Will businesses wholly embrace the use of robots in the workplace, or not? What most experts in these fields seem to agree upon is that the potential impact of tech-nology through robotics will be undeniably profound.

Artificial intelligence is also making its mark in the workplace. According to a study conducted by IBM in 2017, more than 73 percent of 6,000 CEOs surveyed predicted that cognitive computing, or artificial intelligence, technologies would play a “key role” in their business’s future. And, 15 percent of the CEOs expected a return on their AI investments.

For example, Royal Dutch Shell, the energy company, had used AI to create algo-rithms enabling their managers to determine the most efficient allocation of work among employees and to coordinate with many self-employed and part-time work-ers. Shell applied AI technology to evaluate their digital business models in the car-maintenance sector to locate Shell staffers with the right expertise and assigned the job with a click. Using machine-learning software, Shell could match workers and projects, track performance, and evaluate this activity so it could refine the next round of matches.18

BlackRock, the world’s largest asset manager, used automated computer-driven systems, to make stock buy-or-sell decisions, relying more on artificial intelligence decision systems than human decision systems. Before the company had turned to artificial intelligence deci-sion making, BlackRock customers had complained that the human stockbrokers’ decisions often lagged behind their competitors and had begun to withdraw their money.19

Artificial intelligence has also been applied in the development of autonomous vehicles. Also known as driverless or self-driving cars, these vehicles are capable of sensing the sur-rounding environment and navigating without human input or control. The discussion case at the end of the chapter discusses the costs and benefits of autonomous vehicles.

How will these many technological breakthroughs be successfully managed? Many companies have created and empowered a new executive: the chief information officer, dis-cussed next.

The Chief Information, Security, Technology Officer

Businesses often entrust the responsibility for managing information technology and its many privacy and security issues to the chief information officer (CIO) or individuals with other similar titles such as chief security officer or chief technology officer. Many firms have elevated the role of their data processing managers by giving them the title of chief

18 “IBM: 73% of CEOs Predict AI, Cognitive Computing to Play ‘Key Role’ in Future of Business,” TechRepublic, July 6, 2017, www.techrepublic.com; and “Meet Your New Boss: An Algorithm,” The Wall Street Journal, December 10, 2017, www.wsj.com.19 “BlackRock Bets on Robots to Improve Its Stock Picking,” The Wall Street Journal, March 28, 2017, www.wsj.com.

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information officer. With the emergence of robotics and artificial intelligence in the work-place, the role of the CIO to manage this digital transformation has become even more critical. In a 2018 study of CIOs by Korn/Ferry International, 83 percent said their role was more strategic than it was three years ago. Another 67 percent said they were on their com-pany’s executive committee (a committee made up of the firm’s CEO and other senor executives), up from 55 percent in a similar survey from 2017.20 Recently this role has expanded even more to include broader responsibilities and greater influences on corpo-rate policies and practices. Given the increase in costly cyberattacks, as discussed next in this chapter, the CIO plays an even more critical role for the business organization.

According to Steven Fox, a security expert, “The CIO is a ‘General.’ Generals are not concerned with how the weapons function or how the rank-and-file are per-forming. This is the job of the lieutenants. The General focuses on the strategic application of resources on the battlefield. It is his/her duty to bring the plans of the sovereign (e.g. the CEO, the Board of Directors) to fruition.”21

In recent years, the CIO’s role has changed dramatically, becoming more integrated into the overall strategic direction of the firm. “CIOs themselves are in the midst of a make-or-break personal change-management project: CIOs who can only take orders, who can’t speak the language of the business, who can’t step out of the proverbial back-office and into the front lines of customer service, social media or supply chain management will soon go the way of the ancient tech gear,” warned Thomas Wailgum of CIO Magazine. Wayne Shurts, CIO of the grocery chain SuperValu concurred, “You’re part of the strategic leadership team; you’re on the inside of all the issues to help the company win today, tomorrow, and the next decade.”22 As shown in Figure 12.2, the duties assigned to a CIO are quite diverse.

20 “Tech Chief Role Grows More Strategic, Korn Ferry Survey Finds,” CIO Journal, June 19, 2018, blogs.wsj.com.21 Steven Fox, “The Art of CIO Success,” CSO Security and Risk, June 29, 2009, blogs.csoonline.com.22 “The New CIO Role: Big Changes Ahead,” CIO.com, August 20, 2010, www.cio.com.

FIGURE 12.2The Roles and Responsibilities of the Chief Information Officer (CIO)

Sources: The Meta Group study of the role of the CIO can be found at “New Roles, New Responsibilities: Today’s CIO,” n.d., www.cioupdate.com. Additional information for this exhibit is from “What Are the Duties of a CIO?” eHow, n.d., www.ehow.com; and “The Duties of a CIO,” Ezine Articles, n.d., ezinearticles.com.

In a study conducted by the Meta Group entitled The CIO as Enterprise Change Agent, almost half (47 percent) of the CIOs surveyed reported that they have broadened their responsibilities beyond the traditional CIO-only role. Some of these emerging responsibilities include:

• Establishing an innovative language to enable everyone throughout the organization to be clear of the objectives, processes, and timetables for any project that involves technology or information.

• Providing structure to welcome inventive thinking and creating protocols for testing and reviewing these novel ideas.

• Educating others in the organization to help open the eyes of organizational members to what is possible or what is not regarding technological initiatives or information.

