Business & Society Ethics Sustainability and Stakeholder Management

Preface

Business & Society: Ethics, Sustainability, and Stakeholder Management, Tenth Edition, pro- vides a conceptual framework, analysis, and discussion of the issues surrounding the business and society relationship. The book’s structure, chapters, and cases identify and engage the major topics involved in developing a robust understanding of business and society, or busi- ness in society. The latest research, examples, and cases provide you with a broad, yet detailed, analysis of the subject matter; they also offer a solid basis for thoughtful learning, reflection, and analysis of the domestic and global issues facing businesses today.

The book employs a managerial perspective that identifies and integrates current and rel- evant thought and practice. The managerial perspective is embedded within the book’s major themes of business ethics, sustainability, and stakeholder management. Each of these themes is essential today. Each theme builds upon its own perspective but is consistent with and overlaps with the others. Taken together, they capture the challenges of the past and provide frameworks for thinking about the current and future role of business in society.

The business ethics dimension is central because it has become clear that value con- siderations are and need to be woven into the fabric of the public issues that organiza- tions face today. An emphasis is placed on business ethics essentials and how ethics integrates into managerial and organizational decision making. Special spheres of busi- ness ethics discussed include the realms of technology and global capitalism, where ethi- cal questions increasingly have arisen for the past 20 years. The subject of each chapter, moreover, is infused with ethics considerations that are vital to their full treatment.

Sustainability is now one of business’s most pressing mandates. This dimension has been developed further since the ninth edition of this book because it has become more evident in the business world today that a concern for the natural, social, and financial environments are interconnected and that all three must be maintained in balance for both current and future generations. Hence, topics of the new circular economy, as well as measures of sustainability, are highlighted in this edition.

The stakeholder management perspective is crucial and enduring and it helps managers to (1) identify the various groups or individuals who have stakes in the firm or its actions, decisions, policies, and practices and (2) incorporate the stakeholders’ concerns into the firm’s daily operations and strategic plans. Stakeholder management is an approach that increases the likelihood decision makers will integrate ethical wisdom with management wisdom with respect to all salient parties to the business and society relationship.

As this edition goes to press, the country and world economies are still striving to recover from one of the most perilous financial periods since the Great Depression. The world stock market collapse beginning in the fall of 2008 had devastating repercussions for economies, governments, businesses, and individuals, and still we have not resolved completely the uncertainty associated with what began as financial turmoil and bank- ruptcies on Wall Street. This major event and its consequences will be with us for many years, and we urge readers to keep in mind the extent to which our world has now changed as they read the book and consider its content and application. Major events have the power to change the business and society relationship in significant ways—and instantaneously—so it is essential that the book’s topics be read with an ever present eye on the events breaking in the news each day.

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Applicable Courses for Book This text is appropriate for college and university courses that carry such titles as Busi- ness and Society; Business in Society; Business and Its Environment; Business Ethics; Business and Public Policy; Social Issues in Management; Business, Government, and Society; Social Responsibility of Business; and Stakeholder Management. The book is appropriate for either a required or an elective course seeking to meet the most recent accrediting standards of the Association to Advance Collegiate Schools of Business (AACSB International). The book has been used successfully in both undergraduate and graduate courses.

Though the AACSB does not require any specific courses in this subject matter, its recently updated (January 31, 2016) standards specify that a business school’s curriculum should include the topics covered throughout this textbook in both undergraduate and graduate degree programs. For undergraduate and graduate degree programs, learning experiences should be addressed and are addressed in General Skill Areas such as ethical understanding and reasoning (able to identify ethical issues and address the issues in a socially responsible way) and diverse and multicultural work environments.

In terms of AACSB’s General Business and Management Knowledge Areas, the following topics should be addressed and are addressed in this textbook: economic, political, regulatory, legal, technological, and social contexts of organizations in a globalized society; and social responsibility, including sustainability, and ethical behavior and approaches to management.

This book is ideal for coverage of perspectives that form the context for business: eth- ical and global issues; the influence of political, social, legal, environmental, technologi- cal, and regulatory issues; and the impact of diversity on organizations. The book provides perspectives on business, society, and ethics in the United States, along with examples from Europe, Asia, and other parts of the world. As the world has grown closer due to technology, communications, and transportation, there has been more conver- gence than divergence in applicability of the ideas presented herein. The book has proved suitable in a number of different countries outside of the United States. In previ- ous editions, versions were published in Canada and China. Publication in Japan is under consideration. Though written from the perspective of American society, a special effort has been made to include some examples from different parts of the world to illus- trate major points. Most of the book applies in developed economies around the world.

Objectives in Relevant Courses Depending on the placement of a course in the curriculum or the individual instructor’s philosophy or strategy, this book could be used for a variety of objectives. The courses for which it is intended typically include several essential goals, including the following:

1. Students should be made aware of the expectations and demands that emanate from the stakeholder environment and are placed on business firms.

2. As prospective managers, students need to understand appropriate business responses and management approaches for dealing with social, political, environ- mental, technological, and global issues and stakeholders.

3. An appreciation of ethics and sustainability issues and the influence these have on society, management decision making, behavior, policies, and practices is important.

4. The broad question of business’s legitimacy as an institution in a global society is at stake and must be addressed from both business and societal perspectives. These topics are essential to business building trust with society and all stakeholders.

5. The increasing extent to which social, ethical, public, environmental, and global issues must be considered from a strategic perspective is critical in such courses.

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New to the Tenth Edition This tenth edition has been updated and revised to reflect recent research, laws, cases, and examples. Material in this new edition includes:

• New research, surveys, and examples throughout all the chapters • Coverage throughout the text on the most recent ethics scandals and their influence

on business, society, organizations, and people • New concepts and examples on the developing theme of “behavioral ethics” • Discussion of recent developments with the Dodd Frank Wall Street Reform and

Consumer Financial Protection Act, the Net Neutrality Act, the Consumer Drone Safety Act, the Affordable Care Act, and other laws with significant importance to managers today

• Expanded coverage of social media issues, including issues of usage, privacy, and liability • Coverage of competing corporate governance perspectives • Incorporation of the issue of risk management and its relation to business in society • Updated coverage of social entrepreneurship and social enterprises • Discussion of the emerging topic of Political Corporate Social Responsibility (PCSR) • Expanded coverage of sustainability reporting and integrated reports • Extended coverage of Citizens United, Super PACs, and Dark Money, and the

importance of Corporate Political Accountability and Transparency • Consideration of diversity, employee rights, and recent legislation regarding discrim-

ination, including LGBT rights and updated protections, updated affirmative action issues, and new EEOC reforms

• Updated “Spotlight on Sustainability” features in each chapter, which demonstrate how sustainability is relevant and applicable to each chapter’s topics

• Fifty-five “Ethics in Practice Cases” embedded in chapters throughout the book, many of which are brand new to this edition

• Thirty-nine end-of-text “Cases” that may be assigned with any of the book’s chapter topics, 11 of which are brand new to this edition

• A revised and updated Instructor’s Manual • A brand new MindTap product that includes a digital version of the book, plus

practice, graded, and media quizzes

“Ethics in Practice Cases” Integral to this tenth edition are in-chapter features titled “Ethics in Practice Cases.” Inter- spersed throughout the chapters, these short cases and incidents present (1) actual ethical situations faced by companies, managers, consumers, or employees; (2) topics currently being discussed in the news; or (3) dilemmas faced personally in the work experiences of our former students in university or executive education classes. These latter types of cases are real-life situations actually encountered in their full- and part-time work experiences. Students and managers wrote some of these cases, and we are pleased they gave us permis- sion to use them. They provide ready examples of the ethical issues people face today as citizens, consumers, and employees. We would like to acknowledge the authors of these for their contributions to the book. Instructors may wish to use these as mini-cases for class discussion when a lengthier case is not assigned. They can be read quickly, but they con- tain considerable substance for class discussion and analysis.

“Spotlight on Sustainability” Features The “Spotlight on Sustainability” features in each chapter highlight an important and rele- vant linkage of sustainability concepts that augment each chapter’s text material. The feature

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sometimes highlights a pertinent organization covered in the chapter and further dis- cusses its activities or issues. Other features highlight a sustainability challenge that a range of organizations face or a sustainability success that organizations or individuals can emulate. These features permit readers to quickly and easily discover how the sus- tainability theme applies to each topic covered in the text. The concept of sustainability extends to virtually all business, society, and ethics topics and embraces people and profits, as well as the planet.

Structure of the Book Part 1. Business, Society, and Stakeholders Part 1 of the book provides foundational coverage of pertinent business, society, and stakeholder topics and issues. Because most courses that will use this book relate to the issue of corporate social responsibility (CSR), this concept is discussed at the out- set. Part 1 explores vital issues in the business and society relationship and discusses how corporate social responsibility and its complementary concepts—corporate citi- zenship and sustainability—provide basic frameworks to understanding. Also given early coverage is the stakeholder management concept, because it provides a way of thinking and analyzing all topics in the book, as well as a helpful perspective for think- ing about organizations.

Part 2. Corporate Governance and Strategic Management Issues The second part of the text addresses corporate governance and strategic manage- ment for stakeholder responsiveness. The purpose of this part is to discuss manage- ment considerations and implications for dealing with the issues discussed throughout the text. Corporate governance is covered early because in the past decade this topic has been identified as central to effective strategic management. The strategic management perspective is useful because these issues have impacts on the total organization and have become intense ones for many upper-level managers. Special treatment is given to corporate public policy; issue, risk, and crisis manage- ment; and public affairs management.

Some instructors may elect to cover Part 2 later in their courses. It could easily be covered after Part 4 or 5. This option would be most appropriate for those who use the book for a business ethics course or who desire to spend less time on the governance, strategy, and management perspectives.

Part 3. Business Ethics and Leadership Four chapters dedicated to business ethics and leadership topics are presented in Part 3. In actual practice, business ethics cannot be separated from the full range of external and internal stakeholder concerns, but the topic’s importance merits the more detailed treatment presented here. Part 3 focuses on business ethics essentials, managerial and organizational ethics, business ethics and technology, and ethical issues in the global arena. Taken together, these chapters examine business and society issues that require ethical thinking.

Part 4. External Stakeholder Issues Vital topics in Part 4 include business’s relations with government, consumers, the natural environment, and the community. In each of these topic areas, we encounter social and ethical issues and challenges that are integral to business today. The business–government relationship is divided into the regulatory initiatives to monitor business practices and business’s attempts to influence government. Consumers, environment, and community stakeholders are then treated in separate chapters.

