Attached.

Business and
Society
Stakeholders, Ethics, Public Policy

Sixteenth Edition

Anne T. Lawrence
San José State University

James Weber
Duquesne University

BUSINESS AND SOCIETY: STAKEHOLDERS, ETHICS, PUBLIC POLICY, SIXTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill
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Library of Congress Cataloging-in-Publication Data
Names: Lawrence, Anne T., author. | Weber, James (Business ethics professor),
  author.
Title: Business and society: stakeholders, ethics, public policy / Anne T.
   Lawrence, San Jose State University, James Weber, Duquesne University.
Description: Sixteenth edition. | New York, NY : McGraw-Hill Education, [2020]
Identifiers: LCCN 2018052591 | ISBN 9781260043662 (alk. paper) | ISBN
   1260043665 (bound edition) | ISBN 9781260140491 (loose-leaf edition) |
   ISBN 1260140490 (loose-leaf edition)
Subjects: LCSH: Social responsibility of business.
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About the Authors
Anne T. Lawrence San José State University
Anne T. Lawrence is professor of management emerita at San José State University. She
holds a Ph.D. from the University of California, Berkeley, and completed two years of postdoctoral study at Stanford University. Her articles, cases, and reviews have appeared in many
journals, including the Academy of Management Review, Administrative Science Quarterly,
Case Research Journal, Journal of Management Education, California Management Review,
Business and Society Review, Research in Corporate Social Performance and Policy, and
Journal of Corporate Citizenship. Her cases in business and society have been reprinted
in many textbooks and anthologies. She has served as guest editor of the Case Research
Journal. She served as president of both the North American Case Research Association
(NACRA) and of the Western Casewriters Association and is a Fellow of NACRA, from
which she received a Distinguished Contributor Award in 2014. She received the Emerson
Center Award for Outstanding Case in Business Ethics (2004) and the Curtis E. Tate Award
for Outstanding Case of the Year (1998, 2009, and 2015). At San José State University,
she was named Outstanding Professor of the Year in 2005. In 2015, she received a Master
Teacher in Ethics Award from The Wheatley Institution at Brigham Young University. She
currently serves as chair of the board of the Case Research Foundation.
James Weber

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

iii

Preface
In a world economy that is becoming increasingly integrated and interdependent, the relationship between business and society is becoming ever more complex. The globalization of business, the emergence of civil society organizations in many nations, and rapidly
changing government regulations and international agreements have significantly altered
the job of managers and the nature of strategic decision making within the firm.
At no time has business faced greater public scrutiny or more urgent demands to act
in an ethical and socially responsible manner than at the present. Consider the following:
∙ The rise of populist and nationalist political leaders in the United States and parts of
Europe and the Middle East have led to renewed debates on the proper role of government in regulating business and protecting stakeholders. As environmental, financial,
employment, and consumer regulations have been rolled back, particularly in the United
States, businesses have had to choose whether to take advantage of loosened rules or to
follow a strategy of voluntary corporate responsibility. Long-standing trade relationships
have been upended by tariffs and other barriers on imports, helping some businesses and
hurting others. Changing immigration policy has required firms to rethink their policies
toward their foreign-born workers, including so-called Dreamers brought to the United
States illegally as children. In this rapidly changing environment, business firms have
been challenged to manage in a way that remains consistent with their values.
∙ A host of new technologies have become part of the everyday lives of billions of the
world’s people. Advances in the basic sciences are stimulating extraordinary changes in
agriculture, telecommunications, transportation, and pharmaceuticals, which have the
potential to enhance peoples’ health and quality of life. Artificial intelligence can be
used to drive vehicles, diagnose illnesses, and manage investments. Technology has
changed how we interact with others, bringing people closer together through social
networking, instant messaging, and photo and video sharing. These innovations hold
great promise. But they also raise serious ethical issues, such as those associated with
the use of the Internet to exploit or defraud others, censor free expression, or invade
individuals’ privacy. Businesses must learn to harness powerful technologies for good,
while acting responsibly and ethically toward their many stakeholders.
∙ Businesses in the United States and other nations are transforming the employment
relationship, abandoning practices that once provided job security and guaranteed pensions in favor of highly flexible but less secure forms of employment. The rise of the
“gig” economy has transformed many workers into self-employed contractors. Many
jobs, including those in the service sector, are being outsourced to the emerging economies of China, India, and other nations. As jobs shift abroad, multinational corporations
are challenged to address their obligations to workers in far-flung locations with very
different cultures and to respond to initiatives, like the Responsible Business Alliance
Code of Conduct, which call for voluntary commitment to enlightened labor standards
and human rights. The #MeToo movement has focused a spotlight on sexual harassment
and abusive behavior in the workplace, and led to the fall of well-known executives and
media personalities and calls for change in workplace culture.
∙ Severe weather events—hurricanes, floods, and wildfires—have urgently focused
attention on the human impact on natural systems, prompting both businesses and
iv

Preface v

governments to act. An emerging consensus about the causes and risks of climate
change is leading many companies to adopt new practices, and once again the nations
of the world have experimented with public policies designed to limit the emissions
of greenhouse gases, most notably in the Paris Agreement. Many businesses have
cut air pollution, curbed solid waste, and designed products and buildings to be more
energy-efficient, saving money in the process. A better understanding of how human
activities affect natural resources is producing a growing understanding that economic
growth must be achieved in balance with environmental protection if development is to
be sustainable.
∙ Many regions of the world and its nations are developing at an extraordinary rate. Yet,
the prosperity that accompanies economic growth is not shared equally. Access to health
care, adequate nutrition, and education remain unevenly distributed among and within
the world’s nations, and inequalities of wealth and income have become greater than
they have been in many years. These trends have challenged businesses to consider the
impact of their compensation, recruitment, and professional development practices on
the persistent—and in some cases, growing—gap between the haves and the have-nots.
Big corporate tax cuts in the United States have required companies to decide whether
to distribute their windfalls to their executives, shareholders, employees, or customers;
to invest in new jobs; or to buy back stock.
∙ The opioid epidemic has focused attention on the role of drug companies, distributors,
and pharmacies—as well as government regulators—in contributing to the scourge of
addiction, disability, and death caused by narcotics. The continuing pandemic of AIDS
in sub-Saharan Africa and the threat of a swine or avian flu, the Zika virus, or another
Ebola outbreak have compelled drug makers to rethink both their pricing policies and
their research priorities. Many businesses must consider the delicate balance between
their intellectual property rights and the urgent demands of public health, particularly in
the developing world.
∙ In many nations, legislators have questioned business’s influence on politics. Business
has a legitimate role to play in the public policy process, but it has on occasion shaded
over into undue influence and even corruption. Technology offers candidates and political parties new ways to reach out and inform potential voters, but it has also created new
opportunities for manipulation of the electoral process through deceptive messaging.
Businesses the world over are challenged to determine their legitimate scope of influence and how to voice their interests most effectively in the public policy process.
The new Sixteenth Edition of Business and Society addresses this complex agenda of
issues and their impact on business and its stakeholders. It is designed to be the required
textbook in an undergraduate or graduate course in Business and Society; Business, Government, and Society; Social Issues in Management; or the Environment of Business. It may
also be used, in whole or in part, in courses in Business Ethics and Public Affairs Management. This new edition of the text is also appropriate for an undergraduate sociology course
that focuses on the role of business in society or on contemporary issues in business.
The core argument of Business and Society is that corporations serve a broad public
purpose: to create value for society. All companies must make a profit for their owners.
Indeed, if they did not, they would not long survive. However, corporations create many
other kinds of value as well. They are responsible for professional development for their
employees, innovative new products for their customers, and generosity to their communities. They must partner with a wide range of individuals and groups in society to advance
collaborative goals. In our view, corporations have multiple obligations, and all stakeholders’ interests must be considered.

vi Preface

A Tradition of Excellence
Since the 1960s, when Professors Keith Davis and Robert Blomstrom wrote the first edition of this book, Business and Society has maintained a position of leadership by discussing central issues of corporate social performance in a form that students and faculty have
found engaging and stimulating. The leadership of the two founding authors, and later of
Professors William C. Frederick and James E. Post, helped Business and Society to achieve
a consistently high standard of quality and market acceptance. Thanks to these authors’
remarkable eye for the emerging issues that shape the organizational, social, and public
policy environments in which students will soon live and work, the book has added value
to the business education of many thousands of students.
Business and Society has continued through several successive author teams to be the
market leader in its field. The current authors bring a broad background of business and
society research, teaching, consulting, and case development to the ongoing evolution of
the text. The new Sixteenth Edition of Business and Society builds on its legacy of market
leadership by reexamining such central issues as the role of business in society, the nature
of corporate responsibility and global citizenship, business ethics practices, and the complex roles of government and business in a global community.

For Instructors
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Preface vii

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x Preface

New for the Sixteenth Edition
Over the years, the issues addressed by Business and Society have changed as the environment of business itself has been transformed. This Sixteenth Edition is no exception,
as readers will discover. Some issues have become less compelling and others have taken
their place on the business agenda, while others have endured through the years.
The Sixteenth Edition has been thoroughly revised and updated to reflect the latest
theoretical work in the field and statistical data, as well as recent events. Among the new
additions are:
∙ New discussion of theoretical advances in stakeholder theory, corporate citizenship,
public affairs management, public and private regulation, corporate governance,
social and environmental auditing, social investing, reputation management, business
partnerships, supply chain codes of conduct, social entrepreneurship, and corporate
philanthropy.
∙ Treatment of practical issues, such as social networking, artificial intelligence and
robotics, gender diversity, political advertising and campaign contributions, public and
media relations, well as the latest developments in the regulatory environment in which
businesses operate.
∙ New discussion cases and full-length cases on such timely topics as the role of business in the unfolding opioid crisis, Wells Fargo’s unauthorized consumer accounts, the
Volkswagen diesel emissions scandal, the aftermath of the BP disaster in the Gulf of
Mexico, the massive Equifax data breach, the consumer boycott of Stoli vodka, the
business response to the movement for school safety, LaFarge’s dealings in the Syrian
war zone, the potential regulation of Facebook in the United States and Europe, political
action by the U.S. steel industry on the issue of tariffs, the rise of autonomous vehicles,
law enforcement access to mobile phone data, executive misconduct at Wynn Resorts,
business response to the threat to “Dreamers,” IKEA’s sustainable supply chain, Salesforce’s integrated philanthropy, and social media criticism of United Airlines.
Finally, this is a book with a vision. It is not simply a compendium of information
and ideas. The new edition of Business and Society articulates the view that in a global
community, where traditional buffers no longer protect business from external change,
managers can create strategies that integrate stakeholder interests, respect personal values,
support community development, and are implemented fairly. Most important, businesses
can achieve these goals while also being economically successful. Indeed, this may be the
only way to achieve economic success over the long term.
Anne T. Lawrence
James Weber

Acknowledgments
We are grateful for the assistance of many colleagues at universities in the United States
and abroad who over the years have helped shape this book with their excellent suggestions
and ideas. We also note the feedback from students in our classes and at other colleges and
universities that has helped make this book as user-friendly as possible.
We especially wish to thank two esteemed colleagues who made special contributions
to this edition. David M. Wasieleski, professor of management and business ethics at
Duquesne University, led the revisions of Chapters 5 and 6, to which he contributed his
knowledge of ethics theory and organizational practice. Vanessa D. Hill, associate professor of management at the University of Louisiana at Lafayette, generously shared with us
her expertise on the employment relationship and workplace diversity and inclusion. She
was the lead author of Chapters 15 and 16, which have greatly benefited from her insights.
For these contributions, we are most grateful.
We also wish to express our appreciation for the colleagues who provided detailed
reviews for this edition. These reviewers were Hossein Bidgoli, California State University, Bakersfield; Ryan Fehr, Foster School of Business, University of Washington,
Seattle; Scott Jeffrey, Monmouth University; Eun-Hee Kim, Gabelli School of Business,
Fordham University; Jet Mboga, William Paterson University; Stephen P. Preacher, Southern Wesleyan University; and A. J. Stagliano, Saint Joseph’s University. Their insights
helped guide our revision.
Thanks are also due Daniel Jacobs of Loyola Marymount University; Samir Kumar
Barua of the Indian Institute of Management Ahmedabad and Mahendra R. Gurarathi
of Bentley University; Grishma Shah, Janet Rovenpor, and Musa Jafar of Manhattan
College; Robyn Linde of Rhode Island College and H. Richard Eisenbeis of the University of Southern Colorado Pueblo (retired); Cynthia E. Clark of Bentley University; and
Debra M. Staab, a freelance writer and researcher, who contributed cases to this edition.
We are grateful to several individuals have made specific research contributions to this
project. Denise Kleinrichert, of the Center for Ethical and Sustainable Business Management at San Francisco State University, provided new material on B Corporations and
social entrepreneurship for Chapter 3, which we appreciate. Natalie Hanna and Kelsey
Aemi of Duquesne University provided able research assistance. Thanks are due also to
Carolyn Roose Eagle, Ben Eagle, and Nate Marsh for research support. Emily Marsh, of
Colorbox Industries, provided graphic design services.
Debra M. Staab, in addition to authoring a case, provided research assistance and undertook the complex task of preparing the instructor’s resource manual, test bank, and other
ancillary materials. Her contributions have been invaluable.
In addition, we are grateful to the many colleagues who over the years have generously shared with us their insights into the theory and pedagogy of business and society. In particular, we would like to thank Cynthia E. Clark and Jill Brown of Bentley
University; Shawn Berman, Harry J. Van Buren III, Natalia Vidal, and Garima Sharma
of the University of New Mexico; Anke Arnaud of Embry Riddle Aeronautical University; Jennifer J. Griffin of Loyola University of Chicago; Ronald M. Roman, Asbjorn
Osland, Thomas Altura, and Matthew Maguire of San José State University; Heather
Elms of American University; Joseph A. Petrick of Wright State University; Kathleen
xi

xii Acknowledgments

Rehbein of Marquette University; Judith Schrempf-Stirling of the University of Geneva;
Michelle Westermann-Behaylo of the University of Amsterdam; Diane Swanson and
Bernie Hayen of Kansas State University; Cynthia M. Orms of Georgia College & State
University; Ali Al-Kazemi of Kuwait University; Sandra Waddock of Boston College;
Mary C. Gentile of the University of Virginia Darden School of Business; Michael E.
Johnson-Cramer and Jamie Hendry of Bucknell University; John Mahon and Stephanie
Welcomer of the University of Maine; Bradley Agle of Brigham Young University;
Gina Vega of Merrimack College; Craig Dunn and Brian Burton of Western Washington
University; Lori V. Ryan of San Diego State University; Bryan W. Husted of EGADE
Business School Monterrey; Sharon Livesey of Fordham University; Barry Mitnick of
the University of Pittsburgh; Virginia Gerde of Furman University; Matthew Drake of
Duquesne University; Robbin Derry of the University of Lethbridge; Jerry Calton of
the University of Hawaii-Hilo; Linda Klebe Treviño of Pennsylvania State University;
Mary Meisenhelter of York College of Pennsylvania; Amy Hillman and Gerald Keim
of Arizona State University; Barbara Altman of Texas A&M University Central Texas;
Randall Harris of Texas A&M University Corpus Christi; Richard Wokutch of Virginia
Tech University; Dawn Elm of University of St. Thomas; Lynda Brown of the University of Montana; Kathleen A. Getz of Loyola University – Maryland; Gordon P. Rands
of Western Illinois University; Paul S. Adler of the University of Southern California;
Linda C. Rodriguez of the University of South Carolina Aiken; Emmanuel Raufflet
of HEC Montreal; Bruce Paton of Menlo College; Smita Trivedi, Tom E. Thomas,
Geoffrey Desa, and Murray Silverman (retired), of San Francisco State University; Jacob
Park of Green Mountain College; Armand Gilinsky of Sonoma State University; and
Tara Ceranic Salinas of the University of San Diego.
These scholars’ dedication to the creative teaching of business and society has been a
continuing inspiration to us.
We wish to express our appreciation to James E. Post, a former author of this book, who
has continued to offer valuable intellectual guidance to this project. We also wish to note,
with sadness and gratitude, the passing of our mentor and a former author of this book,
William C. Frederick, in 2018. His ideas live on in this book.
We continue to be grateful to the excellent editorial and production team at McGrawHill. We offer special thanks to Laura Hurst Spell, our associate portfolio manager, for her
skillful leadership of this project. We also wish to recognize the able assistance of Marla
Sussman, executive editor, and of Jeni McAtee, content project manager, whose ability to
keep us on track and on time has been critical. Lisa Granger headed the excellent marketing team. Katie Reuter, content project manager (assessment); Susan K. Culbertson, buyer;
Richard Wright, copy editor; Traci Vaske, content licensing specialist; and Jessica Cuevas,
who designed the book cover, also played key roles. Each of these people has provided
professional contributions that we deeply value and appreciate.
As always, we are profoundly grateful for the ongoing support of our spouses, Paul
Roose and Sharon Green.
Anne T. Lawrence
James Weber

Brief Contents
PART ONE

Business in Society

14. Consumer Protection

1

1. The Corporation and Its Stakeholders 2
2. Managing Public Issues and Stakeholder
Relationships 25
3. Corporate Social Responsibility and
Citizenship 47
4. Business in a Globalized World 71

15. Employees and the Corporation

327

16. Managing a Diverse Workforce

350

17. Business and Its Suppliers

374

18. The Community and the
Corporation 396
19. Managing the Public and the Corporate
Reputation 419

CASES IN BUSINESS AND SOCIETY 441

PART TWO

Business and Ethics 93
5. Ethics and Ethical Reasoning 94
6. Organizational Ethics 115

PART THREE

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

1. Profiting from Pain: Business and the
U.S. Opioid Epidemic 442
2. Wells Fargo’s Unauthorized Customer
Accounts 453
3. The Carlson Company and Protecting
Children in the Global Tourism
Industry 462
4. BP Blowout: The Aftermath of the Gulf
Oil Disaster 471
5. Google and the Right to Be
Forgotten 480

PART FOUR

Business and the Natural
Environment 187
9. Sustainable Development and Global
Business 188
10. Managing for Sustainability 211

6. General Motors and the Ignition Switch
Recalls 490
7. The Upper Big Branch Mine
Disaster 500
8. After Rana Plaza

510

9. The Boycott of Stoli Vodka

PART FIVE

Business and Technology 237
11. The Role of Technology

305

238

12. Regulating and Managing Technology 261

PART SIX

Business and Its Stakeholders 281
13. Shareholder Rights and Corporate
Governance 282

GLOSSARY

521

529

BIBLIOGRAPHY 542
INDEXES
Name
Subject

547
550
xiii

Contents
Stakeholder Dialogue

PART ONE

BUSINESS IN SOCIETY 1
CHAPTER 1
The Corporation and Its Stakeholders
Business and Society

5

The Stakeholder Theory of the Firm
The Stakeholder Concept 8
Different Kinds of Stakeholders

Stakeholder Analysis

2

4

A Systems Perspective

6

11

Corporate Power and Responsibility 49
Corporate Social Responsibility and Citizenship
The Origins of Corporate Social Responsibility

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

CHAPTER 2
Managing Public Issues and Stakeholder
Relationships 25
28

Competitive Intelligence 31
Stakeholder Materiality 32

The Issue Management Process

33

Organizing for Effective Issue Management
Stakeholder Engagement 38

51

51

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

53

Support for Corporate Social Responsibility 53
Concerns about Corporate Social Responsibility 57

Social Entrepreneurs and B Corporations 59
Management Systems for Corporate Social
Responsibility and Citizenship 60
Stages of Corporate Citizenship 62
Assessing and Reporting Social Performance 64
Social Audit Standards
Social Reporting 65

65

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

CHAPTER 4
Business in a Globalized World 71

Identify Issue 33
Analyze Issue 34
Generate Options 35
Take Action 35
Evaluate Results 35

The Process of Globalization
36

Stages in the Business–Stakeholder Relationship 38
Drivers of Stakeholder Engagement 39
The Role of Social Media in Stakeholder Engagement 40
xiv

42

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

CHAPTER 3
Corporate Social Responsibility and
Citizenship 47

9

Stakeholder Interests 12
Stakeholder Power 13
Stakeholder Coalitions 15
Stakeholder Mapping 16

Public Issues 26
Environmental Analysis

41

Stakeholder Networks 41
The Benefits of Engagement

72

Major Multinational Enterprises 73
International Financial and Trade Institutions

The Benefits and Costs of Globalization

75

78

Benefits of Globalization 78
Costs of Globalization 79

Doing Business in a Diverse World

81

Comparative Political and Economic Systems

82

Contents xv

Global Inequality and the Bottom of the
Pyramid 84

Information Technology Ethics
Supply Chain Ethics 122

Collaborative Partnerships for Global Problem
Solving 86
A Three-Sector World

Making Ethics Work in Corporations
Ethics in a Global Economy

90

CHAPTER 7
Business–Government Relations 138

95

How Business and Government Relate

97

101

Personal Gain and Selfish Interest 101
Competitive Pressures on Profits 102
Conflicts of Interest 102
Cross-Cultural Contradictions 102

The Core Elements of Ethical Character

103

106

Virtue Ethics: Pursuing a “Good” Life 107
Utility: Comparing Benefits and Costs 108
Rights: Determining and Protecting Entitlements 109
Justice: Is It Fair? 110
Applying Ethical Reasoning to Business Activities 110

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

CHAPTER 6
Organizational Ethics

141

Elements of Public Policy 142
Types of Public Policy 145

Government Regulation of Business

147

Market Failure 147
Negative Externalities 148
Natural Monopolies 148
Ethical Arguments 148
Types of Regulation 149
The Effects of Regulation 154

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

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

115

Corporate Ethical Climates 116
Business Ethics across Organizational
Functions 118
Accounting Ethics 118
Financial Ethics 119
Marketing Ethics 120

139

Seeking a Collaborative Partnership 139
Working in Opposition to Government 140
Legitimacy Issues 141

Government’s Public Policy Role

Managers’ Values 103
Spirituality in the Workplace 104
Managers’ Moral Development 105

Analyzing Ethical Problems in Business

133

BUSINESS AND PUBLIC POLICY 137

CHAPTER 5
Ethics and Ethical Reasoning 94

Why Ethical Problems Occur in Business

130

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

PART THREE

BUSINESS AND ETHICS 93

What Is Business Ethics? 96
Why Should Business Be Ethical?

123

129

Efforts to Curtail Unethical Practices

PART TWO

The Meaning of Ethics

123

Building Ethical Safeguards into the Company

87

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

121

Business as a Political Participant

163

163

Influencing the Business–Government
Relationship 164
Corporate Political Strategy

Political Action Tactics

164

165

Promoting an Information Strategy 166
Promoting a Financial-Incentive Strategy 170
Promoting a Constituency-Building Strategy 175

xvi Contents

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

BUSINESS AND THE NATURAL
ENVIRONMENT 187
CHAPTER 9
Sustainable Development and Global
Business 188

Cost Savings 229
Brand Differentiation 229
Technological Innovation 230
Reduction of Regulatory and Liability Risk
Strategic Planning 231

231

BUSINESS AND TECHNOLOGY

237

CHAPTER 11
The Role of Technology 238

Sustainable Development 190
Threats to the Earth’s Ecosystem 191
Forces of Change 192
The Earth’s Carrying Capacity 194

Technology Defined

239

Phases of Technology in Society

240

The Role of Technology in Our Daily Lives

196

241

The Presence of the Internet 241
Unwanted Technology Threats 243

Climate Change 196
Ozone Depletion 199
Resource Scarcity: Water and Land 199
Decline of Biodiversity 201
Threats to Marine Ecosystems 202

Public Access to and Use of Technology

245

The Digital Divide in the United States and
Worldwide 245
Mobile Telephones 246
Social Networking 248

Response of the International Business
Community 203
Summary 207
Key Terms 208
Internet Resources 208
Discussion Case: Clean Cooking

Sustainability Management as a Competitive
Advantage 228

PART FIVE

Business and Society in the Natural
Environment 190

Codes of Environmental Conduct

227

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

PART FOUR

Global Environmental Issues

Environmental Auditing and Reporting
Environmental Partnerships 228

Ethical Challenges Involving Technology

206

250

The Loss of Privacy 250
Free Speech Issues 251

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

208

CHAPTER 10
Managing for Sustainability

Genetically Engineered Foods 253
Sequencing of the Human Genome 255
Biotechnology and Stem Cell Research 256
Medical Breakthroughs 256

211

Role of Government 213
Major Areas of Environmental Regulation
Alternative Policy Approaches 218

213

Costs and Benefits of Environmental
Regulation 222
Managing for Sustainability 224
Stages of Corporate Environmental
Responsibility 224

The Ecologically Sustainable Organization
Sustainability Management in Practice

225

225

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

CHAPTER 12
Regulating and Managing Technology 261
Government Regulation of Technology

262

Contents xvii

The Role of Technology in Business

264

Access to Stakeholders’ Personal Information
E-Business 266

265

The Use of Robots and Artificial Intelligence at
Work 267
The Chief Information, Security, Technology
Officer 269
Cybercrime: A Threat to Organizations and the
Public 271
Exploring Why Hackers Hack
Costs of Cybercrime 272

271

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

BUSINESS AND ITS
STAKEHOLDERS 281
CHAPTER 13
Shareholder Rights and Corporate
Governance 282

Corporate Governance

286

289

Special Issue: Executive Compensation
Shareholder Activism 295
The Rise of Institutional Investors
Social Investment 297
Shareholder Lawsuits 298

291

296

Government Protection of Shareholder
Interests 299
Securities and Exchange Commission 299
Information Transparency and Disclosure 299
Insider Trading 300

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

301

The Rights of Consumers 307
Self-Advocacy for Consumer Interests 308
How Government Protects Consumers 309
Goals of Consumer Laws 309
Major Consumer Protection Agencies

311

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

316

Strict Liability 317
Product Liability Reform and Alternative Dispute
Resolution 317

Positive Business Responses to Consumerism

320

Managing for Quality 320
Voluntary Industry Codes of Conduct 321
Consumer Affairs Departments 322
Product Recalls 322

The Employment Relationship
Workplace Rights 330

287

The Board of Directors 287
Principles of Good Governance

305

CHAPTER 15
Employees and the Corporation

283

Who Are Shareholders? 284
Objectives of Stock Ownership 285
Shareholders’ Legal Rights and Safeguards

CHAPTER 14
Consumer Protection

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

PART SIX

Shareholders Around the World

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

327

329

The Right to Organize and Bargain
Collectively 330
The Right to a Safe and Healthy Workplace 333
Job Security and the Right to Due Process 334

Fair Wages and Income Inequality 337
The Right to Privacy in the Workplace 339
Electronic Monitoring 340
Romance in the Workplace 341
Employee Drug Use and Testing 342
Alcohol Abuse at Work 343
Employee Theft and Honesty Testing 344

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

xviii Contents

CHAPTER 16
Managing a Diverse Workforce

Community Relations

350

The Changing Face of the Workforce 351
Gender and Race in the Workplace 353
Women and Minorities at Work 353
The Gender and Racial Pay Gap 354
Where Women and Persons of Color Manage 356
Breaking the Glass Ceiling 356
Women and Minority Business Ownership 359

Government’s Role in Securing Equal Employment
Opportunity 360
Equal Employment Opportunity 360
Affirmative Action 361
Sexual and Racial Harassment 362

What Business Can Do: Diversity and Inclusion
Policies and Practices 364
Balancing Work and Life 367
Child Care and Elder Care 367
Work Flexibility 368

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

401

Economic Development 401
Housing 402
Aid to Minority, Women, and Disabled Veteran-Owned
Enterprises 402
Disaster, Terrorism, and War Relief 403

Corporate Giving

403

Forms of Corporate Giving 407
Priorities in Corporate Giving 409
Corporate Giving in a Strategic Context 410
Measuring the Return on Social Investment 412

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

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

371

Why Does Reputation Matter?

422

CHAPTER 17
Business and Its Suppliers 374

The Public Relations Department

424

Suppliers 376
Social, Ethical, and Environmental Issues in Global
Supply Chains 378

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

Public Relations in the Internet and Social
Media Age 424

Social Issues 379
Ethical Issues 380
Environmental Issues 382
Supply Chain Risk 383

Executive Visibility 431
User-Generated Content 433
Paid Content 434
Event Sponsorship 434
Public Service Announcements
Image Advertisements 436

Private Regulation of the Business–Supplier
Relationship 384
Supply Chain Auditing 387

436

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

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

CHAPTER 18
The Community and the Corporation

1. Profiting from Pain: Business and the
U.S. Opioid Epidemic 442

The Business–Community Relationship

396

398

The Business Case for Community Involvement

399

CASES IN BUSINESS AND SOCIETY 441
2. Wells Fargo’s Unauthorized Customer
Accounts 453

Contents xix

3. The Carlson Company and Protecting
Children in the Global Tourism
Industry 462
4. BP Blowout: The Aftermath of the Gulf
Oil Disaster 471
5. Google and the Right to Be
Forgotten 480
6. General Motors and the Ignition Switch
Recalls 490
7. The Upper Big Branch Mine
Disaster 500

8. After Rana Plaza

510

9. The Boycott of Stoli Vodka 521
Glossary

529

Bibliography 542
Indexes
Name 547
Subject 550

P A R T

O N E

Business in Society

C H A P T E R

O N E

The Corporation
and Its Stakeholders
Business corporations have complex relationships with many individuals and organizations in society.
The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. An
important part of management’s role is to identify a firm’s relevant stakeholders and understand the
nature of their interests, power, and alliances with one another. Building positive and mutually beneficial relationships across organizational boundaries can help enhance a company’s reputation and
address critical social and ethical challenges. In a world of fast-paced globalization, shifting public
expectations and government policies, growing ecological concerns, and new technologies, managers face the difficult challenge of achieving economic results while simultaneously creating value for
all of their diverse stakeholders.
This Chapter Focuses on These Key Learning Objectives:
LO 1-1 Understanding the relationship between business and society and the ways in which business and
society are part of an interactive system.
LO 1-2 Considering the purpose of the modern corporation.
LO 1-3 Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and
external stakeholders are.
LO 1-4 Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power.
LO 1-5 Recognizing the diverse ways in which modern corporations organize internally to interact with
various stakeholders.
LO 1-6 Analyzing the forces of change that continually reshape the business and society relationship.

2

Chapter 1 The Corporation and Its Stakeholders 3

Amazon—which some have called the “Earth’s biggest store”—is an important part of
many of our lives. We browse on Amazon, watch on Amazon, and buy on Amazon. We
freely disclose to Amazon our wishes, interests, and willingness to pay. You may well have
purchased or rented this textbook from Amazon.
In 2018, Amazon was the largest Internet retailer in the world, measured both by annual
revenue ($178 billion) and market capitalization (more than $800 billion). It was the
second largest private employer in the United States (after Walmart), with more than
540,000 employees (not counting the additional 120,000 or so temporary workers the company brought on each year during the busy holiday season).1 From its start in 1994 as a
scrappy Seattle start-up selling books online, Amazon had grown at an astonishing pace; in
2017, Amazon was responsible for fully 70 percent of all growth in U.S. online commerce.2
By 2018, the company’s founder and CEO, Jeff Bezos, had become the world’s richest
person, with a net worth greater than $100 billion.3 Shareholders in the company had been
richly rewarded; in early 2018, the price of Amazon’s stock was more than 12 times higher
than it had been a decade earlier. The company was enormously popular with consumers,
who turned to Amazon for one-click convenience, free and speedy delivery, and the ability
to compare a seemingly endless assortment of products on the basis of price and reviews.
Small businesses affiliated with Amazon Marketplace were able to tap into the company’s
global e-commerce platform and unrivaled logistics to reach customers they never could
have reached before. No doubt, many had benefited from Amazon’s success.
Yet the company had also become the target of criticism from many quarters, charged
with destroying brick-and-mortar businesses, relentlessly driving their own employees,
unfairly besting competitors, and pressuring communities for concessions. Consider that:
∙ Much of Amazon’s success had come at the expense of brick-and-mortar stores. Iconic
retailers—such as Macy’s, JCPenney, and Target—had shed thousands of jobs as Amazon
attracted ever-larger slices of consumer spending. A leading economist calculated that
the rise of online commerce had caused the cumulative loss of 1.2 million retailing
jobs—positions such as cashiers, salespeople, and stock clerks—in the United States.4
Many of these jobs were held by women and minorities (who made up 60 percent and
40 percent, respectively, of department store employees).5 Traditional retailing, concluded
Scott Galloway, the author of The Four: The Hidden DNA of Amazon, Apple, Facebook,
and Google, had been “ravaged and depopulated by a single player”—Amazon.6
∙ Amazon’s own employees, by some accounts, were subject to an unusually punishing
work culture. An investigative report by The New York Times, based on interviews with
more than 100 current and former white-collar employees, found a pattern of setting
“unreasonably high” performance standards, continually monitoring performance, and
weeding out employees in a “rank and yank” system that one called “purposeful Darwinism.” Turnover rates were among the highest in the Fortune 500. Said one former
marketer, “Amazon is where overachievers go to feel bad about themselves.”7
1

“Amazon Is Now the Size of a Small Country,” Business Insider, January 16, 2018.
“U.S. E-Commerce Sales Grow 16.0% in 2017,” Internet Retailer, at www.digitalcommerce360.com, February 16, 2018.
3
“Jeff Bezos Is Now the Richest Person in History,” http://money.cnn.com, January 9, 2018.
4
Michael Feroli, chief U.S. economist at J.P. Morgan, cited in “Amazon to Add 100,000 Jobs as Brick-and-Mortar Retail Crumbles,” The New York Times, January 12, 2017.
5
“The Silent Crisis of Retail Employment,” The Atlantic, April 18, 2017, and “Decline in Retail Jobs Felt Entirely by Women,”
Institute for Women’s Policy Research, December 2017.
6
Scott Galloway, The Four: Scott Galloway, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google (New York:
Penguin, 2017), Chapter 2.
7
“Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” The New York Times, August 15, 2015.
2

4

Part One Business in Society

∙ Amazon’s control of both online and voice-activated search gave it powerful advantages—
leading to what some saw as unfair competition. One study found that under some conditions, products displayed under “customers who bought this item also bought” were
dominated by Amazon’s own private-label brands.8 Alexa, Amazon’s voice-activated
virtual assistant on Echo and other digital devices, also gave the company an edge. The
consulting firm Bain & Company found that Alexa’s recommendations were biased
toward “Amazon’s Choice” and the company’s own private-label products (after products the customer had previously ordered). “The ‘endless aisle’ just got a lot smaller,”
Bain concluded.9
∙ In 2017, Amazon announced it would invest $5 billion to open a second North American headquarters outside Seattle, promising to create 50,000 new jobs paying $100,000
or more. This was a tantalizing prospect, and 238 cities and regions submitted proposals, with at least six offering financial incentives of $1 billion or more. Some public
officials thought this was well worth it, but others thought taxpayer money should not
be used to subsidize such a successful company. “Blindly giving away the farm isn’t our
style,” said the mayor of San Antonio, Texas, which dropped out of the race.10
Amazon’s experience illustrates, on a particularly large scale, the challenges of managing successfully in a complex network of stakeholders. The company’s actions affected not
only itself, but also many other people, groups, and organizations in society. Customers,
employees, business partners and suppliers, competitors, shareholders, creditors, governments, and local communities all had a stake in Amazon’s decisions.
Every modern company, whether small or large, is part of a vast global business system. Whether a firm has 50 employees or, like Amazon, more than half a million—its
links to customers, suppliers, employees, and communities are certain to be numerous,
diverse, and vital to its success. This is why the relationship between business and society
is important for you to understand as both a citizen and a manager.

