C H A P T E R S E V E N Business–Government Relations Governments seek to protect and promote the public good and in these roles establish rules under which business operates in society. Therefore, a government’s influence on business through public policy and regulation is a vital concern for managers. Government’s relationship with business can be either cooperative or adversarial. Various economic or social assistance policies significantly affect society, in which businesses must operate. Many government regulations also impact business directly. Managers must understand the objectives and effects of government policy and regulation, both at home and abroad, in order to conduct business in an ethical and legal manner. This Chapter Focuses on These Key Learning Objectives: LO 7-1 Understanding why sometimes governments and business collaborate and other times work in opposition to each other. LO 7-2 Defining public policy and the elements of the public policy process. LO 7-3 Explaining the reasons for regulation. LO 7-4 Knowing the major types of government regulation of business. LO 7-5 Identifying the purpose of antitrust laws and the remedies that may be imposed. LO 7-6 Comparing the costs and benefits of regulation for business and society. LO 7-7 Examining the conditions that affect the regulation of business in a global context. 138 Chapter 7 Business–Government Relations 139 Uber Technologies, a U.S.–based international transportation network company founded in 2009, developed a mobile app that allowed consumers to submit a trip request, which was then routed to one of its drivers. By 2018, the service was available in 84 countries and nearly 800 cities worldwide. Yet, Uber encountered serious opposition when it attempted to expand into the European Union. The Employment Appeal Tribunal ruled in 2017 that the 50,000 Uber drivers in the United Kingdom must be considered employees, not independent contractors, as Uber had argued. This ruling meant that the drivers qualified for various employee rights such as paid vacations. Experts stated that this decision could serve as a bellwether for other employment lawsuits against Uber in the United States, Canada, and other countries, potentially jeopardizing the company’s business model globally.1 In 2016, the U.S. Food and Drug Administration (FDA) created tough regulatory standards for the e-cigarette industry, including banning all sales to anyone under 18 years of age, requiring package-warning labels, and making all products—even those currently on the market— subject to government approval. This was seen as a devastating blow to the fast-growing $3.5 billion e-cigarette industry, which was largely unregulated and dominated by small manufacturers and vape shops. Most experts predicted that this was only the first step and that the FDA would soon move to regulate the e-cigarette industry further, targeting advertising and e-cigarette flavors, such as cotton candy and watermelon, which may appeal to youth.2 What prompted or compelled governments to become more involved in the status of employees or the sale of a consumer product? How do these governments’ actions affect businesses and what they are permitted to do? How did these actions affect competition or society and the public’s health? Did governments’ involvement promote or harm companies or allow other firms to maintain their competitive advantage? Were these efforts by the governments necessary and effective, or can this only be answered in time? Governments create the conditions that make it possible for businesses to compete in the modern economy. As shown in the opening examples, governments can act in dramatic ways to provide or limit opportunities for businesses and control business activities to better ensure the public’s health. In good times and bad, government’s role is to create and enforce the laws that balance the relationship between business and society. Governments also hold the power to grant or refuse permission for many types of business activity. Even the largest multinational companies, which operate in dozens of countries, must obey the laws and public policies of national governments. This chapter considers the ways in which government actions impact business through the powerful twin mechanisms of public policy and regulation. The next chapter addresses the related question of actions business may take to influence the political process. How Business and Government Relate The relationship between business and government is dynamic and complex. Understanding the government’s authority and its relationship with business is essential for managers in developing their strategies and achieving their organization’s goals. Seeking a Collaborative Partnership In some situations, government may work closely with business to build a collaborative partnership and seek mutually beneficial goals. They see each other as key partners in the relationship and work openly to achieve common objectives. 