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Part 5. Internal Stakeholder Issues The primary internal stakeholders addressed in this part are employees. Here, we con- sider workplace issues and the key themes of employee rights, diversity, employment dis- crimination, and affirmative action. Two chapters address the changing social contract between business and employees and the urgent subjects of employee rights. A final chapter treats the vital topic of diversity and employment discrimination. Owner stake- holders may be seen as internal stakeholders too, but we cover them in Part 2, where the subject of corporate governance has been placed.

Case Studies Throughout each of the chapters, there are “Ethics in Practice Cases,” 55 in total, that pertain to the chapter in which they are located, but also can be used with other chapters as needed. The 39 end-of-text Cases address a broad range of topics and decision situa- tions. The cases are of varying length. They include classic cases (involving such corpo- rate giants as Walmart, The Body Shop, Nike, McDonald’s, Volkswagen, Chipotle, Coke, Pepsi, and Apple) with ongoing deliberations, as well as new cases touching upon issues that have arisen in the past several years.

All the cases are intended to provide instructors and students with real-life situations within which to further analyze course issues, concepts, and topics covered throughout the book. Both the Ethics in Practice Cases and the end-of-text Cases may be used with various chapters depending on the emphasis of the course. Many of the cases carry rami- fications that spill over into several subject areas or issues. Immediately preceding the end-of-text Cases is a set of guidelines for case analysis that the instructor may wish to use in place of or in addition to the questions that appear at the end of each case. A case matrix, located inside the front cover of the instructor edition of the textbook and in the instructor’s manual, provides guidance as to which of the cases in the book, both Ethics in Practice and end of text, work best with each chapter.

Support for the Student MindTap MindTap® Management for Carroll/Brown/Buchholtz, Business & Society: Ethics, Sustain- ability, and Stakeholder Management, 10th edition is the digital learning solution that powers students from memorization to mastery. It gives you complete control of your course—to provide engaging content, to challenge every individual, and to build their confidence. Empower students to accelerate their progress with MindTap. MindTap: Powered by You.

CourseMate Student Resources The CourseMate site, accessible at www.cengagebrain.com, includes student support resources to enhance and assess learning, including PowerPoint slides, key terms, and learning objectives.

Support for the Instructor Instructor’s Manual The Instructor’s Manual includes learning objectives, teaching suggestions, complete chap- ter outlines, highlighted key terms, answers to discussion questions, case notes, and group exercises. The Instructor’s Manual is available on the Instructor Companion Site.

Test Bank Cengage Learning Testing Powered by Cognero is a flexible, online system that allows you to author, edit, and manage test-bank content from multiple Cengage Learning solutions;

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create multiple test versions in an instant; and deliver tests from your LMS, your class- room, or wherever you want. The test bank for each chapter includes true/false, multiple- choice, short-answer, and essay questions, all correlated to AACSB guidelines and learning standards, and questions are identified by the level of difficulty.

PowerPoint Slides The PowerPoint presentations are colorful and varied, designed to hold students’ interest and reinforce each chapter’s main points. The PowerPoint presentations are available on the Instructor Companion Site.

Online Instructor Resources To access the online course materials, please visit www.cengage.com, and log in with your credentials.

Acknowledgments First, we would like to remember our dear friend, co-author, and colleague, Ann Buch- holtz, whose contributions to the study of business and society will remain with us forever, as will our memories of her generous spirit. When Ann won the Sumner Marcus Award for the Social Issues in Management Division at the 2015 Academy of Management Con- ference, the words used to describe her included “top tier scholar,” “mentor,” “servant leader,” and “teacher.” Beyond the stories of her incredible research impact in the areas of ethics, corporate governance, corporate social responsibility, and strategy, Ann was someone who stood out among her peers in every dimension of performance and service. She loved the phrase from Mahatma Gandhi, “Be truthful, gentle and fearless,” and it described her nature perfectly. Ann leaves behind many friends, colleagues, and students who will miss her dearly, as well as a beloved brother, Dick Buchholtz, who has been a friend to us over the years. Ann’s spirit will live on in this textbook, and we dedicate this edition to her.

Second, we would like to express gratitude to our professional colleagues in the Social Issues in Management (SIM) Division of the Academy of Management, the International Association for Business and Society (IABS), and the Society for Business Ethics (SBE). Over the years, members of these organizations have meant a great deal to us and have helped provide a stimulating environment in which we could intellectually pursue these topics in which we have a common interest. Many of these individuals are cited in this book and their work is sincerely appreciated.

Third, we would like to thank the many reviewers of the nine previous editions who took the time to provide us with helpful critiques. Many of their ideas and suggestions have been used for this edition and led to improvements in the text:

Steven C. Alber, Hawaii Pacific University

Paula Becker Alexander, Seton Hall University

Laquita C. Blockson, St. Leo University

Mark A. Buchanan, Boise State University

Peter Burkhardt, Western State College of Colorado

Preston D. Cameron, Mesa Community College

William B. Carper, University of West Florida

George S. Cole, Shippensburg University

Brenda Eichelberger, Portland State University

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Jeanne Enders, Portland State University

Joshua S. Friedlander, Baruch College

John William Geranios, George Washington University

Kathleen Getz, Loyola University Maryland

Peggy A. Golden, University of Northern Iowa

Russell Gough, Pepperdine University

Michele A. Govekar, Ohio Northern University

Wade Graves, Grayson College

Frank J. Hitt, Mountain State University

Robert H. Hogner, Florida International University

Sylvester R. Houston, University of Denver

Ralph W. Jackson, University of Tulsa

David C. Jacobs, American University

Leigh Redd Johnson, Murray State University

Ed Leonard, Indiana University–Purdue University Fort Wayne

Charles Lyons, University of Georgia

Timothy A. Matherly, Florida State University

Kenneth R. Mayer, Cleveland State University

Douglas M. McCabe, Georgetown University

Douglas McCloskey, Washington University School of Law

Bill McShain, Cumberland University

Geralyn Miller, Indiana University–Purdue University Fort Wayne

Nana Lee Moore, Warner University

Harvey Nussbaum, Wayne State University

Nathan Oliver, University of Alabama Birmingham

E. Leroy Plumlee, Western Washington University

Richard Raspen, Wilkes University

Dawna Rhoades, Embry-Riddle Aeronautical University

William T. Rupp, Austin Peay State University

Robert J. Rustic, The University of Findlay

John K. Sands, Western Washington University

William Sodeman, University of Alabama in Huntsville (UAH)

Valarie Spiser-Albert, University of Texas at San Antonio

David S. Steingard, St. Joseph’s University

John M. Stevens, The Pennsylvania State University

Diane L. Swanson, Kansas State University

Dave Thiessen, Lewis-Clark State College

Jeff R. Turner, Howard Payne University

Ivan R. Vernon, Cleveland State University

Marion Webb, Cleveland State University

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George E. Weber, Whitworth College

Ira E. Wessler, Robert Morris University

We would also like to express gratitude to our students, who have not only provided comments on a regular basis but also made this tenth edition even more interesting with the ethical dilemmas they have personally contributed, as highlighted in the Ethics in Practice Cases features found in many of the chapters or at the end of the text. In addi- tion to those who are named in the Ethics in Practice Cases features and end-of-text Cases and have given permission for their materials to be used, we would like to thank the following individuals for their contributions: Michelle Alen, Kristine Calo, Chad Cleveland, Ken Crowe, Lee Askew Elkins, Charles Lyons, William Megathlin, Jr., Made- line Meibauer, Laura Rosario, Paul Rouland, Sr., William Sodeman and Clayton Wilcox. We express grateful appreciation to the authors of the other cases that appear at the end of the text, and their names are mentioned there. We also would like to thank Bruce F. Freed and Karl Sandstrom of the Center for Political Accountability for their support as we incorporated the issues stemming from Citizens United into our discussion of corpo- rate political activity.

Finally, we wish to express heartfelt appreciation to our family members and friends for their patience, understanding, and support when work on the book altered our priorities and plans.

Archie B. Carroll Jill A. Brown

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About the Authors

Archie B. Carroll Archie B. Carroll is Robert W. Scherer Chair of Management & Corporate Public Affairs emeritus and professor of management emeritus in the Terry College of Business, Uni- versity of Georgia. He also served as director of the Nonprofit Management and Com- munity Service Program in the Terry College of Business. Dr. Carroll received his three academic degrees from The Florida State University in Tallahassee. He is the co-author of Corporate Responsibility: The American Experience (Cambridge University Press, 2012), which won the Academy of Management, Social Issues in Management, Book of the Year Award in 2014. He was recognized with the first Lifetime Achievement Award in Corporate Social Responsibility (2012) given by the Institute of Management, Hum- boldt University, Berlin, Germany.

Professor Carroll has published numerous books, chapters, articles, and encyclopedia entries. His research has appeared in the Academy of Management Journal, Academy of Management Review, Business and Society, Journal of Management, Business Ethics Quar- terly, Journal of Business Ethics, and many others.

He is former Division Chair of the Social Issues in Management (SIM) Division of the Academy of Management, a founding board member of the International Association for Business and Society (IABS), and past president of the Society for Business Ethics (SBE). He is an elected Fellow of the Southern Management Association (1995), Fellow of the Academy of Management (2005), and Fellow of the International Association for Busi- ness and Society (2012).

Other important professional recognitions include the Sumner Marcus Award (1992) for Distinguished Service by the SIM Division of the Academy of Management; Distin- guished Research Award (1993) by Terry College of Business, University of Georgia; Dis- tinguished Service Award (2003) by the Terry College of Business; and the Hunt SMA Sustained Outstanding Service Award (2016) by the Southern Management Association. He was named professor emeritus (2005) at the University of Georgia, and in 2008, he was recognized with the Outstanding Ph.D. Award from the College of Business, Florida State University.

Jill A. Brown Jill Brown is the Harold S. Geneen Research Professor of Corporate Governance at Bentley University. She received her Ph.D. at the University of Georgia; Ann Buchholtz served as her Dissertation Chair.

Dr. Brown’s research and teaching interests include ethics, corporate social responsibil- ity, corporate governance, and strategic leadership—with a focus on understanding how businesses can create both financial and social value. Brown’s work has been published in the Journal of Business Ethics, Organization Science, Business Ethics Quarterly, the Journal of Management Studies, the Oxford Handbook of Corporate Social Responsibility, Strategic Organization, and Corporate Governance: An International Review (CGIR), where she is an associate editor. She also serves as an associate editor for Business and Society.