Business and Society
Business today is arguably the most dominant institution in the world. The term business
refers here to any organization that is engaged in making a product or providing a service for
a profit. Consider that in the United States today there are 6 million businesses, according
to government estimates, and in the world as a whole, there are uncounted millions more.
Of course, these businesses vary greatly in size and impact. They range from a woman who
helps support her family by selling handmade tortillas by the side of the road in Mexico
City for a few pesos, to ExxonMobil, a huge corporation that employs almost 75,000 workers and earns annual revenues approaching $237 billion in almost every nation in the world.
Society, in its broadest sense, refers to human beings and to the social structures they
collectively create. In a more specific sense, the term is used to refer to segments of
humankind, such as members of a particular community, nation, or interest group. As a set
of organizations created by humans, business is clearly a part of society. At the same time,
it is also a distinct entity, separated from the rest of society by clear boundaries. Business
8

“The Antitrust Case Against Facebook, Google, and Amazon,” The Wall Street Journal, January 16, 2018, and “How
Amazon Steers Shoppers to Its Own Products,” The Wall Street Journal, June 23, 2018; see also Galloway, op. cit.
9
“Dreaming of an Amazon Christmas?” Bain & Company, November 9, 2017.
10
“Amazon Just Revealed the Top Cities for HQ2—Here Are the Ones Throwing Hundreds of Millions to Land It,” Business
Insider, January 18, 2018, and “As Cities Woo Amazon to Build Second Headquarters, Incentives Are Key,” The Wall Street
Journal, October 19, 2017.

Chapter 1 The Corporation and Its Stakeholders 5

FIGURE 1.1

Business and Society:
An Interactive
System

Society

Business

is engaged in ongoing exchanges with its external environment across these dividing lines.
For example, businesses recruit workers, buy supplies, and borrow money; they also sell
products, donate time, and pay taxes. This book is broadly concerned with the relationship between business and society. A simple diagram of the relationship between the two
appears in Figure 1.1.
As the Amazon example that opened this chapter illustrates, business and society are
highly interdependent. Business activities impact other activities in society, and actions
by various social actors and governments continuously affect business. To manage these
interdependencies, managers need an understanding of their company’s key relationships
and how the social and economic system of which they are a part affects, and is affected
by, their decisions.

A Systems Perspective
General systems theory, first introduced in the 1940s, argues that all organisms are open to,
and interact with, their external environments. Although most organisms have clear boundaries, they cannot be understood in isolation, but only in relationship to their surroundings.
This simple but powerful idea can be applied to many disciplines. For example, in botany,
the growth of a plant cannot be explained without reference to soil, light, oxygen, moisture,
and other characteristics of its environment. As applied to management theory, the systems
concept implies that business firms (social organisms) are embedded in a broader social
structure (external environment) with which they constantly interact. Corporations have
ongoing boundary exchanges with customers, governments, competitors, suppliers, communities, and many other individuals and groups. Just as good soil, water, and light help a
plant grow, positive interactions with society benefit a business firm.
Like biological organisms, moreover, businesses must adapt to changes in the environment. Plants growing in low-moisture environments must develop survival strategies, like
the cactus that evolves to store water in its leaves. Similarly, a telecommunications company in a newly deregulated market must learn to compete by changing the products and
services it offers. The key to business survival is often this ability to adapt effectively to
changing conditions. In business, systems theory provides a powerful tool to help managers
conceptualize the relationship between their companies and their external environments.

6

Part One Business in Society

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

The Stakeholder Theory of the Firm
What is the purpose of the modern corporation? To whom, or what, should the firm be responsible?11 No question is more central to the relationship between business and society.
In the shareholder theory of the firm (sometimes also called the ownership theory), the
firm is seen as the property of its owners. The purpose of the firm is to maximize its longterm market value, that is, to make the most money it can for shareholders who own stock
in the company. Managers and boards of directors are agents of shareholders and have no
obligations to others, other than those directly specified by law. In this view, owners’ interests are paramount and take precedence over the interests of others.
A contrasting view, called the stakeholder theory of the firm, argues that corporations
serve a broad public purpose: to create value for society. All companies must make a profit
for their owners; indeed, if they did not, they would not long survive. However, corporations create many other kinds of value as well, such as professional development for their
employees and innovative new products for their customers. In this view, corporations
have multiple obligations, and all stakeholders’ interests must be taken into account. This
perspective was well expressed by Laurence Fink, the CEO of BlackRock, a global firm
that manages more than $5 trillion worth of assets for its clients. In his 2018 letter to
CEOs, Fink stated that “. . . every company must not only deliver financial performance,
but also show how it makes a positive contribution to society. Companies must benefit all
of their stakeholders, including shareholders, employees, customers, and the communities
in which they operate.”12
Supporters of the stakeholder theory of the firm make three core arguments for their
position: descriptive, instrumental, and normative.13
The descriptive argument says that the stakeholder view is simply a more realistic
description of how companies really work. Managers have to pay keen attention, of course,
to their quarterly and annual financial performance. Keeping Wall Street satisfied by managing for growth—thereby attracting more investors and increasing the stock price—is
a core part of any top manager’s job. But the job of management is much more complex
than this. In order to produce consistent results, managers have to be concerned with producing high-quality and innovative products and services for their customers, attracting
11
For summaries of contrasting theories of the purpose of the firm, see Margaret M. Blair, “Whose Interests Should Corporations Serve,” in Margaret M. Blair and Bruce K. MacLaury, Ownership and Control: Rethinking Corporate Governance for the
Twenty-First Century (Washington, DC: Brookings Institution, 1995), Ch. 6, pp. 202–34; and James E. Post, Lee E. Preston,
and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Palo Alto, CA: Stanford
University Press, 2002).
12
“Larry Fink’s Annual [2018] Letter to CEOs: A Sense of Purpose,” at www.blackrock.com.
13
The descriptive, instrumental, and normative arguments are summarized in Thomas Donaldson and Lee E. Preston, “The
Stakeholder Theory of the Corporation: Concepts, Evidence and Implications,” Academy of Management Review 20, no. 1
(1995), pp. 65–71. See also, Post, Preston, and Sachs, Redefining the Corporation, Ch. 1.

Chapter 1 The Corporation and Its Stakeholders 7

and retaining talented employees, and complying with a plethora of complex government
regulations. As a practical matter, managers direct their energies toward all stakeholders,
not just owners.
In what became known as the “dollar store wars,” two companies made
competing bids to buy Family Dollar, a U.S. discount retail chain based in
Charlotte, North Carolina—each with very different consequences for
stakeholders. One suitor, Dollar Tree, offered $76.50 per share for the company,
while the other, Dollar General, offered $80—seemingly a better deal for
shareholders. But the Dollar General deal faced likely government antitrust
scrutiny and would probably have required the closure of thousands of stores,
throwing employees out of work and depriving low-income communities of
access to a discount store. In the end, after considering the impact on all
stakeholders, Family Dollar’s management recommended the lower-priced offer,
and three-quarters of its shareholders agreed.14
The instrumental argument says that stakeholder management is more effective as a
corporate strategy. A wide range of studies have shown that companies that behave responsibly toward multiple stakeholder groups perform better financially, over the long run,
than those that do not. (This empirical evidence is further explored in Chapter 3.) These
findings make sense, because good relationships with stakeholders are themselves a source
of value for the firm. Attention to stakeholders’ rights and concerns can help produce motivated employees, satisfied customers, committed suppliers, and supportive communities,
all good for the company’s bottom line.
The normative argument says that stakeholder management is simply the right thing to
do. Corporations have great power and control vast resources; these privileges carry with
them a duty toward all those affected by a corporation’s actions. Moreover, all stakeholders, not just owners, contribute something of value to the corporation. A skilled engineer
at Microsoft who applies his or her creativity to solving a difficult programming problem
has made a kind of investment in the company, even if it is not a monetary investment. Any
individual or group who makes a contribution, or takes a risk, has a moral right to some
claim on the corporation’s rewards.15
A basis for both the shareholder and stakeholder theories of the firm exists in law. The
legal term fiduciary means a person who exercises power on behalf of another, that is, who
acts as the other’s agent. In U.S. law, managers are considered fiduciaries of the owners
of the firm (its shareholders) and have an obligation to run the business in their interest.
These legal concepts are clearly consistent with the shareholder theory of the firm. However, other laws and court cases have given managers broad latitude in the exercise of
their fiduciary duties. In the United States (where corporations are chartered not by the
federal government but by the states), most states have passed laws that permit managers
to take into consideration a wide range of other stakeholders’ interests, including those of
employees, customers, creditors, suppliers, and communities. (Benefit corporations, firms
with a special legal status that obligates them to do so, are further discussed in Chapter 3.)
14

“Family Dollar Shareholders Approve Sale to Dollar Tree,” Charlotte Observer, January 22, 2015.
Abe Zakhem and Daniel E. Palmer, “Normative Stakeholder Theory,” in David M. Wasieleski and James Weber (eds.),
Stakeholder Management, Business and Society 360: Volume 1, pages 49–74 (Bingley, United Kingdom: Emerald Publishing
Ltd., 2017). Another formulation of this point has been offered by Robert Phillips, who argues for a principle of stakeholder
fairness. This states that “when people are engaged in a cooperative effort and the benefits of this cooperative effort are
accepted, obligations are created on the part of the group accepting the benefit” [i.e., the business firm]. Robert Phillips,
Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 9 and Ch. 5.
15

8

Part One Business in Society

In addition, many federal laws extend specific protections to various groups of stakeholders, such as those that prohibit discrimination against employees or grant consumers the
right to sue if harmed by a product.
In other nations, the legal rights of nonowner stakeholders are often more fully developed than in the United States. For example, a number of European countries—including
Germany, Norway, Austria, Denmark, Finland, and Sweden—require public companies
to include employee members on their boards of directors, so that their interests will be
explicitly represented. Under the European Union’s so-called harmonization statutes, managers are specifically permitted to take into account the interests of customers, employees,
creditors, and others.
In short, while the law requires managers to act on behalf of shareholders, it also gives
them wide discretion—and in some instances requires them—to manage on behalf of the
full range of stakeholder groups. The next section provides a more formal definition and an
expanded discussion of the stakeholder concept.

The Stakeholder Concept
The term stakeholder refers to persons and groups that affect, or are affected by, an organization’s decisions, policies, and operations.16 The word stake originally meant a pointed
stick or post. The word later became used as a verb, as when a person was said to mark
territory with a stake to assert ownership—that is, to stake a claim.17 In the context of management theory, stake is used more abstractly to mean an interest in—or claim on—a business enterprise. Those with a stake in the firm’s actions include such diverse groups as
customers, employees, shareholders (also called stockholders), governments, suppliers,
professional and trade associations, social and environmental activists, and nongovernmental organizations. The term stakeholder is not the same as stockholder, although the
words sound similar. Stockholders—individuals or organizations that own shares of a company’s stock—are one of several kinds of stakeholders.
Business organizations are embedded in networks involving many participants. Each
of these participants has a relationship with the firm, based on ongoing interactions. Each
of them shares, to some degree, in both the risks and rewards of the firm’s activities. And
each has some kind of claim on the firm’s resources and attention, based on law, moral
right, or both. The number of these stakeholders and the variety of their interests can be
large, making a company’s decisions very complex, as the Amazon example illustrates.
Managers make good decisions when they pay attention to the effects of their decisions on stakeholders, as well as stakeholders’ effects on the company. On the positive
side, strong relationships between a corporation and its stakeholders are an asset that adds
value. On the negative side, some companies disregard stakeholders’ interests, either out
of the belief that the stakeholder is wrong or out of the misguided notion that an unhappy
customer, employee, or regulator does not matter. Such attitudes often prove costly to the
company involved. Today, for example, companies know that they cannot locate a factory
or store in a community that strongly objects. They also know that making a product that is
perceived as unsafe invites lawsuits and jeopardizes market share.

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

Exhibit 1.A

Are Managers Stakeholders?

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

Different Kinds of Stakeholders
Business interacts with society in many diverse ways, and a company’s relationships with
various stakeholders differ.
Market stakeholders are those that engage in economic transactions with the company
as it carries out its purpose of providing society with goods and services. Each relationship
between a business and one of its market stakeholders is based on a unique transaction, or
two-way exchange. Shareholders invest in the firm and in return receive the potential for
dividends and capital gains. Creditors loan money and collect payments of interest and
principal. Employees contribute their skills and knowledge in exchange for wages, benefits, and the opportunity for personal satisfaction and professional development. In return
for payment, suppliers provide raw materials, energy, services, finished products, and other
inputs; and wholesalers, distributors, and retailers engage in market transactions with the
firm as they help move the product from plant to sales outlets to customers. All businesses
need customers who are willing to buy their products or services.
The puzzling question of whether or not managers should be classified as stakeholders
along with other employees is discussed in Exhibit 1.A.
Nonmarket stakeholders, by contrast, are people and groups who—although they do
not engage in direct economic exchange with the firm—are nonetheless affected by or
can affect its actions. Nonmarket stakeholders include the community, various levels of
government, nongovernmental organizations, business support groups, competitors, and
the general public. Nonmarket stakeholders are not necessarily less important than others,
simply because they do not engage in direct economic exchange with a business. On the
contrary, interactions with such groups can be critical to a firm’s success or failure, as
shown in the following example.
In late 2017, a company called Energy Management Inc. (EMI) said it would finally
call off its sixteen-year effort to build a wind farm off the shore of Cape Cod,
Massachusetts, to supply clean, renewable power to New England customers. The
project, called Cape Wind, had generated intense opposition from residents of Cape
9

10

Part One Business in Society

Cod and nearby islands, who were concerned that its 130 wind turbines would spoil
the view and get in the way of boats. A nonprofit group called Save Our Sound filed
dozens of lawsuits, charging possible harm to wildlife, increased electricity rates,
and danger to aircraft. Local utilities had withdrawn their commitments to buy
power from the wind farm, and state regulators had denied permission for a power
line connection to the mainland. “We were kept in a repeated sudden death period,”
said the company’s discouraged owner, using a football analogy. “And the goal
posts kept moving.”18
In this instance, various stakeholders were able to block the company’s plans completely—
even though many did not have a market relationship with it.
Theorists also distinguish between internal stakeholders and external stakeholders.
Internal stakeholders are those, such as employees and managers, who are employed by the
firm. They are “inside” the firm, in the sense that they contribute their effort and skill, usually at a company worksite. External stakeholders, by contrast, are those who—although
they may have important transactions with the firm—are not directly employed by it.
The classification of government as a nonmarket stakeholder has been controversial
in stakeholder theory. Most theorists say that government is a nonmarket stakeholder (as
does this book) because it does not normally conduct any direct market exchanges (buying
and selling) with business. However, money often flows from business to government in
the form of taxes and fees, and sometimes from government to business in the form of
subsidies or incentives. Moreover, some businesses—defense contractors for example—do
sell directly to the government and receive payment for goods and services rendered. For
this reason, a few theorists have called government a market stakeholder of business. And,
in a few cases, the government may take a direct ownership stake in a company—as the
U.S. government did after the financial crisis of 2008–09 when it invested in several banks
and auto companies, becoming a shareholder of these firms. Government also has special
influence over business because of its ability to charter and tax corporations, as well as
make laws that regulate their activities. The unique relationship between government and
business is discussed throughout this book.
Other stakeholders also have some market and some nonmarket characteristics. For
example, business support groups, such as the Chamber of Commerce, are normally considered a nonmarket stakeholder. However, companies may support the Chamber of Commerce with their membership dues—a market exchange. Communities are a nonmarket
stakeholder, but receive taxes, philanthropic contributions, and other monetary benefits
from businesses. These subtleties are further explored in later chapters.
Modern stakeholder theory recognizes that most business firms are embedded in a complex web of stakeholders, many of which have independent relationships with each other.19
In this view, a business firm and its stakeholders are best visualized as an interconnected
network. Imagine, for example, an electronics company, based in the United States, that
produces smartphones, tablets, and music players. The firm employs people to design,
engineer, and market its devices to customers in many countries. Shares in the company

18

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

Chapter 1 The Corporation and Its Stakeholders 11

FIGURE 1.2

A Firm and its
Stakeholders

Employees

Nongovernmental
organizations

Creditors
Customers

Business
Firm
Shareholders

Governments
Competitors
Suppliers

are owned by investors around the world, including many of its own employees and managers. Production is carried out by suppliers in Asia. Banks provide credit to the company,
as well as to other companies. Competing firms sell their products to some of the same
customers, and also contract production to some of the same Asian suppliers. Nongovernmental organizations may seek to lobby the government concerning the firm’s practices,
and may count some employees among their members. A visual representation of this
company and its stakeholders is shown in Figure 1.2.
As Figure 1.2 suggests, some individuals or groups may play multiple stakeholder roles.
Some theorists use the term role sets to refer to this phenomenon. For example, a person
may work at a company, but also live in the surrounding community, own shares of company stock in his or her 401(k) retirement account, and even purchase the company’s products from time to time. This person has several stakes in a company’s actions.
Later sections of this book (especially Chapters 13 through 19) will discuss in more
detail the relationship between business and its various stakeholders.

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

12

Part One Business in Society

FIGURE 1.3

Who are the relevant stakeholders?

The Four Key
Questions of
Stakeholder Analysis

What are the interests of each stakeholder?

What is the power of each stakeholder?

How are coalitions likely to form?

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

Who are the relevant stakeholders?
The first question requires management to identify and map the relevant stakeholders.
Exhibit 1.B, which appears later in this chapter, provides a guide. However, not all stakeholders listed will be relevant in every management situation. For example, a privately held
firm will not have shareholders. Some businesses sell directly to customers online, and
therefore will not have retailers. In other situations, a firm may have a stakeholder—say,
a creditor that has loaned money—but this group is not relevant to a particular issue that
management faces.
But stakeholder analysis involves more than simply identifying stakeholders; it also
involves understanding the nature of their interests, power, legitimacy, and links with one
another.

Stakeholder Interests
What are the interests of each stakeholder?
Each stakeholder has a unique relationship to the organization, and managers must respond
accordingly. Stakeholder interests are, essentially, the nature of each group’s stake. What
are their concerns, and what do they want from their relationship with the firm?20
Shareholders, for their part, have an ownership interest in the firm. In exchange for their
investment, shareholders expect to receive dividends and, over time, capital appreciation.
The economic health of the corporation affects these people financially; their personal
wealth—and often, their retirement security—is at stake. They may also seek to achieve
social objectives through their choice of investments. Customers, for their part, are most
20

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

Chapter 1 The Corporation and Its Stakeholders 13

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

Stakeholder Power
What is the power of each stakeholder?
Stakeholder power means the ability to use resources to make an event happen or to secure
a desired outcome. Stakeholders have five different kinds of power: voting power, economic power, political power, legal power, and informational power.
Voting power means that the stakeholder has a legitimate right to cast a vote. Shareholders typically have voting power proportionate to the percentage of the company’s stock
they own. They typically have an opportunity to vote on such major decisions as mergers
and acquisitions, the composition of the board of directors, and other issues that may come
before the annual meeting. (Shareholder voting power should be distinguished from the
voting power exercised by citizens, which is discussed below.)
For example, Starboard Value LP, a New York-based hedge fund, used its voting
power as a shareholder to force change in a company it had invested in. Starboard
bought more than 10 percent of the shares of Mellanox Technologies, an Israeli
semiconductor company, and called for radical change, slamming management for
“weak execution,” “excessive spending,” and “missed growth opportunities.” When
Mellanox did not respond aggressively enough, in 2018 Starboard and its allies
fielded their own slate of nominees in the election for the board of directors and
organized support from other voting shareholders. The company eventually compromised with Starboard, agreeing to add two of the activists’ nominees to the
board and a third if performance goals were not met. In recent years, activist investors like Starboard Value have won one board seat for every two board election
campaigns they have waged.21
Suppliers, customers, employees, and other stakeholders have economic power with the
company. Suppliers, for example, can withhold supplies or refuse to fill orders if a company fails to meet its contractual responsibilities. Customers may refuse to buy a company’s products or services if the company acts improperly. They can boycott products if they
believe the goods are too expensive, poorly made, or unsafe. Employees, for their part, can
refuse to work under certain conditions, a form of economic power known as a strike or
slowdown. Economic power often depends on how well organized a stakeholder group is.
For example, workers who are organized into unions usually have more economic power
than do workers who try to negotiate individually with their employers.
Governments exercise political power through legislation, regulations, or lawsuits.
While government agencies act directly, other stakeholders use their political power
21
“Mellanox, Starboard Settle on New Board Members,” Reuters, June 19, 2018; “Starboard Value to Launch Proxy Fight for
Entire Board at Mellanox,” The Wall Street Journal, January 17, 2018; and “Review and Analysis of 2017 U.S. Shareholder
Activism,” Sullivan & Cromwell LLP, March 26, 2018.

14

Part One Business in Society

indirectly by urging government to use its powers by passing new laws or enacting regulations. Citizens may also vote for candidates that support their views with respect to government laws and regulations affecting business, a different kind of voting power than the one
discussed above. Stakeholders may also exercise political power directly, as when social,
environmental, or community activists organize to protest a particular corporate action.
Stakeholders have legal power when they bring suit against a company for damages,
based on harm caused by the firm; for instance, lawsuits brought by customers for damages
caused by defective products, brought by employees for damages caused by workplace
injury, or brought by environmentalists for damages caused by pollution or harm to species
or habitat. After the mortgage lender Countrywide collapsed, many institutional shareholders, such as state pension funds, sued Bank of America (which had acquired Countrywide) to recoup some of their losses.
Finally, stakeholders have informational power when they have access to valuable data,
facts, or details and are able to bring their own information and perspectives to the attention of the public or key decision makers. With the explosive growth of technologies that
facilitate the sharing of information, this kind of stakeholder power has become increasingly important.
Consumers’ ability to use social networks to express their views about businesses
they like—and do not like—has given them power they did not previously have.
For example, Yelp Inc. operates a website where people can search for local
businesses, post reviews, and read others’ comments. In 2016, a dozen years after
its launch, Yelp attracted 145 million unique visitors every month. Its reviewers
collectively have gained considerable influence. Restaurants, cultural venues,
hair salons, and other establishments can attract customers with five-star ratings
and “People Love Us on Yelp” stickers in their windows—but, by the same
token, can be badly hurt when reviews turn nasty. A Harvard Business School
study reported that a one-star increase in an independent restaurant’s Yelp rating
led to a 5 to 9 percent increase in revenue. Some businesses have complained that
Yelp reviewers have too much power. “My business just died,” said the sole
proprietor of a housecleaning business. “Once they locked me into the 3.5 stars, I
wasn’t getting any calls.”22
Activists often try to use all of these kinds of power when they want to change a company’s policy. For example, human rights activists wanted to bring pressure on Unocal Corporation to change its practices in Burma (Myanmar), where it had entered into a joint venture
with the government to build a gas pipeline. Critics charged that many human rights violations occurred during this project, including forced labor and relocations. In an effort to
pressure Unocal to change its behavior, activists organized protests at shareholder meetings
(voting power), called for boycotts of Unocal products (economic power), promoted local
ordinances prohibiting cities from buying from Unocal (political power), brought a lawsuit
for damages on behalf of Burmese villagers (legal power), and gathered information about
government abuses by interviewing Burmese refugees and publicizing the results online
(informational power). These activists increased their chances of success by mobilizing
many kinds of power. This combination of tactics eventually forced Unocal to pay compensation to people whose rights had been violated and to fund education and health care
projects in the pipeline region.23
22
Michael Luca, “Reviews, Reputation, and Revenue: The Case of Yelp.Com,” Harvard Business School NOM Unit Working
Paper No. 12-016, March 16, 2016; and “Is Yelp Fair to Businesses?” PC World, November 15, 2011.
23
Further information about the campaign against Unocal is available at www.earthrights.org/unocal.

Chapter 1 The Corporation and Its Stakeholders 15

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

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

How are coalitions likely to form?
Not surprisingly, stakeholder interests often coincide. For example, consumers of fresh
fruit and farmworkers who harvest that fruit in the field may have a shared interest in
reducing the use of pesticides, because of possible adverse health effects from exposure to
chemicals. When their interests are similar, stakeholders may form coalitions, temporary
alliances to pursue a common interest. Companies may be both opposed and supported by
stakeholder coalitions, as shown in the example of the controversial Keystone XL pipeline.
TransCanada, a major North American energy company, sought approval to build a
pipeline from Alberta, Canada, to Steele City, Nebraska, where it would connect to
existing pipelines running to refineries and ports along the Gulf Coast. In opposing
the Keystone XL pipeline, environmentalists argued it would enable the export of
oil extracted from Canadian tar sands, an energy-intensive and dirty process. When
burned, the tar sands oil would release carbon dioxide, contributing to further climate change, and spills from the pipeline could foul water supplies. They were
joined in coalition by other groups, such as ranchers, farmers, and Native Americans whose land would be crossed by the pipeline. On the other side, construction
unions, many local governments, and business groups supported the pipeline, saying that it would create jobs, reduce U.S. dependence on foreign oil, and provide a
safer method of transport than trains or tanker trucks. In 2018, debate still raged,
and construction on the project had not begun.24
Stakeholder coalitions are not static. Groups that are highly involved with a company
today may be less involved tomorrow. Issues that are controversial at one time may be
uncontroversial later; stakeholders that are dependent on an organization at one time may
be less so at another. To make matters more complicated, the process of shifting coalitions does not occur uniformly in all parts of a large corporation. Stakeholders involved
with one part of a large company often have little or nothing to do with other parts of the
organization.
The discussion case at the end of this chapter describes the coalitions that developed in
favor of and opposition to new regulations that would require the ride-hailing start-up Uber
to insure drivers logged onto its system to look for customers.
Another variation of stakeholder analysis focuses on stakeholder salience. Some scholars have suggested that managers pay the most attention to stakeholders possessing greater
salience. (Something is salient when it stands out from a background, is seen as important,
or draws attention.) Stakeholders stand out to managers when they have power, legitimacy,
and urgency. This section has already discussed various forms of stakeholder power. Legitimacy refers to the extent to which a stakeholder’s actions are seen as proper or appropriate
by the broader society, because they are clearly affected by the company’s actions. Urgency
refers to the time-sensitivity of a stakeholder’s claim, that is, the extent to which it demands
24

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

Exhibit 1.B

Stakeholders: Nature of Interest
and Power

Nature of Interest—
Stakeholder Wishes To:

Nature of Power—Stakeholder
Influences Company By:

Employees

■ Maintain stable employment in firm
■ Receive fair pay for work and mandated
benefits
■ Work in safe, comfortable environment

■ Union bargaining power
■ Work actions or strikes
■ Publicity

Shareholders

■ Receive a satisfactory return on
investments (dividends)
■ Realize appreciation in stock value over
time

■ Exercising voting rights based on share
ownership
■ Exercising rights to inspect company
books and records

Customers

■ Receive fair exchange: value and quality
for money spent
■ Receive safe, reliable products
■ Receive accurate information
■ Be able to voice concerns

■ Purchasing goods from competitors
■ Boycotting companies whose products
are unsatisfactory or whose policies are
unacceptable

Suppliers

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

■ Refusing to meet orders if conditions of
contract are breached
■ Supplying to competitors

Retailers, Wholesalers

■ Receive quality goods in a timely fashion
at reasonable cost
■ Offer reliable products that consumers
trust and value

■ Buying from other suppliers if terms of
contract are unsatisfactory
■ Boycotting companies whose goods or
policies are unsatisfactory

Creditors

■ Receive repayment of loans
■ Collect debts and interest

■ Calling in loans if payments are not made
■ Utilizing legal authorities to repossess or
take over property if loan payments are
severely delinquent

Stakeholder
Market Stakeholders

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

Stakeholder Mapping
Once managers have conducted a stakeholder analysis, they can use it to develop a
stakeholder map, a visual representation of the relationships among stakeholder interests, power, and coalitions with respect to a particular issue.26 (A stakeholder map can
25

Ronald K. Mitchell, Bradley R. Agle, and Donna J. Wood, “Toward a Theory of Stakeholder Identification and Salience: Defining
the Principle of Who and What Really Counts,” Academy of Management Review 22, no. 4 (1997), pp. 853–86.
26
For two alternative approaches to stakeholder mapping, see David Saiia and Vananh Le, “A Map Leading to Less Waste,”
Proceedings of the International Association for Business and Society 20: 302–13 (2009); and Robert Boutilier, Stakeholder Politics: Social Capital, Sustainable Development, and the Corporation (Sheffield, UK: Greenleaf Publishing, 2009), Chs. 6 and 7.
16

Stakeholder

Nature of Interest—
Stakeholder Wishes To:

Nature of Power—Stakeholder
Influences Company By:

Nonmarket Stakeholders
Communities

■ Employ local residents in the company
■ Ensure that the local environment is
protected
■ Ensure that the local area is developed

■ Refusing to extend additional credit
■ Issuing or restricting operating licenses
and permits
■ Lobbying government for regulation of
the company’s policies or methods of
land use and waste disposal

Nongovernmental
organizations

■ Monitor company actions and policies
to ensure that they conform to legal and
ethical standards
■ Promote social and economic development

■ Gaining broad public support through
publicizing the issue
■ Lobbying government for regulation of
the company

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

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

■ Using its staff and resources to assist
company in business endeavors and
development efforts
■ Providing legal or “group” political
support beyond that which an individual
company can provide for itself

Governments

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

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

The general public

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

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

Competitors

■ Compete fairly
■ Cooperate on industry-wide or
community issues
■ Seek new customers

■ Pressing government for fair competition
policies
■ Suing companies that compete unfairly

also be used to represent stakeholder salience, to help a firm identify which stakeholders
may require more of their attention.) Consider the following example:
In Anaheim, California, a real estate developer called SunCal purchased a large lot
near to the Disneyland theme park. SunCal planned to build condominiums, with
15 percent of the units set aside for below-market-rate rental apartments. Because
the site was in the resort district, the developer required special permission from
the city council to proceed. Affordable housing advocates quickly backed SunCal’s
plans. Some unions representing Disney employees also supported the idea, as did
environmentalists drawn by the prospect of reducing long commutes, a contributor
to the region’s air pollution. Disney, however, strenuously opposed SunCal’s plan,
arguing that the land should be used only for tourism-related development such as
hotels and restaurants; the company was supported by the chamber of commerce
and various businesses in the resort district. The city council itself was split.
17

18

Part One Business in Society

If SunCal conducted a stakeholder analysis of this situation, it would conclude that
the interests of relevant stakeholders were divided. Some, including Disney and various local businesses and some politicians, opposed its plan. But others, including some
unions, affordable housing advocates, environmentalists, and other politicians, supported
it. An analysis of coalitions would show how these stakeholders were likely to ally with
one another. An analysis of power would show that Disney had enormous clout in Anaheim, because it was the city’s major employer and taxpayer, with power far exceeding
that of other relevant stakeholders. SunCal would no doubt conclude from this analysis
that it was unlikely to succeed in building on this site. A stakeholder map of this situation is shown in Figure 1.4. On the vertical axis, it shows various stakeholders’ level of
power; on the horizontal axis, it shows their position on the issue of SunCal’s proposed
development.
A stakeholder map is a useful tool, because it enables managers to see quickly how
stakeholders feel about an issue. It helps them see how stakeholder coalitions are likely to
form, how powerful these coalitions will be, and what outcomes are likely. The stakeholder
map depicted in Figure 1.4 shows, for example, than the coalition in quadrant 4—Disney,
local businesses, and some members of the City Council—is more powerful that the coalition in quadrant 2—unions, affordable housing activists, environmental groups, and
other City Council members. An additional benefit of stakeholder analysis is that it can
illuminate options that managers may not have initially noticed. In this example, SunCal
might have realized that Disney (high opposition, high power) very much wanted to block
the proposed development, but also had significant resources. Therefore, Disney might
be willing to purchase the lot itself, providing funds for SunCal to use to purchase and
develop another site, with support from unions, housing activists, and others. In short,
stakeholder analysis and mapping can help managers “think outside the box.”
FIGURE 1.4

Stakeholder Map of
SunCal’s Proposed
Development

HIGH POWER
4

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

1
Disney

COALITION
IN OPPOSITION

Local
Businesses

City
Council

OPPOSE

SUPPORT

Unions
Affordable
Housing

COALITION
IN SUPPORT
3

Environmental
Groups

2
LOW POWER

Chapter 1 The Corporation and Its Stakeholders 19

The Corporation’s Boundary-Spanning Departments
How do corporations organize internally to respond to and interact with stakeholders?
Boundary-spanning departments are departments, or offices, within an organization that
reach across the dividing line that separates the company from groups and people in society. Building positive and mutually beneficial relationships across organizational boundaries is a growing part of management’s role.
Figure 1.5 presents a list of the corporation’s market and nonmarket stakeholders, alongside the corporate departments that typically have responsibility for engaging with them.
As the figure suggests, the organization of the corporation’s boundary-spanning functions

ers
old
reh
a
Sh
Shareholder Relations,
Investor Relations
• External and internal
audit
• SEC filings, compliance
• Communications
• Proxy election
management