• Applying marketing knowledge to ensure that innovative ideas reach the proper stakeholders inside and outside of the organization and have a meaningful impact.

• Acting as the lead security officer to protect information and data integrity by overseeing all functions of information technology in the organization.

• Participating in organizationwide committees and projects to maintain a clear emphasis on the value of information, as well as protect against threats to information.

In the past decade since the creation of the CIO position within most business organizations, the CIO role has evolved from primarily being focused only on the collection and protection of information to a senior executive role essential to all business functions and operations.

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IT issues have become more prominent in the national agenda, with implications for employment, privacy, and more. This emphasis was very evident in 2017, when the CEOs and CIOs of Apple, Amazon, and other technology companies met with President Trump at the White House. It was apparent from this gathering how critical the role of CIOs, with their expertise in many different fields of digital transformation and technology, had become not only for businesses but also for the country. CIOs clearly were ascending to greater leadership roles within the companies and for our society.23

Cybercrime: A Threat to Organizations and the Public

One of the most profound challenges for CIOs worldwide is to protect their organization’s information from unauthorized access or cybercrime. Cybercrime is criminal activity done using computers and the Internet. This includes anything from downloading illegal music files to stealing millions of dollars from online bank accounts. Cybercrime also includes nonmonetary offenses, such as creating and distributing viruses on other computers or posting confidential business information on the Internet. One of the largest cybercrimes in the United States occurred at Equifax, discussed in the case at the end of Chapter 6.

Cybercrime is often committed by individuals or groups gaining unauthorized access to a business organization through its computer system. They are called hackers. Hackers are individuals, acting alone or in groups often with advanced technology training, who, for thrill or profit, breach a business’s information security system. Hackers may be individuals employed by the business organization, or formerly employed, or are strangers and com-pletely unknown to the business. Some violations are simply careless actions, while others are intentional. Some of the hackers’ motivations for taking these actions are explored in the next section.

Exploring Why Hackers HackHacking into businesses and other organizations is undoubtedly a powerful and destruc-tive force. Why do hackers do it? The many reasons seem to be to make money, to retal-iate against a company or government, or to gain media attention for an issue or the hackers themselves, as shown in Figure 12.3. This section explores these selected moti-vations for hacking.

A website, called Hacker’s List, seeks to match hackers, who are seeking financial reward, with people looking to gain access to e-mail accounts, take down unflat-tering photos from a website, or gain access to a company’s database often out of

23 “The Morning Download: CIOs Expand Leadership Role as Digital Business Rises on National Agenda,” The Wall Street Journal, June 19, 2017, www.wsj.com.

FIGURE 12.3Why Do Hackers Hack?

While hackers may have any number of reasons underlying the motivations for their actions, three of the more common motivations appear to be

• Hackers hack to profit from their actions—the financial-incentive motive,• Hackers hack in retaliation against action or inaction by a company or government—the retaliation

motive,• Hackers hack to gain media attention for their political or social viewpoint or to boost their own

ego—the seeking media attention motive.

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retaliation for a prior action. In its first three months of operation, over 800 hacking jobs were posted for bid asking hackers—obviously using anonymous names—to bid on performing the task. A man in Sweden posted that he would pay $2,000 to anyone who could break into his landlord’s website. A California woman agreed to pay $500 for someone to hack into her boyfriend’s Facebook and Gmail accounts to see if he is cheating on her. And the list continues and grows each day.24

At the core of this business arrangement is the hacker’s motivation to profit from her or his computer skills and willingness to break the law for payment. The Hacker’s List web-site received a favorable review on hackerforhirereview.com, which specializes in assess-ing the legitimacy of such services. The owner of the site gave his top rating to Hacker’s List because “it’s a really cool concept” that limits the ability of customers and hackers to take advantage of one another.25

Other hackers are more politically motivated. In 2018, U.S. federal prosecutors accused nine Iranians of orchestrating years of cyberattacks on behalf of the Iranian government to steal data from hundreds of universities and businesses in the United States and abroad. Many of the hackers worked on behalf of the Islamic Revolutionary Guard Corps, an Ira-nian government group responsible for gathering intelligence. The group has been labeled a terrorist organization by the United States.26

Some hackers are just trying to prove a point—your system is vulnerable and subject to attack. Some of these efforts are welcomed by businesses; others are not. White hatters are individuals employed by businesses or governments to hack their systems deliberately to discover possible vulnerabilities of their own systems; typically, the discovered weak-nesses are used to strengthen these systems’ defenses. Grey hatters are hackers working on their own, often seeking media attention, but inclined to share their hacking exploits with the businesses they hacked in the expectation that the firm will pay them for the information. The grey hatters are less welcomed by businesses since they might expose the company’s security weaknesses publicly to bring greater attention to the need for more aggressive security measures.27

Whether the motivation is for personal profit, retaliation against a company or govern-ment, or to gain public attention, the instances of hacking are numerous and the potential for damage profound. The following section discusses the costs of cybercrime.

Costs of CybercrimeStephen Schmidt, chief information security officer at Amazon Web Services explained in a 2017 interview,

“The biggest threat that most organizations are facing right now is a combination of excessive access for their employees and an increased focus by nation-state actors on access to sensitive information. . . . So we have to focus on how to reduce that access, how to prevent people from getting unnecessary access to information, whether it be sales data, intellec