She is an elected Representative-at-Large of the International Association of Business and Society (IABS), an international organization committed to understanding relationships

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between business, government, and society. She has also served in many capacities for the SIM (Social Issues in Management) Division at the Academy of Management, including Co-Chair of the Doctoral Consortium, elected Representative-at-Large, and most recently as Program Chair-Elect. Dr. Brown has received numerous teaching and reviewing awards, including the Robert and Christine Staub Faculty Excellence Award at Lehigh University, and Best Reviewer awards from CGIR and Business & Society.

Ann K. Buchholtz The late Ann K. Buchholtz was professor of Leadership and Ethics at Rutgers University and served as research director of the Institute for Ethical Leadership at the Rutgers Business School. She received her Ph.D. from the Stern School of Business at New York University. She passed away in September 2015.

Professor Buchholtz’s research focused on the social and ethical implications of cor- porate governance, in particular, and the relationship of business and society in general. Journals in which her work has appeared include Business and Society, Business Ethics Quarterly, the Academy of Management Journal, the Academy of Management Review, the Journal of Management, Organization Science, the Journal of Management Studies, and Corporate Governance an International Review, among others. Her research on board processes received an ANBAR citation of excellence award.

Her teaching and consulting activities were in the areas of business ethics, social issues, strategic leadership, and corporate governance. Her service learning activities in the classroom received a Trailblazer Advocate of the Year award from the Domestic Vio- lence Council of Northeast Georgia. She was the recipient of numerous teaching awards, including Profound Effect on a Student Leader, and was named a Senior Teaching Fellow at the University of Georgia.

Professor Buchholtz served as past Division Chair of the Social Issues in Management Division of the Academy of Management. She served on the ethics task force that designed a Code of Ethics for the Academy of Management and then became the inau- gural chairperson of the Academy’s Ethics Adjudication Committee when the Academy’s ethics code was put into effect. She completed a three-year term on the Academy of Management’s Board of Governors. In 2015, she was honored with the Sumner Marcus Award for outstanding service given by the SIM Division of the Academy of Manage- ment. Prior to entering academe, Dr. Buchholtz’s work focused on the education, voca- tional, and residential needs of individuals with disabilities. She worked in a variety of organizations, in both managerial and consultative capacities, and consulted with numer- ous public and private firms.

xxvi About the Authors

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PART 1

Business, Society, and Stakeholders

CHAPTER 1 The Business and Society Relationship

CHAPTER 2 Corporate Social Responsibility, Citizenship, and Sustainability

CHAPTER 3 The Stakeholder Approach to Business, Society, and Ethics

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1 The Business and Society Relationship

The business and society relationship has generated many economic, social,ethical, and environmental challenges over the decades. Though the busi-ness system has served most market-based societies well, criticism of business and its practices has become commonplace. Aided by the media persis- tently looking for stories of conflict, this may be a reflection of the natural ten- dency to highlight the negative and to take for granted the beneficial aspects of the relationship. This tendency propels a focus on the stresses and strains of business operating in society. A Bloomberg BusinessWeek article in 2016 says that it is still “open season on big business.”1

Beginning with the Enron scandal in the early 2000s, a number of major companies have been in the news because of their ethical violations. In the fall of 2008, a collapsing U.S. stock market and worldwide recession had a deeper and more far-reaching impact on the world economy and began to raise questions about the future of the business system as we have known it. In what is now believed to be the most serious financial collapse since the 1920s, this financial crisis centered on Wall Street and many of the large firms that historically had been the backbone of the U.S. financial system.

The causes of the financial collapse and the ensuing economic chaos continue to be debated. The housing bubble burst and years of lax lending standards put big investment banks and Wall Street at the center of the collapse.2 Faced with an unprecedented financial crisis, the federal government got into the bailout business as Congress approved a $700 billion rescue plan3 for Wall Street financial firms, such as Merrill Lynch, Bear Stearns, Citigroup, Lehman Brothers, AIG, and notable industries, like the auto industry.

There was plenty of blame to go around for the financial crisis, and the finger- pointing continues to this day. Some of those identified as guilty parties included greedy home buyers who took on more debt than they could handle; mortgage lenders who ceased using conventional lending standards; credit rating agencies that did not do their job; commission-hungry brokers; builders who conspired with crooked appraisers; and the Federal Reserve, which was accused of flooding the market with easy money.4 Significant criticism was targeted toward Wall Street and the businesses themselves as being central to the financial collapse. Others claimed that capitalism itself was behind the mess because the Wall Street firms were just doing what the capitalist system encourages. The recent movie, The Big Short, provided a dramatic reminder of how this financial crisis unfolded.

By the fall of 2011, Big Business and the capitalistic system were targeted by a new protest movement, which called itself “Occupy Wall Street.” The movement reflected some of the built up discontent with the business system, which had resulted in high unemployment and financial stress for millions. In spite of

CHAPTER LEARNING OUTCOMES

After studying this chapter, you should be able to:

1 Define and explain business and society as foundational concepts. Describe how society is viewed as the macroenvironment.

2 Explain the characteristics of a pluralistic society. Describe pluralism and identify its attributes, strengths, and weaknesses.

3 Clarify what is a special-interest society and how it evolves.

4 Identify, discuss, and illustrate the factors leading up to business criticism and corporate response. What is the general criticism of business? How may the balance of power and responsibility be resolved? What is the changing social contract?

5 Make clear the major focuses or themes of the book: managerial approach, business ethics, sustainability, and stakeholder management.

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protestations that continued beyond 2012, the Occupy Wall Street (OWS) movement never had a clear list of criticisms or demands but it was understood that the enemy was the big business system and modern capitalism. The movement’s broad list of accusations reflected a litany of complaints that included crony capitalism, inequality of wealth, poor housing, obscenely high executive compensation, business greed, the lack of good jobs, a culture that puts profits before people, and a general discontent with capitalism and the economic system.5 Though most of OWS’s complaints were targeted at business and the capitalistic system, some observers criticized the protestors because they failed to see the complicity of big government in developing and supporting housing policies that led to the financial crisis in the first place.6 In short, though many critics were preoccupied with Wall Street and the capitalistic system, Big Government also had a hand in the crisis as well.

Business is a more inviting target than government, however, because it is seen as being motivated only by profit while government is not seeking profits but is charged with acting in the public interest. Consequently, business and the capitalistic system have become the primary targets of the critics though flaws in the business-government relationship played a huge role in the controversy. The Wall Street protestors framed the battle as if they represented the 99 percent of citizens who were angry at the 1 percent of wealthy, primarily business people. This focus on the “One Percent” who own most of the wealth had become center stage by 2015 and continues today as the One Percent movement. Global income inequality has become the rallying point for many critics of the business system.7 Only time will tell whether the OWS and One Percent movements will continue, but in the meantime, it has raised public awareness of weaknesses in the capitalistic system. One major consequence of the OWS movement is that Wall Street, especially the big banks, have lost their “cool” factor and a lot of their prestige. Many of today’s top grads are more interested in going to Silicon Valley rather than Wall Street, believing they can make good money there and also have a chance to change the world.8 In addition, more and more commentaries questioning the capitalistic system have emerged, so it appears to be an issue the business community will need to address to repair its bruised image.9

The business system and society suffered another high profile blow when the Deepwater Horizon/BP oil spill occurred in the spring of 2010. Called the worst environmental disaster in history, the cleanup is still ongoing, with significant ecological and business consequences. The spill heightened the public’s awareness of the impact business can have on the natural environment and doubtless heightened support for the sustainability movement that was already well underway. In the fall of 2015, the Justice Department announced a record setting $20 billion settlement with BP, the British energy giant, after five years of negotiations over the effects of the Deepwater Horizon oil spill. The oil spill damaged more than 1,300 miles of the Gulf of Mexico’s coastline, and it has been called the largest environmental disaster in U.S. history.10

By 2016, a number of different business scandals had surfaced and damaged the business and society relationship further. These included the Volkswagen emissions scandal, admission by General Motors’ that it had schemed to conceal deadly safety defects in its ignition switches, revelations that Takata Corporation had been selling defective air bags, and disclosure that Toshiba had engaged in at least $1 billion in accounting irregularities. In addition to these scandals, a national

Chapter 1: The Business and Society Relationship 3

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malaise seemed to have set in as many in the general public began experiencing a middle class financial squeeze due to a jobless economic recovery.11

According to a 2015 Gallup poll, many Americans began thinking that the country has been heading in the wrong direction. This has led to countless people questioning the major institutions of society, and according to one observer, a period of political distrust has taken over.12 A 2016 poll by the Edelman public relations firm confirmed that America has a trust issue with business and government, especially financial companies, and that this erosion of trust is not only in the United States but also around the world.13

In light of the business criticisms that have arisen, it is little wonder that the “conscious capitalism” movement is gaining increased attention. This movement has been inspired by the book Conscious Capitalism: Liberating the Heroic Spirit of Business, co-authored by John Mackey, CEO and cofounder of Whole Foods Market and Rajendra Sisodia, professor of marketing at Bentley University. Their book has helped to spawn a whole new way of thinking about capitalism that is based on four principles—seeking a higher purpose, using a stakeholder orientation, embracing conscious leadership, and promoting a conscious culture that seeks to improve the social fabric of business. According to one writer, Mackey’s latest mission is cleansing America’s free-enterprise soul.14

Other serious questions continue to be raised about a host of other ongoing day- to-day business issues: corporate governance, ethical conduct, executive compensation, the use of illegal immigrants as employees, fluctuating energy prices, government involvement in the economy, healthiness of fast food, international corruption, and so on. The listing of such issues could go on and on, but these examples illustrate the enduring tensions between business and society, which in part can be traced to recent high-profile incidents, trends, or events.

Undergirding the recent scandals and issues, familiar worries embodying social or ethical implications have continued to be debated within the business and society interface. Some of these have included businesses moving offshore, downsizing of pension programs, high unemployment, underemployment, level of the minimum wage, reduced health insurance benefits, abuses of corporate power, toxic waste disposal, insider trading, whistle-blowing, product liability, deceptive marketing, and questionable lobbying by business to influence the outcome of legislation. These examples of both general and specific issues are typical of the kinds of stories about business and society that one finds in newspapers and magazines today and on television, social media, and the Internet.