Public Affairs,
Governmental Affairs,
Government Relations
• Public policy
• Lobbying
• Political action
• Trade associations
• Advocacy ads
• Grassroots mobilization

Cus
tom
ers

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

y
unit
mm
Co

Community Relations,
Corporate Citizenship
• Corporate philanthropy
• Partners with communitybased organizations
• Volunteerism, employee
time contributions

ees
loy
Emp

Corporation
Corporate Relations,
Human Resources, Labor Relations
Corporate Citizenship, Corporate
• Communications
Responsibility, External Affairs
• Union negotiations
• Environmental scanning
• OSHA, EEOC, and labor
• Stakeholder engagement
law compliance
• Social reporting and auditing
• Diversity and family–work
programs
• Healthcare
Environment,
Health & Safety,
Public Relations,
Sustainability
Media Relations,
• EPA and state
Corporate Communications
environmental
• Public relations
compliance
• Brand management
• Internal environmental • Image advertising
auditing
• Crisis management
• Recycling, take-back
En
lic
viro
ub
nme
al p
r
e
nt
Gen

NG
Os
, su
ppli
ers

Gove
rnm
ent

FIGURE 1.5 The Corporation’s Boundary-Spanning Departments

20

Part One Business in Society

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

The Dynamic Environment of Business
A core argument of this book is that the external environment of business is dynamic and
ever changing. Businesses and their stakeholders do not interact in a vacuum. On the contrary, most companies operate in a swirl of social, ethical, global, political, ecological, and
technological change that produces both opportunities and threats. Figure 1.6 diagrams the
six dynamic forces that powerfully shape the business and society relationship. Each of these
forces is introduced briefly below and will be discussed in more detail later in this book.
Changing societal expectations. Everywhere around the world, society’s expectations of business are rising. People increasingly expect business to be more
responsible, believing companies should pay close attention to social issues and act
as good citizens in society. New public issues constantly arise that require action.
Increasingly, business is faced with the daunting task of balancing its social, legal,
and economic obligations, seeking to meet its commitments to multiple stakeholders. Modern businesses are increasingly exploring opportunities to act in ways
that balance numerous stakeholders’ needs with their multiple obligations. These
changes in society’s expectations of business, and how managers have responded,
are described in Chapters 2 and 3.
FIGURE 1.6

Evolving
Government
Regulation
of Business

Forces That Shape
the Business and
Society Relationship
Growing
Emphasis on
Ethical Values

Globalization

Business
and Its
Stakeholders

Explosion
of
New
Technology

Changing
Societal
Expectations

Dynamic
Natural
Environment

Chapter 1 The Corporation and Its Stakeholders 21

Globalization. We live in an increasingly integrated world economy, characterized
by the unceasing movement of goods, services, and capital across national borders.
Large transnational corporations do business in scores of countries. Products and
services people buy every day in the United States or Germany may have come from
Indonesia, Haiti, or Mexico. Today, economic forces truly play out on a global stage.
A financial crisis on Wall Street can quickly impact economies around the world.
Societal issues—such as the race to find a cure for Ebola, the movement for gender
equality, or the demands of citizens everywhere for full access to the Internet—also
cut across national boundaries. Chapter 4 addresses the challenges of globalization.
Growing emphasis on ethical reasoning and actions. The public also expects business
to be ethical and wants corporate managers to apply ethical principles or values—in
other words, guidelines about what is right and wrong, fair and unfair, and morally
correct—when they make business decisions. Fair employment practices, concern
for consumer safety, contribution to the welfare of the community, and human rights
protection around the world have become more prominent and important. Business has
created ethics programs to help ensure that employees are aware of these issues and act
in accordance with ethical standards. The ethical challenges faced by business, both
domestically and abroad—and business’s response—are discussed in Chapters 5 and 6.
Evolving government regulations and business response. The role of government
has changed dramatically in many nations in recent decades. Governments around
the world have enacted a myriad of new policies that have profoundly constrained
how business is allowed to operate. Government regulation of business periodically
advances and then retreats, much as a pendulum swings back and forth. Because of
the dynamic nature of this force, business has developed various strategies to influence elected officials and government regulators at federal, state, and local levels.
Companies may seek to be active participants in the political process, and in recent
years the courts have given them more opportunities to do so. The changing role of
government, its impact, and business’s response are explored in Chapters 7 and 8.
Dynamic natural environment. All interactions between business and society occur
within a finite natural ecosystem. Humans share a single planet, and many of our
resources—oil, coal, and gas, for example—are nonrenewable. Once used, they are
gone forever. Other resources, like clean water, timber, and fish, are renewable, but
only if humans use them sustainably, not taking more than can be naturally replenished. Climate change now threatens all nations. The relentless demands of human
society, in many arenas, have already exceeded the carrying capacity of the Earth’s
ecosystem. The state of the Earth’s resources and changing attitudes about the natural environment powerfully impact the business–society relationship. These issues
are explored in Chapters 9 and 10.
Explosion of new technology and innovation. Technology is one of the most dramatic and powerful forces affecting business and society. It has led to the world
appearing to be smaller and more connected. New technological innovations harness the human imagination to create new machines, processes, and software that
address the needs, problems, and concerns of modern society. In recent years, the
pace of technological change has increased enormously. From scientific breakthroughs in medicine to autonomous vehicles and artificial intelligence, change
keeps coming. The extent and pace of technological innovation pose massive challenges for business, and sometimes government, as they seek to manage various
privacy, security, and intellectual property issues embedded in this dynamic force.

22

Part One Business in Society

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

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

Summary

∙ Business firms are organizations that are engaged in making a product or providing
a service for a profit. Society, in its broadest sense, refers to human beings and to the
social structures they collectively create. Business is part of society and engages in
ongoing exchanges with its external environment. Together, business and society form
an interactive social system in which the actions of each profoundly influence the other.
∙ According to the stakeholder theory of the firm, the purpose of the modern corporation
is to create value for all of its stakeholders. To survive, all companies must make a
profit for their owners. However, they also create many other kinds of value as well for
their employees, customers, suppliers, communities, and others. For both practical and
ethical reasons, corporations must take all stakeholders’ interests into account.
∙ Every business firm has economic and social relationships with others in society. Some
are intended, some unintended; some are positive, others negative. Stakeholders are
all those who affect, or are affected by, the actions of the firm. Some have a market
relationship with the company, and others have a nonmarket relationship with it; some
stakeholders are internal, and others are external.
∙ Stakeholders often have multiple interests and can exercise their economic, political, and
other powers in ways that benefit or challenge the organization. Stakeholders may also
act independently or create coalitions to influence the company. Stakeholder mapping is
a technique for visually representing stakeholders’ relationship to an issue facing a firm.
∙ Modern corporations have developed a range of boundary-crossing departments and
offices to manage interactions with market and nonmarket stakeholders. The organization of the corporation’s boundary-spanning functions is complex. Most companies
have many departments specifically charged with interacting with stakeholders.
∙ A number of broad forces shape the relationship between business and society. These
include changing societal and ethical expectations; a dynamic global economy; redefinition of the role of government; ecological and natural resource concerns; and the transformational role of technology and innovation. To deal effectively with these changes,
corporate strategy must address the expectations of all of the company’s stakeholders.

Chapter 1 The Corporation and Its Stakeholders 23

Key Terms

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

Internet
Resources

www.economist.com
www.fortune.com
www.nytimes.com
www.wsj.com
www.bloomberg.com
www.ft.com
www.cnnmoney.com

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

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

The Economist
Fortune
The New York Times
The Wall Street Journal
Bloomberg
Financial Times (London)
CNN Money

Discussion Case: Insuring Uber’s App-On Gap
At around 8 p.m. on a New Year’s Eve, a mother and her two young children were walking
home in San Francisco. At a busy intersection, the family waited for the “walk” signal
and then started across the street. Just then, an SUV made a right turn, striking all three
members of the family in the crosswalk. The mother and her 5-year-old son were seriously
injured. Her 6-year-old daughter was killed. The man behind the wheel of the SUV identified himself as a driver for the ride-hailing service Uber.
Uber immediately distanced itself from the tragedy, saying that the driver was “not
providing services on the Uber system at the time of the accident.” The family’s attorney
contested this, saying that the driver was logged onto the Uber application, appeared on the
system as available to accept a rider, and was interacting with his device when he struck
the mother and children.
In other words, the tragic incident had apparently occurred during the app-on gap—the
driver was on the road with his Uber application activated, but had not yet connected with
or picked up a rider. So, who was responsible, the driver or the ride-hailing service?
Uber was, in the words of a New York Times columnist, “the hottest, most valuable technology startup on the planet.” The company was founded in 2009 as “everyone’s private
driver,” providing a premium town car service that could be summoned online. In 2012, it
rolled out UberX, a service that enabled nonprofessional drivers to use their own vehicles
to transport riders. Customers could use the Uber app to hail a car, connect with a willing
driver, watch the vehicle approach on a map, pay their fare, and receive a receipt, all on their
smartphone. Uber provided the technology and took a commission on each transaction.
Uber’s disruptive business model caught on rapidly. By 2014, Uber’s ride-sharing service
had spread to more than 120 cities in 36 countries. In the United States, the service could reach
137 million people with an average pickup time of less than 10 minutes. Demand was growing
so fast that Uber was scrambling to recruit 20,000 new drivers, whom Uber called “transportation entrepreneurs,” every month. Private investors were enthusiastic about the company’s
prospects: Uber had attracted $1.2 billion in funding and was valued at $18.2 billion.

24

Part One Business in Society

Drivers who partnered with Uber had the flexibility to drive when and as much as they
wished. They could also make a decent living; the median annual income for its full-time
drivers in San Francisco, for example, was about $74,000. But they also assumed risk. In the
event of an accident, Uber instructed its drivers to submit a claim to their personal insurance
carrier first. If it was denied, Uber’s backup commercial liability insurance would go into
effect, but only after the driver had been summoned by a customer or had one in the vehicle.
Traditional taxicab companies did not welcome competition from Uber. Cabdrivers in
many cities across the world protested the entry of Uber into their markets, conducting
strikes and “rolling rallies” charging Uber with unfair practices. Uber drivers did not have
to comply with many of the rules that applied to taxicabs, such as those requiring commercial driver’s licenses, regular mechanical inspections, and commercial liability insurance.
Governments at city, state, and national levels had become involved, with some imposing
restrictions and others even banning Uber outright.
In the wake of the 6-year-old’s death in San Francisco, California legislator
Susan Bonilla introduced a bill that would require Uber and other ride-hailing companies
to provide commercial liability insurance from when the driver turned on the app to when
the customer got out of the car, thus filling the app-on gap.
The American Insurance Association, representing insurance companies, supported the
legislation, saying that personal auto policies should not be expected to cover ride-hailing
drivers once they signaled availability. “This is not someone commuting to work or going
to the grocery store or stopping to pick their children up from school,” a spokesperson said.
The family of the girl killed on New Year’s Eve also supported Bonilla’s bill, as did consumer attorneys and the California App-Based Drivers Association.
But others lined up in opposition. Uber and other ride-hailing companies strenuously
objected to the bill, as did trade associations representing high-technology and Internet-based
firms, apparently concerned about increases in their costs of doing business. The bill, said
an Uber spokesperson, was “an example of what happens when special interest groups distract lawmakers from the best interests of consumers and small businesses.”
Sources: “Deadly Pedestrian Accident Driver Claimed He Drove for Uber,” January 1, 2014, www.abclocal.go.com; “Uber
and a Child’s Death,” The New York Times, January 27, 2014; “An Uber Impact: 20,000 Jobs Created on the Uber Platform
Every Month,” Uber press release, May 27, 2014; “With Uber, Less Reason to Own a Car,” The New York Times, June 11,
2014; “Uber and Airbnb’s Incredible Growth in 4 Charts,” VB News, June 19, 2014, online at www.venturebeat.com; “In Uber
vs. Taxi Companies, Local Governments Play Referee,” Christian Science Monitor, July 7, 2014; “The Company Cities Love
to Hate,” Bloomberg Businessweek, July 7, 2014; “Uber, Lyft, Sidecar Fight to Block New California Regulations,” San Jose
Mercury News, August 13, 2014; “The Question of Coverage for Ride Service Drivers,” The New York Times, September 5,
2014; and private correspondence with the office of Assemblywoman Susan Bonilla.

Discussion
Questions

1. Who are Uber’s relevant market and nonmarket stakeholders in this situation?
2. What are the various stakeholders’ interests? Please indicate if each stakeholder would
likely support, or oppose, a requirement that Uber extend its insurance to cover the
app-on gap.
3. What sources of power do the relevant stakeholders have?
4. Based on the information you have, draw a stakeholder map of this case showing each
stakeholder’s position on the issue, its degree of power, and likely coalitions. What conclusions can you draw from the stakeholder map?
5. Which of the stakeholders mentioned do you think has the most salience, and why?
6. Based on your stakeholder analysis and map, what do you think Uber should do in
response to the bill introduced by Susan Bonilla, and why?

C H A P T E R

T W O

Managing Public
Issues and Stakeholder
Relationships
Businesses today operate in an ever-changing external environment, where effective management
requires anticipating emerging public issues and engaging positively with a wide range of stakeholders. Whether the issue is growing concerns about climate change, health care, safety at work
or in our schools, social equality, or consumer safety, managers must respond to the opportunities
and risks it presents. To do so effectively often requires building relationships across organizational
boundaries, learning from external stakeholders, and altering practices in response. Effective management of public issues and stakeholder relationships builds value for the firm.
This Chapter Focuses on These Key Learning Objectives:
LO 2-1 Identifying public issues and analyzing gaps between corporate performance and stakeholder
expectations.
LO 2-2 Applying available tools or techniques to scan an organization’s multiple environments and assessing stakeholder materiality.
LO 2-3 Describing the steps in the issue management process and determining how to make the process
most effective.
LO 2-4 Identifying the managerial skills required to respond to emerging issues effectively.
LO 2-5 Understanding the various stages through which businesses can engage with stakeholders, what
drives this engagement, and the role social media can play.
LO 2-6 Recognizing the value of creating stakeholder dialogue and networks.

25

26

Part One Business in Society

A 2016 study from the Public Affairs Council found that many major corporations are
feeling increased pressure to speak out on social issues, ranging from discrimination and
human rights to environmental sustainability and quality education. Among companies
with more than $15 billion in annual revenue, more than three in four said expectations for
engagement had risen. Most of the pressure to engage in social issues, said the companies,
has come from their own employees.1
Legislative battles in North Carolina, Tennessee, Mississippi, and Georgia prompted
business leaders to take a stand favoring rights for transgender individuals. Dow Chemical,
Alcoa, and Northrup Grumman lobbied elected officials and publicly condemned measures
seen as discriminatory. Monsanto lead the fight in Missouri against a bill that would allow
businesses to deny certain services to same-sex couples as a matter of religious freedom. In
response to North Carolina’s state legislature passing a law that blocked antidiscriminatory
protections at the local level, Deutsche Bank, the German financial institution with significant business in the United States, said it would freeze its plans to add jobs in North Carolina. PayPal announced it would halt its plans to open a new global operations center there.
While some thought these issues had little to do with business, executives pointed out
these discriminatory state laws could harm local economies and hamper business’s ability
to recruit and retain bright young workers. In the past few years, businesses have employed
a number of measures to voice their views. These have ranged from joining coalitions, to
issuing press releases, to engaging in lobbying at the state or local governmental levels.
Experts believe that these efforts had some impact, such as in North Carolina where company protests contributed to the state legislature’s repeal of a law that discriminated against
gays and lesbians. Public reaction has been generally positive to these business actions.
A Global Strategy Group poll found that 78 percent of Americans supported corporate
engagement in social issues such as discrimination, human rights, and equality.2
In this case, emerging social issues focused on individual rights prompting various businesses and their executives to become engaged and take action. This will likely improve
the communities where these firms hire employees, operate, and sell their products. Yet,
as this chapter will show, companies sometimes also ignore or mismanage public issues.

Public Issues
A public issue is any issue that is of mutual concern to an organization and one or more
of its stakeholders. (Public issues are sometimes also called social issues or sociopolitical
issues.) They are typically broad issues, often impacting many companies and groups, and
of concern to a significant number of people. Public issues are often contentious—different
groups may have different opinions about what should be done about them. They often, but
not always, have public policy or legislative implications.
The emergence of a new public issue often indicates there is a gap between what the
firm wants to do or is doing and what stakeholders expect. Scholars have called this the
performance–expectations gap. Stakeholder expectations are a mixture of people’s opinions, attitudes, and beliefs about what constitutes reasonable business behavior. Managers
and organizations have good reason to identify emergent expectations as early as possible.
Failure to understand stakeholder concerns and to respond appropriately will permit the
1

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

2

Chapter 2 Managing Public Issues and Stakeholder Relationships 27

FIGURE 2.1

High

Expected
Corporate
Performance
(What stakeholders
expect)

Performance (Social and Economic)

The Performance–
Expectations Gap

Low

Performance–
Expectations
Gap
Actual
Corporate
Performance
(What actually
happens)
Time

performance–expectations gap to grow: the larger the gap, the greater the risk of stakeholder backlash or of missing a major business opportunity. The performance–expectations
gap is pictured in Figure 2.1.
Emerging public issues are both an opportunity and a risk. On one hand, correctly
anticipating the emergence of a public issue can confer a competitive advantage. However,
they also are a risk because issues that firms do not anticipate and plan for effectively can
seriously hurt a company, as the following example shows.
The Italian–U.S. automobile maker, Fiat Chrysler, became aware of a serious problem involving more than 11 million vehicles, including older Jeeps with rear gasoline tanks that were linked to numerous fatal fires. Yet, Fiat Chrysler was slow to
respond to the increasing expectations of its customers and regulators, the National
Highway Traffic Safety Administration (NHTSA). The NHTSA accused the firm
of misleading and obstructing regulators tasked with overseeing the resolution of
many consumer complaints, inadequate and lagging repairs authorized through
their dealerships, and failing to notify car owners of the recalls in a timely manner.
The firm agreed to a consent agreement that included a fine of $105 million and an
unprecedented buyback option covering hundreds of thousands of vehicles, whose
owners can receive a trade-in or a financial incentive to get their vehicles repaired.
Fiat Chrysler also agreed to submit to an independent monitor’s audit of its recall
performance over the following three-year period.3
Understanding and responding to changing stakeholder expectations is a business necessity. As Mark Moody-Stuart, former managing director of Royal Dutch/Shell, put it in an
interview, “Communication with society. . . is a commercial matter, because society is your
customers. It is not a soft and wooly thing, because society is what we depend on for our
living. So we had better be in line with its wishes, its desires, its aspirations, its dreams.4
3
4

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

28

Part One Business in Society

Every company faces many public issues. Some emerge over a long period of time;
others emerge suddenly. Some are predictable; others are completely unexpected. Some
companies respond effectively; others do not. Consider the following recent examples of
public issues and companies’ responses:
∙ Sexual harassment: An often well-kept secret vaulted into the public spotlight in 2017:
accusations of sexual harassment in the corporate boardroom, executive suite, and
workplace. Numerous high-profile business leaders were accused, including Fox News
host Bill O’Reilly, film producer Harvey Weinstein, television show host Matt Lauer,
Fox News CEO Roger Ailes, Ford Motor Company president for North America Raj
Nair, CEO of the Humane Society of the United States Wayne Pacelle, and billionaire
and casino executive Steve Wynn, along with many others. These executives resigned or
were fired amidst sexual harassment accusations.
∙ Consumer safety: The Centers for Disease Control and Prevention declared separate
E. coli outbreaks that sickened hundreds of customers at two different Chipotle Mexican
Grill restaurants in the Pacific Northwest in 2015. These incidents followed other occurrences where customers became ill from a salmonella outbreak involving tomatoes in
Minnesota, as well as an outbreak of norovirus in California and Massachusetts. Chipotle
tried to counter the negative publicity by pledging $10 million to help local growers
meet new food safety standards and invited its 50,000 employees nationwide to tune in
to a broadcasted meeting with executives at their Denver headquarters.
∙ Protection of personal information: Instances of the illegal acquisition, or hacking, of
individuals’ personal identification and financial information have become common
occurrences. Yahoo, Equifax, Delta Airlines, FedEx, England’s National Health Services, Merck Pharmaceuticals, Forever 21, Target, and many more organizations experienced data breaches that compromised and exposed personal data of its customers or
employees. These breaches may have reflected managers’ failure to keep abreast of the
latest techniques used by sophisticated cybercriminals.
Whether the focus is sexual harassment in the workplace, consumer safety, or the protection of personal information, society has increased its demands that businesses take on
important public issues and become more involved in addressing them. Another critical
public issue that caught the attention of many business organizations after a school shooting in Florida—gun violence and school safety in America—is discussed in the case at the
end of this chapter.
A survey of Millennials (people born between 1977 and 1994) was conducted in 2014
and found that four out of five Millennials “need (not just want) business to get involved in
addressing social issues and believe business can make a greater impact.” One Millennial
from China explained: “Compared to governments, businesses have the potential and the
possibility to make real change in society happen faster and more efficiently. Businesses
have the resources—from financial means, collective intelligence to technology—to contribute and make a difference.”5

Environmental Analysis
As new public issues arise, businesses must respond. Organizations need a systematic way
of identifying, monitoring, and selecting public issues that warrant organizational action
because of the risks or opportunities they present. Organizations rarely have full control of
5

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

Chapter 2 Managing Public Issues and Stakeholder Relationships 29

a public issue because of the many factors involved. But it is possible for the organization
to create a management system that identifies and monitors issues as they emerge.
To identify those public issues that require attention and action, a firm needs a framework for seeking out and evaluating environmental information. (In this context, environmental means outside the organization; in Chapters 9 and 10, the term refers to the natural
environment.) Environmental analysis is a method managers use to gather information
about external issues and trends, so they can develop an organizational strategy that minimizes threats and takes advantage of new opportunities.
Environmental intelligence is the acquisition of information gained from analyzing the
multiple environments affecting organizations. Acquiring this information may be done
informally or as a formal management process. If done well, this environmental intelligence can help an organization avoid crises and spot opportunities.
According to management scholar Karl Albrecht, scanning to acquire environmental
intelligence should focus on eight strategic radar screens.6 Radar is an instrument that uses
microwave radiation to detect and locate distant objects, which are often displayed on a
screen; law enforcement authorities use radar, for example, to track the speed of passing
cars. Albrecht uses the analogy of radar to suggest that companies must have a way of
tracking important developments that are outside of their immediate view. He identifies
eight different environments that managers must systematically follow. These are shown in
Figure 2.2 and described next.
∙ Customer environment includes the demographic factors, such as gender, age, marital
status, and other factors, of the organization’s customers as well as their social values
or preferences, buying preferences, and technology usage. For example, the explosion
of social media has created opportunities for creating new marketing approaches that
provide potential consumers with coupons or sales information on their smartphones as
they leave their car and walk toward the retail store.
∙ Competitor environment includes information on the number and strength of the organization’s competitors, whether they are potential or actual allies, patterns of aggressive growth versus static maintenance of market share, and the potential for customers
to become competitors if they “insource” products or services previously purchased
from the organization. (This environment is discussed further in the next section of this
chapter.)
∙ Economic environment includes information about costs, prices, international trade,
and any other features of the economic environment. The severe recession that hit the
world’s economy in the late 2000s greatly shifted the behavior of customers, suppliers, creditors, and other stakeholders, dramatically impacting decision making in many
firms.
∙ Technological environment includes the development of new technologies and their
applications affecting the organization, its customers, and other stakeholder groups.
Faster access to information through cell phones, tablets, and other handheld electronic
devices changed how people around the world were alerted to the devastation of natural
disasters or terrorist actions and how they could be contacted regarding new job openings or the launching of innovative consumer products.
∙ Social environment includes cultural patterns, values, beliefs, trends, and conflicts
among the people in the societies where the organization conducts business or might
6

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

30

Part One Business in Society

FIGURE 2.2 Eight
Strategic Radar
Screens

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

Customer
Environment
Competitor
Environment

Geophysical
Environment

Legal
Environment

Seeking
Environmental
Intelligence

Political
Environment

Economic
Environment

Technological
Environment
Social
Environment

conduct business. Issues of civil or human rights, family values, and the roles of special interest groups are important elements in acquiring intelligence from the social
environment.
∙ Political environment includes the structure, processes, and actions of all levels of
government—local, state, national, and international. Awareness of the stability or instability of governments and their inclination or disinclination to pass laws and regulations
is essential environmental intelligence for the organization. The emergence of strict
environmental laws in Europe—including requirements to limit waste and provide for
recycling at the end of a product’s life—have caused firms all over the world that sell to
Europeans to rethink how they design and package their products.
∙ Legal environment includes patents, copyrights, trademarks, and considerations of intellectual property, as well as antitrust considerations and trade protectionism and organizational liability issues. China’s commitment to triple its patent filings from nearly one
million in 2013 to three million by 2020 sent shock waves through the global business
community.
∙ Geophysical environment relates to awareness of the physical surroundings of the organization’s facilities and operations, whether it is the organization’s headquarters or its
field offices and distribution centers, and the organization’s dependency and impact on
natural resources such as minerals, water, land, or air. Growing concerns about global
warming and climate change, for example, have caused many firms to seek to improve
their energy efficiency.

Chapter 2 Managing Public Issues and Stakeholder Relationships 31

The eight strategic radar screens represent a system of interrelated segments, each one
connected to and influencing the others.
Companies do not become experts in acquiring environmental intelligence overnight.
New attitudes have to be developed, new routines learned, and new policies and action programs designed. Many obstacles must be overcome in developing and implementing the
effective scanning of the business environments. Some are structural, such as the reporting relationships between groups of managers; others are cultural, such as changing traditional ways of doing things. In addition, the dynamic nature of the business environments
requires organizations to continually evaluate their environmental scanning procedures.

Competitive Intelligence
One of the eight environments discussed by Albrecht is the competitor environment. The
term competitive intelligence refers to the systematic and continuous process of gathering,
analyzing, and managing external information about the organization’s competitors that
can affect the organization’s plans, decisions, and operations. (As discussed in Chapter 1,
competitors may be considered a nonmarket stakeholder of business.) The acquisition of
this information benefits an organization by helping it better understand what other companies in its industry are doing. Competitive intelligence enables managers in companies of
all sizes to make informed decisions ranging from marketing, research and development,
and investing tactics to long-term business strategies. “During difficult times, excellent
competitive intelligence can be the differentiating factor in the marketplace,” explained
Paul Meade, vice president of the research and consulting firm Best Practices. “Companies
that can successfully gather and analyze competitive information, then implement strategic
decisions based on that analysis, position themselves to be ahead of the pack.”7
However, the quest for competitors’ information can also raise numerous ethical issues.
Businesses may overstep ethical and legal boundaries when attempting to learn as much as
they can about their competitors, as the following example shows.
Today, Deloitte is one of the world’s largest accounting firms, employing
245,000 people in 150 countries and providing various accounting and consulting
services. But, in the mid-2000s, the firm wanted to dramatically grow its federal
security consulting services from a $300 million to more than a billion dollars in
annual revenues. Deloitte formed a competitive intelligence unit (CIU). “Our job
was to spy on Ernst & Young, PriceWaterhouseCoopers, KPMG, and some of the
consulting competitors,” said a CIU employee. “We were trying to steal their
pricing models, how they determined discounts, and especially new product lines
or service lines.”
One example of how the CIU conducted its business occurred in 2007 when they
learned that BearingPoint, a consulting firm, was struggling financially and had
called an emergency meeting to determine its fate. Deloitte’s CIU agents traveled to
the meeting location and spent several days stationing themselves at a bar, picking
up scraps of conversation from distraught BearingPoint partners. Others spent time
in bathrooms. “You can’t believe what people will say while they’re in there,” said
a CIU agent. The best source for information was a Bearing Point meeting room
the agents discovered. They entered the meeting room, found notes and other documents left behind, and brought this information back to Deloitte’s CIU. According
to one Deloitte CIU employee, “There were accounts that would have taken years

7

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

32

Part One Business in Society

for Deloitte to develop relationships at the Department of Defense, the Department
of Homeland Security, and other institutions. It was a huge opportunity.”
A few years later, Deloitte was able to take advantage of an opportunity to buy
BearingPoint’s North American public services unit for $350 million as BearingPoint worked through a bankruptcy.
As the example above indicates, the perceived value of intellectual property or other
information may be so great that businesses or their employees may be tempted to use
unethical or illegal means to obtain such information. Although questionable, Deloitte
employees did nothing illegal. Competitive intelligence acquired ethically remains one of
the most valued assets sought by businesses. A business must balance the importance of
acquiring information about its competitors’ practices with the need to comply with all
applicable laws, domestic and international, and to follow the professional standards of
fairness and honesty. Disclosure of all relevant information prior to conducting an interview and avoidance of conflicts of interest are just a few of the ethical guidelines promoted
by the Strategic and Competitive Intelligence Professional’s code of ethics.8

Stakeholder Materiality
After the many environments are scanned, a company needs to evaluate and prioritize the
impact that its stakeholders and their issues may have on the company. The importance
attributed to a stakeholder is often referred to as materiality. Stakeholder materiality is an
adaptation of an accounting term that focuses on the importance or significance of something. In this case, it describes a method used to prioritize the relevance of the stakeholders
and their issues to the company.
Sonoco, a global provider of packaging products and services, completed its first
stakeholder materiality assessment of economic, environmental, and social issues in
2014. The company began by identifying potential stakeholders and created a list of
nine stakeholders: customers, suppliers, peers, shareholders, non-governmental
organizations, community leaders, government regulators, employees, and leadership. The company then searched various sources for information on each
stakeholder, such as websites, corporate social responsibility reports, mission
statements, and 10-K filings to create a list of issues. They used a four-point scale
to rate each stakeholder from low to high based on the significance of the issue to
the stakeholder. This scoring system enabled Sonoco to identify highly influential
stakeholder groups as having the greatest potential impact on the company’s strategic
objectives or those stakeholders most influenced by the company’s operations.9
After the information is collected, it needs to be analyzed and placed on a matrix that
shows the importance of the issue for the stakeholder and the importance of the issue
assigned by the company. This evaluation allows the company to prioritize their attention
on issues in the quadrant showing issues of importance to stakeholders AND the company.
An example of such a matrix representing stakeholder materiality at Nestlé is shown in
Figure 2.3. Nestlé assessed the degree of stakeholder importance for an issue, as well as
the potential impact of the issue on Nestlé. This combination enabled the company to place
a higher, or lower, priority on many public issues.

8

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

Chapter 2 Managing Public Issues and Stakeholder Relationships 33

FIGURE 2.3 The Stakeholder Materiality Matrix

High

Source: Nestlé

Climate
change

Stakeholder Interest

Animal
welfare

Responsible
marketing
and influence

Resource efficiency, (food)
waste, and circular economy

Natural resource
stewardship
Employee safety,
health, and wellness

Over- and
under-nutrition

Human
rights

Business ethics

Water
stewardship
Food and
product
safety

Food and
nutrition security

Responsible sourcing
and traceability

Fair employment
and youth
employability

Rural development and
poverty alleviation

Water, sanitation
and hygiene

Low

Women’s
empowerment

Moderate

Significant

Major

Impact on Nestlé
Nutrition

Rural development

Water

Environmental sustainability

Our people, human rights, and compliance

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

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

34

Part One Business in Society

FIGURE 2.4

The Issue
Management Process

IDENTIFY
ISSUE

ANALYZE
ISSUE

EVALUATE
RESULTS

GENERATE
OPTIONS

TAKE
ACTION

their feed for cattle, hogs and chickens. Many poultry producers, for example, used
antibiotics in their chickens’ feed since it increased their weight and prevented outbreaks of illnesses. But the consumer groups and the FDA charged that overuse of
antibiotics also increased the development of potentially deadly bacteria that antibiotics could not kill. These antibiotic-resistance bacteria could be transferred to people who ate the meat (or consumed the milk or eggs) of treated animals. Although
the health risks were small, public outcry increased dramatically, and consumers
called for action by the animal producers.10
The concern over increased health risk from antibiotics caught poultry producers by
surprise, and many firms began an immediate investigation into the issue.

Analyze Issue
Once an issue has been identified, its implications must be analyzed. Organizations must
understand how the issue is likely to evolve, and how it is likely to affect them. For each
company, the ramifications of the issue will be different.
Understanding how the use of antibiotics could affect the health of humans consuming chickens was complex. On one hand, the company was concerned about
the public’s safety, and did not want customers to become ill if they consumed
chickens raised with antibiotics. On the other hand, antibiotics were a mainstay
for most poultry producers in the United States. Bigger, healthier chickens translated into greater profits. Poultry producers were unsure of the consequences of
removing antibiotics for their companies, both in terms of their chickens’ health
but also the firms’ profitability. One outbreak of illness could quickly spread
throughout their entire flock of chickens, resulting in devastating costs for the
10

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

Chapter 2 Managing Public Issues and Stakeholder Relationships 35

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

Generate Options
An issue’s public profile indicates to managers how significant an issue is for the organization, but it does not tell them what to do. The next step in the issue management process
involves generating, evaluating, and selecting among possible options. This requires complex judgments that incorporate ethical considerations, the organization’s reputation and
good name, and other nonquantifiable factors.
Many of the poultry producers started to investigate if there were alternatives available to them to replace the use of antibiotics. Firms explored the use of organic
and antibiotics-free production practices that could keep the flocks healthy and
robust, while also keeping pace with the changing consumer demands. The use of
probiotics—beneficial, plant-based bacteria that can strengthen immune systems—
appeared to be a viable alternative.
Selecting an appropriate response often involves a creative process of considering various alternatives and rigorously evaluating them to see how they work in practice.