At the broadest level, the role of business in society is the subject of this book. Many key questions will be addressed—the role of business relative to the role of government in the socioeconomic system; what a firm must do to be considered socially responsible; what managers must do to be considered ethical; and what responsibilities companies have to consumers, employees, shareholders, and communities in an age of economic uncertainty and globalization. And, throughout all this, an escalating mandate for sustainability has captured the attention of business leaders, critics, and public policymakers.

As we approach the end of the second decade of the new millennium, many economic, legal, ethical, and technological issues concerning business and society continue on. This period is turbulent and has been characterized by significant and rapid changes in the world, the economy, society, technology, and global relationships. Against this setting of ongoing instability in the business and society relationship, some basic concepts and ideas are worth considering first.

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1.1 Business and Society There are some basic concepts that are central to understanding the continuing business and society relationship. Some have chosen to frame it as business in society. Either way it is framed, important concepts include pluralism, our special-interest society, business criticism, corporate power, and corporate social response to stakeholders. First, it is important to define and describe two key terms that are central to the discussion: busi- ness and society.

1.1a Business Defined Business may be defined as the collection of private, commercially oriented (profit- oriented) organizations, ranging in size from one-family proprietorships (e.g., DePalma’s Italian Café, Half-Moon Outfitters, and Taqueria del Sol) to corporate giants (e.g., Coca- Cola, UPS, Microsoft, Apple, Google, and Delta Airlines). Between these two extremes are many medium-sized proprietorships, partnerships, and corporations.

When businesses are thought of in this collective sense, all sizes and types of indus- tries are included. However, in embarking on a study of business and society, there is a tendency to focus more on big businesses in highly visible industries. Big businesses’ pro- ducts, services and advertising are widely known and they are more frequently in the critical public eye. Size is often associated with power, and the powerful are given closer scrutiny. Although it is well known that small businesses far outnumber large ones, the prevalence, power, visibility, and impact of large firms keep them in the spotlight most of the time.

In addition, some industries are simply more conducive than others in the creation of visible, social problems. For example, many manufacturing firms by their very nature cause observable air, water, and solid waste pollution and contribute to climate changes. Such firms, therefore, are more likely to be subject to criticism than a life insurance com- pany, which emits no obvious pollutant. The auto industry with the manufacture of trucks and sport utility vehicles (SUVs) is a specific case in point. Criticism of Volkswa- gen, General Motors (GM), and other automakers is raised because of their high profile as manufacturers, the omnipresence of the products they make (which are the largest single source of air pollution), and the popularity of their products (many families own multiple cars), and road congestion is experienced daily.

SPOTLIGHT on Sustainability

Sustainability—What Does It Mean?

• Sustainability is… providing for the needs of the pres- ent generation while not compromising the ability of future generations to meet theirs (original definition in the U.N. Brundtland Commission Report on “Our Common Future.”)

• Sustainability is … creating shareholder and social value while decreasing the environmental footprint along the value chains in which we operate (DuPont).

• Corporate sustainability is about being able to sustain your business responsibly, with one eye on new

external risks and the other on future consequences of your decisions (PwC).

• Corporate sustainability can be broadly defined as the pursuit of a business growth strategy by allocating financial or in-kind resources of the corporation to a social or environmental initiative (The Conference Board, Sustainability Matters).

• Sustainability involves the simultaneous pursuit of economic prosperity, environmental quality, and social equity (World Business Council on Sustainable Development).

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Some industries are highly visible because of the advertising-intensive nature of their products (e.g., Procter & Gamble, FedEx, Anheuser-Busch, and Home Depot). Other industries (e.g., the cigarette, toy, and fast food industries) are scrutinized because of the possible effects of their products on health or because of their roles in providing health-related products (e.g., pharmaceutical firms, vitamin firms).

For these reasons, when discussing business in its relationship with society, the focus of attention tends to be on large businesses in well-known industries. However, we should not lose sight of the fact that small- and medium-sized companies increasingly represent settings in which our discussions also apply. In recent years, the social respon- sibilities of smaller enterprises and the developing movement toward social entre- preneurship has captivated increasing attention.

1.1b Society Defined Society may be thought of as a community, a nation, or a broad grouping of people with common traditions, values, institutions, and collective activities and interests. As such, when speaking of business and society relationships, this may be referring to business and the local community (business and Nashville), business and the United States as a whole, global business, or business and a specific group of stakeholders (consumers, employees, investors, environmentalists).

When discussing business and the total society, society is thought of as being com- posed of numerous interest groups, more or less formalized organizations, and a wide variety of institutions. Each of these groups, organizations, and institutions is a purpose- ful aggregation of people who are grouped together because they represent a common cause or share a set of common beliefs about a particular issue. Examples of special interest groups are numerous: The Sierra Club, Center for Science in the Public Interest, chambers of commerce, National Small Business Association, People for the Ethical Treatment of Animals (PETA), and the Forest Stewardship Council.

1.2 Society as the Macroenvironment The environment of society is a key element in analyzing business and society relationships. At its broadest level, the societal environment might be thought of as a macroenvironment that includes the total environment outside the firm. The macroenvironment is the compre- hensive societal context in which organizations reside. The idea of the macroenvironment is just another way of thinking about society as a whole. In fact, early courses on business and society were sometimes (and some still are) titled “Business and Its Environment.” The con- cept of the macroenvironment evokes different images or ways of thinking about business and society relationships and is therefore valuable in terms of analyzing and understanding the total business context.

A useful conceptualization of the macroenvironment is to think of it as being com- posed of four identifiable but interrelated segments: social, economic, political, and tech- nological.15

The social environment focuses on demographics, lifestyles, culture, and social values of the society. Of particular interest here is the manner in which shifts in these factors affect the organization and its functioning. For example, the influx of undocumented workers and immigrants over the past decade has brought changes to the demographic profile of countries. The economic environment addresses the nature and direction of the economy in which business operates. Variables of interest include such indices as gross national product, inflation, interest rates, unemployment rates, foreign exchange fluctuations, national debt, global trade, balance of payments, and various other indices

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of economic activity. Hypercompetition in the world economy has dominated the economic segment of this environment and global competitiveness is now a huge issue for businesses.16 Underwhelming business growth during the past several years has been a serious problem.

The economic picture has darkened since the start of the new millennium. Lackluster growth has been typical and the recovery from the recession of 2007–2008 has been even weaker and the middle class has felt it the most.17 Businesses moving jobs offshore to lower labor costs have been a controversial trend. Enduring levels of high unemployment, underemployment and use of part-time workers have been problematic economic issues. Many people have become frustrated about finding jobs and have left the workforce completely. An important overlay to these problems has been the growing belief by some that a significant income inequality has taken hold in American society and globally.

The political environment focuses on the processes by which laws get passed and officials get elected and all other aspects of the interaction between firms, political prac- tices, and government. Of particular interest to business in this segment are taxation, the regulatory process, and the changes that occur over time in business regulation of vari- ous industries, products, and different issues. Beginning in 2009, Congress ramped up its regulatory ambitions as it sought to improve the global economic system. Passage of the Affordable Care Act (ACA) in 2010 introduced considerable uncertainty in business decision making because of its dramatic impact on business costs and this concern con- tinues. At this writing, the 2016 presidential election process is well underway and an issue that keeps coming to the surface is the inability of Congress to get anything done because of paralysis in the political process. Part of the public’s reaction has been to favor “outsiders” to the Washington-centered political process when it comes to national elections.

Finally, the technological environment represents the total set of technology-based advancements taking place in society and the world. This rapidly changing segment includes new products, processes, materials, and means of communication (e.g., social networking), as well as the status of knowledge and scientific advancement. The process and speed of technological change is of significant importance here.18 The rate of inven- tion, innovation, and diffusion seems to become more dynamic with each passing year. In recent years, information technologies and biotechnology have been driving this seg- ment of environmental turbulence.

Understanding that business and society relationships are embedded in a macroenvir- onment provides us with a constructive way of understanding the kinds of issues that constitute the broad milieu in which business functions. Throughout this book, evidence of these ever-changing environmental segments will become apparent and it will become easier to appreciate what challenges managers face as they strive to operate effective organizations while interfacing with society. Each of the thousands of specific groups and organizations that make up our pluralistic society can typically be traced to one of these four environmental segments.

1.3 A Pluralistic Society Societies as macroenvironments are typically pluralistic. Pluralistic societies make for business and society relationships that are complex and dynamic. Pluralism refers to a diffusion of power among society’s many groups and organizations. A long-standing def- inition of a pluralistic society is helpful: “A pluralistic society is one in which there is wide decentralization and diversity of power concentration.”19

The key terms in this definition are decentralization and diversity. In other words, power is decentralized—dispersed among many groups and people. Power is not held

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in the hands of any single institution (e.g., business, government, labor, military) or a small number of groups. Pluralistic societies are found all over the world now, and some of the virtues of a pluralistic society are summarized in Figure 1-1.

1.3a Pluralism Has Strengths and Weaknesses All social systems have strengths and weaknesses. A pluralistic society prevents power from being concentrated in the hands of a few. It also maximizes freedom of expression and action. Pluralism provides for a built-in set of checks and balances so that no single group dominates. However, a weakness of a pluralistic system is that it creates an envi- ronment in which diverse institutions pursue their own self-interests with the result that there is no unified direction to bring together individual pursuits. Another weakness is that groups and institutions proliferate to the extent that their goals start to overlap, thus causing confusion as to which organizations best serve which functions. Pluralism forces conflict, or differences in opinions, onto center stage because of its emphasis on autonomous groups, each pursuing its own objectives. In light of these concerns, a pluralistic system does not appear to be very efficient though it does provide a greater balance of power among groups in society.

1.3b Multiple Publics, Systems, and Stakeholders Knowing that society is composed of so many different semiautonomous and autono- mous groups might cause one to question whether we can realistically speak of society in a definitive sense that has any generally agreed-upon meaning. Nevertheless, we do speak in such terms, knowing that, unless we specify a particular societal subgroup or subsystem, we are referring to the total collectivity of all those persons, groups, and insti- tutions that constitute society. Thus, references to business and society relationships may refer either to particular segments or subgroups of society (consumers, women, minori- ties, environmentalists, millennials, senior citizens) or to business and some system in our society (politics, law, custom, religion, economics). These groups of people or sys- tems also may be referred to in an institutional form (business and the courts, business and labor unions, business and the church, business and the Federal Trade Commission, and so on).

Figure 1-2 depicts in graphic form the points of interface between business and some of the multiple publics, systems, or stakeholders with which business interacts. Stakeholders

FIGURE 1-1 The Virtues of a Pluralistic Society

A pluralistic society …

• Prevents power from being concentrated in the hands of a few • Maximizes freedom of expression and action and strikes a balance between monism (social

organization into one institution), on the one hand, and anarchy (social organization into an infi- nite number of persons), on the othera

• Is one in which the allegiance of individuals to groups is dispersed • Creates a widely diversified set of loyalties to many organizations and minimizes the danger that

a leader of any one organization will be left uncontrolledb

• Provides a built-in set of checks and balances, in that groups can exert power over one another with no single organization (business or government) dominating and becoming overly influential

Sources: aKeith Davis and Robert L. Blomstrom, Business and Society: Environment and Responsibility, 3d ed. (New York: McGraw-Hill, 1975), 63. bJoseph W. McGuire, Business and Society (New York: McGraw-Hill, 1963), 132. Also see “What Are Pluralistic Societies?” http://www.ask.com/world-view/pluralistic-societies -798b3a7163095a11. Accessed March 28, 2015.

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are those groups or individuals with whom an organization interacts or has interdependen- cies. The stakeholder concept will be developed further in Chapter 3. It also should be noted that each of the stakeholder groups may be further subdivided into more specific stakeholder subgroups, each of them posing special challenges for business.

If sheer numbers of relationships and interactions are an indicator of complexity, it is easily seen that business’s current relationships with different segments of society consti- tute a truly complex macroenvironment. Today, managers must deal with these inter- faces on a daily basis and the study of business and/in society is designed to improve that understanding.

1.4 A Special-Interest Society A pluralistic society often becomes a special-interest society. As pluralism expands, a society develops that is characterized by tens of thousands of special-interest groups, each pursuing its own specific agenda. General-purpose interest organizations, often called advocacy groups, such as Common Cause and the U.S. Chamber of Commerce, still exist. However, the past several decades have been characterized by increasing spe- cialization on the part of interest groups representing all sectors of society—consumers, employees, investors, communities, the natural environment, government, and business itself. In many parts of the world, these nonprofit organizations are frequently called nongovernmental organizations (NGOs). They are citizens’ groups that may be orga- nized on a local, national, or international level. Today, many NGOs are long-lived, robust, and ever active watchdogs and actors in the business and society relationship.20

One newspaper headline noted that “there is a group for every cause.” Special-interest groups not only have grown in number at an accelerated pace but they also have become increasingly activist, intense, and focused on single issues. Such groups are strongly com- mitted to their causes and strive to bring pressure to bear on businesses to meet their needs and on governments to accommodate their agendas.

The health-care debate in the United States that continues to rage on illustrates how a pluralistic, special-interest society works. Consider that the following special-interest groups have all been active and continue to be so in the fine-tuning of the health-care

FIGURE 1-2 Business and Selected Stakeholder Relationships

Business

Community

Owners

Consumers

Employees

Government

Environmental Groups Local State

Federal

Unions Older Employees Women

Minorities Civil Liberties Activists

Product Liability ThreatsConsumer Activists

Institutional Investors

Private Citizens

Corporate Raiders

General Public

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system. The major interest groups include doctors, hospitals, drug companies, insurance companies, employers, insured people, seniors, and uninsured people.21 Each of these groups has much at stake in resolving this society-level issue that has significant implica- tions for many sectors, especially business, and tens of millions of dollars have been spent on lobbying by these groups. The implementation of the current health-care sys- tem has been gradual and contentious details are still in the process of being worked out. The full implications for business are not yet clear.

The minimum wage debate is another context in which different interest groups recently are making their views known. A number of interest groups think that a “living wage” should be the minimum wage and have sought a $15 per hour minimum wage. Some cities have taken this action. Other interest groups disagree and think the market should determine the minimum wage. Yet another nonprofit organization, “Business for a Fair Minimum Wage,” thinks that the current minimum wage is outdated and that the minimum wage should be gradually increased to $12 per hour by the year 2020. This group is made up of many business people who think a fair minimum wage makes good business sense.22 One conundrum is that if the minimum wage is raised too quickly it hurts smaller businesses and layoffs of these minimum wage employees typically follows.

The consequence of interest group specialization is that each of these groups has been able to attract a significant following that is dedicated to the group’s goals. Increased memberships have meant increased revenues and a sharper focus as each of these groups has aggressively sought its specific, narrow purposes. The likelihood of these groups working at cross-purposes and with no unified set of goals has made life immensely more complex for the major institutions, such as business and government. But this is how a pluralistic society works.

1.5 Business Criticism and Corporate Response It is inevitable in a pluralistic, special-interest society that the major institutions that make up that society, such as business and government, will become the subjects of con- siderable analysis and criticism. The purpose here is not so much to focus on the nega- tive as it is to illustrate how the process of business criticism has shaped the emergence of the business and society relationship today. Were it not for the fact that individuals and groups have been critical of business and have such high expectations and demands, there would be no articles, books or courses on this subject, and fewer improvements would occur in the business and society relationship over time.

Figure 1-3 illustrates how certain factors or social forces that have arisen in the social environment have created an atmosphere in which business criticism has taken place and flourished. Though a fair degree of resistance to change has been apparent on business’s part, the more positive responses on the part of business have been (1) an increased awareness and concern for the social environment in which it operates and (2) a chan- ged social contract (relationship) between business and society. Each of these factors merits closer attention.

1.5a Factors in the Social Environment Over the decades, many factors in the social environment have created a climate in which criticism of business has taken place and flourished. Some of these factors arise independent of one another, but some are interrelated; that is, they occur and grow hand in hand, often feeding off of one another.

Affluence and Education. Two factors that have advanced side by side in developed economies are affluence and education. As a society becomes more prosperous and

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better educated, higher expectations of its major institutions, such as business, naturally follow.

Affluence refers to the level of wealth, disposable income, and standard of living of the society. Measures of the U.S. standard of living indicate that it has been rising for decades, but leveling off during the recent decade. In the past several years, questions have been raised as to whether successive generations will be better off or not. In spite of recent events, overall affluence remains high, though this could change. This move- ment toward affluence is found in many of the world’s developed countries and also is occurring in emerging economies as global capitalism spreads. The recent, worldwide economic recession raises valid questions about continuing affluence, however.

Alongside a relatively high standard of living has been a growth in the average formal education of the populace. The U.S. Census Bureau’s most recent data reports that the number of American adults who were high school graduates have grown to 86 percent, and the numbers who were college graduates increased to 29 percent.23 As citizens con- tinue to gain more formal education, these percentages will increase and their expecta- tions of life generally rise. The combination of relative affluence and rising education has formed the underpinning for a society in which criticism of major institutions, such as business, naturally arises. Moderating factors such as unemployment, underemployment, and mounting educational costs resulting in huge student loans are also at work. It might also be added that when income and educational levels plateau or decline, business is often singled out to be a major culprit. There is significant uncertainty today as to whether past trends will continue.

Awareness through Television, Movies, Internet, and Social Media. Closely related to formal education is the widespread and growing level of public awareness in society today. Although newspapers and magazines are read by a declining fraction of the population, more powerful media—television, movies, social media, and the Internet—are accessed by virtually the entire society. Through television, the citizenry gets a profusion of information that contributes to a climate of business criticism.

FIGURE 1-3 Social Environment Factors, Business Criticism, and Corporate Response

Education AwarenessAffluence

Rising Expectations

Entitlement Mentality

Factors in the Social Environment

Increased Concern for the Societal Environment

A Changed Social Contract

Victimization Philosophy

Business Criticism

Rights Movement

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In recent decades, especially, movies have bashed both the capitalist system and busi- nesses. In addition, the Internet and smartphone explosion have brought elevated levels of awareness around the world. Through texts, tweets, e-mails, blogs, and other social media, the average citizen is extraordinarily aware of what is going on in the world on a real-time basis.

The prevalence and power of TV touches all socioeconomic classes. According to data compiled by the A. C. Nielsen Co., the average daily time spent viewing television per household exceeds six hours per day.24 In the United States today, over 99 percent of homes have TVs, and a great majority of homes have two or more televisions. In devel- oped countries around the world, these statistics are becoming more common. Television remains a pervasive and powerful medium in society.

24/7 News and Investigative Programs There are at least three ways in which infor- mation that leads to criticism of business appears on television. First, there are straight news shows, such as the ubiquitous 24-hour cable news channels, the evening news on the major networks, and investigative news programs. It is debatable whether or not the major news programs are treating business fairly, but in one major study conducted by Corporate Reputation Watch, senior executives identified media criticism, along with unethical behavior, as the biggest threats to a company’s reputation. Reflecting on the lessons learned from high-profile cases of corporate wrongdoing, half the executives sur- veyed thought unethical behavior and media criticism were the biggest threats to their corporate reputations.25 Coverage of Wall Street’s complicity in the recent worldwide recession has been particularly damaging because it has called into question society’s basic trust of corporate executives and the business system, especially the financial sys- tem. And, business has demonstrated a low level of preparedness for dealing with the social media criticism it has received.26

Business has to deal not only with the scrutiny of 24/7 news coverage but also with a myriad of different investigative news programs, such as 60 Minutes, 20/20, Dateline NBC, and PBS’s Frontline, that often present exposés of corporate wrongdoings or ques- tionable practices. American Greed is a “true crime” documentary that focuses on the stories behind some of the biggest corporate and white collar crimes going on today, including Ponzi schemes, real estate and investment fraud, embezzlement, insurance fraud, and money laundering. Whereas the straight news programs make some effort to be objective, the investigative shows are tougher on business, tending to favor stories that expose the dark side of the enterprises or their executives. These shows are enormously popular and influential, and many companies squirm when reporters show up on their premises complete with camera crews.

Prime-Time Television Programs A second way in which criticisms of business appear on TV is through prime-time programs. Television’s depiction of businesspeople in nega- tive ways always brings to mind the scheming oilman J. R. Ewing of Dallas, whose back- stabbing shenanigans dominated prime-time TV for years (1978–1991) before it went off the air. In 2012, Dallas came roaring back on TV and J. R. and his son were typically up to no good. Just as the second season of Dallas was being filmed, Larry Hagman, who played J. R., died of cancer, and TV’s most delightful scoundrel would no longer be around.27 One of J. R.’s favorite quips was “never tell the truth when a good lie will do.”