Take Action
Once an option has been chosen, the organization must design and implement a plan of
action. Sometimes there may be unintended consequences from the actions undertaken by
the company.
Purdue Farms, the third-largest U.S. poultry producer, addressed emerging consumer concerns about antibiotics by announcing its “no antibiotics ever” policy.
The firm stated it would eliminate, by June 2016, antibiotics in all chicken products
sold in supermarkets across the United States. Other poultry producers quickly
followed. Tyson Foods, the country’s largest poultry producer, announced in
February 2017 that it would eliminate antibiotics used in its chicken products,
including breasts, wings, and nuggets. “We believe our responsibility is to grow and
grow responsibly,” said Tyson’s CEO Tom Hayes.12

Evaluate Results
Once an organization has implemented the issue management program, it must continue
to assess the results and make adjustments if necessary. Many managers see issue management as a continuous process, rather than one that comes to a clear conclusion.
Although specific results from the switch to chickens raised without antibiotics had
not yet been fully studied, experts made some predictions. Some argued that the
likelihood of serious illness, even death, caused by ingesting antibiotic-resistant
bacteria would be reduced. Others argued that more medical research jobs would
be created to study probiotics and other alternative treatments to keep poultry and
livestock healthy and growing.
11
Ibid., The Wall Street Journal, February 21, 2017, and “Perdue to Eliminate Antibiotics in Some Chicken Products,” The
Wall Street Journal, February 26, 2016, www.wsj.com.
12
Ibid., The Wall Street Journal, February 21, 2017, and “Adjuncts and Alternatives in the Time of Antibiotic Resistance and
in Feed Antibiotic Bans,” Microbial Biotechnology, June 22, 2017, onlinelibrary.wiley.com.

36

Part One Business in Society

This example illustrates the complexity of the issue management process. Figure 2.4
is deliberately drawn in the form of a loop. When working well, the issue management
process continuously cycles back to the beginning and repeats, pulling in more information, generating more options, and improving programmatic response. Such was the case
with the concern over the use of antibiotics in animals. Poultry producers stated they were
committed to addressing the issue and knew that they needed to monitor the progress being
made with the development of technologies and new medicines to fully address an emerging public issue.
Contemporary issue management is truly an interactive process, as forward-thinking
companies must continually engage in a dialogue with their stakeholders about issues that
matter, as Purdue Farms, Tyson Foods, and other firms have learned. New challenges may
emerge from anywhere in the world and at any time. Managers must not only implement
programs, but continue to reassess their actions to be consistent with both ethical practices
and long-term survival.

Organizing for Effective Issue Management
Who manages public issues? What departments and people are involved? There is no simple answer to this question. Figure 1.5, presented in Chapter 1, showed that the modern
corporation has many boundary-spanning departments. Which part of the organization is
mobilized to address a particular emerging issue often depends on the nature of the issue
itself. For example, if the issue has implications for public policy or government regulations, the public affairs or government relations department may take a leadership role.
(The public affairs department is further discussed in Chapter 8.) If the issue is an environmental one, the department of sustainability or environment, health, and safety may take
on this role. Some companies combine multiple issue management functions in an office
of external relations or corporate affairs. The following example illustrates how one company has organized to manage emerging public issues.
At Publix, the largest employee-owned grocery chain in the United States with
revenues of over $34.6 billion in 2017, the coordination of public issues is handled
by six different, yet related, teams: corporate communications, customer care,
government relations, media and community relations, social media, and special
projects. The corporate communications team handles a wide array of internal
communications, including an eight-page monthly newsletter, Publix News. When
customers contact the company with a potential public issue, the customer care
team responds to resolve customer concerns and answer customer questions. If the
public issue has a governmental element, then the government relations team is
organized to communicate with federal, state, and local officials regarding matters
affecting the company’s ability to effectively compete in the marketplace. Each
division within the company has a media and community relations team who
interacts with the news media and the communities served by the company to
address any public issue. A social media team at Publix uses Facebook, Twitter,
and other channels to monitor and handle any emerging public issues. And, finally,
the special projects team preserves and promotes the company’s history as an
important part of the Publix culture. The company relies on its tradition to guide
responses to public issues as they arise.13

13

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

Exhibit 2.A

Coca-Cola Sets Recycling Goals

For many years, Coca-Cola was the target of environmental activists because the firm produced billions of
plastic bottles that often ended up in landfills and oceans. In January 2018, the company announced an
ambitious sustainability goal: it would collect and recycle the equivalent of all the packaging it put out into
the world by 2030. The program was called “A World Without Waste” and included investing in more efficient
packaging, local recycling programs, and consumer education.
The program was announced shortly after Greenpeace, an environmental advocacy group, identified
Coca-Cola, PepsiCo, and Nestlé as some of the world’s worst polluters. Greenpeace was also critical of
Coca-Cola’s new sustainability initiative. “The plan failed to include any reduction of the company’s rapidly
increasing use of single-use plastic bottles globally, which now stands at well over 110 billion annually,”
according to a Greenpeace press release.
Coca-Cola CEO James Quincey disagreed. “If we recollect all the bottles, there is no such thing a single
use bottle. Every bottle comes back and every bottle has another life.” Rather than tackle the difficult task of
collecting every bottle it produced, Coca-Cola aimed to collect an equivalent number of bottles. But, Quincey
admitted that the biggest challenge for his company’s plan would be in developing countries that did not
have modern systems of waste collection. “That’s clearly going to be a lot of groundwork with a lot of other
organizations and the governments to start building that infrastructure.”
Source: “Coca-Cola, Criticized for Plastic Bottles, Sets Recycling Goals,” The Wall Street Journal, January 19, 2018, www.wsj.com.

Public affairs professionals help companies and nonprofits manage their operations by
anticipating governmental concerns and actions, understanding how stakeholders influence
a firm’s license to operate, and helping their organization deal with emerging threats and
opportunities. The Foundation for Public Affairs (FPA) reported in 2017 that “when political risk and economic uncertainty are high, . . . the public affairs function becomes even
more indispensable.”14 FPA survey data showed that 56 percent of companies had increased
their public affairs budgets in the previous three years and only 26 percent had experienced
a decrease. And CEOs are increasingly getting involved in public affairs, with 57 percent
engaged moderately or extensively and only 9 percent not engaged at all. One example of
an exemplary corporate response to an important public issue is described in Exhibit 2.A.
What kinds of managers are best able to anticipate and respond effectively to emerging
public issues? What skill sets are required? The European Academy of Business in Society
(EABIS) undertook a major study of leaders in companies participating in the United
Nations Global Compact. (This initiative is a set of basic principles covering labor, human
rights, and environmental standards, to which companies can voluntarily commit.) The
researchers were interested in the knowledge and skills required of what they called the
“global leader of tomorrow.”
They found that effective global leadership on these public issues required three basic
capabilities. The first was an understanding of the changing business context: emerging
environmental and social trends affecting the firm. The second was an ability to lead in
the face of complexity. Many emerging issues, the researchers found, were surrounded by
ambiguity; to deal with them, leaders needed to be flexible, creative, and willing to learn
from their mistakes. The final capability was connectedness: the ability to engage with
external stakeholders in dialogue and partnership. More than three-fourths of executives
polled said that these skills were important.15
14

Quotation from “The State of Corporate Public Affairs,” Foundation for Public Affairs, 2017.
European Academy of Business in Society, Developing the Global Leader of Tomorrow (United Kingdom: Ashridge,
December 2008). Based on a global survey of 194 CEOs and senior executives in September–October 2008.
15

37

38

Part One Business in Society

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

Stages in the Business–Stakeholder Relationship
Over time, the nature of business’s relationship with its stakeholders often evolves through
a series of stages. Scholars have characterized these stages as inactive, reactive, proactive,
and interactive, with each stage representing a deepening of the relationship. Sometimes,
companies progress through this sequence from one stage to the next; other companies
remain at one stage or another, or move backward in the sequence.16
∙ Inactive companies simply ignore stakeholder concerns. These firms may believe—
often incorrectly—that they can make decisions unilaterally, without taking into consideration their impact on others. Executives at Home Depot failed to listen to their
employees’ concerns about potential breaches of the company’s data security systems
and later experienced the theft of detailed consumer information from 56 million credit
and debit cards. Their inactive response was costly: according to some estimates, the
information from the stolen cards could be used to make $3 billion in illegal purchases.
∙ Companies that adopt a reactive posture generally act only when forced to do so, and
then in a defensive manner. For example, in the film A Civil Action, based on a true
story, W. R. Grace (a company that was later bought by Beatrice Foods) allegedly
dumped toxic chemicals that leaked into underground wells used for drinking water,
causing illness and death in the community of Woburn, Massachusetts. The company
paid no attention to the problem until forced to defend itself in a lawsuit brought by a
crusading lawyer on behalf of members of the community.
∙ Proactive companies try to anticipate stakeholder concerns. These firms use environmental scanning practices to identify emerging public issues. They often have specialized departments, such as those at Publix, described earlier in the chapter. These firms
are much less likely to be blindsided by crises and negative surprises. Stakeholders and
their concerns are still, however, considered a problem to be managed, rather than a
source of competitive advantage.
∙ Finally, an interactive stance means that companies actively engage with stakeholders
in an ongoing relationship of mutual respect, openness, and trust. For example, in an
effort to address continuing high unemployment rates, Starbucks teamed with Opportunity Finance Network, a group of community development financial institutions, to
launch “Create Jobs for USA.” Donations from Starbucks customers, employees, and
others were pooled into a nationwide fund to promote community business lending. The
16
This typology was first introduced in Lee Preston and James E. Post, Private Management and Public Policy (Englewood
Cliffs, NJ: Prentice Hall, 1975). For a more recent discussion, see Sandra Waddock and Andreas Rasche, Building the
Responsible Enterprise: Where Vision and Values Meet Value (Palo Alto: Stanford University Press, 2012).

Chapter 2 Managing Public Issues and Stakeholder Relationships 39

focus of this program later expanded to include veterans with a goal of employing
10,000 veterans and active duty spouses by 2018.17
Firms with this approach recognize that positive stakeholder relationships are a source
of value and competitive advantage for the company. They know that these relationships
must be nurtured over time.

Drivers of Stakeholder Engagement
When are companies most likely to engage with stakeholders, that is, to be at the interactive stage? What drives companies to go beyond an inactive or reactive stage to a proactive
or interactive stage of stakeholder engagement?
Stakeholder engagement is, at its core, a relationship. The participation of a business organization and at least one stakeholder organization is necessary, by definition, to constitute
engagement. In one scholar’s view, engagement is most likely when the company and its stakeholders both have an urgent and important goal, the motivation to participate, and the organizational capacity to engage with one another. These three elements are presented in Figure 2.5.

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

Motivation
Both sides must also be motivated to work with one another to solve the problem. For
example, the company may realize that the stakeholder group has technical expertise to
help it address an issue. Or, it needs the stakeholder’s approval, because the stakeholder is
in a position to influence policymakers, damage a company’s reputation, or bring a lawsuit. Stakeholders may realize that the best way actually to bring about change is to help a
FIGURE 2.5

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

17

Company

Stakeholders(s)

Goal

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

To change corporate behavior
on an issue of concern

Motivation

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

Governmental campaigns,
protest perceived as
inadequate to change
corporate behavior

Organizational capacity

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

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

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

40

Part One Business in Society

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

Organizational Capacity
Each side must have the organizational capacity to engage the other in a productive dialogue. For the business, this may include support from top leadership and an adequately
funded external affairs or comparable department with a reporting relationship to top executives. It may also include an issue management process that provides an opportunity for
leaders to identify and respond quickly to shifts in the external environment. For the stakeholder, this means a leadership or a significant faction that supports dialogue and individuals or organizational units with expertise in working with the business community.
In short, engagement is most likely to occur where both companies and stakeholders
perceive an important and urgent problem, see each other as essential to a solution, and
have the organizational capacity to interact with one another.

The Role of Social Media in Stakeholder Engagement
Social media plays an increasingly important role in businesses’ effort to address public
issues and engage stakeholders. Beyond the common use of social media as an advertising
tool, many companies now use social networks to identify and solve problems faster, share
information better among their employees and partners, and bring customers’ ideas for
new product designs to market earlier.
Experts argue that corporate social networking has its advantages and its disasdvantages. Some studies show that many employees enjoy creating a corporate social
networking page that is separate from their public social networking profile. While
adding work colleagues and supervisors to a public social networking group is possible, many people prefer to keep their social lives separate from their work lives.
In addition, creating internal blog posts, commenting on projects, and keeping up
with work-related news is advantageous to some workers, supporting the building
of social network pages at work.
Yet, experts also point out that a corporate social network can cost thousands of dollars
to build. In order to erect an internal networking platform to house the employees’
social network pages, numerous specialists must be hired. Once a platform is constructed, employees must spend the time to create profiles, maintain updates, and network within a corporate social networking group, generally all occurring on company
time. Many employees do not want to spend the time or effort building a corporate networking page. Since employees cannot access an internal social networking group after
leaving a job, many employees feel as though spending time working on a networking
page is futile. In addition, any information posted to a corporate social networking page
remains the property of a company. Thus, most employees looking to gain recognition
with new customers and new employers will not spend time building an internal social
networking page.18
Despite some of the reservations voiced by employees, businesses and their public
affairs managers have increasingly turned to social media platforms to engage with multiple stakeholders, resulting in communication that has become faster and more effective.

18

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

Exhibit 2.B

Merck and Access Accelerated

Around the world, approximately 400 million people lack access to effective and affordable health care.
According to the World Health Organization, low- and middle-income countries bear about 90 percent of
the world’s disease burden. Merck, a German-based multinational chemical, pharmaceutical, and life sciences company, began a global partnership program, Access Accelerated, to tackle this complex challenge
by researching innovative solutions, developing new approaches, and improving existing programs to help
people at the point of care.
At the 2017 World Economic Forum, Merck convened with 21 other leading pharmaceutical companies
and dozens of multilateral organizations, government agencies, and NGOs, as well as academic institutions,
health industry associations, and experts from the private sector. They began a dialogue to explore accessing
information on the world’s most pressing health issues and to design how to best launch global initiatives to
focus on improving both treatment and prevention of noncommunicable diseases in low- and middle-income
countries.
By 2018, Merck and its business partners had joined the Kenya Ministry of Health, the World Bank Group,
and AMPATH, a Kenyan hospital, to launch the first noncommunicable disease (NCD) county pilots. The pilots
integrated NCD services into primary health care in two Kenyan counties: Busia and Trans Nzoia. In another
effort, Celgene Corporation, a business partner in Access Accelerated, announced the launch of Celgene
Cancer Care Links, a new grant program designed to support and enhance patient cancer care in
resource-constrained countries.
Source: See Merck’s Corporate Responsibility Report at reports.emdgroup.com/2016/cr-report/products/access-to-health.html
and the Access Accelerated website, accessaccelerated.org

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

Stakeholder Networks
Dialogue between a single firm and its stakeholders is sometimes insufficient to address
an issue effectively. Corporations sometimes encounter public issues that they can address
effectively only by working collaboratively with other businesses and concerned persons
and organizations in stakeholder networks. One such issue that confronted Nike, Inc., was
19

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

41

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Part One Business in Society

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

The Benefits of Engagement
Engaging interactively with stakeholders—whether through dialogue, network building,
or some other process—carries a number of potential benefits. Managers increasingly recognize the critical nature of this corporate strategy as the number of stakeholders and the
complexity of the issues involving stakeholders are increasing significantly, as one business consulting organization reports.22
In an era of hyper-transparency and intensifying political and social disruptions,
companies are re-evaluating their purpose in society and the benefits of engaging
with multiple stakeholders. There are growing calls from government and civil
society for corporations to become partners in supporting a more inclusive economy and sustainable environment and these expectations will only increase. More
than ever before, companies face competitive pressure to integrate new ideas and
voices into their work. These changes are adding significant value to the business
and the communities in which they operate.23
Companies deeply engaging in stakeholder partnerships bring a number of distinct strengths. Stakeholder groups are often aware of shifts in popular sentiment before

21
Nike’s description of its sustainability targets and measures are provided in Nike’s Sustainable Business Report,
2014–2015 found at about.nike.com.
22
For an overview of stakeholder engagement, see Michael Yaziji and Jonathan Doh, NGOs and Corporations: Conflict and
Collaboration: (Cambridge, UK: Cambridge University Press, 2009), ch. 7, “Corporate-NGO Engagements: From Conflict to
Collaboration,” pp. 123–45.
23
“The Future of Stakeholder Engagement,” BSR, October 2016, p. 3.

Chapter 2 Managing Public Issues and Stakeholder Relationships 43

companies are, and are thus able to alert companies to emerging issues. For example,
as described earlier in this chapter, Purdue Farms’ and Tyson Foods’ engagements with
consumer-activist groups and government agencies helped raise its awareness of concerns
about their antibiotic use in animals. Stakeholders often operate in networks of organizations very different from the company’s; interacting with them gives a firm access to
information in these networks. As introduced at the beginning of this chapter, businesses
took action against various social issues, joining social activist and community groups in
protest of the government’s actions. Community groups raised important issues about gun
violence and gun control after a school shooting in Florida, causing businesses to re-think
their positions on these social issues, as discussed at the end of this chapter.
Firms are learning that their engagement with stakeholders is of critical importance to
the organization and need to address multiple levels of engagement. This engagement
should include both internal, as well as external, stakeholders and emphasize issues that
directly affect corporate strategy. As the BSR report on stakeholder engagement points out,
there are five drivers fueling a change in stakeholder engagement: communication, individual empowerment, automation of work, climate change and other sustainability issues,
and supply chain impact.24
Companies are learning that it is important to take a strategic approach to the management of public issues, both domestically and globally. This requires thinking ahead, understanding what is important to stakeholders, scanning the environment, and formulating
action plans to anticipate changes in the external environment. Effective issue management
requires involvement both by professional staff and leaders at top levels of the organization. It entails communicating across organizational boundaries, engaging with the public,
and working creatively with stakeholders to solve complex problems.

Summary

∙ A public issue is an issue that is of mutual concern to an organization and one or more
of the organization’s stakeholders. Stakeholders expect a level of performance by businesses, and if it is not met a gap between performance and expectation emerges. The
larger the gap, the greater risk of stakeholder backlash or missed business opportunity.
∙ The eight strategic radar screens (the customer, competitor, economic, technological,
social, political, legal, and geophysical environments) enable public affairs managers to assess and acquire information regarding their business environments. Managers must also assess the importance or materiality of public issues to the firm and its
stakeholders.
∙ The issue management process includes identification and analysis of issues, the generation of options, action, and evaluation of the results.
∙ In the modern corporation, the issue management process takes place in many boundaryspanning departments. Some firms have a department of external affairs or corporate
relations to coordinate these activities and top management support is essential for
effective issue management.
∙ Stakeholder engagement involves building relationships between a business firm and
its stakeholders around issues of common concern and is enhanced by understanding
the goals, motivations, and organizational capacities relevant to the engagement. Social
media is playing a more expansive role in stakeholder engagement.
∙ Stakeholder dialogue is central to good stakeholder engagement, supported by network
building or partnerships.
24

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

44

Part One Business in Society

Key Terms

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

Internet
Resources

www.wn.com/publicissues
www.nifi.org
www.un.org/en/globalissues
www.issuemanagement.org
www.scip.org
www.wfs.org
www.globalissues.org
millennium-project.org
www.cfr.org
pac.org/fpa

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

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

World News, Public Issues
National Issues Forum
United Nations, Global Issues
Issue Management Council
Strategic and Competitive Intelligence Professionals
World Future Society
Global Issues
The Millennium Project
Council on Foreign Relations
Foundation for Public Affairs, Public Affairs Council

Discussion Case: Businesses Respond to the Movement
for School Safety
The quiet community of Parkland, Florida, was rocked in 2018 when a 19-year-old former
student entered Marjory Stoneman Douglas High School with a duffel bag containing an
AR-15-style rifle, a vest with additional magazines for the weapon, and a semi-automatic
version of the M16 rifle used by the U.S. military. Within minutes, he had shot and killed
17 people, and the nation mourned another tragic school shooting.
In response, Parkland students launched the #NeverAgain movement and protested continuing gun violence, especially in schools; the lack of gun control measures; and a mental
health system that had allowed someone with a troubled history to purchase an assault
rifle. A month later hundreds of thousands of people—children, parents, politicians, and
celebrities—gathered for “The March For Our Lives” in Washington, DC, jamming onto
Pennsylvania Avenue from the White House to the U.S. Capitol in what may have been the
biggest rally for tighter gun control in American history. Other similar marches and protests were held that day in nearly every major U.S. city. Many called on Congress to take
action and pass strict gun control legislation, as had also occurred after prior mass shooting
incidents in Las Vegas, Newtown, Orlando, and other cities and towns.
Some protesters simply called for a ban on assault rifles and more thorough background checks for gun purchasers. Others specifically targeted the National Rifle Association (NRA), an advocacy organization that had vigorously opposed any restrictions
on gun ownership. In response to the Parkland students, NRA’s CEO Wayne LaPierre
told an audience at the Conservative Political Action Conference that “as usual the
opportunists wasted not one second to exploit tragedy for gain,” adding that gun control

Chapter 2 Managing Public Issues and Stakeholder Relationships 45

advocates and the media “hate the NRA, they hate the Second Amendment [to the U.S.
Constitution, which states the right of the people to keep and bear arms], [and] they hate
individual freedom.”
In the wake of the Parkland shootings and subsequent protests, several companies broke
their relationship with the NRA and its members. MetLife, a large insurance company,
announced it would stop providing discounts for auto and home insurance for NRA members. “We value all our customers but have decided to end our discount program with
the NRA,” the company announced in a press statement. The cybersecurity firm Symantec stopped its discount program for NRA members who purchased its LifeLock identity
theft protection service and Norton antivirus software. SimpliSafe, a home security services company, ended its NRA promotions. Numerous rental car companies, including
Hertz, Enterprise (which also operates Alamo and National), and Avis Budget, ended their
NRA-membership discount programs.
The First National Bank of Omaha was among the first banks to end a Visa credit
card with NRA branding that offered cardholders 5 percent cashback on gas and sporting
goods purchases. Bank of America said they would no longer lend money to manufacturers of military-inspired firearms that civilians could use, such as AR-15-style rifles. Delta
and United Airlines, two of America’s largest passenger airline carriers, cut ties with the
NRA after a call to boycott the NRA became a top trend on Twitter. Both airline companies ended discount programs for NRA members through their group travel programs,
including United’s program to offer discounts to NRA members traveling to the NRA’s
annual meeting. “Bank and other companies are sensitive to being on the wrong side of
a social media campaign, which can spread pretty quickly these days,” said University of
Michigan marketing professor Erik Gordon. “They don’t want to risk having people march
or boycott.”
The NRA was quick to fire back. In an official statement, the organization said, “Some
corporations have decided to punish NRA membership in a shameful display of political
and civic cowardice. In time, these brands will be replaced.”
Some businesses experienced a backlash to their actions. Senator Michael Crapo, the
head of the Senate banking committee, sent blistering letters to top executives at some
major banks accusing them of using their market power to manage social policy. He
warned them against developing ways to monitor gun transactions through their payments
systems. The Georgia state legislature removed a provision in a tax bill which would have
given Delta Airlines a $40 million airline fuel tax exemption. Analysts calculated that only
13 NRA members actually had used Delta’s group travel discount, resulting in a cost to
Delta of more than $3 million per NRA passenger served. Delta’s CEO responded, “The
decision [to cancel the NRA discount] was not made for economic gain and our values are
not for sale.” Others argued that the so-called liberal reaction by businesses to join the gun
protesters galvanized conservative groups, deepening their support of the NRA and their
resolve to protect their right to bear arms.
Sources: “NRA-Affiliated Businesses Shed Ties after Parkland, Florida, School Shooting,” USA Today, February 23, 2018,
www.usatoday.com; “Firms Reassess Involvement in Gun Industry in Wake of Florida Shooting,” The Wall Street Journal,
February 25, 2018, www.wsj.com; “Banks Tried to Curb Gun Sales; Now Republicans Are Trying to Stop Them,” The New York
Times, May 25, 2018, www.nytimes.com; and, “Only 13 NRA Members Used Delta’s Discount, It Cost the Airline a $40 Million
Tax Break,” Washington Post, March 3, 2018, www.washingtonpost.com.

46

Part One Business in Society

Discussion
Questions

1. What was the public issue facing the companies in this case?
2. Describe the “performance–expectations gap” found in the case. What were the stakeholders’ (community and school students) expectations, and how did they differ from
businesses’ performance?
3. If you applied the strategic radar screens model to this case, which of the eight environments would be most significant, and why?
4. Apply the issue management life cycle process model to this case. Which stages of the
process can you identify?
5. In your opinion, did businesses respond appropriately to this issue? Why or why not?
6. If you had been a manager of one of the airlines or banks discussed in the case, what
would you have decided to do (or not do) in the face of emerging public concern about
gun violence in schools?

C H A P T E R

T H R E E

Corporate Social
Responsibility and
Citizenship
The idea that businesses bear broad responsibilities to society as they pursue economic goals is an
age-old belief. Both market and nonmarket stakeholders expect businesses to act responsibly, and
many companies have responded by making social goals a part of their overall business operations
and adopting the goal of being a good corporate citizen. Businesses embracing these responsibilities often build positive relationships with stakeholders, discover business opportunities in serving
society, and transform a concern for financial performance into a vision of integrated financial, social,
and environmental performance. Business ventures of all sizes—entrepreneurial, small to medium
business enterprises, and corporate endeavors—hold innate responsibilities to those they impact
market and nonmarket stakeholders. Establishing effective structures and processes to meet a company’s social and corporate citizenship responsibilities, assessing the results of these efforts, and
reporting on the firm’s performance to the public are important challenges facing today’s managers
and business owners.
This Chapter Focuses on These Key Learning Objectives:
LO 3-1 Understanding the role of big business and the responsible use of corporate power in a democratic
society.
LO 3-2 Knowing when the idea of corporate social responsibility originated and investigating how a company’s purpose or mission can integrate social objectives with economic and legal objectives.
LO 3-3 Examining the key arguments in support of and concerns about corporate social responsibility.
LO 3-4 Defining global corporate citizenship and recognizing the rapidly evolving management practices
to support global citizenship.
LO 3-5 Examining businesses with an explicitly social mission, such as social ventures and B corporations.
LO 3-6 Distinguishing among the sequential stages of global corporate citizenship.
LO 3-7 Understanding how businesses assess and report their social performance.

47

48

Part One Business in Society

Do managers have a responsibility to their shareholders? Certainly they do, because the
owners of the business have invested their capital in the firm, exhibiting the ownership
theory of the firm presented in Chapter 1. Do managers also have a responsibility, a social
responsibility, to their company’s other market and nonmarket stakeholders—the people
who live where the firm operates, who purchase the firm’s product or service, or who work
for the firm? Does the stakeholder theory of the firm, described in detail in Chapter 1,
expand a firm’s obligations to include multiple stakeholders present in an interactive social
system? Generally, yes, but while managers may have a clear responsibility to respond to all
stakeholders, just how far should this responsibility go? Consider the following examples:
Starbucks Coffee Company launched a $70 million initiative to help coffee farming
communities around the world mitigate their climate change impacts and promote
long-term crop stability. Starbucks transformed a 240-hectare farm located on the
slopes of the Poas Volcano in Costa Rica into a global agronomy center, enabling
the company to expand its Coffee and Farming Equity practices program (C.A.F.E.).
Starbucks’ chairman Howard Schultz said, “This investment, and the cumulative
impact it will have when combined with programs we have put into place over the
last forty years, will support the resiliency of coffee farmers and their families as
well as one million people that represent our collective coffee supply chain.”1
Joshua Shapiro visited three small villages in Uganda and was shocked by the
unsafe cooking conditions he saw there. Kitchens were small, dark, and unventilated. People could barely breathe. According to the World Health Organization,
around 3 billion people cook and heat their homes using open fires and simple
stoves burning wood, animal dung, and crop waste for fuel. Shapiro, an engineer in
Carnegie Mellon University’s CREATE lab, began working on an idea and returned
five years later as part of the Toyota’s Ideas for Good project to install a half-dozen
hand-built, solar-powered ventilation systems to clear the air in the kitchens.
Schapiro and his venture partner, Mike Taylor, assembled and installed an additional 25 systems during their second trip to Uganda and planned to construct
hundreds more. These social entrepreneurs were funded by gifts and grants from
various nonprofit organizations, corporations, and individuals.2
Are the efforts described above examples of social responsibility and citizenship practiced by a corporation and social entrepreneurs? Do they represent a successful merger of
social and economic objectives, or should these programs be questioned as inappropriate
uses of business assets—finances, personnel, and products? How far should an organization
or entrepreneur go to help those in society in need of their support? How much is too much?
This chapter describes the role business plays in society, introduces the concepts of corporate social responsibility and global citizenship, and describes how businesses implement
them in practice. How organizations should balance their multiple responsibilities—
economic, legal, and social—and become a valued corporate citizen is an ongoing challenge. What are the advantages and drawbacks of being socially responsible? Should the
purpose or mission of the business explicitly seek to integrate social objectives with economic objectives? How does a business become a better corporate citizen; what steps are
necessary? What standards do businesses use to assess their social performance, and how
do they report their performance to stakeholders?
1

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

Chapter 3 Corporate Social Responsibility and Citizenship 49

CORPORATE POWER AND RESPONSIBILITY
Undeniably, businesses, especially large corporations—whether by intention or accident,
and whether for good or evil—play a major role in all that occurs in society. The power
exerted by the world’s largest business organizations is obvious and enormous. This influence, termed corporate power, refers to the capability of corporations to influence government, the economy, and society, based on their organizational resources.
One way to get a sense of the economic power of the world’s largest companies is to
compare them with nations. Figure 3.1 shows some leading companies alongside countries
whose total gross domestic product is about the same as these companies’ revenue. The
revenues of the wealthiest company in the world, Walmart, are about the same as the gross
domestic product (GDP) of Belgium. China Natural Petroleum’s revenues are the same as
Chile’s GDP; Apple’s revenues are the same as Vietnam’s GDP; Amazon’s revenues are
the same as Hungary’s GDP; and BMW’s revenues are the same as Ukraine’s GDP.
The size and global reach of major international enterprises such as Walmart and the
others listed in Figure 3.1 give them tremendous power. Through their ever-present marketing, they influence what people want and how they act around the world. We count on
corporations for job creation; much of our community well-being; the standard of living
FIGURE 3.1 Comparison of Annual Sales Revenue and the Gross Domestic Product for
Selected Multinational Enterprises and Nations in $ Billions*

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

486

Walmart
315
263

Belgium

State Grid

Philippines

China National
Petroleum

Chile

Toyota Motor

Bangladesh

255

205

321
263
250

Apple

Vietnam

216

Exxon Mobil

Romania

205

216

General
Motors

166

135 Amazon
118 Costco

166

Qatar

Hungary 132
Kuwait 118

China Mobile
107 Communications

Morocco 110

104

Ukraine 104

BMW

94 Wells Fargo

492

Ecuador 97

$ Billions of Sales
(2017)
*2017 $ billions of sales compared to 2016 gross domestic product in $ billions.

Gross Domestic Product,
$ Billions (2016)

50

Part One Business in Society

we enjoy; the tax base for essential municipal, state, and national services; and our needs
for banking and financial services, insurance, transportation, communication, utilities,
entertainment, and a growing proportion of health care. These corporations have the
resources to make substantial contributions to political campaigns, as discussed in Chapter 8,
thus influencing the policies of governments. They dominate not only the traditional
domains of product manufacture and service delivery, but also increasingly reach into such
traditionally public sector activities as education, law enforcement, and the provision of
social services.3
The following well-known quotation, frequently appearing in journals for business
executives, challenges its readers to assume a responsible role for business in society:
Business has become . . . the most powerful institution on the planet. The dominant
institution in any society needs to take responsibility for the whole. . . . Every decision that is made, every action that is taken, must be viewed in light of that kind of
responsibility.4
The tremendous power of the world’s leading corporations has both positive and negative effects. A big company may have definite advantages over a small one. It can command more resources, produce at a lower cost, plan further into the future, and weather
business fluctuations somewhat better. Globalization of markets can bring new products,
technologies, and economic opportunities to developing societies, and help those in need.
For example, as discussed in Chapter 11, UPS teamed up with regional African health care
providers to use drones for shipping needed medical supplies within minutes, rather than
hours, to save lives.
Yet, the concentration of corporate power can also harm society. Huge businesses can
disproportionately influence politics, shape tastes, and dominate public discourse. They can
move production from one site to another, weakening unions and communities. These companies can also use their economic influence to collude to fix prices, divide markets, and quash
competition in ways that can negatively affect consumer choices, employment opportunities,
or the creation of new businesses. The Carbon Majors Report released in 2017 claimed that,
since 1988, just 100 companies had been the source of more than 70 percent of the world’s
greenhouse gas emissions. Multinational energy companies, including ExxonMobil, Shell,
BP, and Chevron, were identified as among the highest emitting investor-owned companies.5
The focused power found in the modern business corporation means that every action
it takes can affect the quality of human life—for individuals, for communities, and for the
entire globe. The obligation this gives rise to is the notion of the iron law of responsibility.
The iron law of responsibility says that in the long run those who do not use power in ways
that society considers responsible will tend to lose it.
Given the virtually immeasurable power in the hands of the leaders of large, global
corporations, stakeholders throughout the social system expect business to take great care
in wielding its power responsibly for the betterment of society. As a result, social responsibility has become a worldwide expectation.
3

For two classic analyses of corporate power, see Alfred C. Neal, Business Power and Public Policy (New York: Praeger,
1981); and Edwin M. Epstein and Dow Votaw, eds., Rationality, Legitimacy, Responsibility: Search for New Directions in Business and Society (Santa Monica, CA: Goodyear, 1978). More recent treatments may be found in Luis Suarez-Villa, Corporate
Power, Oligopolies, and the Crisis of the State (Albany, NY: State University of New York Press, 2015) and Steve Coll, Private
Empire” ExxonMobil and American Power (New York: Penguin Books, 2012).
4
David C. Korten, “Limits to the Social Responsibility of Business,” The People-Centered Development Forum, article 19,
June 1, 1996.
5
“Just 100 Companies Responsible for 71% of Global Emissions, Study Says,” The Guardian, July 10, 2017, www.theguardian.com.