More often than not, the businessperson has been portrayed across the nation’s television screens as smirking, scheming, cheating, and conniving “bad guys.” The Economist magazine summed it up nicely in its recent article in which it has declared that “businessmen are always the villains.”28 Even the enormously popular Don Draper on the successful TV series Mad Men didn’t leave much of a positive reputation behind when he went off the air after eight seasons. Though more urbane and subtle than J. R.

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Ewing, Don Draper and his Madison Avenue cronies made millions while creating arti- ficial appetites in the unsuspecting TV viewer. One writer called the deeply cynical Draper a “moral vandal,” as he let down, abandoned, or lied to every person who had ever loved him and spent his professional advertising life reducing every emotion to a slogan and every desire into slick copy.29

On one show, Law & Order, half of the felons were businesspeople.30 A few other TV shows where this unfavorable portrayal of business people has been evident include CSI, Mad Men, Empire, Horrible Bosses, Damages, Banshee, Criminal Minds, and Vinyl. In 2016, the new Showtime drama, Billions, took questionable business people to new heights by featuring the unethical executive of a successful hedge fund, Bobby Axelrod, who introduced the world to a ruthlessness that was frightening.31

Any redeeming social values that business and businesspeople may have rarely show up on television. Rather, businesspeople are often cast as evil and greedy social parasites whose efforts to get more for themselves are justly condemned and often thwarted.32

One of Hollywood’s latest themes is to demonize business people in children’s movies. Although the “Lego Movie” did not win the Academy Award, tens of millions of children have witnessed the evil deeds of its villain, President Business. Other children’s movies depicting business people as bad guys have included Big Boss in Rio 2, Clayton in the new Tarzan, and Chester V in “Cloudy with a Chance of Meatballs 2.”33 Negative por- trayals of business people and the business system are probably here to stay. TV narra- tives demand heroes and villains and film makers typically find it easier to portray business folks in negative roles.34

Commercials A third way in which television contributes to business criticism is through its own commercials. To the extent that business does not accurately and fairly portray its products and services on TV, it undermines its own credibility. Commercials are a two-edged sword. On the one hand, they may sell more products and services in the short run. On the other hand, they could damage business’s long-term credibility if they promote products and services deceptively and dishonestly. It is also believed by many that TV today promotes excessive commercialism as well as sedentary lifestyles.

In sum, there are three specific TV settings—news coverage, prime-time program- ming, and commercials—in which a tense, antibusiness environment is fostered by this “awareness” factor made available through the power and pervasiveness of television and social media.

Movies Movies also are a significant birthplace of business criticism. Hollywood seems to perceive corporations as powerful, profit-seeking enterprises that have no redeeming values. In these movies, corporate life is depicted as amoral, at best, and possibly deadly. In 2010, the sequel to Wall Street was released—Wall Street: Money Never Sleeps—with Michael Douglas again playing the malevolent Gordon Gekko. Gekko is released from 14 years in prison just in time to witness the financial system’s collapse and to visit his old ways. Hollywood writers seem to love advancing the “greed is good” portrayal of busi- ness, and they go out of their way to perpetuate this image of the corporate commu- nity.35 The release of The Social Network did not focus on the positive aspects of Facebook, but portrayed its cofounder Mark Zuckerberg as a conniving, antisocial indi- vidual who had to make a few enemies to succeed. The movie Margin Call cast its char- acters as flawed and cynical as they sought to save their financial institution from imminent collapse.36 Side Effects portrayed a hotshot trader on Wall Street who’s just done time for insider trading. The movie appears to be a modest film about the victims of a greedy pharmaceutical industry but it turns into a murder mystery set in the world of white-collar crime.37 And, Leonardo DiCaprio’s scams in The Wolf of Wall Street are especially memorable of the dark side of business people.

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Social Media No discussion would be complete without the mention of social media that now are able to instantaneously bring information, awareness, and criticism to the public’s attention. Social media have now made it possible for consumers and employees to communicate with hundreds or thousands of others about companies’ products, ser- vices, or policies. Popular social media, such as Twitter, Facebook, YouTube, Googleþ, Snapchat, and many others, are growing by numbers and influence every day. Social media have taken on a new momentum in the digital age. And, while many businesses have been taking advantage of these for promotion purposes, they also have had a poten- tial downside for businesses as customers now have quick and ready platforms for com- plaining and pointing out businesses’ shortcomings. Businesses are quickly learning that social media is a double-edged sword and that they are ill prepared to deal with social media criticism. As an example of how speedy social media consequences can be, a com- munications director was fired immediately due to an inflammatory tweet she made before boarding her plane toward Africa. By the time her flight had landed 12 hours later, her tweet had generated so much social media opposition and uproar that her employer fired her, though she didn’t know it until her plane had landed. With social media, a new world of business criticism has been opened up and large businesses as well as small ones now have to be prepared to deal with it.38

To be fair, the media are not to blame for all business’s problems. If it were not for the fact that the behavior of some businesses and business people is deeply questionable, the media would not be able to create such an environment. The media makes the public more aware of questionable practices and should be seen as only one influential factor that contributes to the environment in which business continues to find itself criticized.

Revolution of Rising Expectations. In addition to affluence, formal education, and awareness through television, movies, social media, and the Internet, other societal trends have fostered the climate in which business criticism has flourished. When these factors work together in concert, one emerging result has been a revolution of rising expectations that is held by many in spite of the tougher economic times. This is a belief or an outlook that each succeeding generation ought to have a standard of living higher than that of its predecessor. A study conducted in 2014 found that most people are still living the American dream though they don’t recognize it. Though only 40 percent of American adults felt that they were “living the American dream,” this same study found sizable majorities reporting owning their own home, receiving a good education, finding a good job, and giving their children better lives than they themselves had—all characteristics of the “American dream.”39

A mitigating factor for young people recently is that many of them have had to move back in with their parents because they couldn’t find jobs, they wanted to pay off student loans, or some just want to save some money so that they can live better once they get out on their own. A 2016 study of Millennials found that they still embrace high hopes and expectations for a better life than their predecessors, but that they might define success a little differently than in the past and it may take longer to achieve it.40 It is also worth noting that in spite of the tougher economic times, society is still very much characterized as an “impulse society” wherein we continue to live in an age of instant gratification.41

If rising expectations continue as they have in the past, people’s hopes for major insti- tutions, such as business, should be greater too. Building on this line of thinking, it could be argued that business criticism continues today because society’s rising expectations of business’s social performance have outpaced business’s ability to meet these growing expectations. To the extent that this has occurred over the past and continues, business will find itself with a larger social problem.42 To be balanced, some have observed that we may have entered an era of diminishing economic expectations43 but whether this turns out to apply to business’ social performance remains to be seen.

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One helpful way to think about a social problem is that it is a gap between society’s expectations of social conditions and the current social realities.44 From the viewpoint of a business firm, the social problem it faces is experienced as the gap grows between society’s expectations of the firm’s social performance and its actual social performance. Rising expectations typically outpace the responsiveness of institutions such as business, thus creating a constant predicament in that it is subject to endless criticism for not meeting the public’s expectations of it. Figure 1-4 illustrates the larger “social problem” that business faces today. It is depicted by the growing “gap” between society’s expecta- tions of business and business’s actual social performance.

Although the general trend of rising expectations may continue, the revolution mod- erates at times when the economy is not as robust. Historically, job situations, health, family lives, and overall quality of life have continued to improve, though the effect of the recent economic recession makes their future hard to predict. The persistence of problems in society, such as poverty, crime, homelessness, unemployment, illegal immigra- tion, crime, environmental pollution, and alcohol and drug abuse, along with terrorism and potential pandemics, are always present to moderate rising expectations.45

Entitlement Mentality. One noteworthy outgrowth of the revolution of rising expec- tations has been the emergence of an entitlement mentality on the part of some indivi- duals and groups in society. The entitlement mentality is the general belief that someone is owed something (e.g., a job, an education, a living wage, or health care) just because she or he is a member of society. Much of this entitlement mentality impacts businesses because businesses are a central provider for many in society such as consumers, employees, and communities. Much of the entitlement mentality falls upon government but governments have a way of transferring some of these expectations to businesses.

As we approach the end of the second decade of the 2000s, jobs, expectations of “living” wages, insurance, retirement programs, “fair treatment,” and health care continue to be issues on which entitlement thinking has centered though these have been moderated somewhat by the stagnant economy. Each of these has significant implications for business when they are perceived to be “entitlements” but are not received.

FIGURE 1-4 Society’s Expectations versus Business’s Actual Social Performance

So ci

al P

er fo

rm an

ce : E

xp ec

te d

an d

A ct

ua l

20201960s Time

Business’s Actual Social Performance

Society’s Expectations of Business’s Performance

Social Problem

Social Problem

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Rights Movement. The revolution of rising expectations, the entitlement mentality, and all of the factors discussed so far have contributed to what has been termed the rights movement that has been evident in society for many decades now. “Rights” thinking may have received significant impetus by the adoption of The Universal Declaration of Human Rights by the United Nations in 1948. In the past several decades, and continuing, the U.S. Supreme Court has heard increasing numbers of cases aimed at establishing for some groups various legal rights that perhaps never occurred to the founders of the nation.46

Some of these rights, such as the right to privacy and the right to due process, have been perceived as generic for all citizens. However, in addition to these generalized rights, there has been activism for rights for many particular groups in society. This modern movement began in the United States with the civil rights movement of the 1950s and 1960s. Many groups have been inspired by the success of the civil rights movement and have sought progress by similar means. Thus, we have seen the protected status of individuals and groups grow to include many others. At various levels— international, federal, state, and local—there have been claims for the rights of many dif- ferent groups each claiming they are due special protections or privileges.

Business, as one of society’s prominent institutions, has been affected with an ever- expanding array of expectations as to how people want to be treated, not only as employees but also as shareholders, consumers, environmentally conscious citizens, and members of the community. The “rights” movement is interrelated with the special- interest society discussed earlier and sometimes follows an “entitlement” mentality among some people and within some sectors of society.

Victimization Philosophy. It has become apparent during the past several decades that there are increasing numbers of individuals and groups who see themselves as having been victimized by society, thus leading to a culture of victimhood.47 The New York magazine fea- tured a cover story on “The New Culture of Victimization,” with the title “Don’t Blame Me!”48

Esquire probed what it called “A Confederacy of Complainers.”49 Charles Sykes published A Nation of Victims: The Decay of the American Character.50 Sykes’s thesis, with which these other observers might agree, is that modern cultures have become a “society of victims.”

What is particularly interesting about the novel victimization philosophy is the extent to which it is dispersing in the population. According to these writers, the victim mentality is just as likely to be seen among many groups in society—regardless of race, gender, age, or any other classification. Sykes observed that previous movements may have been seen as a “revolution of rising expectations,” but the victimization movement might be called a “revolution of rising sensitivities” in which grievance begets grievance. In such a society of victims, “feelings” rather than reason or facts prevail, and people start perceiving that they are being unfairly “hurt” by society’s institutions—business, government, and education. The victimization philosophy is intimately related to and sometimes inseparable from the rights movement and the entitlement mentality. Taken together, these emerging ways of viewing one’s plight—as someone else’s unfairness— pose special challenges for business managers now and in the future.

In summary, affluence and education; awareness through television, movies, social media, and the internet; the revolution of rising expectations; an entitlement mentality; the rights movement; and the victimization philosophy have formed a backdrop against which criti- cism of business has developed and flourished. This helps explain why we have a societal environment that is conducive to criticism of business. Though the U.S. and world econo- mies have been through their worst fiscal slump since World War II, some of these same general trends are bound to continue but may be moderated if economies improve.

In the next two subsections, some of the general criticisms of business and some of the general responses to such criticisms are identified and discussed.

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1.5b A General Criticism of Business: Use and Abuse of Power Many different criticisms have been directed toward business over the years: Business is too big, it is too powerful, it pollutes the environment and exploits people for its own gain, it takes advantage of workers and consumers, it does not tell the truth, its’ execu- tives are too highly paid, and so on. If one were to identify a common thread that seems to run through all the grievances, it would be business’s use and perceived abuse of power. This is an issue that will not go away. In one cover story, Bloomberg Business- Week posed the question: “Too Much Corporate Power?” In this featured article, the magazine presented its surveys of the public regarding business power. In their survey, nearly two-thirds of Americans said they thought business had too much power over various aspects of their lives.51 Many citizens also are deeply distrustful of employers because they believe business has derived power by virtue of being big.52

In the book, Power, Inc., the case is made that companies, not kings, now rule the world. The author maintains that global corporations wield greater power today than most nation-states.53 In Michael Moore’s provocative movie, Capitalism: A Love Story, the filmmaker continued his assault on business power by laying the blame for the worldwide recession on both big business and government. Whether at the general level or the level of the firm, questions about business’s use or abuse of power continue to be raised. As recently as 2016, a major Bloomberg BusinessWeek article asserted that “fairly

Working for My Cup or the House?

For those who are not familiar with the service industry, employees are paid minimally by the company they work for and their pay rate is determined by the tips received from customers. As a bartender, a person is exposed to having to deal with all sorts of peoples’ needs as well as employee competition and standard operating proce- dures set forth by management. Every time a drink is poured, a decision must be made whether to follow company standards or give away extra alcohol in order to receive a larger tip.

When first being promoted to bartender at an established golf resort, I witnessed firsthand the dif- ferent factors that can affect one’s “pour.” A pour can be defined as how much liquor is added to a cus- tomer’s drink. The three factors that affect one’s pour are as follows: comparisons to other employees’ pours, the requests of customers for extra pours with compensation of a larger tip, and what the company designates as a pour.

When working as a team or having repeat customers, bartenders are compared based on their pour. If one bar- tender uses two pours and another uses one pour (the latter is the standard for the company), the rule-following bartender is not viewed as favorably as the one using the larger pour. This is clearly reflected in tips from custo- mers. Similarly, the customer might say, “Put a little extra in there and I’ll take care of you.” The employee is put on the spot to choose between the company and him or herself.

The bartender with the heavier pour or who gives away drinks for free may receive more money in their tip cup but the company suffers from lost revenues. If a bartender makes an average of 100 drinks a night and uses two pours instead of one for each drink, that bar- tender is giving away 100 drinks worth of alcohol each night which reduces nightly revenues, and has a huge effect on yearly liquor revenues.

In this highly competitive and profitable industry, over pouring is a practice that can cripple a business. As the new- est bartender, one wants to fit in with the other bartenders and earn as much money as possible though it costs the company or “house” profits. Which is more important, fill- ing your own tip cup or maximizing the house’s profits that does not directly benefit the bartender?

1. Is it ethical to over pour customers’ drinks in order to develop better customer relations to earn more tips at the expense of company revenues? Are the bar- tenders using the “entitlement mentality” here to justify their self-serving actions? Do bartenders have a “right” to take care of their own cups?

2. If the customer wants or expects over pouring, should the companies allow over pouring in order to satisfy the customers’ wants and desires?

3. Is it ethical to witness and not report over pouring on the part of fellow bartenders who have been there lon- ger? Should I inform management what is happening?

Contributed by Matthew DePasquale

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or not, Big Business is taking heat for the stagnation of living standards and the widen- ing gap between rich and poor.”54

So, what exactly is business power? Business power refers to the capacity or ability to produce an effect, have impact, or to bring influence to bear on a situation or people. Power may be perceived or felt either positively or negatively. In the context of business criticism, however, power typically is perceived as being “abused.” Business certainly does have enormous power, but whether it abuses power is an issue that needs to be carefully examined. The allegation that business abuses power remains the central theme behind the discussion in this section.

Levels of Power. Business power exists at and may be manifested at several different levels. Four such levels include the macrolevel, the intermediate level, the microlevel, and the individual level.55 The macrolevel refers to the entire corporate system—“Corporate America,” Big Business—the totality of business organizations. Power here emanates from the sheer size, resources, and dominance of the corporate system over society and our lives. As the corporate system has globalized, its impact has become more far reach- ing as well. At the 2012 World Economic Forum, it was noted that the worlds’ major companies are now larger than many governments and are operating in a universe that is increasingly supranational, often disconnected from local issues and home markets.56

During the election year of 2016, it was asserted that there remains “contempt for Big Business.”57 This is a refrain that just does not seem to go away.

The intermediate level of business power refers to groups of corporations acting in concert in an effort to produce a desired effect—to set prices, control markets, dominate purchasers, promote an issue, or pass or defeat legislation. Prime examples include OPEC (gas prices), airlines, cable TV companies, banks, pharmaceutical companies, and defense contractors pursuing the interests they have in common. The combined effect of companies acting in concert is substantial.

The microlevel of business power is the level of the individual firm. This might refer to the exertion of power or influence by any major corporation—Google, Wal-Mart, Apple, Microsoft, Nike, or Exxon—for example. The final level at which business power may be manifested is the individual level. This refers to the individual corporate leader exerting power—for example, Indra Nooyi (Pepsi), Mark Zuckerberg (Facebook), Daniel Amos (Aflac), Virginia Rometty (IBM), Tim Cook (Apple), Marissa Mayer (Yahoo), Muhtar Kent (Coca-Cola), Elon Musk (Tesla Motors), or Warren Buffett (Berkshire Hathaway).

The key point here is that as one analyzes corporate power, one should think in terms of the different levels at which that power is manifested or felt. When this is done, it is not easy to generalize whether corporate power is excessive or has been abused. The results are often mixed. Specific levels of power need to be delineated and examined before conclusions can be reached.

Spheres of Power. In addition to levels of power, there are also many different spheres or arenas in which business power may be manifested. Figure 1-5 depicts one way of look- ing at the four levels identified and some of the spheres of power that also exist. Economic power and political power are two spheres that are dominant, but business has other, more subtle forms of power as well. These other spheres include social and cultural power, power over the individual, technological power, and environmental power.58

Is the power of business excessive? Does business abuse its power? Apparently, many people think so. To provide sensible and fair answers to these questions, however, one must carefully specify which level of power is being referred to and in which sphere the power is being exercised. When this is done, it is not simple to arrive at answers that are generalizable. Furthermore, the nature of power is such that it is sometimes wielded

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FIGURE 1-5 Corporate Power–Levels and Spheres

Macrolevel (the business system)

Economic

Intermediate Level (several firms)

Microlevel (single firm)

Individual Level (single executive)

Social/Cultural

Individual

Technological

Environmental

Political

Spheres

Levels

Is Business Power Too Great?

The “business system,” that totality of all businesses in a nation or the world, is said to be one of the most pow- erful institutions known to humankind. The other major candidates for this honor are typically government and the military. One of the most often repeated accusations about large businesses is that they have too much power. It is also claimed that they abuse this power.

Business power is the ability to produce an effect—to get things done and to bring about its desired state of affairs. It’s about business getting its way. One way of thinking about business power is to frame it in terms that analysts have claimed are relevant in understanding power. John French and Bertram Raven have argued that business has five types of power: coercive power, legitimate power, reward power, referent power, and expert power. Each of these may be thought of from the perspective of a large business.

Coercive power occurs when a manager in authority forces someone to do something—usually with some threat of punishment. Legitimate power exists when a person in the chain of command has a title or position

that implies he or she has the authority to take some action. Reward power is manifested when a boss uses rewards to get things done. The rewards may not only be monetary, such as pay increases and promotions, but may also be psychological, such as praise. The flip side of reward is punishment and it is part of reward power as well. Referent power is gained by leaders due to others admiring him or her as a role model. Finally, Expert power arises when someone becomes highly regarded due to their superior training, expertise, and/or experience.

1. Which type of power do businesses display the most? Give an example.

2. As an employee, with which type of power would you be most concerned? Why?

3. As a consumer, with which type of power would you be most troubled? Why?

4. Have you been the “victim” of business power? Explain.

5. Is business power too great? Does business abuse its’ power?

Sources: John French and Bertram Raven, “Bases of Social Power.” Studies in Social Power. Dorwin Cartwright (ed.) University of Michigan, Ann Arbor, 1959. Jeffrey Pfeffer, Power—Why Some People Have It—and Others Don’t, Harper Business, 2010; Justin Johnson, “Five Types of Power in Business,” Chron, http://smallbusiness.chron.com/5-types-power-businesses-18221.html. Accessed March 28, 2016.