Chapter 3 Corporate Social Responsibility and Citizenship 51

CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP
Corporate social responsibility (CSR) means that a corporation should act in a way that
enhances society and its inhabitants and be held accountable for any of its actions that
affect people, their communities, and their environment. This concept is based in the root
of the term responsibility, meaning “to pledge back,” creating a commitment to give back
to society and the organization’s stakeholders.6 It implies that harm to people and society
should be acknowledged and corrected if possible. It may require a company to forgo some
profits if its social impacts seriously hurt some of its stakeholders or if its funds can be
used to have a positive social impact.
Being socially responsible does not mean that a company must abandon its other missions. As discussed later in this chapter, a business has many responsibilities: economic,
legal, and social; the challenge for management is to integrate them all into a coherent and
comprehensive mission. As Axel Weber, chairman of UBS, a Swiss global financial services company, explained,
“I see it as my duty to understand the scope and scale of societal challenges. [At
UBS] we consider the immediate and long-term effects of these challenges. We
look at how they may impact the firm, our clients, and other stakeholders, and what
action we may need to take in response. Acting responsibly, achieving a positive
societal change—through our own activities as well as through the products, services and advice we offer to our clients—that’s one of our key roles.”7
More recently, many companies have adopted the term corporate citizenship to refer the
actions they take to put their commitments to corporate social responsibility into practice.
The term global corporate citizenship, similarly, refers to putting these commitments into
practice worldwide, not only locally or regionally. Companies demonstrate their corporate
citizenship by proactively building stakeholder partnerships, discovering business opportunities in serving society, and transforming a concern for financial performance into a
vision of integrated financial and social performance.

The Origins of Corporate Social Responsibility
In the United States, the idea of corporate social responsibility appeared around the start of
the 20th century. Corporations at that time came under attack for being too big, too powerful, and guilty of antisocial and anticompetitive practices. Critics tried to curb corporate
power through antitrust laws, banking regulations, and consumer protection laws.
Faced with this social protest, a few farsighted business executives advised corporations
to use their power and influence voluntarily for broad social purposes rather than for profits alone. Some of the wealthiest business leaders—steelmaker Andrew Carnegie is a good
example—became great philanthropists who gave much of their wealth to educational
and charitable institutions. Other business leaders, like automaker Henry Ford, developed
paternalistic programs to support the recreational and health needs of their employees.
These business leaders believed that business had a responsibility to society that went
beyond their efforts to make profits.
Today a new cohort of philanthropists is emerging. Mark Zuckerberg, CEO of Facebook, and his wife, physician Priscilla Chan, announced that they would give away about
6

For a more complete discussion of the roots of corporate social responsibility and how it is practiced, see Jerry D. Goldstein
and Andrew C. Wicks, “Corporate and Stakeholder Responsibility: Making Business Ethics a Two-Way Conversation,”
Business Ethics Quarterly 17 (2007), pp. 375–98.
7
“Interview with Axel Weber on Corporate Culture and Responsibility at UBS,” UBS website, www.ubs.com.

52

Part One Business in Society

99 percent of their Facebook shares through the Chan Zuckerberg Initiative. The initiative
focused on “personalized learning, curing disease, connecting people and building strong
communities.” Some have predicted that this new cohort of business executives could
amass even greater wealth than their predecessors, through inheritance, entrepreneurial
success, and other means. They will be in a position to transform charitable giving unlike
any previous generation.8 Corporate philanthropy is discussed in more detail in Chapter 18.
William C. Frederick, a leading scholar and a coauthor of several earlier editions of this textbook, described how business’s understanding of corporate social responsibility has evolved
over the past half century.9 During each of four historical periods, corporate social responsibility has had a distinct focus, set of drivers, and policy instruments, as shown in Figure 3.2.
Corporate social responsibility is defined in its most basic form as “learning to live with, and
respect, others.” In his view, corporate social responsibility evolved from a stewardship, to
FIGURE 3.2 Evolving Phases of Corporate Social Responsibility
Source: William C. Frederick, “Corporate Social Responsibility: Deep Roots, Flourishing Growth, Promising Future,” in Andrew Crane, Abagail Williams, Dirk Matten, Jeremy
Moon, and Donald S. Siegel, (Editors), The Oxford Handbook of Corporate Social Responsibility (Oxford: Oxford University Press, 2008), pp. 522–532.

Phases of Corporate Social
Responsibility

CSR Drivers

CSR Policy Instruments

CSR1
Early in the 20th
century but
formally in the
1950s–60s

Corporate Social Stewardship
Corporate philanthropy—acts of charity
Managers as public
Trustee-stewards
Balancing social pressures

Executive conscience
Company image/reputation

Philanthropic funding
Public relations

CSR2
1960s–70s

Corporate Social Responsiveness
Social impact analysis
Strategic priority for social response
Organizational redesign and training
for responsiveness
Stakeholder mapping and
implementation

Social unrest/protest
Repeated corporate misbehavior
Public policy/government regulation
Stakeholder pressures think tank
policy papers

Stakeholder strategy
Regulatory compliance
Social audits
Public affairs function
Governance reform
Political lobbying

CSR3
1980s–90s

Corporate/Business Ethics
Foster an ethical corporate culture
Establish an ethical organizational
climate
Recognize common ethical principles

Religious/ethnic beliefs
Technology-driven value changes
Human rights pressures
Code of ethics
Ethics committee/officer/audits
Ethics training
Stakeholder negotiations

Mission/vision/values
Statements
CEO leadership ethics

CSR4
1990s–present

Corporate/Global Citizenship
Stakeholder partnerships
Integrate financial, social, and
environmental performance
Identify globalization impacts
Sustainability of company and
environment

Global economic trade/investment
High-tech communication networks
Geopolitical shifts/competition
Ecological awareness/concern
NGO pressures

Intergovernmental
compacts
Global audit standards
NGO dialogue
Sustainability audits/
reports

8

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

Chapter 3 Corporate Social Responsibility and Citizenship 53

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

BALANCING SOCIAL, ECONOMIC, AND LEGAL RESPONSIBILITIES
Being socially responsible by meeting the public’s continually changing expectations
requires wise leadership at the top of the corporation. Companies with the ability to recognize profound social changes and anticipate how they will affect operations have proven
to be survivors. They get along better with government regulators, are more open to the
needs of the company’s stakeholders, and often cooperate with legislators as new laws are
developed to cope with social problems.
Nestlé, the world’s leading nutrition, health, and wellness company with its headquarters in Switzerland, launched a large-scale research project on children’s
nutrition leading to product modification or new product development. The global
initiative focused on 10 countries and collaborated with over 240,000 public health
opinion leaders, third-party organizations, and pediatricians around the world. The
Kids Nutrition and Health Study targeted children’s nutrient intake, dietary patterns, and family lifestyle factors. The aim was to help parents ensure the healthy
growth and development of their children, while also giving the company insights
into how to modify existing product ingredients and develop new products.10
The actions taken by Nestlé are an example of a business organization’s leaders being
guided by enlightened self-interest. This concept reflects the notion that providing value to
stakeholders is in a business’s long run self-interest. Nestlé’s research initiative certainly
cost the company money in the short run, but new product development and assistance to
the families and children who used their products and the communities where they lived
would also bring long-term benefits through enhanced reputation and customer loyalty.
Social responsibility is not a business organization’s sole responsibility. In addition, as
members of civil society, organizations have legal obligations, as well as economic responsibilities, to their owners and other stakeholders affected by the financial well-being of the
firm. Any organization or manager must seek to juggle these multiple responsibilities—
economic, legal, and social. The belief that the business of business is solely to attend to
shareholders’ return on investment and make a profit is no longer widely held and has no
legal foundation, as discussed next in the chapter. Rather, many business executives believe
the key challenge facing their organizations today is to meet their multiple economic and
social responsibilities simultaneously.

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

Support for Corporate Social Responsibility
Many business executives believe that companies should make a profit but should balance
this with their social responsibilities. Clearly, many stakeholder groups see the value in
10

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

54

Part One Business in Society

FIGURE 3.3

The Support for
and Concerns about
Corporate Social
Responsibility

In Support for Corporate Social
Responsibility

Concerns about Corporate Social
Responsibility

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

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

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

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

Discourages Government Regulation
One of the most appealing arguments in support of CSR is that voluntary socially responsible
acts may head off increased government regulation of business. Some regulation may reduce
freedom for both business and society, and freedom is a desirable public good. In the case of
business, regulations tend to add economic costs and restrict flexibility in decision making.
From business’s point of view, participating in programs typically the focus for government
efforts, can produce a unique business opportunity as the following example illustrates.
In the United States, food producers could use up to ten different label phrases on
their packages, ranging from “expires on” to “better if used by.” Many consumers
complained to the Department of Agriculture that they were increasingly confused
by the different messages. In 2017, the Food Marketing Institute and the Grocery
Manufacturers Association, the two largest trade groups for the U.S. grocery industry, announced they had adopted standardized, voluntary regulations to clear up
what product date labels mean. Manufacturers would begin to put on their food
packages “use by” or “best if used by.” This change was meant to explain to the
consumer when the product would be at its peak flavor and safe to consume—and
potentially stave off further government rules on labeling.11
11

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

Chapter 3 Corporate Social Responsibility and Citizenship 55

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

Promotes Long-Term Profits for Business
At times, social initiatives by business produce long-run business profits. In 1951, a New
Jersey judge ruled in a precedent-setting case, Barlow et al. v. A.P. Smith Manufacturing,
that a corporate donation to Princeton University was an investment by the firm, and thus
an allowable business expense. The rationale was that a corporate gift to a school, though
costly in the present, might later provide a flow of talented graduates to work for the company. The court ruled that top executives must take “a long-range view of the matter” and
exercise “enlightened leadership and direction” when it comes to using company funds
for socially responsible programs.12
A classic example of the long-term benefits of social responsibility was the Johnson
& Johnson Tylenol incident in the 1980s, when several people died after ingesting
Extra-Strength Tylenol capsules laced with the poison cyanide. To ensure the safety
of its customers, Johnson & Johnson immediately recalled the product, an action
that cost the firm millions of dollars in the short term. The company’s production
processes were never found defective. Customers rewarded Johnson & Johnson’s
responsible actions by continuing to buy its products, and in the long run the company once again became profitable.
Empirical evidence has supported this view. Studies generally have found that most of
the time, more responsible companies also had better financial results; the statistical association has been highly to modestly positive across the range of all prior studies. According
to one recent study, when firms practice socially responsible activities the firm’s financial
performance is enhanced, especially in a highly competitive industry environment.13

Improves Stakeholder Relationships
Managers often believe that developing a strong social agenda and series of social programs will improve the firm’s stakeholder relationships. Whether it improved the quality of people it attracted as employees, or appealed to consumers to purchase the firm’s
product or services, or built strong ties with the community residents in which it operated, or persuaded investors to purchase company stock, managers felt that social action by
the firm was viewed positively by stakeholders. In a national survey of 1,000 executives,
70 percent said that company-sponsored social programs aided them in recruiting employees and 68 percent reported that employees were more engaged in their work if they were
involved in social-oriented projects on and off the job.14 As Doris Gonzalez, director of
corporate citizenship at IBM, explained:
“Corporate Social Responsibility has long stopped being just a ‘nice to have’ set of
programs that help companies tell their story of how they invest resources in a local
community. These programs are at the core of employee engagement, retention
12
Barlow et al. v. A.P. Smith Manufacturing (1951, New Jersey Supreme Court), discussed in Clarence C. Walton, Corporate
Social Responsibility (Belmont, CA: Wadsworth, 1967), pp. 48–52.
13
Kim Kwang-Ho, Kim MinChung, and Qian Cuili, “Effects of Corporate Social Responsibility on Corporate Financial Performance: A Competitive-Action Perspective,” Journal of Management, 44 (2018), pp. 1097–1118.
14
“Covestro Grant to Expand ‘Social Purpose’ Programs,” Pittsburgh Post-Gazette, April 6, 2018, www.post-gazette.com.

56

Part One Business in Society

and recruiting, as well as making an impact in the community. Most importantly,
in order to be sustainable, corporate responsibility programs must be aligned with
business strategies. At IBM, the corporate giving programs make a difference in the
communities where employees live and work as well as improve the skills and success of the staff, and ultimately, our business.”15
This belief was borne out in recent research where corporate social responsibility was
analyzed in comparison to the relationships between the firm and various stakeholders. As
one study concluded, “The quality of the relationship between the company and its stakeholders represents a key factor that affects the success of the company.” Managers must be
acutely aware of these relationships and understand how best to manage them.16

Enhances Business Reputation
The social reputation of the firm is often viewed as an important element in establishing
trust between the firm and its stakeholders. Reputation refers to desirable or undesirable
qualities associated with an organization or its actors that may influence the organization’s
relationships with its stakeholders.17 Reputation Institute created the RepTrak® model that
examines 15 stakeholders in more than 25 industries, involving more than 7,000 companies in 40 countries. Since 2005, Forbes Magazine has published its annual “World’s Most
Reputable Companies” list to recognize firms with exemplary reputations.18
As further explored in Chapter 19, a firm’s reputation is a valuable intangible asset, as it
prompts repeat purchases by loyal consumers and helps to attract and retain better employees to spur productivity and enhance profitability. Employees who have the most to offer
may be attracted to work for a firm that contributes to the social good of the community,
or is more sensitive to the needs and safety of its consumers, or takes better care of its
employees. Research has confirmed that a firm’s “good deeds” or reputation increases its
attractiveness to employees.19 An example of a company that has embraced having a solid
reputation when managing their stakeholders is described next.
Sodexo, a provider of integrated food and facilities management services throughout North America including many hospitals, senior living centers, colleges, universities, and school districts, was committed to developing a positive reputation.
“Being a responsible corporate citizen is at the core of Sodexo’s business,” declared
the company’s website. “We set the benchmark in areas such as sustainability,
diversity and inclusion, wellness, and the fight against hunger.” Sodexo’s “The
Better Tomorrow Plan” impacted 80 countries at 30,600 locations and engaged the
company’s 380,000 employees. The program addressed 14 different issues, such
as reducing the firm’s carbon and water usage in all company operations and at all
client’s locations, providing and promoting varied and balanced food options to

15

Doris B. Gonzalez, “The Role CSR Plays in Employee Engagement,” CRO Magazine, March/April 2016, www.thecro.com.
The quote is from Andrija Baric, “Corporate Social Responsibility and Stakeholders: Review of the Last Decade
(2006–2015),” Business Systems Research 8 (2017), pp. 133–46.
17
The definition of reputation is adapted from John F. Mahon, “Corporate Reputation: A Research Agenda Using Strategy and
Stakeholder Literature,” Business & Society 41, no. 4 (December 2002), pp. 415–45. For the “reputation index,” see Charles
Fombrun, Reputation: Realizing Value from the Corporate Image (Cambridge, MA: Harvard University Press, 1996) and Rating
Research LLC, www.ratingresearch.com.
18
See www.reputationinstitute.com and fortune.com/worlds-most-admired-companies.
19
Turhan Erkmen and Emel Esen, “The Mediating Role of Trust to Managers on the Relationship Between Corporate Reputation Practices and Employees’ Course of Actions to Customers, Social Responsibility Journal 10 (2014), pp. 296–82.
16

Chapter 3 Corporate Social Responsibility and Citizenship 57

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

Concerns about Corporate Social Responsibility
The economist Milton Friedman famously stated in 1970, “There is only one responsibility of
business, namely to use its resources and engage in activities designed to increase its profits.”
Some people in the business world—such as the 16 percent of CEOs in a McKinsey survey
who believe that the appropriate role of business is to provide the highest possible returns to
shareholders while obeying all laws and regulations—clearly agree with this view. According
to some of the more radical critics of the private business system, social responsibility is nothing but a clever public relations smokescreen to hide business’s true intentions to make as
much money as possible, often at the expense of workers, communities, and customers.21 See
Figure 3.3 again for some of the concerns about corporate social responsibility, discussed next.

Lowers Economic Efficiency and Profits
According to one argument, when a business uses some of its resources for social purposes, it risks lowering its efficiency or even going out of business.
Life was very good for Aaron Feuerstein in the mid-1990s. His company, Malden
Mills, was flourishing, despite a sharp decline in the textile industry in the United
States. Malden Mills’ popular flagship product, Polartec, was widely used in
high-performance athletic and aerobic apparel, outerwear products, and had even
been adopted for military use. On December 11, 1995, as Feuerstein was returning
from his 70th birthday party, he saw his factory burn to the ground. Critics thought
Feuerstein should just accept the $300 million in insurance money and relocate or
dissolve the business. Feuerstein was committed to his employees, so he vowed to
keep them all on the payroll, at a cost of $1.5 million per week, and continue their
benefits for at least 90 more days. The eventual cost of $25 million in employee
wages, lawsuits filed by injured employees, and the $100 million cost to rebuild the
factory turned out to be too much for Feuerstein’s company. By 2001, Malden Mills
had filed for bankruptcy, and Feuerstein eventually lost control of the company.22
In this example, Feuerstein’s motives were admirable; his commitments to his employees eventually became too costly and threatened the survival of the firm.
Business managers and economists argue that the business of business is business.
Businesses are told to concentrate on producing goods and services and selling them at the
lowest competitive price. When these economic tasks are done, the most efficient firms
survive. Even though corporate social responsibility is well-intended, such social activities
lower business’s efficiency, thereby depriving society of higher levels of economic production needed to maintain everyone’s standard of living.23
20

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

58

Part One Business in Society

Imposes Unequal Costs among Competitors
Another concern about social responsibility is that it imposes greater costs on more
responsible companies, putting them at a competitive disadvantage. Consider the following scenario:
A manufacturer operating in multiple countries wishes to be more socially responsible worldwide and decides to protect its employees by installing more safety
equipment at its plants than local law requires. Other manufacturers in competition
with this company do not take similar steps, choosing to install only as much safety
equipment as required by law. As a result, their costs are lower, and their profits
higher. In this case, the socially responsible firm penalizes itself and even runs the
risk of going out of business, especially in a highly competitive market.
This kind of problem becomes acute when viewed from a global perspective, where
laws and regulations differ from one country to the next. If one nation requires higher and
more costly pollution control standards, or stricter job safety rules, or more stringent premarket testing of prescription drugs than other nations, it imposes higher costs on business.
This cost disadvantage means that competition cannot be equal. Foreign competitors who
are the least socially responsible will actually be rewarded because they will be able to
capture a bigger share of the market.

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

Requires Skills Business May Lack
Businesspeople are not primarily trained to solve social problems. They may know about
supply chain management, marketing, accounting, finance, information technology, and personnel work, but what do they know about inner-city issues or world poverty or violence in
schools? Putting businesspeople in charge of solving such problems may lead to unnecessarily
expensive and poorly conceived approaches. Business analysts might be tempted to believe
that methods that succeed in normal business operations will also be applicable to complex
social problems, even though different approaches may work better in the social arena.
A related idea is that public officials who are duly elected by citizens in a democratic
society should address societal issues. Business leaders are not elected by the public and
therefore do not have a mandate to solve social problems. In short, businesspeople do not
have the expertise or the popular support required to address what are essentially issues of
public policy.

Places Responsibility on Business Rather Than Individuals
The entire idea of corporate responsibility is misguided, according to some critics. Only
individual persons can be responsible for their actions. People make decisions; organizations do not. An entire company cannot be held liable for its actions, only those individuals

Chapter 3 Corporate Social Responsibility and Citizenship 59

who are involved in promoting or carrying out a policy. Therefore, it is wrong to talk about
the social responsibility of business when it is the social responsibility of individual businesspersons that is involved. If individual business managers want to contribute their own
personal money to a social cause, let them do so; but it is wrong for them to contribute their
company’s funds in the name of corporate social responsibility.24 Together, the above arguments claim that the attempt to exercise corporate social responsibility places added burdens on both business and society without producing the intended effect of social
improvement or produces it at excessive cost.
This view was challenged several years ago when a survey by the consulting firm
McKinsey reported that a solid majority—84 percent—of business executives said that
they believe that companies should balance their responsibility to their investors with their
responsibilities of other business stakeholders. In another survey of executives, 80 percent
said that companies must demonstrate a mission that balances profit and purpose to grow
and be successful.25 Recently, senior executives from all over the world were asked about
the role of corporate social responsibility as part of their business strategy. Their responses
are shown in Figure 3.4.

SOCIAL ENTREPRENEURS AND B CORPORATIONS
Some businesses have a social mission at their very core. Two such businesses are ventures
launched by social entrepreneurs and benefit corporations.
Social entrepreneurs are like traditional entrepreneurs who act boldly to pursue opportunities, attract support, and build new organizations. Yet, unlike traditional entrepreneurs, social entrepreneurs are typically driven by a core mission to create and sustain
social rather than economic value. When a person or group of people identify a social
need and use their entrepreneurial skills to address this need, this process is called social
entrepreneurship, and the organizations they found are called social ventures. Although

FIGURE 3.4

The Role of CSR in
Business Strategy

Senior executives were asked: Is CSR becoming an increasingly important part of your
business strategy? Their responses were:
No

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

90%
12%

North American
executives

88%
15%

European
executives

85%
0

24

Yes

10%

Asia–Pacific
executives

20

40

60

80

100

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

60

Part One Business in Society

their primary purpose is to achieve a social or environmental objective, this focus does not
preclude these entrepreneurs from creating an economically viable organization that can
continue to address social needs.
B Corporations are businesses that focus on social responsibility and corporate citizenship by blending their social and environmental objectives with financial goals to use the
power of business to solve social and sustainability challenges. To qualify for B Corporation status, an organization must meet rigorous, independent social and environmental
performance standards, assessed by the nonprofit organization, B Lab. The idea is that
a business cannot just claim it is socially responsible, but it must prove it by meeting the
B Lab standards. By 2018, there were 2,504 organizations, in more than 50 countries and
35 U.S. states among 130 industries that had received the B Corp certification. (Certified
B Corporations are different from businesses that are chartered in a state as a “benefit
corporation.” Benefit corporations use the protection afforded by state-driven statutes to
enable the company to address social objectives, as well as financial objectives, without
facing legal challenges by stockholders for shirking the firm’s financial responsibilities.)
Certified B Corporations are more likely to receive various government recognitions,
such as the U.S. Drug Administration’s organic seal, or to qualify for a LEED certification
for their buildings (designating environmental excellence), or to be certified as engaging in
fair trade. B Corporations are subjected to random audits, and these reports are made public, adding a layer of transparency to the process and certification. In addition, B Corporations must modify their company’s bylaws in order to formalize their social mission.26
The metrics used by B Lab to assess a company’s submission for review can be completed
online in 1 to 3 hours, and include meeting rigorous standards that demonstrate a company’s
leadership commitment to specific environmental and social commitments to improve their
stakeholders’ well-being, including their workers and the community. In addition, these companies are held to specific standards of accountability for their actions and must demonstrate
transparency of their decisions and practices regarding their stakeholder impacts.
Warby Parker is a B Corporation. Four college friends started the company to
design, manufacture, and distribute high-quality eyeglasses selling for around $95
rather than the more common $500 price tag. Its founders also wanted to have a
social impact, so they adopted the policy that for every pair of eyeglasses sold, one
pair would be donated to someone in need. Warby Parker also pledged to become
one of the few carbon-neutral eyewear brands in the world. “It was important to the
four of us that if we are going to dedicate our life savings and our time to building
an organization, we wanted to have a positive impact,” said Neil Blumenthal, one of
the founders. This combination of economic and social objectives qualified Warby
Parker for B Corporation certification.27

MANAGEMENT SYSTEMS FOR CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP
Corporate social responsibility and citizenship require more than espoused values; they
require action. Companies must establish management processes and structures to carry out
their citizenship commitments. This section describes some of the ways forward-thinking
companies are changing to improve their ability to act as socially responsible citizens.
26
For an overview of the B Corporation movement see Caddie Putnam Rankin, “Safeguarding Corporate Social Responsibility: The Benefit Movement,” in James Weber and David M. Wasieleski (eds.) Business and Society 360: Corporate Social
Responsibility, pp. 245–64, (Bingley, UK: Emerald Publishers, 2018).
27
See the B Corporation website at www.bcorporation.net and the Warby Parker website at www.warbyparker.com.

Chapter 3 Corporate Social Responsibility and Citizenship 61

BSR, a management consultancy formerly called Businesses for Social Responsibility,
surveyed its more than 300 members and found that the goal of a global citizenship management system was to integrate corporate responsibility and citizenship concerns into a
company’s values, culture, operations, and business decisions at all levels of the organization.
They also found that the CEO exerted the greatest influence over the company’s CSR agenda,
more so than consumers, investors, employees or the government.28 Managers engaged in
corporate citizenship are increasingly being tasked by executive leadership to work across
departments and business units on a global basis to ensure the company has developed a
strong approach to meeting a range of stakeholder expectations. This responsibility has
evolved from overseeing programs targeted primarily toward the community and only utilizing philanthropy and volunteers, to a more integrated approach that leverages company
skills and resources that impact society and drive stakeholder expectations.29
Corporate citizenship is a rapidly evolving area of managerial practice in many organizations. While businesses administer this corporate activity in different ways, Elin Wallberg at Samsung Electronics provides one example of a manager with an extensive social
program background who is directing her firm’s corporate citizenship strategy.
Elin Wallberg has served as the corporate citizenship officer of Samsung Electronics Nordic since 2014. Wallberg is responsible for corporate citizenship in the
Nordic region, which includes heading Samsung’s programs in technology, innovation, education, and learning, where young innovators create start-up firms aimed
to benefit the next generation. Wallberg had over 10 years of experience in driving
innovation in technology and partnerships in various organizations. Prior to joining
Samsung, she was head of programs at Global Child Forum, where she ran the initiative Children in a Digital World. Before that, she had been instrumental at Save
the Children in setting up the Centre for Child Rights and Corporate Social Responsibility in Beijing.30
CEOs increasingly have accepted the multiple responsibilities of business notion—
economic, social and legal—that make up the citizenship profile, as described by senior
Walmart executives:
“Long-term capitalism takes a deeper view of business’s role in society, recognizing
that, in the long run, the interests of stakeholders converge with the interests of the
broader community. The actions of any one company may reverberate throughout
the various systems in which it operates, generating second- and third-order benefits. . . . Under long-term capitalism, companies recognize that fact and, through
concerted actions with otters of sufficient scale, work to ensure constant improvements to those systems.”31
Visionary CEOs clearly see citizenship as an opportunity to create value for their
organization, gain a competitive advantage, and help address some of the world’s biggest
challenges. As businesses have become more committed to citizenship, specialized consultancies and professional associations for managers with responsibility in this area have
emerged. Many of these organizations, including BSR, whose study is cited earlier, are
profiled in Exhibit 3.A.
28

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

Professional Associations and Consultancies in
Corporate Social Responsibility and Citizenship
around the Globe

Exhibit 3.A

As the practice of corporate citizenship has spread, so have professional associations and consultancies
serving managers in this arena. Among the leading organizations are these:
• In the United States, BSR (formerly Business for Social Responsibility) provides consulting services to its
network of more than 250 member companies and other partners to build a just and sustainable world.
• Canadian Business for Social Responsibility seeks to accelerate and scale corporate social and environmental sustainability in Canada by strategically bringing together stakeholders to tackle key issues.
• The European Network for Corporate Social Responsibility Europe (CSR Europe) is the leading European
business network with 48 multinational corporate members and 42 national partner organizations, representing over 10,000 companies. It provides the opportunity for companies to share best practices on CSR
and innovate with peers.
• Forum Empresa is an American alliance of CSR-based business organizations to promote CSR throughout
the Americas, with over 133 independent organizations from more than 67 different countries. Forum
Empresa’s programs reach over 6,000 companies around the world.
• Established in 2001 in South Africa, the African Institute of Corporate Citizenship is committed to being
the center of excellence in corporate citizenship in Africa and it focuses on the role of business in building
sustainable communities.
• From its origins as a sustainability pioneer in the region, CSR Asia has evolved to help hundreds of organizations across Asia embrace sustainability at every level.
• Launched in 2002, the Asian Forum on Corporate Social Responsibility (AFCSR) is Asia’s leading annual
conference and awards program on corporate social responsibility.
Source: More information about these organizations is available online at www.bsr.org, www.cbsr.ca, www.csreurope.org,
www.csr360gpn.org, aiccafrica.org, csr-asia.com, and www.asianforumcsr.com.

STAGES OF CORPORATE CITIZENSHIP
Companies do not become socially responsible or good corporate citizens overnight. The
process takes time. New attitudes have to be developed, new routines learned, new policies
and action programs designed, and new relationships formed. Many obstacles must be
overcome. What process do companies go through as they proceed down this path? What
factors push and pull them along?
Philip H. Mirvis and Bradley K. Googins of the Center for Corporate Citizenship at Boston
College developed a five-stage model of global corporate citizenship, based on their work
with hundreds of practitioners in a wide range of companies.32 In their view, firms typically
pass through a sequence of five stages as they develop as corporate citizens. Each stage is
characterized by a distinctive pattern of concepts, strategic intent, leadership, structure, issues
management, stakeholder relationships, and transparency, as illustrated in Figure 3.5.
Elementary Stage. At this stage, citizenship is undeveloped. Managers are uninterested
and uninvolved in social issues. Although companies at this stage obey the law, they
do not move beyond compliance. Companies tend to be defensive; they react only
when threatened. Communication with stakeholders is one-way: from the company
to the stakeholder.
32
Philip H. Mirvis and Bradley K. Googins, Stages of Corporate Citizenship: A Developmental Framework (Chestnut Hill, MA:
Center for Corporate Citizenship at Boston College, 2006). For a contrasting stage model, based on the experience of Nike,
see Simon Zadek, “The Path to Corporate Responsibility,” Harvard Business Review, December 2004, pp. 125–32.

62

Chapter 3 Corporate Social Responsibility and Citizenship 63

FIGURE 3.5 The Stages of Global Corporate Citizenship
Source: Adapted from the Boston College Center for Corporate Citizenship’s “Stages of Corporate Citizenship: A Developmental Framework,” by Philip Mirvis, Ph.D. and
Bradley K. Googins, Ph.D., 2006.

Citizenship
Content

Strategic
Intent

Leadership

Structure

Stage 5:
Change the
Transforming game

Market
creation or
social change

Visionary,
ahead
of the pack

Mainstream:
Defining
business driven

Multiorganization

Full
disclosure

Stage 4:
Integrated

Sustainability
or triple
bottom line

Value
proposition

Champion,
in front of it

Organizational
alignment

Proactive,
systems

Partnership
alliance

Assurance

Stage 3:
Innovative

Stakeholder
management

Business
case

Steward,
on top of it

Crossfunctional
coordination

Responsive,
programs

Mutual
influence

Public
reporting

Stage 2:
Engaged

Philanthropy,
License to
environmental operate
protection

Supporter,
in the loop

Functional
ownership

Reactive,
policies

Interactive

Public
relations

Stage 1:
Elementary

Jobs, profits,
and taxes

Lip service,
out of touch

Marginal,
staff-driven

Defensive

Unilateral

Flank
protection

Legal
compliance

Issues
Stakeholder
Management Relationships Transparency

Engaged Stage. At this second stage, companies typically become aware of changing
public expectations and see the need to maintain their license to operate. Engaged
companies may adopt formal policies, such as governing labor standards or human
rights. They begin to interact with and listen to stakeholders, although engagement
occurs mainly through established departments. Top managers become involved.
Often, a company at this stage will step up its philanthropic giving or commit to
specific environmental objectives. Brew Dog, a Scottish-based brewery and pub
chain, announced that it would distribute 10 percent of its profits to its staff and
another 10 percent to charities chosen by the company’s workers and investors. The
company demonstrated philanthropy, supportive leadership, and interactive stakeholder relationships, all part of corporate citizenship at the engaged stage.33
Innovative Stage. At this third stage, organizations may become aware that they lack the
capacity to carry out new commitments, prompting a wave of structural innovation.
Departments begin to coordinate, new programs are launched, and many companies
begin reporting their efforts to stakeholders. (Social reporting is discussed later in this
chapter.) External groups become more influential. Companies begin to understand
more fully the business reasons for engaging in citizenship. The actions taken by
Nestlé and Sodexo, described earlier in this chapter, illustrate a company at this stage.
Integrated Stage. As they move into the fourth stage, companies see the need to build
initiatives that are more coherent. Mirvis and Googins cite the example of Asea
Brown Boveri (ABB), a Swedish–Swiss multinational pioneering technology leader,
which carefully coordinates its many sustainability programs from the CEO level
down to line officers in more than 100 countries where the company has a presence.
33

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

64

Part One Business in Society

Integrated companies may adopt sustainability/triple bottom line measures, turn to
external audits, and enter into ongoing partnerships with stakeholders.
Transforming Stage. This is the fifth and highest stage in the model. Companies at
this stage have visionary leaders and are motivated by a higher sense of corporate
purpose. They partner extensively with other organizations and individuals across
business, industry, and national borders to address broad social problems and reach
underserved markets.
Northwestern Mutual, a U.S. life insurance and financial services organization,
illustrates the transforming stage of corporate citizenship. The company’s signature
outreach program focused on fundraising to cure childhood cancer. A review of
social issues that mattered to employees and representatives found that this program
aligned with the company’s mission—helping others build a secure future. After
selecting the childhood cancer focus, the company commissioned a survey to understand the current field of research. The survey discovered inadequate financial support addressing this disease. Northwestern Mutual created a strategic philanthropy
and community relations department to engage its employees with local neighborhoods, schools, and cultural programs and events—all to bring more attention to
childhood cancer. “By involving multiple stakeholders in our corporate citizenship
efforts, we foster transparent and synergistic relationships,” said John Kordsmeier,
president of the Northwestern Mutual Foundation.34
The model’s authors emphasize that individual companies can be at more than one
stage at once, if their development progresses faster in some areas than in others. For
example, a company might audit its activities and disclose the findings to the public in
social reports (transparency, stage 5), but still be interacting with stakeholders in a pattern
of mutual influence (stakeholder relationships, stage 3). This is normal, the authors point
out, because each organization evolves in a way that reflects the special challenges it faces.
Nevertheless, because the dimensions of global corporate citizenship are linked, they tend
to become more closely aligned over time.

ASSESSING AND REPORTING SOCIAL PERFORMANCE
As companies around the world expand their commitment to corporate responsibility and
citizenship, they have also improved their capacity to measure performance and assess
results. A social audit is a systematic evaluation of an organization’s social, ethical, and
environmental performance.35
In a social audit, a company’s performance is evaluated relative to a set of externally
imposed standards. The results of the audit are used to improve the firm’s performance
and to communicate with stakeholders and the public. The scholar Simon Zadek has
identified six benefits of social audits. They help businesses know what is happening
within their firm, understand what stakeholders think about and want from the business,
tell stakeholders what the business has achieved, strengthen the loyalty and commitment
of stakeholders, enhance the organization’s decision making, and improve the business’s
overall performance.

34

“The Corporate Citizen,” Boston College Center for Corporate Citizenship, Winter 2016, p. 28.
The concept of a social audit was first introduced in Howard R. Bowen, Social Responsibilities of the Businessman (New
York: Harper, 1953).
35

Chapter 3 Corporate Social Responsibility and Citizenship 65

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

Social Audit Standards
In response to the emerging efforts by governments to promote global citizenship, a number of different corporate citizenship standards have been developed that establish measures or benchmarks against which a firm’s citizenship activities (or those of its suppliers
or partners) can be compared in a social audit. Social audits look not only at what an organization does, but also at the results of these actions. For example, if a company supports
a tutorial program at a local school, the audit might not only look at the number of hours
of employee volunteerism, but also assess changes in student test scores as an indicator of
the program’s social impact.
Audit standards can be created in three different ways. Companies can develop standards designed to set expectations of performance for themselves or their suppliers or
partners. For example, Apple developed its own supplier code of conduct. Or, companies
within an industry can agree on a common industrywide standard, as several high technology companies did when they agreed to the Responsible Business Alliance (RBS) Code of
Conduct, formerly the Electronic Industry Citizenship Coalition.
The RBA Code of Conduct is a set of standards on social, environmental and ethical issues in the electronics industry supply chain. The standards set out in the Code
of Conduct reference international norms including the Universal Declaration of
Human Rights, ILO International Labor Standards, OECD Guidelines for Multinational Enterprises, International Organisation for Standards, the Social Accountability 8000, and many more (some of these standards are discussed next). The
RBA Code of Conduct is reviewed every three years to ensure its relevance to international norms and issues members may face in their supply chains.36
Both companywide and industrywide supply chain codes of conduct, as well as auditing
processes, are further described in Chapter 17.
Finally, audit standards can be developed by global nongovernmental organizations or
standard-setting organizations. A number of such organizations have developed standards
to judge corporate performance. These include the International Organisation for Standards (ISO 14001 and 26000), Social Accountability 8000, AccountAbility (or AA 1000),
and the United Nations Global Compact and the Global Reporting Initiative, which is profiled in Exhibit 3.B.

Social Reporting
When a company decides to publicize information collected in a social audit, this is called
corporate social reporting. While there is a risk of incurring reputational damage from exposing
any problems publicly, many companies see value in practicing transparency. The term transparency refers to a quality of complete clarity; a clear glass window, for example, is said to
be transparent. When companies clearly and openly report their performance—financial,
36

See the Responsible Business Alliance website at responsiblebusiness.org.

Exhibit 3.B

The Global Reporting Initiative (GRI)

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

social, and environmental—to their various stakeholders, they are acting with transparency. One region where the trend toward corporate reporting and transparency has been
particular apparent is Australia and New Zealand.
By 2014, 99 percent of all Australian and New Zealand companies indicated that
they would conduct an assessment of their business operations and publicly report
the results that year, according to a study by the Australian Centre for Corporate
Social Responsibility. They attributed their nearly unanimous preference for reporting to the International Integrated Reporting Commission’s Integrated Reporting
Framework and the new Global Reporting Initiative fourth generation (G4) guidelines (see Exhibit 3.B). The companies surveyed said they believed in transparent
reporting because they understood it could build a reputation for responsibility,
contribute to the company’s brand, engage senior leadership in strategic conversations, improve stakeholder engagement, and identify opportunities for improvement. According to Victoria Whitaker, head of GRI Focal Point Australia,
“businesses around the world are recognizing that reporting can help them understand the context in which they operate and the stakeholders whom they serve.
Done well it informs corporate strategy and decision making.”37
A survey of business firms by KPMG, an accounting and consulting firm, reported on
the state corporate social reporting in 2017, as shown in Exhibit 3.C. This survey found
that 93 percent of the world’s largest companies produced some type of a corporate social
report for external stakeholders that covered social and environmental responsibility
practices.
As noted in Exhibit 3.C, an emerging trend in corporate reporting is the integration of
legally required financial information with social and environmental information into a single integrated report. By 2017, a majority of the largest companies included information of
corporate responsibility in their annual financial reports. This reflected a dramatic rise in
integrated reporting, from 8 percent in 2008 and 51 percent in 2013 to 78 percent by 2017.38
37

Information from “The 10th Year-Progress and Prospects for CSR in Australia and New Zealand,” Australian Centre for
Corporate Social Responsibility, 2014. Also see Colin Higgins, Markus J. Milne, and Bernadine van Gramberg, “The Uptake of
Sustainability Reporting in Australia,” Journal of Business Ethics, 2015, pp. 445–68.
38
KPMG report 2017, Ibid.
66

Exhibit 3.C

The State of Corporate Social Reporting, 2017

In the KPMG Survey of Corporate Responsible Reporting 2017, the following trends were noted:
• Corporate responsibility (CR) reporting has filtered down from large companies to mid-sized companies,
as 75 percent of the 4,900 large and mid-cap firms surveyed issued CR reports.
• Across all industry sectors, CR reporting was more than 60 percent, the first time in the survey’s history.
• Companies in Latin America reported a large surge in CR reporting, driven by regulation, foreign investor
demands, and the need to build and protect public trust.
• Integrated Reporting has taken off in Japan, Brazil, Mexico, and Spain. Most of the largest companies,
78 percent, integrate financial and nonfinancial data in their reports, suggesting they believe that CR
information is relevant for investors.
• Around two-thirds of all reports utilize the Global Reporting Initiative (GRI) G4 Guidelines or Standards.

Why do companies publish social responsibility reports? According to one study, most
firms (80 percent) are motivated by ethical concerns. Ethical drivers replaced economic
considerations (80 percent versus 50 percent) as the primary motivator for publishing these
reports, a complete reverse from a few years ago when economic considerations were
viewed as the most important. Nearly two-thirds of the 250 firms worldwide reported that
they engaged with their stakeholders in a structured way, up from 33 percent a decade earlier. These relevant stakeholder groups have expanded from social and environmental
groups to include financial analysts and investors. Other firms pointed to increasing governmental regulatory pressure to report financial as well as nonfinancial data.39
In today’s business climate, multiple stakeholders demand that businesses adopt measurable standards for corporate responsibility and citizenship, audit their organizations
according to these standards, and report the results to the public.

Summary

∙ The world’s largest corporations are capable of wielding tremendous influence, at times
even more than national governments, due to their economic power. Because of this
potential influence, the organizations’ stakeholders expect businesses to enhance society when exercising their power.
∙ The idea of corporate social responsibility was adopted by business leaders in the United
States in the early 20th century. It has evolved from a notion of stewardship and strategic responsiveness to an ethics-based understanding found in culture and the practice
of corporate citizenship. Socially responsible businesses attempt to balance economic,
legal, and social obligations. Following an enlightened self-interest approach, a firm
may be economically rewarded while society benefits from the firm’s actions.
∙ Corporate social responsibility is a controversial notion. Some argue that its benefits
include discouraging government regulation, promoting long-term profitability for the
firm, and enhancing the company’s stakeholder relationships and business reputation.
Others believe that it lowers efficiency, imposes undue costs, and shifts unnecessary
obligations to business. Most executives believe that they should use their corporate

39

“Socially Responsible Investment Analysts Find More Large U.S. Companies Reporting on Social and Environmental Issues,”
Social Investment Research Analysts Network report, www.kld.com; and KPMG report 2017, Ibid.
67

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Part One Business in Society

∙

∙

∙

∙

power and influence to balance their response to multiple stakeholders rather than maximize stockholders’ return alone.
Global corporate citizenship refers to putting a commitment to serving various stakeholders into practice by building stakeholder partnerships, discovering business opportunities in serving society, and transforming a concern for financial performance into
a vision of integrated financial and social performance worldwide. Global corporate
citizenship programs can be considered a strategic investment by the firm.
Social entrepreneurs incorporate social and environmental benefit into their core business mission. B Corporations, similarly, are businesses that seek and achieve certification, through rigorous assessments by the nonprofit B Lab organization, gained via
specific social and environmental standards.
Companies progress through five distinct stages as they develop as global corporate
citizens; these are termed the elementary, engaged, innovative, integrated, and transforming stages. A specific company may be at more than one stage at once, as it may be
progressing more quickly on some dimensions than on others.
Many companies have created systemic audits of their social, ethical, and environmental performance, measured against industrywide performance expectations as well as
auditing standards developed by global standard-setting organizations. An emerging
trend is the practice of communicating social, environmental, and financial results to
stakeholders through an integrated corporate report.

Key Terms

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

Internet
Resources

www.bsr.org
www.businessinsociety.eu
www.bcorporation.net
www.csrwire.com
consciouscompanymedia.com
www.3blassociation
www.unicef.org/csr
www.globalreporting.org
www.unglobalcompact.org

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

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

BSR: The business of a better world
The Business in Society Gateway
Certified B Corporation
The Corporate Social Responsibility Newswire
Conscious Company Media
3BL Association
UNICEF and Corporate Social Responsibility
Global Reporting Initiative
United Nations Global Compact

Chapter 3 Corporate Social Responsibility and Citizenship 69

Discussion Case: Corporate Social Responsibility at
Gravity Payments
Dan Price, the founder of Gravity Payments, a small, privately owned company that provided high-service and low-cost credit card processing, surprised his 120-person staff
when he announced in 2015 that over the next three years he would raise the salary of all
employees, even the lowest paid clerk, customer service representative, and salesperson,
to a minimum of $70,000. The average annual salary at that time at Gravity was around
$48,000, so the increase would nearly double some employees’ salaries. Price explained
that he would pay for the wage increases by cutting his own salary from nearly $1 million
to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit.
Price’s announcement was met with mixed reactions. Some employees were thrilled,
clapping and whooping when they heard the announcement. “I’m freaking out,” said one
employee. Others—many from the financial services community—said that this was just a
costly publicity stunt. The conservative radio show host Rush Limbaugh said he “smelled
a socialist agenda.” However, others were supportive. Other talk show hosts lined up interviews with Price. Job seekers by the thousands sent in résumés. Harvard business professors flew out to Gravity Payment’s headquarters to conduct a case study. Third graders
wrote Price thank-you notes, and single women wanted to date him.
Price was no stranger to the spotlight. He had earned the honor of Entrepreneur of the
Year in 2014 from Enterprise Magazine. GeekWire named Price its Young Entrepreneur
of the Year in 2013, and in 2010 he received the Small Business Administration’s National
Young Entrepreneur of the Year award. Price also annually donated 10 percent of Gravity’s
profits to charity. The equitable employee salary announcement seemed like another step
toward achieving Price’s goals as a business owner.
Price launched Gravity (a name, Price explained, that was selected since “you could
understand [it] on the phone”) while attending college, but the firm actually grew out of a
technology consulting business he created while in high school. His goal was to manage
credit card transactions for small businesses, like coffeehouses, in a more affordable and
transparent way. “I never intended to make a lot of money, or really any,” said Price. “I
was really upset at this industry for the way they were treating my [consulting] clients,
and I just wanted to blow the thing up. So I was like, ‘I’m going to charge a third of what
everyone [else does].’”
Financial analysts recognized Gravity Payments’ success; his company processed
nearly $10 billion in credit card transactions and generated revenues of about $150 million
annually. When asked why he did not “cash out,” Price responded, “I’ll ask my friends
who have sold their businesses, ‘Did that business get to the goal that you originally had
in mind?’ And they’re all happy they sold because of the phenomenal financial outcome.
But when I ask them, ‘Did you actually accomplish the nonfinancial goal that you set out
in starting a business?’ . . . they almost all say no.”
Price encountered hard times in 2008 when Gravity lost 20 percent of its revenue nearly
overnight because customers were running less volume through the system during the economic recession. Price recalled that half of his staff was in his office asking for raises and
the other half was definitely afraid they were going to lose their jobs. So, he called his
employees together and explained that the company had eight months of cash in the bank.
“If we hold our expenses steady and just sell the same amount every month for five months,
we’ll get back to break-even and not have to do any benefit cuts, any layoffs, anything like
that,” he told his staff. Given Price’s response during the economically challenging times,

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it did not surprise his employees when he took the bold move of promising every employee
a salary of $70,000 annually.
Price’s commitment to a new company minimum wage captured national attention given
the soaring disparity between executives’ pay and that of their employees. In the United
States, where the pay gap was the greatest for any country, chief executives earned more
than 300 times what the average worker made (as discussed in more detail in Chapter 13).
Some people, like Gilded Age’s executive J. Pierpont Morgan and management scholar
Peter Drucker, advocated a 20-to-1 executive to average employee ratio. Price’s 1-to-1 ratio
was unprecedented in the business community. “The market rate for me as a CEO compared to a regular person is ridiculous, it’s absurd,” explained Price, who admitted that his
only main extravagances were snowboarding and picking up the bar bill for his friends. He
drove a 12-year-old Audi, which he received in a barter for service from the local dealer.
“As much as I’m a capitalist, there is nothing in the market that is making me do it,” said
Price, referring to paying wages that would make it possible for his employees “to go after
their own American dream, buy a house and pay for their children’s education.”
Price admitted that hearing his employees’ problems with making ends meet on wages
that were well above the $7.50 per hour minimum wage or even at $40,000 a year “just
eats at me inside.” He wanted to address the social issue of wage inequality and felt that
as a business leader he was in a position to do something, but he wanted to do something
that would not result in raising prices for his customers or cutting back on services. Hayley
Vogt, a 24-year-old communications coordinator at Gravity who earned $45,000 annually,
said, “I’m completely blown away right now [after hearing Price’s announcement].” She
said she had worried about covering rent increases and a recent emergency room bill.
“Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it.”
Fifteen months after Price’s unprecedented announcement, his employees decided that
he should not be driving around in his outdated Audi, so they bought him a Tesla. Price
posted to his Facebook page, “Gravity employees saved up and pitched in over the past six
months and bought me my dream car. A brand new, gorgeous blue #Tesla. Still in shock.
How do I even begin to say thank you?” As for the pay raises, commentators remained
divided. Paul Davidson, of USA Today, commented, “Big pay hikes may yield surprisingly
beneficial results, especially in the current tight labor market.” Yet, other experts said that
the outsized, across-the-board increase Price shelled out should not set a benchmark for
most companies.
Sources: “One Company’s New Minimum Wage: $70,000 a Year,” The New York Times, April 13, 2015, www.nytimes.com;
“A Company Copes with Backlash Against the Raise that Roared,” The New York Times, July 31, 2015, www.nytimes.com;
“Employees Just Bought a Tesla for their CEO Because He Raised Minimum Salaries to $70,000,” Business Insider, July 14,
2016, www.businessinsider.com; and, “Does a $70,000 Minimum Wage Work?” USA Today, May 26, 2016, www.usatoday.com.

Discussion
Questions

1. Is Price demonstrating elements of corporate social responsibility by his actions in this
case, or not?
2. How is Price exhibiting the fourth Phase of Corporate Citizenship (Figure 3.2, 1990s to
present: Corporate/Global Citizenship) in his actions at Gravity Payments?
3. What arguments in support of, or concerns about, corporate social responsibility (referring to Figure 3.3) are relevant to this case?
4. Is Price acting like an executive of a firm that could be certified as a B corporation?
5. What stage of global corporate citizenship (using Figure 3.5) is Gravity Payments operating at, and why do you think so?

C H A P T E R

F O U R

Business in a Globalized
World
The world economy has become increasingly integrated, and many businesses have extended their
reach beyond national borders. Yet the process of globalization is controversial, and the involvement of corporations in other nations is not always welcome. Doing business in diverse political
and economic systems and in societies with stark differences in wealth and income poses difficult
challenges. When a multinational corporation buys resources, manufactures products, or sells goods
and services in multiple countries, it is inevitably drawn into a web of global social and ethical issues.
Understanding what these issues are and how to manage them through collaborative action with
governments and civil society organizations is a vital skill for today’s managers.
This Chapter Focuses on These Key Learning Objectives:
LO 4-1 Defining globalization and classifying the major ways in which companies enter the global
marketplace.
LO 4-2 Identifying the international financial and trade institutions that have shaped the globalization process in recent decades.
LO 4-3 Analyzing the benefits and costs of the globalization of business.
LO 4-4 Identifying the major types of political and economic systems in which companies operate across
the world.
LO 4-5 Understanding global inequalities of wealth and income and analyzing the special challenges of
serving those at the “bottom of the pyramid.”
LO 4-6 Assessing how businesses can work collaboratively with governments and the civil sector to
address global social issues.

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In 2016, Uber finally gave up on its quest to dominate the huge Chinese market for ridehailing services. After two years of bruising competition, during which it lost $2 billion,
Uber threw in the towel and agreed to sell its business there to its Chinese competitor, Didi
Chuxing. In exchange, Uber received $1 billion and a 20 percent minority stake in Didi,
and both companies agreed to give the other’s CEO a seat on its board. Uber had made an
enormous effort, but in the end, could not overcome the many obstacles to besting its local
rival. The U.S.–based company had struggled to set up in-country servers to get around
China’s Internet firewall, deal with Chinese customers’ aversion to paying by credit card,
and comply with government regulations that pressured the company to collaborate with
municipal taxi companies. Didi, by contrast, was able to leverage its local connections and
financing to become a formidable opponent, even against the ride-hailing industry’s world
leader. Commented the author of Global Vision: How Companies Can Overcome the Pitfalls of Globalization, “China is an incredibly complex market that differs culturally, politically, and economically from the United States.”1
In 2018, the process of globalization was in some ways at a crossroads. In many
respects, the world’s economy remained as deeply integrated and interdependent as ever.
Multinational enterprises continued to deliver much-needed technical know-how, capital,
managerial experience, products, and services across national borders. At the same time,
populist political movements in the United States, Europe, and elsewhere had pushed back
against international trade agreements and common markets, citing the costs of globalization to their own industries and citizens. Some firms, like Uber, were pulling back from
expensive foreign commitments, and the profits of multinationals compared with domestic
firms were dropping.2 How companies can best deal with the challenges of doing business
in a world of great complexity and flux is the subject of this chapter. It will also examine
the respective roles of business, civil society organizations, and governments in addressing
common global problems.

The Process of Globalization
Globalization refers to the increasing movement of goods, services, capital, and labor
across national borders. Globalization is a process, that is, an ongoing series of interrelated
events. International trade and financial flows integrate the world economy, leading to the
spread of technology, culture, and politics. Thomas Friedman, a columnist for The New
York Times and a well-known commentator, has described globalization as a system with
its own internal logic:
Globalization is not simply a trend or a fad but is, rather, an international system.
It is the system that has now replaced the old Cold War system, and, like that Cold
War system, globalization has its own rules and logic that today directly or indirectly influence the politics, environment, geopolitics, and economics of virtually
every country in the world.3

1

“Why Uber Couldn’t Crack China,” Fortune, August 7, 2017; “The Real Reason Uber is Giving Up in China,” Harvard Business Review, August 2, 2016; and “Uber Slayer: How China’s Didi Beat the Ride-Hailing Superpower,” October 6, 2016, at
www.bloomberg.com. See also Robert Salomon, Global Vision: How Companies Can Overcome the Pitfalls of Globalization
(Basingstoke, UK: Palgrave Macmillan, 2016).
2
“Multinationals: The Retreat of the Global Economy,” The Economist, January 28, 2017.
3
Thomas L. Friedman, The Lexus and the Olive Tree (New York: Anchor Books, 2000), p. ix.

Chapter 4 Business in a Globalized World 73

The process of globalization is so pervasive that it affects all businesses—whether they
are small or large, local or multinational, or an employer of one or many.
Firms can enter and compete in the global marketplace in several ways. Many companies first build a successful business in their home country, and then export their products
or services to buyers in other countries. In other words, they develop global market channels for their products. Nestlé, for example, began in Switzerland, but now sells its food
and beverage products all over the world. An emerging trend is what The Economist magazine has called a rising cohort of small companies that, while remaining local, have successfully used e-commerce platforms to sell to customers around the world. PayPal, the
digital payments firm, has reported that it facilitates $80 billion a year in cross-border
transactions, many of which are of this type.4
Other firms begin in their home country but realize that they can cut costs by locating
some or all of their global operations in another country. This decision leads to establishing manufacturing plants or service operations abroad. For example, BMW, which is
headquartered in Germany, has manufacturing facilities in 15 countries, including Brazil,
Thailand, Egypt, Indonesia, and the United States. Finally, a third strategy involves subcontracting manufacturing to suppliers located abroad. In other words, these companies
develop global supply chains. For example, in the apparel and shoe industries, companies
such as Nike, Gap, and Abercrombie & Fitch have extensive networks of suppliers outside
the United States—mostly in Asia—that make products of their design. Suppliers and their
relationship to lead firms are further discussed in Chapter 17.
These three strategies of globalization can be summarized in three words: sell, make,
and source. Today, many companies have all three elements of global business—market
channels, manufacturing operations, and supply chains.

Major Multinational Enterprises
A multinational enterprise (MNE) is a firm with significant foreign assets or revenues, or
that has subsidiaries outside its home country. Although only one in a thousand of the
world’s businesses are multinational, because they are among the largest, they have an
outsized impact. By some estimates, MNEs account for more than half of world trade,
comprise 40 percent of the world’s stock value, and own much of its intellectual property.5 Their affiliates—meaning suppliers, subcontractors, retailers, and other entities with
which they have some business relationship—collectively produce 10 percent of global
gross domestic product (GDP).6
Although many firms conduct business across national boundaries, most global commerce is carried out by a small number of powerful firms. (Corporate power is further
discussed in Chapter 3.) Who are these leading multinational enterprises? Figure 4.1 lists
the top 10 nonfinancial MNEs, ranked in order of the value of the foreign assets they control. Leading the list is Royal Dutch Shell, the international petroleum company. Rounding
out the group are several of the world’s leading automakers, other petroleum companies,
a food and beverage maker, and a telecommunications firm.7 Although Figure 4.1 does
not include any information technology firms (such as Google, Apple, and Microsoft), the
number of such firms in the top 100 has more than doubled in the past five years. For their

4

“Multinationals: The Retreat of the Global Economy,” The Economist, January 28, 2017.
Ibid.
6
“Globalization in the Age of Trump,” Harvard Business Review, July–August 2017.
7
United Nations Conference on Trade and Development, World Investment Report 2017, www.unctad.org. Data are for 2016.
5

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Part One Business in Society

FIGURE 4.1

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

Corporation

Home Economy

Industry

Foreign Assets
(in $ millions)

Royal Dutch Shell

United Kingdom

Petroleum

$349,720

Toyota Motor

Japan

Motor vehicles

303,678

BP

United Kingdom

Petroleum

235,124

Total

France

Petroleum

233,217

Anheuser-Busch InBev

Belgium

Food & Beverages

208,012

Volkswagen Group

Germany

Motor vehicles

197,254

Chevron

United States

Petroleum

189,116

General Electric

United States

Industrial and Commercial
Machinery

178,525

Exxon Mobil Corporation

United States

Petroleum

165,969

Softbank Corp

Japan

Telecommunications

145,611

part, the world’s major financial institutions also extend across the globe; four of the five
largest banks in the world, ranked by assets, are in China.8 JP Morgan Chase, the largest
U.S.–based bank, operates in more than 60 countries.
Although much of global commerce is carried out by a small number of large firms,
globalization affects almost all businesses, whatever their size and reach. Even small, local
firms use products and services that originate abroad, and they often compete with other
businesses from around the world.
Another important aspect of globalization is the worldwide flow of capital. Foreign direct
investment (FDI) occurs when a company, individual, or fund invests money in another country, for example, by buying shares of stock in or loaning money to a foreign firm. The world
economy is bound together by such cross-border flows of capital. In 2016, FDI was
$1.75 trillion, still below its average right before the financial crisis of 2008.9 An emerging
trend in foreign direct investment is the rise of sovereign wealth funds. These are funds operated by governments to invest their foreign currency reserves. They are most commonly
operated by nations that export large amounts of oil and manufactured goods; the largest are
run by Norway, the United Arab Emirates (Abu Dhabi), China, Kuwait, and Saudi Arabia.
In recent years, sovereign wealth funds have made significant cross-border investments.
In past years, some U.S. companies sought to avoid corporate taxes by merging with
companies located in other countries with lower tax rates and shifting their headquarters
there, in a phenomenon known as inversion. For example, in 2014 Burger King (based
in the United States) acquired Tim Horton’s, a Canadian coffee-and-donut chain, for
$11.5 billion. After the acquisition, Burger King reincorporated in Canada and renamed
itself Restaurant Brands International, saving the company an estimated $275 million in
U.S. taxes over the next three years. Many commentators expected this trend would slow
after the implementation in 2018 of new tax legislation in the United States, which reduced
corporate tax rates from 35 percent to 21 percent.

8
9

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

Chapter 4 Business in a Globalized World 75

Finally, globalization involves the movement of people across national borders. Although
recent political movements in some countries have sought to block or reduce the inflow,
human migration has continued. In 2017, 258 million persons—about 3.4 percent of the
world’s population—were living in countries other than those in which they were born.
The proportion was higher—12 percent—in developed countries. More than half of the
world’s migrants were living in just ten countries, topped by Saudi Arabia (37 percent of its
population), Canada (22 percent), and the United States and Germany (15 percent each).10
Some of these people had migrated legally, some illegally; some were seeking economic
opportunity, while others were fleeing war or persecution. In the mid to late 2010s, as
many as 800,000 people a year poured out of Syria to escape brutal armed conflict, many
settling in Europe.
How did European businesses respond to this influx of refugees from Syria and
nearby countries? In 2015, dozens of German companies joined together as Wir
Zusammen, or “We Together,” under the leadership of the CEO of the country’s
largest Internet provider, to pool their resources to help integrate migrants. This was
potentially a boon to an economy in which more than a million jobs were unfilled.
The idea was for the companies to collaborate in providing language training,
housing, and training—and even sports leagues. For example, ThyssenKrupp, a
major conglomerate and member of the group, created hundreds of internships and
apprenticeships for refugees. Wir Zusammen also ran an ad campaign designed to
encourage Germans to see migrants as partners, not threats.11
A study of 300 companies in Germany found that integrating these workers was challenging, because of language barriers and lack of documentation. But the companies
reported that many refugee employees had succeeded when given appropriate support.12
The role of businesses in employing immigrant workers is further explored in Chapter 16.

International Financial and Trade Institutions
Global commerce is carried out in the context of a set of important international financial
and trade institutions (IFTIs). The most important of these are the World Bank, the International Monetary Fund, and the World Trade Organization. By setting the rules by which
international commerce is transacted, these institutions increasingly determine who wins
and who loses in the global economy.
The World Bank (WB) was set up in 1944, near the end of World War II, to provide
economic development loans to its member nations. Its main motivation at that time was
to help rebuild the war-torn economies of Europe. Today, the World Bank is one of the
world’s largest sources of economic development assistance; it provided $61 billion in
loans, grants, equity investments and guarantees in 2016 for roads, dams, power plants, and
other infrastructure projects, as well as for education, health, and social services. The bank
gets its funds from dues paid by its member countries and from money it borrows in the
international capital markets. Representation on the bank’s governing board is based on
economic power; that is, countries have voting power based on the size of their economies.

10

“Migrants Are on the Rise Around the World, and Myths About Them Are Shaping Attitudes,” The New York Times, June 20,
2018.
11
“German Billionaire Rallies Business to Migrant Cause,” Financial Times, January 7, 2017.
12
“International Migration Report 2017,” United Nations Department of Economic and Social Affairs, December 2017;
“How 300 Companies Integrated 2,500 Refugees into Germany’s Labor Market,” Boston Consulting Group, May 30, 2017,
www.bcg.com; and “Germany Bets on Second Time Lucky with Migrant Workers,” Reuters, August 18, 2017.

76

Part One Business in Society

As the United States—the bank’s largest shareholder—became increasingly reluctant to
support the bank’s mission during the Trump administration, the bank’s leadership began
to turn to partnerships with private investors to fund various development projects.13
The World Bank’s sister organization is the International Monetary Fund (IMF). Founded
at the same time as the bank (and today residing across the street from it in Washington, DC),
the IMF has a somewhat narrower purpose: to stabilize the system of currency exchange
rates and international payments to enable member countries to participate in global trade.
It does this by lending foreign exchange to member countries. Like the World Bank, the
IMF sometimes imposes strict conditions on governments that receive its loans. These
conditions may include demands that governments cut spending, devalue their currencies,
increase exports, liberalize financial markets, and reduce wages. These conditions often
lead to hardship.
One country that was particularly hard hit by loan conditions was Greece, one of
the poorest nations in the European Union. Beginning in 2010, the IMF, the
European Central Bank, and several European countries made a series of
multibillion-dollar loans to Greece to enable it to pay its bills and service its debts.
In exchange, the lenders imposed severe conditions, including sharp cuts in government spending and the sale of public assets. The Greek economy shrank by a
quarter, the unemployment rate rose to 27 percent, and half its young people were
thrown out of work. Public pensions and salaries were slashed. The Greek people
voted in a new government whose candidates had called the austerity measures
“waterboarding” and advocated for a restructuring of the country’s debt. By 2018,
Greece’s economy had finally improved somewhat, and the nation hoped to be able
to renegotiate its loans on more favorable terms.14
Significant progress has been made to reduce indebtedness by poor countries. By the
mid-2000s, many developing countries had accumulated huge debts to the World Bank,
the IMF, and other lenders. The total amount of money owed was almost $3 trillion. One
of the unintended consequences of past loans was persistent poverty, because a large share
of many nations’ earnings went to pay off debt rather than to develop the economy or
improve the lives of citizens. In response, many industrialized nations extended aid to
heavily indebted countries to enable them to pay down loans to the World Bank, IMG, and
other lenders. By 2017, more than $77 billion in debt relief had been extended to 36 heavily indebted countries, significantly reducing these nations’ payments and enabling them to
direct more resources to alleviating poverty.15
However, problems remained. Poor countries still owed billions more, and the world
financial crisis weakened their ability to pay—and the ability of developed countries to
offer aid. And, so-called vulture funds sought to take advantage of the indebted countries,
a situation that is profiled in Exhibit 4.A.
The final member of the triumvirate of IFTIs is the World Trade Organization (WTO).
The WTO, founded in 1995 as a successor to the General Agreement on Tariffs and Trade
(GATT), is an international body that establishes the ground rules for trade among nations.
Most of the world’s nations are members of the WTO, which is based in Switzerland.

13

“The World Bank is Remaking Itself as a Creature of Wall Street,” The New York Times, January 25, 2018.
“Plausible that Greece Will Exit Bailout Programme This Year,” Financial Times, January 4, 2018; and “Explaining Greece’s
Debt Crisis,” The New York Times, June 17, 2016.
15
“Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, Statistical Update,” (Washington, D.C.:
International Monetary Fund, September 1, 2017).
14

Exhibit 4.A

Vulture Funds and Heavily Indebted Nations

A “vulture fund” is a private equity fund (also called a hedge fund) that buys the debt of weak companies
or heavily indebted countries with the intention of making a profit. (The term analogizes these investors to
vultures, birds of prey that feed on dead or dying animals.) For example, when Argentina defaulted on about
$81 billion of loans in 2001, a hedge fund called Elliott Management bought some of these defaulted loans
at a deep discount. It then sued, demanding that Argentina pay back the loans at full face value with interest, much more than it had paid. In 2012, a U.S. judge ruled in favor of the hedge fund—and said that until
Argentina paid what it owed to Elliott Management, it was barred from paying any of its creditors (who had
already agreed to accept less). In 2016, Argentina finally capitulated, agreeing to pay $2.4 billion to settle
debt that Elliott Management had purchased 15 years earlier for just $117 million, generating an enormous
windfall. Both the IMF and the World Bank said that the behavior of vulture funds like Elliott Management
threatened the financial recovery of fragile economies. “When vulture funds sue for such exorbitant amounts,
it’s clearly taking away money that should be invested in health, education, infrastructure, and other social
problems, and goes to line the pockets of already wealthy investors,” said a representative of the nongovernmental organization (NGO) Africa Action.
Sources: “How One Hedge Fund Made $2 Billion from Argentina’s Economic Collapse,” The Washington Post, March 29, 2016;
and “A Good Week for Vulture Funds,” The New Yorker, March 5, 2016.

Its major objective is to promote free trade; that is, to eliminate barriers to trade among
nations, such as tariffs. A tariff is a tax on an imported (or sometimes exported) product,
often imposed by governments to protect their own industries from foreign competition.
Unlike the WB and the IMF, the WTO does not lend money or foreign exchange; it simply
sets the rules for international trade. The WTO conducts multiyear negotiations, called
rounds, on various trade-related topics, rotating its meetings among different cities.
Under the WTO’s most favored nation rule, member countries may not discriminate
against foreign products. Most import restrictions (such as protective tariffs) are illegal.
Under rare circumstances, they are permitted to protect a nation from an imported product scientifically proven to be unsafe—or to safeguard a nation’s industry from a sudden,
unforeseen, and damaging surge in imports. The Trump administration cited the latter
exception when it imposed tariffs on imported solar panels in 2018, saying the restrictions
were needed to protect American industry from unfair foreign competition. Exhibit 4.B
explores whether jobs were gained or lost because of this protectionist policy. (Trade policy is further discussed in Chapter 7, and corporate efforts to obtain protective tariffs are
described in the discussion case at the end of Chapter 8.)
If countries disagree about the interpretation of this or any other WTO rule, they can
bring a complaint before the WTO’s Dispute Settlement Body (DSB), a panel of appointed
experts, which meets behind closed doors. Usually, member countries comply voluntarily
with the DSB’s rulings. If they do not, the DSB can allow the aggrieved nation to take
retaliatory measures, such as imposing their own tariffs. Rulings are binding; the only way
a decision can be overruled is if every member country opposes it.
These three international financial and trade institutions are important because no business can operate across national boundaries without complying with the rules set by the
WTO, and many businesses in the developing world are dependent on World Bank and
IMF loans for their very lifeblood. The policies these institutions adopt, therefore, have
much to do with whether globalization is perceived as a positive or negative force, a subject to which we turn next.
77

Tariffs on Solar Panels: Job Creator or
Job Destroyer?