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unintentionally. Sometimes the use of power is consequential; that is, it is not wielded intentionally, but nevertheless exerts its influence even though no attempt is made to exercise it.59 Whether business abuses its power is a question we will continue to exam- ine and certainly one that the business system and companies need to keep in the fore- front of their thinking.

1.5c Balancing Power with Responsibility Whether or not business abuses its power or allows its use of power to become excessive is a central issue that cuts through all the topics examined in this book. But power should not be viewed in isolation from responsibility, and this power–responsibility rela- tionship is the foundation for appeals for corporate social responsibility that are at the heart of business and society discussions.

Iron Law of Responsibility. The Iron Law of Responsibility is a concept that addresses this: “In the long run, those who do not use power in a manner which society considers responsible will tend to lose it.”60 Stated another way, whenever power and responsibility become substantially out of balance, forces will be generated to bring them into closer balance.

When power gets out of balance with responsibility, a variety of forces may come to bear on business to be more responsible and more responsive to the criticisms being made against it. Some of these more obvious forces include governmental actions such as increased regulations, or consumer actions such as boycotts or refusing to buy. The investigative news media may become interested in what is going on, and a whole host of special-interest groups may bring pressure to bear. In the Business Week story cited ear- lier, the point was made that “it’s this power imbalance that’s helping to breed the cur- rent resentment against corporations.”61

The tobacco industry is an excellent example of an industry that has felt the brunt of efforts to address allegations of abuse of power. After years of perceived abuse, the Food and Drug Administration (FDA) was given additional authority to address the power imbalance between the industry and customers.

The stream of corporate scandals beginning with Enron in 2001 led to government action in this sphere. In 2002, the U.S. Congress quickly passed the Sarbanes–Oxley Act, which was designed to rein in the power and abuse that were manifested in such corporate scandals as Enron, WorldCom, Arthur Andersen, and Tyco. Beginning in 2011, a new federal regulatory body began its work—The Consumer Financial Protection Bureau (CFPB). CFPB was created to make markets fairer for consumers wanting to apply for a mortgage, choose among competing credit cards, or engage in a number of other consumer financial transactions in which business has traditionally held the upper hand.62 A major point of view presented in this book is that many such governmental regulations may have been circumvented by business if it had done a better job of bal- ancing its power with responsibility in these sectors. This is what corporate social responsibility (CSR) is all about, and this topic will be developed further in Chapter 2.

1.5d Business’s Response: Concern and a Changing Social Contract Growing out of criticisms of business and unease regarding the power–responsibility imbalance has been an increased concern on the part of business for the stakeholder environment and a changed social contract. Previously it was discussed how the social environment was composed of such factors as demographics, lifestyles, and social values of the society. It may also be seen as a collection of conditions, events, and trends that reflect how people think and behave and what they value. As firms have sensed that the social environment, social values, and the expectations of business have been changing,

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they have realized that they must adapt as well. Many positive changes have been made by businesses but as the discussion of the characteristics of a “social problem” indicated, business seldom catches up with stakeholder expectations. As we will see in Chapter 2 and later, businesses’ attempts to be socially responsible or sustainable reflect how this concern is being expressed. Just to get a quick glimpse at how many major businesses have been expressing their social concern, Fortune magazine recently published its first ever list of companies that are “changing the world.” Some of the companies recognized and what they have been doing include the following:63

Vodafone and Safaricom—connecting the unbanked masses to the global economy

Google (Alphabet)—knocking down barriers to knowledge

Toyota—building ways to lower automobile emissions

Walmart—pushing an army of suppliers to eliminate waste

Enel—cleaning up as it cleans up the power grid

GSK—bringing hope with an innovative malaria vaccine

Novartis—bringing essential medicines to the poor

Facebook—philanthropy? we have an app for that

Social contract. One way of thinking about the business–society relationship is through the concept of social contract. The social contract is a set of reciprocal under- standings and expectations that characterize the relationship between major institutions—in our case, business and society. It also is seen as understood and tacit agreements that guide behavior in relationships among members of a community or group.64 The social contract between business and society has been changing, and these changes have been a direct outgrowth of the increased importance of the social environ- ment to many stakeholders. The social contract has been changing to reflect society’s expanded expectations of business, especially in the social, ethical, and sustainability realms. Businesses have responded to these changing expectations though seldom as quickly or as much as the public would like.

The social contract between business and society, as illustrated in Figure 1-6, is artic- ulated or expressed primarily in two main ways:

1. Laws and regulations that society has established as the framework within which business must operate in its relationships with stakeholders, and

2. Shared understandings that evolve over time as to each group’s expectations of the other.

FIGURE 1-6 Elements in the Social Contract

Laws or Regulations: “Rules of the Game”

Two-Way Shared Understandings of

Each Other

Business Society or

Societal Stakeholder Groups

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Laws and regulations spell out the “rules of the game” for business for which they are held accountable. Shared understandings, on the other hand, are more subtle and create room for misunderstandings. These shared understandings reflect mutual expectations regarding each other’s roles, responsibilities, and ethics. These unspoken elements of the social contract represent what might be called the normative perspective on the relation- ship (i.e., what “ought” to be done by each party to the social contract).65 The mounting importance of social responsibility, sustainability, and business ethics are reflected here.

If these shared understandings were spelled out, a company might adopt the following hypothetical principles as part of its social contract with consumers:

• We believe our company has a right to innovation, entrepreneurship, and profit- making, whereas our consumers have a right to a healthy society and planet for living.

• We believe that the interests of our company and our customers are best served through a sustainable practice of capitalism—economically, morally, environmen- tally, and socially.

• We believe that our customers and our company owe each other an equal duty of transparent, authentic, and accountable communication.

• We believe that our company and our customers are duty-bound to serve as custo- dians of global well-being for this and all future generations.66

Unfortunately, a shared understanding of an aspect of the social contract is seldom expressed in clear, written format such as this. Since there are so many of the shared understandings existing in the world of perceptions and expectations, the opportunities for disagreements are always with us.

A BusinessWeek editorial on the subject of the social contract summarizes well the current era of business and society relationships:

Today it is clear that the terms of the contract between society and business are, in fact, changing in substantial and important ways. Business is being asked to assume broader responsibilities to society than ever before, and to serve a wider range of human values…. Inasmuch as business exists to serve society, its future will depend on the quality of management’s response to the changing expectations of the public.67

Another BusinessWeek editorial commented on the new social contract by saying, “Listen up, Corporate America. The American people are having a most serious discus- sion about your role in their lives.” The editorial was referring to the criticisms coming out about the abuse of corporate power.68 Such a statement suggests that changes in the social contract between business and society will be an ongoing process.

1.6 Focus of the Book This book takes a managerial approach to the business and society relationship. This managerial approach emphasizes three main themes that are of vital importance to man- agers, organizations, and society today: business ethics, sustainability, and stakeholder management.

1.6a Managerial Approach Managers are practical, and they have begun to deal with social and ethical concerns in ways similar to those they have used to manage traditional business functions— marketing, finance, operations, risk management, and so forth—in a rational, systematic, and administratively sound fashion. By viewing issues of social and ethical concern and sustainability from a managerial frame of reference, managers have been able to convert seemingly unmanageable issues into ones that can be dealt with in a balanced and

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impartial fashion. At the same time, managers have had to integrate traditional economic and financial considerations with ethical and social considerations.

Urgent versus Enduring Issues. From the standpoint of urgency in organizational response, management is concerned with two broad types or classes of social issues. First, there are those urgent issues or crises that arise instantaneously and for which management must formulate relatively quick responses. A typical example might be a protest group that shows up on management’s doorstep one day, arguing vehemently that the company should withdraw its sponsorship of a violent television show scheduled to air the next week or a crisis could occur with respect to a company’s products, services, or operations.

Second, there are issues that management has time to deal with on more of a long- term basis. These enduring issues include environmental pollution, sustainability, employment discrimination, and occupational safety and health. These are continuing long-term issues that will be of concern to society on an ongoing basis and for which management must develop planned, thoughtful organizational responses. Management must be concerned with both short-term and long-term capabilities for dealing with social problems and the organization’s social performance.

The measure of success of the managerial approach will be the extent to which leaders can improve an organization’s social, ethical, and sustainability performance by taking a managerial approach rather than dealing with issues and crises on an ad hoc basis. This managerial approach will require balancing the needs of urgency with the requirements of enduring issues.

1.6b Business Ethics Theme The managerial focus attempts to take a practical look at the social issues and expectations business faces, but ethical questions inevitably and continuously come into play. In the work- place, ethics essentially refers to issues of fairness, and justice, and business ethics focuses on ethical issues that arise in the organizational realm. Ethical factors appear throughout our discussion because questions of fairness, and justice, no matter how slippery they are to deal with, permeate business’s activities as it attempts to interact successfully with major stakeholder groups. In light of the ongoing ethical scandals in recent years, the ethics theme resonates as one of the most urgent aspects of business and society relationships.

1.6c Sustainability Theme The concept of sustainability has become one of businesses’ most pressing mandates. Dis- cussions of sustainability began with respect to the natural environment. As time has passed, however, it has become evident that it is a broader concept that applies not only to the natural environment but to the entirety of businesses’ operations and processes as well, especially business’s global role and development. At a basic level, sustainability is about business’s ability to survive and thrive over the long term.69 The concept of sustain- ability is derived from the notion of sustainable development, which is a pattern of resource use that aims to meet current human needs while preserving the environment so that these needs can be met not only in the present but also for future generations. The term sustainability was initiated by the Brundtland Commission, which coined what has become the most often-quoted definition of sustainable development:

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.70

Today, sustainability is understood to embrace environmental, economic, and social criteria, and this is the general sense in which it will be used in this book.71 Thus,

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discussions of sustainability and its implications will be explicit or implicit in most chap- ters, not just in the chapter on the natural environment.

1.6d Stakeholder Management Theme As suggested throughout this chapter, stakeholders are individuals or groups with which business interacts who have a “stake,” or vested interest, in the firm. Stakeholders are integral constituents in the business and society relationship.

Two broad groups of stakeholders are considered in this book—external and internal. Though all chapters touch on the stakeholder management theme, Chapter 3 develops the concept in detail and Chapter 4 provides early treatment of shareholding stake- holders within the topic of corporate governance.

Later, external stakeholders, which include government, consumers, the natural envi- ronment, and community members, are considered. Both domestic and global stake- holders are major concerns throughout. Government is treated first because ostensibly it represents the public interests. It is h