Exhibit 4.B

In 2018, President Trump imposed a 30 percent tariff on imported solar panels and cells, set to phase out
after four years. “Our companies have been decimated,” the president said, “and those companies are going
to be coming back strong.” The immediate effect of the tariff was to raise the prices of imported solar panels
and cells, most of which came from China, South Korea, and Malaysia.
Two U.S.–based solar equipment manufacturers responded enthusiastically. Suniva praised the move for
“holding China and its proxies accountable,” and SolarWorld said it was “hopeful [the tariffs] will be enough.”
How many U.S. jobs were protected or created? According to the Solar Foundation, although 38,000 American
workers were employed in all aspects of solar manufacturing, only 2,000 made solar panels and cells. One
foreign solar-panel maker reportedly contacted the city of Jacksonville, Florida, after the tariff announcement
to discuss opening a manufacturing plant there, promising as many as 800 new jobs.
Other companies opposed the tariffs, saying they would eliminate the jobs of many Americans who
installed and maintained solar systems for businesses, homes, and utilities. Almost 90 percent of solar panels
were imported, and as their prices rose, demand for these systems was expected to fall. The Solar Energy
Industries Association, a trade group, estimated that the tariffs would lead to the loss of 23,000 U.S. jobs in
2018 alone as solar investments were cancelled or delayed. The chief executive of SunPower, a U.S. firm that
sourced its panels from Asia, commented that tariffs would “burden domestic manufacturers and suppliers of
other key components, raise prices for customers, and eliminate tens of thousands of jobs.” And some feared
that the Administration’s move would prompt retaliation from Asian countries, hurting U.S. exporters. “This is
now really starting to escalate,” said one prominent economist.
Sources: “Manufacturers Fight Over New Tariffs’ Effect on U.S. Jobs,” The Wall Street Journal, January 23, 2018; “Job Creator, or
Job Killer? Trump Angers Solar Installers with Panel Tariff” and “Q&A: Winners, Losers of Trump’s Solar Panel Tariff,” The New York
Times, January 23, 2018; “Trump Says Solar Tariff Will Create ‘Lots of Jobs.’ But It Could Wipe Out Many More,” The Washington
Post, January 29, 2018; and “President Trump’s Solar Tariffs Are a Big Blow to Renewables,” Fortune, January 22, 2018.

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

Benefits of Globalization
Proponents of globalization point to its many benefits. One of the most important of these
is that globalization tends to increase economic productivity. That means, simply, that
more is produced with the same effort.
Why should that be? As the economist David Ricardo first pointed out, productivity
rises more quickly when countries produce goods and services for which they have a natural talent. He called this the theory of comparative advantage. Suppose, for example,
that one country had a climate and terrain ideally suited for raising sheep, giving it an
advantage in the production of wool and woolen goods. A second country had a favorable
combination of iron, coal, and water power that allowed it to produce high-grade steel. The
first country would benefit from trading its woolen goods for the second country’s steel,
and vice versa; and the world’s economy overall would be more productive than if both
countries had tried to make everything they needed for themselves. In other words, in the
context of free trade, specialization (everyone does what they are best at) makes the world
economy as a whole more efficient, so living standards rise.
Many countries today have developed a specialization in one or another skill or
industry. India, with its excellent system of technical education, has become a world
78

Chapter 4 Business in a Globalized World 79

powerhouse in the production of software engineers. China has become expert in
electronics manufacturing. France and Italy, with their strong networks of skilled
craftspeople and designers, are acknowledged leaders in the world’s high fashion
and footwear design industries. The United States, with its concentration of actors,
directors, special effects experts, and screenwriters, is the global headquarters for
the movie industry.
Comparative advantage can come from several possible sources, including natural
resources; the skills, education, or experience of a critical mass of people; or an existing
production infrastructure.
Globalization also tends to reduce prices for consumers. If a shopper in the United
States goes into Walmart to buy a shirt, he or she is likely to find one at a very reasonable price. Walmart sources its apparel from all over the world, enabling it to push down
production costs. Globalization also benefits consumers by giving them access to a wide
range of diverse goods and the latest “big thing.” Teenagers in Malaysia can enjoy the latest Johnny Depp or Jennifer Lawrence movie, while American children can play with new
Sony PlayStation games from Japan.
For the developing world, globalization also brings benefits. It helps entrepreneurs the
world over by giving all countries access to foreign investment funds to support economic
development. Globalization also transfers technology. In a competitive world marketplace,
the best ideas and newest innovations spread quickly. Multinational corporations train their
employees and partners how to make the fastest computer chips, the most productive food
crops, and the most efficient light bulbs. In many nations of the developing world, globalization has meant more manufacturing jobs in export sectors and training for workers eager
to enhance their skills.
The futurist Allen Hammond identifies two additional benefits of globalization. First, he
says that world trade has the potential of supporting the spread of democracy and freedom.
The very nature of economic activity in free markets. . . requires broad access to
information, the spread of competence, and the exercise of individual decision making throughout the workforce—conditions that are more compatible with free societies and democratic forms of government than with authoritarian regimes.16
Second, according to Hammond, global commerce can reduce military conflict by acting
as a force that binds disparate peoples together on the common ground of business interaction. “Nations that once competed for territorial dominance,” he writes, “will now compete
for market share, with money that once supported military forces invested in new ports,
telecommunications, and other infrastructure.” In this view, global business can become
both a stabilizing force and a conduit for Western ideas about democracy and freedom.

Costs of Globalization
If globalization has all these benefits, why are so many individuals and organizations so
critical of it? The answer is complex. Just as some gain from globalization, others are hurt
by it. From the perspective of its victims, globalization does not look nearly so attractive.
One of the costs of globalization is job insecurity. As businesses move manufacturing
across national borders in search of cheaper labor, workers at home are laid off. Jobs in
the domestic economy are lost as imports replace homemade goods and services. In the
American South, for example, tens of thousands of jobs in the textile industry have been
lost, as jobs have shifted to low-labor cost areas of the world, leaving whole communities
16

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

80

Part One Business in Society

devastated. In the past, mainly manufacturing was affected by the shift of jobs abroad;
more recently, clerical, white-collar, and professional jobs have also been “offshored.”
Many customer service calls originating in the United States are now answered by operators in the Philippines and India. The back-office operations of many banks—sorting and
recording check transactions, for example—are done in India and China. Aircraft manufacturers are using aeronautical specialists in Russia to design parts for new planes. Even
when jobs are not actually relocated, wages may be driven down because companies facing
foreign competition try to keep their costs in check. Much of the opposition to globalization in affluent nations comes from people who feel their own jobs, pay, and livelihoods
threatened by workers abroad who can do their work more cheaply.
Some evidence suggests a countertrend, as some companies have moved production back to the United States, in part to gain greater control over the supply chain.
Wages have increased in China and many other developing nations, while wages in
the United States have stagnated. Productivity is considerably higher in the United
States than in China. And, some small businesses have found that solving everyday
production problems with a contractor halfway around the globe can be daunting. “If
we have an issue in manufacturing, in America we can walk down to the plant floor,”
explained the founder of a business called LightSaver Technologies that made emergency lights for homeowners. “We can’t do that in China.” The company had recently
relocated production from China to a facility near its headquarters in California.17
Not only workers in rich countries are affected by globalization. When workers in Indonesia began organizing for higher wages, Nike Corporation moved much of its production
to Vietnam and China. Many Indonesian workers lost their jobs. Some call this feature of
global capitalism the race to the bottom.
Another cost of globalization is that environmental and labor standards may be weakened as companies seek manufacturing sites where regulations are most lax. Just as companies may desire locations offering the cheapest labor, they may also search for locations
with few environmental protections; weak regulation of occupational health and safety,
hours of work, and discrimination; and few rights for unions. A related concern is that
the World Trade Organization’s most favored nation rules make it difficult for individual
nations to adopt policies promoting environmental or social objectives, if these have the
effect of discriminating against products from another country.
For example, the United States banned the importation of Indonesian clove cigarettes, saying that the sweet-flavored cigarettes attracted younger smokers, drawing
them into nicotine addiction and violating U.S. tobacco control laws. Indonesia
brought a complaint before the WTO’s dispute settlement body. The WTO ruled in
Indonesia’s favor, saying that because the United States permitted the sale of
another flavored cigarette—menthols—it had acted in a discriminatory way by
excluding Indonesian clove cigarettes. The dispute was finally settled after Indonesia
agreed to the ban in exchange for other concessions from the United States.18
Critics of globalization say that incidents such as this one show that free trade rules are
being used to restrict the right of sovereign nations to make their own laws setting health or
environmental standards for imported products.

17

“Small U.S. Manufacturers Give Up on ‘Made in China,’” Bloomberg Businessweek, June 21, 2012.
“U.S., Indonesia Settle Fight over Clove Cigarettes,” The Hill, October 3, 2014. Details on this and other cases before the
WTO’s dispute settlement body are available at www.wto.org.
18

Chapter 4 Business in a Globalized World 81

FIGURE 4.2

Benefits and Costs of
Globalization

Benefits of Globalization

Costs of Globalization

Increases economic productivity.

Causes job insecurity.

Reduces prices for consumers.

Weakens environmental and labor standards.

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

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

Transfers technology.

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

Spreads democracy and freedom, and reduces
military conflict.

Is compatible with despotism.

Another cost of globalization is that it erodes regional and national cultures and undermines cultural, linguistic, and religious diversity. In other words, global commerce makes
us all very much the same. Is a world in which everyone is drinking Coke, watching Hollywood movies, texting on an iPhone, and wearing Gap jeans a world we want, or not? Some
have argued that the deep anti-Americanism present in many parts of the world reflects
resentment at the penetration of the values of dominant U.S.–based multinational corporations into every corner of the world.
With respect to the point that globalization promotes democracy, critics charge that
market capitalism is just as compatible with despotism as it is with freedom. Indeed, multinational corporations are often drawn to nations that are governed by antidemocratic or
military regimes, because they are so effective at controlling labor and blocking efforts to
protect the environment. For example, Unocal’s joint-venture collaboration to build a gas
pipeline with the military government of Myanmar (Burma), a notorious abuser of human
rights, may have brought significant financial benefits to the petroleum company.
Figure 4.2 summarizes the major points in the discussion about the costs and benefits
of globalization.
This discussion raises the very real possibility that globalization may benefit the world
economy as a whole, while simultaneously hurting many individuals and localities. An
ongoing challenge to business, government, and society is to find ways to extend the benefits of globalization to all, while mitigating its adverse effects.19

Doing Business in a Diverse World
Doing business in other nations is much more than a step across a geographical boundary;
it is a step into different social, political, cultural, and economic realities. As shown in
Chapters 1, 2, and 3, even businesses operating in one community or one nation cannot
function successfully without considering a wide variety of stakeholder needs and interests. When companies operate globally, the number of stakeholders to be considered in
decision making, and the diversity of their interests, increases dramatically.
19

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

82

Part One Business in Society

Comparative Political and Economic Systems
The many nations of the world differ greatly in their political, social, and economic systems. One important dimension of this diversity is how power is exercised, that is, the
degree to which a nation’s people may freely exercise their democratic rights. Democracy
refers broadly to the presence of political freedom. Arthur Lewis, a Nobel laureate in economics, described it this way: “The primary meaning of democracy is that all who are
affected by a decision should have the right to participate in making that decision, either
directly or through chosen representatives.” According to the United Nations, democracy
has four defining features:20
∙ Fair elections, in which citizens may freely choose their leaders from among candidates
representing more than one political party.
∙ An independent media, in which journalists and citizens may express their political
views without fear of censorship or punishment.
∙ Separation of powers among the executive, legislative, and judicial branches of government.
∙ An open society where citizens have the right to form their own independent organizations to pursue social, religious, and cultural goals.
During much of the twentieth century, democratic rights spread for the first time to many
nations around the world. Consider, for example, that at the beginning of the 20th century
no country in the world had universal suffrage (all citizens can vote); today, a majority of
countries do. The collapse of communist party rule in the former Soviet Union and its
satellites in eastern and central Europe in the early 1990s was followed by the first open
elections ever in these countries. These changes led some observers to call the end of the
20th century the “third wave of democracy.”
Somewhere after the turn of the century, however, the trend toward democratization
seemed to stall. According to a study by Freedom House, a nongovernmental research
organization, 2017 marked the eleventh consecutive year in which more of the world’s
nations experienced declines in political rights and civil liberties than experienced improvements. In some countries that already lacked freedom, authoritarian leaders further consolidated their power. For example, in China, the regime placed further restrictions on dissent
within the ruling Communist Party; and in Russia, the regime intimidated opponents and
repressed free elections. Perhaps more surprisingly, formerly free countries suffered setbacks. In Venezuela, which had been democratic for more than 40 years, the elected president stripped the legislature of power, killed demonstrators, and imprisoned political
opponents, effectively ushering in authoritarian rule. Declines in democratic rights also
occurred in Turkey, Ethiopia, Hungary, and other nations. In all, Freedom House concluded
that in 2017 one quarter of the world’s nations were “not free,” when rated on their political
rights and civil liberties; an additional 30 percent were only “partly free.”21
The degree to which human rights are protected also varies widely across nations.
Human rights, further discussed in Chapters 5 and 17, refer broadly to the rights and privileges accorded to all people, simply by virtue of being human, for example, the rights to a
decent standard of living, free speech, religious freedom, and due process of law, among
others. Fundamental human rights have been codified in various international agreements,
20

United Nations Development Programme, Human Development Report 2000 (New York: Oxford University Press, 2000),
Ch. 3, “Inclusive Democracy Secures Rights,” pp. 56–71. The quotation from Arthur Lewis appears on p. 56.
21
Freedom House, “Freedom in the World 2017: Populists and Autocrats, the Dual Threat to Global Democracy,” at http://
freedomhouse.org. See also: “How Stable Are Democracies? ‘Warning Signs Are Flashing Red,’” The New York Times,
November 29, 2016.

Chapter 4 Business in a Globalized World 83

the most important of which is the Universal Declaration of Human Rights of 1948.22 The
second half of the 20th century was a period of great advances in human rights in many
regions, and over half of the world’s nations have now ratified all of the United Nations’
human right covenants. Nonetheless, many human rights problems remain. Consider the
following examples:
∙ More than 5 million children die each year before their fifth birthday. Most of these
deaths are due to diseases such as pneumonia, diarrhea, and malaria, which are preventable with proper vaccinations, nutrition, and basic medical care. Although this number
has fallen by more than half since 1990, it is still tragically high.23
∙ Gross violations of human rights have not been eliminated. Genocide, mass murder of
innocent civilians, has occurred all too recently in Syria, Rwanda and Burundi, Iraq,
Bosnia and Herzegovina, Democratic Republic of the Congo, Somalia, East Timor, and
Sudan.
∙ The International Labor Organization estimated in 2017 that 25 million people worldwide were victims of forced labor, trafficking, and human slavery. Their labor generated
annual profits of $150 billion. (The topic of forced labor is further explored in Chapter 17.)
More than half of them were women and girls, who had been forced into prostitution or
domestic work.24 The efforts of a major hotel chain, The Carlson Companies, to prevent
the use of their facilities for prostitution or child trafficking is described in a case at the
end of this book.
∙ Minority groups and indigenous peoples in many nations still lack basic political and
social rights. In Nepal, the life expectancy of “untouchables,” the lowest caste, is fully
15 years less than that of Brahmins, the highest caste.
The absence of key human rights in many nations remains a significant issue for companies transacting business there.
Another dimension of difference among nations today is how economic assets are controlled, that is, the degree of economic freedom. On one end of the continuum are societies
in which assets are privately owned and exchanged in a free and open market. Such free
enterprise systems are based on the principle of voluntary association and exchange. In
such a system, people with goods and services to sell take them voluntarily to the marketplace, seeking to exchange them for money or other goods or services. Political and economic freedoms are related: as people gain more control over government decisions they
often press for greater economic opportunity; open markets may give people the resources
to participate effectively in politics. But this is not always the case. The special situation of
China with respect to political and economic freedom is explored in Exhibit 4.C.
At the other end of the continuum are systems of central state control, in which economic power is concentrated in the hands of government officials and political authorities.
The central government owns the property that is used to produce goods and services. Private ownership may be forbidden, or greatly restricted, and most private markets are illegal. Very few societies today operate based on strict central state control of the economy.
More common is a system of mixed free enterprise and central state control in which some
industries are state controlled, and others are privately owned. For example, in Nigeria, the
22
For more information on the Universal Declaration of Human Rights and other United Nations agreements on human rights,
see the website of the U.N. High Commissioner for Human Rights at www.unhchr.org.
23
United Nations Children’s Fund (UNICEF) data on child mortality are available online at https://data.unicef.org.
24
ILO and Walk Free Foundation, Global Estimates of Modern Slavery: Forced Labour and Forced Marriage (2017); and ILO,
Profits and Poverty: The Economics of Forced Labour (2014).

Exhibit 4.C

China: A Case of Authoritarian Capitalism?

Democracy, a political system in which citizens choose their own leaders and may openly express their ideas,
and capitalism, an economic system in which the means of creating wealth are privately owned and controlled, have historically often developed in tandem. The two are not always coupled, however. During the
early years of the 20th century, for example, capitalism coexisted with nondemocratic, fascist governments in
Germany, Spain, and Japan. More recently, scholars have coined the term “authoritarian capitalism” to refer
to modern states that combine elements of a market economy with political control by nonelected elites. A
prime example is China. In its drive for economic development, the Chinese government has granted considerable freedom to private individuals to own property, invest, and innovate. The result has been very rapid
growth in much of the country over the past two decades. At the same time, the Chinese communist authorities have vigorously held onto political power and suppressed dissent. As further explored in Chapter 12, the
Chinese government operates one of the most sophisticated systems of Internet censorship in the world,
restricting its citizens’ ability to search using Google, connect with friends on Facebook, and access the
websites of organizations out of favor with the authorities. It has also held onto ownership of some big
companies, such as the China National Petroleum Corporation and China Mobile. In what direction will China
and other authoritarian capitalist nations evolve in the future? “Some believe these countries could ultimately
become liberal democracies through a combination of internal development, increasing affluence, and outside influence,” commented the political scientist Azar Gat. “Alternatively, they may have enough weight to
create a new nondemocratic but economically advanced Second World.”
Sources: “The Rise of State Capitalism,” The Economist, January 21, 2012; Azar Gat, “The Return of the Authoritarian Capitalists,”
International Herald Tribune, June 14, 2007; and “The Return of Authoritarian Great Powers,” Foreign Affairs, July/August 2007.

oil industry is controlled by a government-owned enterprise that operates in partnership
with foreign companies such as Shell and Chevron, but many other industries are privately
controlled. In the social democracies of Scandinavia, such as Norway, the government
operates some industries but not others. In the United States, the government temporarily
took partial ownership in some banks, including Citigroup, as they faltered during the
financial crisis.
The Heritage Foundation, a conservative think tank, has scored the nations of the
world according to an index of economic freedom defined as “the fundamental
rights of every human being to control his or her own labor and property.” In economically free societies, governments “refrain from coercion or restraint of liberty
beyond the extent necessary to protect and maintain liberty itself.” Among the freest
nations in 2018, by this measure, were Hong Kong, Singapore, and Canada; among
the most repressed were Iran, Venezuela, and—the least free in the world—North
Korea. The United States ranked 48th out of 183 countries.25

Global Inequality and the Bottom of the Pyramid
Nations also differ greatly in their overall levels of economic and social development. Ours
is a world of great inequalities. Nations themselves differ in economic development, and
individual wealth and income varies widely within and among nations.
Inequality may be measured in two ways: by wealth and income.
Wealth refers to assets that a person accumulates and he or she owns at a point in time.
Levels of wealth can be expressed as a pyramid, as shown in Figure 4.3. Most of the world’s
25

84

Available at www.heritage.org.

Chapter 4 Business in a Globalized World 85

FIGURE 4.3

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

Top
of the
Pyramid
36 million
people ($1 million
High Wealth
391 million people (8 percent)
$100,000 to $1 million

Middle Class
1,054 million people (21%)
Assets $10,000 to $100,000

Base of the Pyramid
3,474 million people (70%)
Assets less than $10,000

population—about 70 percent—are at the base, or bottom, of the pyramid, owning less than
$10,000 worth of assets. They might own some work tools, household furnishings, and a
bicycle or used car. More than 90 percent of adults in India and Africa (and only 20 percent
of adults in developed countries) are at the bottom of the pyramid. About a fifth of the
world’s people are considered middle class, with assets between $10,000 and $100,000.
This group is present in all countries, but is growing especially fast in China (whose share
of the world’s middle class has more than doubled since 2000). These individuals might
have equity in a home and some retirement savings. High wealth individuals, with assets
above $100,000, are concentrated in the United States, Europe, Japan, and Australia. At the
top of the pyramid—just over one-half of 1 percent of the world’s population—are millionaires. Forty-three percent of these millionaires reside in the United States. Not reported
separately in Figure 4.3 are so-called ultra-high net worth individuals, with wealth above
$50 million. In 2017, about 148,000 people worldwide were in this category.26
Another way to conceptualize inequality is in terms of income—how much a person
earns in a day or a year. Some theorists have defined the bottom of the pyramid as individuals who earn below $3,000 a year (or about $8 a day) in local purchasing power. By this
measure, about 4 billion people globally are part of this segment.27
Whether measured by assets or income, historically, major multinational corporations
have focused most of their attention on the top of the pyramid and, to some extent, the
middle. But today, they are increasingly facing the challenge of bringing products, services, and employment to the many at the bottom of the pyramid. As the scholar C. K.
Prahalad argued in his book The Fortune at the Bottom of the Pyramid, this group, while
often overlooked, represents an incredible business opportunity. Although the poor earn
26
Data in this paragraph are drawn from Credit Suisse, Global Wealth Report 2017, “The Global Wealth Pyramid,” November
2017.
27
This definition was first proposed in World Resources Institute and International Finance Corporation, “The Next 4 Billion:
Market Size and Business Strategy at the Base of the Pyramid,” March 2007, www.wri.org.

86

Part One Business in Society

little individually, collectively they represent a vast market—and they often pay a “poverty
premium,” creating an opening for companies able to deliver quality products at lower
prices. The size of this market has been estimated at as high as $5 trillion.28 Many businesses are learning that focusing on the bottom of the pyramid can foster social development and provide employment in underserved communities—and reap profits.
For example, S.C. Johnson, a global manufacturer of household cleaning supplies
and other consumer chemicals, launched a business called WOW in rural Ghana. In
partnership with the Gates Foundation and the Center for Sustainable Global Enterprise, the company developed a packet of products specifically designed to help
poor families prevent malaria, an illness spread by mosquitos. Insect repellants and
cleaning products were provided in refillable containers and sold by subscription
in small amounts to groups of homemakers, village by village. “Since our initial
launch of WOW, we’ve learned so much about what consumers in Ghana want and
how to construct a sustainable business model in the process,” said the company’s
vice president of international markets marketing.29
One product that people in poor countries often desperately need is loans with which
to operate or expand their farms or small businesses. Commercial banks have historically
been reluctant to make small loans to people with little or no collateral. In response to this
need, a new system has emerged called microfinance. This occurs when financial organizations provide loans to low-income clients or solidarity lending groups (a community of
borrowers) who traditionally lack access to banking or related services.
In Indonesia, a midsized bank called BTPN grew rapidly after it decided in 2008 to
expand into microloans to what its executives called the “productive poor.” BTPN
set up numerous small branches in rural areas and equipped staff with portable
devices that could scan fingerprints, to facilitate doing business with illiterate customers. Typical loans were for $4,000 or less, with a term of a year or two, made to
traders and small shopkeepers. As the economy rebounded from the global financial crisis, many entrepreneurs were eager to grow their businesses. BTPN’s model
benefited both these customers and the bank, which by 2011 had become one of the
most profitable in Indonesia.30
One of the most recognized microfinance institutions is the Grameen Bank in Bangladesh. Grameen Bank has had amazing results; by 2018, it had made 1.7 million microloans, helping nearly 10 million people. Grameen Foundation and its affiliates and partners
have spread this approach to millions more across Asia, Africa, and Latin America.31

Collaborative Partnerships for Global Problem Solving
As the preceding section suggested, doing business in a diverse world is exceptionally
challenging for businesses. One solution to the challenging questions facing transnational
28
C.K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia: Wharton School Publishing, 2004). See also
C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy + Business, No. 26, 2002.
29
“SC Johnson Expands WOW Business Concept in Ghana,” press release, October 8, 2014, and “Reality Check at the
Bottom of the Pyramid,” Harvard Business Review, June 2012.
30
Gardner Bell, Ryan Nelson, and Carl Zeithaml, “BTPN (A): Banking for the Bottom of the Pyramid in Indonesia,” William
Davidson Institute of the University of Michigan, January 26, 2015; and The Economist, “Rich Pickings: Microlending Has
Helped Make BTPN One of Asia’s Most Profitable Banks,” April 20, 2011.
31
Data available at www.grameen.com and www.grameenfoundation.org.

Chapter 4 Business in a Globalized World 87

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

A Three-Sector World
The term sector refers to broad divisions of a whole. In this context, it refers to major parts
or spheres of society, such as business (the private sector), government (the public sector), and civil society. Civil society comprises nonprofit, educational, religious, community,
family, and interest-group organizations; that is, social organizations that do not have a
commercial or governmental purpose.
The process of globalization has spurred development of civil society. In recent decades,
the world has witnessed the creation and growth of large numbers of nongovernmental
organizations (NGOs) concerned with such issues as environmental risk, labor practices,
worker rights, community development, and human rights. (NGOs are also called civil
society organizations or civil sector organizations.) The number of NGOs accredited by
the United Nations has soared in recent years, rising from 1,000 in 1996 to more than
4,500 in 2016. This figure counts just major organizations.33 Worldwide, the total number
of international NGOs is estimated to be around 55,000.34 (Many millions more NGOs
operate regionally or locally.)
Experts attribute the growth of NGOs to several factors, including the new architecture of global economic and political relationships. As the Cold War has ended, with
democratic governments replacing dictatorships, greater openness has emerged in many
societies. More people, with more views, are free to express their pleasure or displeasure
with government, business, or one another. NGOs form around specific issues or broad
concerns (environment, human rights) and become voices that must be considered in the
public policy debates that ensue.
Each of the three major sectors that participate in global action networks—business,
government, and civil society—has distinctive resources and competencies, as well as
weaknesses. For example, businesses have access to capital, specialized technical knowledge, networks of commercial relationships, and the management skills to get projects
completed on time and on budget. On the other hand, the short-term orientation of many
businesses may lead them to disregard the long-term impacts of their actions on others.
For their part, government agencies have knowledge of public policy, an ability to enforce
rules, and revenue from taxation, but are often inflexible, slow to mobilize, and poorly
coordinated. Finally, NGOs often enjoy strong community knowledge, volunteer assets,
and inspirational leaders, but may lack financial resources and technical skill and may
suffer from a narrow, parochial focus.35 One model highlighting various attributes of the
business, government, and civil society sectors is presented in Figure 4.4.
Many businesses have realized that these differences across sectors can be a resource to
be exploited. In this view, global action networks—alliances among organizations from the

32

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

88

Part One Business in Society

FIGURE 4.4 Distinctive Attributes of the Three Major Sectors
Source: Adapted from Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collaborations,” Journal of Corporate Citizenship,
Autumn 2002, pp. 43–56, Tables 1 and 2.

Business

Government

Civil Society

Organizational form

For-profit

Governmental

Nonprofit

Goods produced

Private

Public

Group

Primary control agent

Owners

Voters/rulers

Communities

Primary power form

Money

Laws, police, fines

Traditions, values

Primary goals

Wealth creation

Societal order

Expression of values

Assessment frame

Profitability

Legality

Justice

Resources

Capital assets, technical
knowledge, production skills

Tax revenue, policy knowledge,
regulatory and enforcement power

Community knowledge,
inspirational leadership

Weaknesses

Short-term focus, lack of
concern for external impacts

Bureaucratic, slow-moving, poorly
coordinated internally

Amateurish, lack of financial
resources, parochial perspective

three sectors—can draw on the unique capabilities of each and overcome specific weaknesses that each has.
One example of a global action network was the Kimberley Process, an initiative
to end the trade in conflict diamonds—gemstones that had been mined or stolen by
rebels fighting internationally recognized governments. The problem was that combatants in civil wars in Africa had seized control of diamond mines in Sierra Leone,
Angola, and the Congo, and were selling uncut diamonds to fund their operations.
Concerned that the image of diamonds as a symbol of romance would be tarnished,
the World Diamond Congress and the international diamond company DeBeers
joined forces with the governments of nations with legitimate diamond industries
and NGOs campaigning to end civil violence. Together, these parties developed the
Kimberley Process, a system for tracking diamonds all the way from the mine to the
jewelry shop, so that consumers could be assured that their gem was “conflict-free.”
In this case, although the interests of the parties were somewhat different, they were
each able to bring their distinctive capabilities to bear to accomplish a common objective. A similar multiparty effort to ban conflict minerals—ones mined in war-torn areas
of the Congo—is profiled in the discussion case at the end of this chapter. Other applications of the principle of cross-sector networks and collaborations are explored in
Chapters 10 and 17.
The process of globalization presents today’s business leaders with both great promise
and great challenge. Despite periodic global economic downturns and the ever-present
threat of war and terrorism, the world’s economy continues to become more integrated
and interdependent. Multinational corporations, with their financial assets and technical
and managerial skills, have a great contribution to make to human betterment. Yet, they
must operate in a world of great diversity, and in which their presence is often distrusted
or feared. Often, they must confront situations in which political and economic freedoms
are lacking and human rights are routinely violated. The challenge facing forward-looking
companies today is how to work collaboratively with stakeholders to promote social and
economic justice, while still achieving strong bottom-line results.

Chapter 4 Business in a Globalized World 89

Summary

∙ Globalization refers to the increasing movement of goods, services, capital, and labor
across national borders. Firms can enter and compete in the global marketplace by
exporting products and services; locating operations in another country; or buying raw
materials, components, or supplies from sellers abroad.
∙ The process of globalization is driven by technological innovation, improvements in
transportation, the rise of major multinational enterprises, and social and political
reforms.
∙ Globalization brings both benefits and costs. On one hand, it has the potential to pull
nations out of poverty, spread innovation, and reduce prices for consumers. On the other
hand, it may also produce job loss, reduce environmental and labor standards, and erode
national cultures. An ongoing challenge is to extend the benefits of globalization to all,
while mitigating its adverse effects.
∙ Multinational enterprises operate in nations that vary greatly in their political, social,
and economic systems. They face the challenge of deciding how to do business in other
nations, while remaining true to their values.
∙ In a world of great inequalities of wealth and income, businesses are making progress in
understanding how to serve the poor to aid social development while earning a profit.
∙ Businesses can work with governments and civil society organizations around the world
in collaborative partnerships that draw on the unique capabilities of each to address
common problems.

Key Terms

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

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

Internet
Resources

www.wto.org
www.imf.org
www.worldbank.org
www.ifg.org
www.globalpolicy.org
www.weforum.org
www.un.org/en/sections/resources-differentaudiences/civil-societyx

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

World Trade Organization
International Monetary Fund
World Bank
International Forum on Globalization
Global Policy Forum
The World Economic Forum
United Nations and Civil Society

90

Part One Business in Society

Discussion Case: Intel and Conflict Minerals
In 2017, Intel joined more than two dozen other companies, nongovernmental organizations, and government entities in launching the second phase of the Public-Private Alliance
for Responsible Minerals Trade (PPA). The company had been an early leader in the effort
to bring social responsibility to its minerals supply chain: in 2014, Intel had become the
first electronics firm to announce that its products would be certified as conflict-free. This
meant they would contain no conflict minerals—tantalum, tungsten, tin, or gold sourced
from mines that financed horrific civil conflict in the Democratic Republic of the Congo
(DRC) and nearby countries. “The solution isn’t easy,” Intel’s CEO had noted at the time.
“But nothing worthwhile ever is.”
Of the four conflict minerals, the one most important to Intel and other electronics companies is tantalum. Columbite-tantalite, commonly known as “coltan,” is a black metallic
ore. When refined, it produces tantalum, which is used to regulate electricity in portable consumer electronics, such as smartphones, laptops, play stations, and digital cameras. The largest share of coltan comes from Africa; other sources include Australia, Brazil, and Canada.
In the late 2000s, a common goal to ban conflict minerals emerged among members of
an oddly matched group—the electronics industry, the United Nations, governments, and
human rights organizations. Their efforts led, ultimately, to a set of international guidelines,
national laws, and voluntary initiatives whose goal was to keep the electronics industry and
its customers from inadvertently supporting killing, sexual assault, and labor abuses.
The Democratic Republic of the Congo is a nation of 79 million people in central Africa,
covering a vast region the size of Western Europe. Since the late 1990s, the DRC has been the
site of a brutal regional conflict, in which armed militias, including some from neighboring
states, have fought for control. Despite the presence of United Nations troops, as many as
5 million people have died—the most in any conflict since World War II. Warring groups have
used sexual assault as a weapon to control the population; an estimated 200,000 Congolese
women and girls have been raped, often in front of their husbands and families.
The United Nations and several NGOs reported that militias had systematically looted
coltan and other minerals from eastern Congo, using the profits to fund their operations.
According to the human rights group Global Witness:
In the course of plundering these minerals, rebel groups and the Congolese army
have used forced labor (often in extremely harsh and dangerous conditions), carried
out systematic extortion, and imposed illegal “taxes” on the civilian population.
They have also used violence and intimidation against civilians who attempt to
resist working for them or handing over the minerals they produce.
Said a representative of The Enough Project, another human rights group, “In eastern
Congo, you see child miners [with] no health or safety standards. Minerals are dug by
hand, traded in sacks, smuggled across borders.”
Once mined—whether in the Congo or elsewhere—raw coltan made its way through a
complex, multistep global supply chain. Local traders sold to regional traders, who shipped
the ore to processing companies such as H.C. Starck (Germany), Cabot Corporation
(United States), and Ningxia (China). Their smelters produced refined tantalum powder,
which was then sold to parts makers such as Kemet (United States), Epcos (Germany), and
Flextronics (Singapore). They sold, in turn, to original equipment manufacturers such as
Dell (United States), Sony (Japan), and Nokia (Finland).
By the time coltan reached the end of this convoluted supply chain, determining its
source was nearly impossible. Steve Jobs, then the CEO of Apple, commented in an e-mail
in 2010, “We require all of our suppliers to certify in writing that they use conflict-free

Chapter 4 Business in a Globalized World 91

materials. But honestly there is no way for them to be sure. Until someone invents a way to
chemically trace minerals from the source mine, it’s a very difficult problem.”
As public awareness of atrocities in the Congo grew, governments began to act.
The Organization for Economic Cooperation and Development, an alliance of mostly
European nations, issued guidance for companies that wished to responsibly source minerals. In 2010, the U.S. Congress passed the Wall Street Reform and Consumer Protection
Act (also known as the Dodd-Frank Act, and further discussed in Chapters 7 and 13). This
law included a provision, Section 1502, which required companies to disclose whether tantalum, tin, tungsten, and gold used in their products had come from the DRC or adjoining
countries. Although the Securities and Exchange Commission (SEC) announced in 2017
that it no longer intended to enforce this provision, the matter remained in legal limbo, and
many firms continued to collect and disclose this information.
Along with governments, companies also acted. For its part, Intel sent teams to visit
107 different smelters and refiners in 23 countries, educating their partners about conflict
minerals and collecting information about the origin of raw materials they processed. The
company collaborated with other companies in the Electronics Industry Citizenship Coalition (EICC) to develop a Conflict-Free Smelter Assessment Program, a voluntary system
in which an independent third-party auditor evaluated smelters and refiners and designated
them as conflict-free. Minerals would be “bagged and tagged” and then tracked through
each step of the supply chain. By 2017, this program had certified 247 smelters and refiners.
Intel and other companies in the coalition were particularly concerned that they remove
from their products only conflict minerals, not minerals coming from legitimate mines in
conflict areas. To this end, they worked with government agencies and civil society organizations, including the U.S. State Department and RESOLVE, an NGO working to map the
conflict mineral supply chain, to form the Public-Private Alliance for Responsible Minerals Trade. This multisector initiative worked to support responsible mines and to develop
effective chain-of-custody programs in the Congo. Evidence suggested that these collaborative efforts had enjoyed some success: by 2016, over three-quarters of the tantalum,
tungsten, and tin mines in eastern Congo surveyed by the International Peace Information
Service were found free of control by armed groups.
Sources: “Intel’s Efforts to Achieve a Conflict-Free Supply Chain,” White Paper, May 2017, www.intel.com; “Conflict Minerals
Rule—Will It Stay or Will It Go?” May 11, 2017, www.conflictmineralslaw.com; The Enough Project, Demand the Supply:
Ranking Consumer Electronics and Jewelry Retail Companies on Their Efforts to Develop Conflict-Free Minerals Supply
Chains from Congo, November 2017, www.enoughproject.org; Peter Eichstaedt, Consuming the Congo (Chicago: Lawrence
Hill, 2011); and Michael Nest, Coltan (Cambridge, UK: Polity Press, 2011). More information on the Public-Private Alliance for
Responsible Minerals Trade is available at www.resolv.org.

Discussion
Questions

1. How do conflict minerals, and in particular, conflict coltan get their name? What groups
benefited from the trade in conflict minerals? What groups were hurt by it?
2. Consider the three sectors discussed in this chapter (business, government, and civil
society). What were the interests of each, with respect to conflict coltan, and in what
ways did their interests converge?
3. Why was Intel unable to eliminate conflict minerals from its supply chain unilaterally,
that is, without the help of others?
4. In what ways did Intel collaborate with other sectors (governments and civil society) in
its efforts to eliminate conflict minerals from its products? What strengths and weaknesses did each sector bring to the task?
5. What further steps could be taken by governments, NGOs, and companies to strengthen
the process to exclude conflict minerals from the global supply chain?

P A R T

T W O

Business and Ethics

C H A P T E R

F I V E

Ethics and Ethical
Reasoning
People who work in business frequently encounter and must deal with on-the-job ethical issues.
Being ethical is important to the individual, the organization, and the global marketplace in today’s
business climate. Managers and employees alike must learn how to recognize ethical dilemmas and
know why they occur. In addition, they need to be aware of the role their own ethical character plays
in their decision-making process, as well as the influence of the ethical character of others. Finally,
managers and employees must be able to analyze the ethical problems they encounter at work to
determine an ethical resolution to these dilemmas.
This Chapter Focuses on These Key Learning Objectives:
LO 5-1 Defining ethics and business ethics.
LO 5-2 Evaluating why businesses should be ethical.
LO 5-3 Knowing why ethical problems occur in business.
LO 5-4 Identifying managerial values and people’s spirituality as influences on ethical decision making.
LO 5-5 Understanding stages of moral reasoning.
LO 5-6 Analyzing ethical problems using generally accepted ethics theories.
LO 5-7 Understanding how moral intensity affects ethical decision-making.

94

Chapter 5 Ethics and Ethical Reasoning 95

Qualcomm, the U.S.–based multinational communication giant, was fined
$853 million by a South Korean regulator for alleged antitrust violations, the highest penalty ever imposed on any company operating in South Korea. The three-year
investigation by the Korea Fair Trade Commission claimed that Qualcomm used its
dominant market position as leverage in negotiations with mobile-phone makers to
force them to accept unfair contractual terms. The commission stated that Qualcomm’s contracts were unfair because it required mobile-phone makers to purchase
comprehensive wireless-technology licenses, including ones they would never use.
The agreements also required these makers to provide their patents to Qualcomm
free of charge.1
The former owner of the Peanut Corporation of America, Stewart Parnell, was
sentenced to 28 years in prison when found guilty of multiple felony counts for
conspiring to hide that his company’s products had salmonella contamination. Over
a two-year period, nine people died and 700 customers became seriously ill from
consuming the company’s food. Under Parnell’s direction, Peanut Corporation
executives falsified lab test results on their products, explicitly stating that the food
was safe to eat. In a shortsighted effort to save the company, Parnell caused injury
or death to hundreds of people, violated customers’ right to safety, and breached
their trust in the company. The severity and breadth of the effects of Parnell’s decisions contributed to his long prison sentence.2
Certainly, the actions taken by executives at Qualcomm and the Peanut Corporation
were highly unethical. What does it mean for an action to be ethical or unethical? This
chapter explains the meaning of ethics, explains why businesses and managers should be
ethical, and identifies the different types of ethical problems that occur in business. It also
presents several ethical decision-making frameworks and shows how decisions are influenced both by the core elements of an individual’s ethical character and the moral intensity
of the dilemma. Then, Chapter 6 builds on this foundation with a discussion of how ethical
performance in business can be improved by strengthening the organization’s culture and
climate and by providing organizational safeguards, such as policies, training, and reporting procedures.

The Meaning of Ethics
Ethics is a conception of right and wrong conduct. It tells us whether our behavior is moral
or immoral and deals with fundamental human relationships—how we think and behave
toward others and how we want them to think and behave toward us. Ethical principles are
guides to moral behavior. For example, in most societies lying, stealing, deceiving, and
harming others are considered to be unethical and immoral. Honesty, keeping promises,
helping others, and respecting the rights of others are considered to be ethically and morally desirable behavior. Such basic rules of behavior are essential for the preservation and
continuation of organized life everywhere.
These notions of right and wrong come from many sources. Religious beliefs are a
major source of ethical guidance for many. The family institution—whether two parents, a
single parent, or a large family with brothers and sisters, grandparents, aunts, cousins, and
1

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

96

Part Two Business and Ethics

other kin—imparts a sense of right and wrong to children as they grow up. Schools and
schoolteachers, neighbors and neighborhoods, friends, admired role models, ethnic groups,
and the ever-present electronic media and the Internet influence what we believe to be right
and wrong in life. The totality of these learning experiences creates in each person a concept of ethics, morality, and socially acceptable behavior. This core of ethical beliefs then
acts as a moral compass that helps guide a person when ethical puzzles arise.
Ethical ideas are present in all societies, organizations, and individual persons, although
they may vary greatly from one to another. Your ethics may not be the same as your neighbor’s; one particular religion’s notion of morality may not be identical to another’s; or what
is considered ethical in one society may be forbidden in another society. These differences
raise the important and controversial issue of ethical relativism, which holds that ethical
principles should be defined by various periods of time in history, a society’s traditions,
the special circumstances of the moment, or personal opinion. In this view, the meaning
given to ethics would be relative to time, place, circumstance, and the person involved. In
that case, the logical conclusion would be that there would be no universal ethical standards on which people around the globe could agree. However, for companies conducting
business in several societies at one time, whether or not ethics is aligned can be vitally
important; we discuss these issues in more detail in Chapter 6.
For the moment, however, we can say that despite the diverse systems of ethics that
exist within our own society and throughout the world, all people everywhere do depend
on ethical systems to tell them whether their actions are right or wrong, moral or immoral,
approved or disapproved. Ethics, in this basic sense, is a universally common human condition, found everywhere.
Are ethics the same as laws? In other words, can we determine what is right or moral by
asking what is legal? Some people have argued that the best way to assure ethical business
conduct is to insist that business firms obey society’s laws. However, laws and ethics are
not quite the same. Laws are society’s formal written rules about what constitutes right and
wrong conduct in various spheres of life. For example, hydraulic fracturing in oil drilling
operations is legal in many communities but some argue it is unethical due to its potential
for destroying the environment. While it may be illegal for environmentalists to attempt to
stop work operations by blockading a drilling location, they believe they are acting ethically by protecting the environment.
Laws are similar to ethics because both define proper and improper behavior. Yet, ethical concepts—like the people who believe in them—are more complex than written rules
of law. As we see in the Qualcomm and Peanut Corporation examples at the beginning
of this chapter, both cases involved legal violations. However, they also involved ethical
issues concerning the proper treatment of organizational stakeholders. Ethics deal with
human dilemmas that frequently go beyond the formal language of law and the meanings
given to legal rules.

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

Chapter 5 Ethics and Ethical Reasoning 97

to make up its own definitions of what is right and wrong. Employees and managers may
believe at times that they are permitted or even encouraged to apply special or weaker ethical rules to business situations, but society does not condone or permit such an exception.
How common are such exceptions? The Ethics and Compliance Initiative has tracked
observations of unethical behavior in the workplace since 2000. Its reports show that consistently about half of all employees’ surveyed report observing unethical practices at work,
year after year. In 2017, employees stated that lying to employees and external stakeholders
was the most common unethical practice they observed (26%), followed by abusive behavior
(21%), Internet abuse (16%), and conflicts of interest and health violations (each at 15%).
This report implies that pressure on managers to act unethically remains a serious problem
for businesses. The Institute for Leadership and Management reported that 63 percent of
managers said they were expected to behave unethically at some point in their careers.3

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

Enhance Business Performance
Some people argue that one reason for businesses to be ethical is that it enhances the firm’s
performance, or simply: ethics pays.
Empirical studies have supported the economic benefits of being perceived as an
ethical company. Ethisphere also found a strong link between ethics and financial
performance. Companies that were on Ethisphere’s 2017 list of the World’s Most
Ethical Companies outperform the Standard and Poor’s 500 by 3.3 percent with
five-year annual returns exceeding 16 percent.4 This positive relationship between
ethics and profits can be seen in Figure 5.2.
Businesses increasingly are recognizing that ethics pays and are encouraging ethical behavior by their employees. Business executives recognize that ethical actions can
directly affect their organization’s bottom line.
Costs to business of unethical behavior go far beyond government fines. News reports
of a company’s ethical or unethical behavior has been shown to affect its share price in
either direction, respectively. According to the Ethical Investment Research Service, such
reports influence a firm’s share price between 0.5 percent and 3 percent.5
FIGURE 5.1

To enhance business performance.

Why Should Business
Be Ethical?

To comply with legal requirements.
To prevent or minimize harm.
To meet demands of business stakeholders.
To promote personal morality.
3

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

98

Part Two Business and Ethics

FIGURE 5.2

70%

World’s Most Ethical
Index versus S&P
500 and FTSE 100,
2006–2017

WME Index
FTSE 100
S&P 500

60%
50%
40%

Source: The pre-2012 financial
data was from www.ethisphere.
com/2011-worlds-mostethical-companies. Additional
data collected from publicly
available financial data sources.

30%
20%
10%
0%
–10%
–20%
2006

2008

2010

2012

2014

2016

Companies with bad reputations face increased recruiting costs, especially when
recruiting women and more experienced employees. According to a survey by Career
Builder, 71 percent of United States workers claim they would not apply for a job at a company with a bad reputation.6 By contrast, companies with good reputations find it easier to
recruit desirable employees, enjoy lower costs to bring these candidates on board, and have
greater retention among employees, according to a report by Alexander Mann Solutions, a
leader of talent acquisition and management services.7

Comply with Legal Requirements
Doing business ethically is also often a legal requirement. Two legal requirements, in particular, provide direction for companies interested in being more ethical in their business
operations. Although they apply only to U.S.–based firms, these legal requirements also
provide a model for firms that operate outside the United States.
The first is the U.S. Corporate Sentencing Guidelines, which provide a strong incentive
for businesses to promote ethics at work.8 The sentencing guidelines come into play when
a firm has been found guilty of criminal wrongdoing and is facing sentencing for the criminal act. To determine the sentencing, the judge computes a culpability (degree of blame)
score using the guidelines, based on whether or not the company has:
1.
2.
3.
4.
6

Established standards and procedures to reduce criminal conduct.
Assigned high-level officer(s) responsibility for compliance.
Not assigned discretionary authority to “risky” individuals.
Effectively communicated standards and procedures through training.

“71 Percent of U.S. Workers Would Not Apply to a Company Experiencing Negative Publicity,” Career Builder, July 20, 2017,
press.careerbuilder.com.
7
“The Cost of Bad Reputation,” Corporate Responsibility Magazine, October 2014.
8
For a thorough discussion of the U.S. Corporate Sentencing Guidelines, see Dan R. Dalton, Michael B. Metzger, and
John W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-Up Call for Corporate America,” Academy of
Management Executive, 1994, pp. 7–13; and Jillian Hewitt, “Fifty Shades of Gray: Sentencing Trends in Major White-Collar
Cases,” The Yale Law Journal, Feb 2016, pp. 1018–71.

Chapter 5 Ethics and Ethical Reasoning 99

5. Taken reasonable steps to ensure compliance—monitor and audit systems, maintain and
publicize reporting system.
6. Enforced standards and procedures through disciplinary mechanisms.
7. Following detection of offense, responded appropriately and prevented reoccurrence.
The U.S. Sentencing Commission reviewed and made important revisions to the Sentencing Guidelines in 2004 and each year from 2010 through 2016, yet the “seven steps”
described above remain the blueprint for many businesses in designing their ethics and
compliance program.9
Another legal requirement imposed upon U.S. businesses is the Sarbanes-Oxley Act of
2002 (often referred to as SOX).10 Born from the ethics scandals at Enron, WorldCom,
Tyco, and others, this law seeks to ensure that firms maintain high ethical standards in
how they conduct and monitor business operations. For example, the Sarbanes-Oxley Act
requires executives to vouch for the accuracy of a firm’s financial reports and requires
them to pay back bonuses based on earnings that are later proved fraudulent, called clawback. The act also established strict rules for auditing firms.11
Fifteen years after its creation, some financial experts questioned if SOX was effective
or not. Some pointed to the fact that the Act has not totally eliminated fraudulent financial
reports since the Enron and Arthur Andersen debacles that gave rise to SOX in 2002. Other
experts found, however, that many corporations had become more committed to enhancing
their corporate culture, which better guaranteed that employees did the right thing, treated
customers fairly, and did not take short cuts.12

Prevent or Minimize Harm
Another reason businesses and their employees should act ethically is to prevent harm to
the general public and the corporation’s many stakeholders. One of the strongest ethical
principles is stated very simply: Do no harm. The notorious examples of outright greed
and other unethical behavior by managers in the financial community contributed in part to
the long-lasting Great Recession in the United States and around the world. These managers’ unethical actions were responsible for significant harm to many stakeholders in society. Investors’ portfolios dropped in value, retirees saw their nest eggs dwindle, hundreds
of thousands of employees lost their jobs, and many small businesses failed. The “do no
harm” principle encompasses more than economic consequences to stakeholders. The loss
of salary, retirement funds, and investment value indeed generate significant economic
harm to the employees and investors affected by organizational indiscretions. But, research
has shown that psychological and emotional harm is likely to manifest as well.
According to a 2013 Gallup poll, the longer an individual is unemployed, the
more likely that person is to experience poor psychological well-being.13 In a 2014
meta-analysis of studies examining the effects of unemployment on mental health,

9

For a discussion of the most recent sentencing guidelines amendments, see www.ussc.gov.
Banerjee Gaurango and Halil D. Kaya, “Short-Term and Long-Term Impact of Sarbanes-Oxley Act on Director Commitment
and Composition of Corporate Board Committees,” Journal of Financial Management & Analysis, January–June 2017,
pp. 1–11, and Matthew Hoag, Mark Myring and Joe Schroeder, “Has Sarbanes-Oxley Standardized Audit Quality?
American Journal of Business, 2017, pp. 2–23.
11
See www.sarbanes-oxley-association.com/Sarbanes_Oxley_News.
12
“Law’s Big Weapon Sits Idle,” The Wall Street Journal, July 29, 2012, online.wsj.com and “Sarbanes-Oxley: 14 Years On,”
International Banker, June 30, 2016, internationalbanker.com.
13
“In U.S., Depression Rates Higher for Long-Term Unemployed,” Gallup, 2013, news.gallup.com.
10

100 Part Two Business and Ethics

it was found that an average of 34 percent of unemployed workers experienced psychological problems compared to 16 percent among employed workers.14
Another workplace behavior that exemplifies physical, economic, and psychological
harm in organizations is sexual harassment. This issue has received increased attention in
the press due to the allegations of sexual harassment and assault by executives and supervisors in many business corporations. Recently, the car-share company, Uber, for example,
fired 20 employees for sexual harassment amidst a probe over 200 employees alleged to be
involved in sexist behavior in the organization. The increased attention to the harms caused
by sexual harassment focuses on not only the economic harm to the victims but also the
physical and psychological damage to those harassed. This issue is discussed in greater
detail in Chapter 16.15

Meet Demands of Business Stakeholders
Another reason businesses should be ethical is that stakeholders demand it. As discussed
in Chapter 3, organizational stakeholders expect that companies will exhibit high levels of
ethical performance and social responsibility. If employees view their company as ethical,
they likely take greater pride in working there, have higher overall work satisfaction, and
are willing to recommend the company as a good place to work. Scholars reviewing work
in this field found that consumers who considered companies as being ethical or involved in
socially responsible programs are more inclined to purchase these companies’ products.16

Promote Personal Morality
A final reason for promoting ethics in business is a personal one. Most people want to act
in ways that are consistent with their own sense of right and wrong. It shows how a lack
of personal morality by the firm’s leader can adversely affect employees. Being pressured
to contradict their personal values creates emotional stress. Knowing that one works in a
supportive ethical climate contributes to one’s sense of psychological security.
According to a 2015 report by the Institute for Business Ethics, British employees
have a negative perception of corrupt business practices they saw at work–ranging
from the misuse of company resources to cheating on travel expenses to nepotism.
More than 50 percent of the employees surveyed considered these workplace practices unacceptable. The survey found that since 2005, British workers had developed attitudes increasingly critical of work actions that appeared to be unethical.17
The Ethics and Compliance Initiative, cited earlier in this chapter, stated in their 2017
report that “employees are reporting misconduct at the highest rates ever,” noting that
69 percent of employees responding to their survey indicated they had reported the misconduct they had observed at work. Some of the most common types of misconduct
reported included misuse of confidential information, giving or accepting bribes or kickbacks, stealing company property, and sexual harassment.18
14
Paul Karsten and Klaus Moser, “Unemployment Impairs Mental Health: Meta-Analyses,” Journal of Vocational Behavior,
2014, pp. 264–82.
15
Michelle Paludi and Richard Barickman, “Definitions and Incidence of Academic and Workplace Sexual Harassment,” Academic and Workplace Sexual Harassment: A Resource Manual (Albany, New York: SUNY Press. 1991), pp. 2–5, and “Uber
Fires 20 Employees in Sexual Harassment Probe,” CNN Tech, June 6, 2017, money.cnn.com.
16
Omer Farooq, Marielle Payaud, Dwight Merunka, and Pierre Valette-Florence, “The Impact of Corporate Social Responsibility on Organizational Commitment: Exploring Multiple Mediation Mechanisms,” Journal of Business Ethics, 2014, pp. 563–80.
17
“Surveys on Business Ethics, 2017,” Institute for Business Ethics, February 8, 2018, www.ibe.org.uk.
18
Ibid., “The State of Ethics and Compliance in the Workplace, 2018, p. 7.

Chapter 5 Ethics and Ethical Reasoning 101

Why Ethical Problems Occur in Business
If businesses have so many reasons to be ethical, why do ethical problems occur? Although
not necessarily common or universal, ethical problems occur frequently in business. Finding out what causes them is one step toward minimizing their impact on business operations and on the people affected. Some of the main reasons are summarized in Figure 5.3
and are discussed next.

Personal Gain and Selfish Interest
Desire for personal gain, or even greed, causes some ethics problems. Businesses sometimes
employ people whose personal values are less than desirable, who will put their own welfare
ahead of all others, regardless of the harm done to other employees, the company, or society.
A manager or employee who puts his or her own self-interest above all other considerations is called an ethical egoist.19 Self-promotion, a focus on self-interest to the point of
selfishness, and greed are traits commonly observed in an ethical egoist. The ethical egoist
tends to ignore ethical principles accepted by others, believing that ethical rules are made
for others. Altruism—acting for the benefit of others when self-interest is sacrificed—is
seen to be sentimental or even irrational. “Looking out for number one” is the ethical egoist’s motto, as demonstrated by the Parnell example at the beginning of this chapter and the
following story:
Former Fiat Chrysler Automobiles executive, Alphons Iacobelli, was indicted in
2017 on charges that he used millions of dollars of company money designated
for a union account to pay for his own lavish expenses. Iacobelli diverted funds
earmarked for a union training center to purchase a $350,000 Ferrari and two gold
Montblanc pens worth over $70,000 for himself. Additionally, during this period,
he remodeled his kitchen and built a swimming pool for his home.20

FIGURE 5.3

Why Ethical
Problems Occur in
Business

Reason

Nature of Ethical
Problem

Personal gain and
selfish interest

Typical Approach

Attitude

Selfish interest versus
others’ interests

Egotistical mentality

“I Want it!”

Competitive
pressures on profits

Firm’s interest versus
others’ interests

Bottom-line mentality

“We have to beat the
others at all costs!”

Conflicts of interest

Multiple obligations or
loyalties

Favoritism mentality

“Help yourself and those
closest to you!”

Cross-cultural
contradictions

Company’s interests
versus diverse cultural
traditions and values

Ethnocentric mentality

“Foreigners have a
funny notion of what’s
right and wrong.”

19
For a compact discussion of ethical egoism, see Denis G. Arnold, Tom L. Beauchamp, and Norman E. Bowie, Ethical
Theory and Business, 9th ed. (Upper Saddle River, NJ: Pearson, 2012), pp. 12–17; and Laura P. Hartman, Joe DesJardins,
and Chris MacDonald, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, 4th ed. (New York:
McGraw-Hill, 2017), p. 70.
20
“Ex-Fiat Chrysler Executive Accused of Siphoning Millions with Union Leader.” The New York Times, July 26, 2017,
www.nytimes.com.

102 Part Two Business and Ethics

Competitive Pressures on Profits
When companies are squeezed by tough competition, they sometimes engage in unethical
activities to protect their profits. This may be especially true in companies whose financial
performance is already substandard. Research has shown that managers of poor financial
performers and companies with financial uncertainty are more prone to commit illegal acts.
In addition, intense competitive pressure in the global marketplace has resulted in unethical
activity, such as price fixing, falsifying documents, or the use of kickbacks or bribes.
In a misguided and unethical effort to boost sales, Tenet Healthcare Corporation
gave kickbacks to hospitals and medical clinics for obstetric referrals in its hospital
network. In 2016, the hospital chain pleaded guilty to criminal fraud and bribery
charges also involving two of their subsidiaries, Atlanta Medical Center and North
Fulton Medical Center, and agreed to pay $524 million to the states of Georgia and
South Carolina and to the federal government. Georgia Attorney General Olens
claimed that the company took advantage of vulnerable pregnant women by pushing for these referrals to be brought into their hospital network.21

Conflicts of Interest
Ethical challenges in business often arise in the form of conflicts of interest. A conflict of
interest occurs when an individual’s self-interest conflicts with acting in the best interest
of another, when the individual has an obligation to do so.22 For example, if a purchasing
agent directed her company’s orders to a firm from which she had received a valuable gift,
regardless if this firm offered the best quality or value, she would have acted unethically
because of a conflict of interest. In this situation, she would have acted to benefit herself,
rather than in the best interests of her employer. A failure to disclose a conflict of interest
may represent deception in and of itself and may hurt the person or organization on whose
behalf judgment has been exercised. Many ethicists believe that even the appearance of a
conflict of interest should be avoided, because it undermines trust.
Many cases of unethical activity illustrate conflicts of interest, in which opportunities for
organizational self-enrichment conflict with the long-term viability of the firm and the best
interests of employees, customers, suppliers, and stockholders. The situation at Peanut Corporation, introduced at the beginning of this chapter, describes an organizational conflict
of interest where executives falsified lab test results on their products that exposed its consumers to salmonella contamination in order to maintain short-term company profitability.
Many firms seek to guard against the dangers inherent in conflicts of interest by including
prohibitions of any such practices in their codes of ethics, as discussed in Chapter 6.

Cross-Cultural Contradictions
Some of the knottiest ethical problems occur as corporations do business in other societies
where ethical standards differ from those at home. Today, policymakers and strategic planners in all multinational corporations, regardless of the nation where they are headquartered, often face this kind of ethical dilemma. Consider the following situation:
For decades the Great Britain-based pesticide manufacturer, Syngenta, has
produced a lethal weed killer, Paraquat. Only one sip of Paraquat can cause death.
21

“Tenet Healthcare to Pay $515 Million to Settle Kickback Allegations.” The Wall Street Journal, October 3, 2016, www.wsj.com.
Based on John R. Boatright and Jeffrey D. Smith, Ethics and the Conduct of Business, 8th ed. (Upper Saddle River, NJ:
Pearson, 2016).
22

Chapter 5 Ethics and Ethical Reasoning 103

The product is banned in the European Union, China, and many other countries—
but not the United States. In 2016, the U.S. Environmental Protection Agency
reported that the pesticide was linked to Parkinson’s disease, resulting in a further
review of its use. But according to the U.S. Department of Agriculture, the use of
this chemical remains widespread in the United States because paraquat is highly
successful at killing and preventing the spread of weeds in agricultural applications.
Syngenta’s decision to continue its production and sale in the United States is certainly linked to economic benefits for the company.23
This episode raises the issue of ethical relativism, which was defined earlier in this
chapter. Although the sale of the pesticide paraquat in the United States was still legal, was
it ethical? Is the selling of unsafe products by any measure ethical if it is not forbidden by
the receiving nation, especially if the company knows that the products are exported to
another country where others are exposed to serious health risks?
As business becomes increasingly global, with more and more corporations penetrating
overseas markets where cultures and ethical traditions vary, these cross-cultural questions
will occur more frequently.

The Core Elements of Ethical Character
The ethical analysis and resolution of ethical dilemmas in the workplace significantly
depend on the ethical character and moral development of managers and other employees.
Good ethical practices not only are possible, but also become normal with the right combination of these components.

Managers’ Values
Managers are key to whether a company and its employees will act ethically or unethically.
The values held by managers, especially the top-level managers, serve as models for others
who work at the company. Unfortunately, according to a 2017 survey Americans hold a
dim view of business executives’ and managers’ values. Forty-five percent of those polled
believe that corporate CEOs should be fired for unethical transgressions in their companies. In this same survey, the public shared that a violation of trust between a company and
its customers is the most serious ethical offense, with 61 percent indicating that the CEO
should be terminated for such behavior.24
In an annual Gallup poll that rated 22 occupations for honesty and ethics, nurses—
for the sixteenth straight year—came out on top. In 2017, only 16 percent of those
surveyed saw business executives as having “very high” or “high” ethical standards
or honesty. This placed executives below clergy, lawyers, and bankers on this list.
Advertising practitioners ranked lower than business executives, with car salespeople, members of Congress, and lobbyists at the bottom of the list.25
How do executives view their own values? Studies generally show that most U.S. managers focus on themselves and place importance on values such as having a comfortable
and exciting life. Researchers also found that new CEOs tend to be more self-interested and
23
“This Pesticide Is Prohibited in Britain. Why Is It Still Being Exported?” The New York Times, December 20, 2016,
www.nytimes.com.
24
“Punishing CEOs for Bad Behavior: 2017 Public Perception Survey,” Rock Center for Corporate Governance, Stanford University, February 2017, www.gsb.stanford.edu.
25
“Honesty/Ethics in the Professions,” Gallup Poll, December 4–11, 2017, www.gallup.com.

104 Part Two Business and Ethics

short-term focused, possibly in an effort to immediately drive up company profits, rather
than valuing long-term investments in research and development or capital expenditures.
However, a recent study found that today’s managers place slightly more importance on
moral values, such as honesty and forgiveness, than managers did in the 1980s, who
focused more on competency values, like capability and independence. Interestingly, the
study also compared the personal values orientations of managers from the 1980s and
today to those of Millennials (individuals born between 1980 and 2000). While generally,
Millennials’ personal values orientations were discovered to be consistent with those of
managers from the 1980s and 2010s, they did indicate a greater self-focused preference
than managers from previous research.26

Spirituality in the Workplace
A person’s spirituality—that is, a personal belief in a supreme being, religious organization, or the power of nature or some other external, life-guiding force—has always been a
part of the human makeup. In 1953, Fortune published an article titled “Businessmen on
Their Knees” and claimed that American businessmen (women generally were excluded
from the executive suite in those days) were taking more notice of God. More recently,
cover stories in Fortune, Bloomberg Businessweek, and other business publications have
documented a resurgence of spirituality or religion at work.
As far back as 1976, scholars have found a positive relationship between an organization’s economic performance and attention to spiritual values. They have shown that
spirituality positively affects employee and organizational performance by enhancing intuitive abilities and individual capacity for innovation, as well as increasing personal growth,
employee commitment, and responsibility. Spirituality also helps employees who are dealing with workplace stress. In a study on workplace spirituality in the United States and
Mexico, meaningful work was found to be directly related to reduced workplace stress.27
Organizations have responded to the increased attention to spirituality and religion at
work by acting to accommodate their employees’ spiritual needs.
The chief diversity officer at PricewaterhouseCoopers found office space in their
Asia-Pacific region facility to provide a prayer room for their Muslim employees.
In the United States, employers are required by law to make substantial accommodations for their employees’ religious practices, as long as it does not create major
hardships for the organization. Ford’s Interfaith Network, a group of employees
focusing on religious issues, successfully lobbied the company to install sinks
designed for the religious washings that Muslim employees perform.28
However, others disagree with the trend toward a stronger presence of religion
in the workplace. They hold the traditional belief that business is a secular—that is,

26
James Weber, “Discovering the Millennials’ Personal Values Orientation: A Comparison to Two Managerial Populations,”
Journal of Business Ethics, 2017, 4, 143, pp. 517–29.
27
For a study establishing a link between spirituality and economic performance, see Christopher P. Neck and John F.
Milliman, “Thought Self-Leadership: Finding Spiritual Fulfillment in Organizational Life,” Journal of Managerial Psychology,
1994, pp. 9–16; and for studies showing how promoting spirituality as a way to reduce workplace stress, see Amal Altaf and
Mohammad Atif Awan, “Moderating Effect of Workplace Spirituality on the Relationship of Job Overload and Job Satisfaction,” Journal of Business Ethics, 2011, pp. 93–99; and “Workplace Spirituality and Stress: Evidence from Mexico and US,”
Management Research Review, 2015, pp. 29–43.
28
“When Religious Needs Test Company Policy,” The New York Times, February 25, 2007, www.nytimes.com; and “More
Businesses Turning to Workplace Chaplains,” PilotOnline.com, October 30, 2011, pilotonline.com.

Chapter 5 Ethics and Ethical Reasoning 105

nonspiritual—institution. They believe that business is business, and spirituality is best left
to churches, synagogues, mosques, and meditation rooms, not corporate boardrooms or
shop floors. This, of course, reflects the separation of church and state in the United States
and many other countries.
Beyond the philosophical opposition to bringing spirituality into the business environment, procedural or practical challenges arise. Whose spirituality should be promoted?
The CEO’s? With greater workplace diversity comes greater spiritual diversity, so which
organized religion’s prayers should be cited or ceremonies enacted? How should businesses handle employees who are agnostics or atheists (who do not follow any religion)?
Just as personal values and character strongly influence employee decision making and
behavior in the workplace, so does personal spirituality, from all points on the religious
spectrum, impact how businesses operate.

Managers’ Moral Development
People’s values and spirituality exert a powerful influence on the way ethical work issues
are treated. Since people have different personal histories and have developed their values
and spirituality in different ways, they are going to think differently about ethical problems. This is as true of corporate managers as it is of other people. In other words, the
managers in a company are likely to be at various stages of moral development. Some will
reason at a high level, others at a lower level.
A summary of the way people grow and develop morally is diagrammed in Figure 5.4.
From childhood to mature adulthood, most people move steadily upward in their moral
reasoning capabilities from stage 1. Over time, they become more developed and are capable of more advanced moral reasoning, although some people never use the most advanced
stages of reasoning in their decision processes.
At first, individuals are limited to an ego-centered focus (stage 1), fixed on avoiding
punishment and obediently following the directions of those in authority. (The word ego
means “self.”) Slowly and sometimes painfully, the child learns that what is considered to
be right and wrong is pretty much a matter of reciprocity: “I’ll let you play with my toy if
I can play with yours” (stage 2). At both stages 1 and 2, however, the individual is mainly

FIGURE 5.4

Stages of Moral
Development and
Ethical Reasoning
Source: Adapted from
Lawrence Kohlberg, The
Philosophy of Moral
Development (New York:
Harper & Row, 1981).

Development Stage and Major Ethics
Referent

Basis of Ethics Reasoning

Mature adulthood

Stage 6 Universal principles: justice,
fairness, universal human rights

Principle-centered
reasoning

Mature adulthood

Stage 5 Moral beliefs above and beyond
specif...