1 “Uber Suffers Setback as U.K. Court Rules Its Drivers Should Have Workers’ Rights,” The Wall Street Journal, November 10, 2017, www.wsj.com. 2 “FDA to Regulate E-Cigarettes, Ban Sales to Minors,” The Wall Street Journal, May 5, 2016, www.wsj.com. 140 Part Three Business and Public Policy The basis for this cooperation may be at the core of the nation’s societal values and customs. In some Asian countries, society is viewed as a collective family that includes both government and business. Thus, working together as a family leads these two powers to seek results that benefit both society and business. In Europe, the relationship between government and business often has been collaborative. European culture includes a sense of teamwork and mutual aid. Unions, for example, are often included on administrative boards with managers to lead the organization toward mutual goals through interactive strategies. One example of government–business collaboration is shown next. While many businesses were requesting and supporting While House directives to eliminate or decrease regulatory control, quite the contrary drone makers and operators were clamoring for more federal rules. They envisioned an increase in the regulatory climate as an opportunity to open up the skies for unmanned aircraft. These businesses pledged to cooperate with regulators to make that happen. In response to these pressures, the Federal Aviation Administration gave approval for small, remotely piloted aircraft weighing up to 55 pounds to operate during daylight hours, up to an altitude of 400 feet and within sight of operators on the ground. Drone maker and operators took this opportunity to expand their operations. Unlike some other businesses that did not welcome government oversight, “we want and need rules and regulations to understand how we can fly drones commercially for expanded operations,” said Gretchen West, a senior legal advisor to the drone industry.3 In this instance, both the Federal Aviation Administration and drone makers agreed on the need for regulation, leading to collaboration between the government and business. Working in Opposition to Government In other situations, government’s and business’s objectives are at odds, and these conflicts result in an adversarial relationship where business and government tend to work in opposition to each other.4 On three difference occasions, Tesla released relevant information to the National Transportation Safety Board (NTSB) to assist the government agency in its investigation of the cause of a crash of its semiautonomous driving Tesla Model S vehicle. But a few weeks later, the company withdrew from its formal agreement to cooperate with the NTSB after the preliminary investigation appeared to target the driver in the car, who died from injuries sustained in the accident. “Today, Tesla withdrew from the party agreement with the NTSB because it requires that we not release information about Autopilot to the public, a requirement which we believe fundamentally affects public safety negatively,” explained a Tesla company press release. Tesla seemed upset that it could be a year or longer before the government investigators reached their conclusions, and meanwhile the company would be subject to negative publicity without an opportunity to respond with their side of the story.5 In this instance, a business concluded that cooperation with the government was not in its best interest. 3 “Unlike Most Industries, Drone Makers and Operators Clamor for Federal Regulation,” The Wall Street Journal, September 17, 2017, www.wsj.com. 4 The “collaborative partnership” and “in opposition” models for business–government relations is discussed in “Managing Regulation in a New Era,” McKinsey Quarterly, December 2008, www.mckinseyquarterly.com. 5 “Tesla Withdraws Formal Cooperation with Probe of Fatal Crash, Will Still Assist Investigators,” The Wall Street Journal, April 12, 2018, www.wsj.com. Chapter 7 Business–Government Relations 141 Why do businesses sometimes welcome government regulation and involvement in the private sector, and other times oppose it? Companies often prefer to operate without government constraints, which can be costly or restrict innovation. But regulations can also help business, by setting minimum standards that all firms must meet, building public confidence in the safety of a product, creating a fair playing field for competition, or creating barriers to entry to maintain a business’s competitive advantage. How a specific company reacts to a specific government policy often depends on their assessment of whether they would be helped or hurt by that rule. In short, the relationship between government and business can range from one of cooperation to one of conflict, with various stages in between. Moreover, this relationship is constantly changing. A cooperative relationship on one issue does not guarantee cooperation on another issue. The stability of a particular form of government in some countries may be quite shaky, while in other countries the form of government is static but those in power can change unexpectedly or government leaders can change on a regular basis. The business–government relationship is one that requires managers to keep a careful eye trained toward significant forces that might alter this relationship or to promote forces that may encourage a positive business–government relationship.6 Legitimacy Issues When dealing with a global economy, business may encounter governments whose authority or right to be in power is questioned. Political leaders may illegally assume lawmaking or legislative power, which can become economic power over business. Elections can be rigged, or military force can be used to acquire governmental control. Business managers may be faced with the dilemma of whether to do business in such a country, where their involvement would indirectly support this illegitimate power. Sometimes, they may choose to become politically active, or refuse to do business in this country until a legitimate government is installed. Businesses can also influence the ability of a government leader or group of leaders to maintain political power. For example, companies can decide to withdraw operations from a country, as many U.S. firms did from South Africa in the 1970s to protest the practice of apartheid (institutionalized racial segregation). Some believe that the economic isolation of South Africa contributed to the eventual collapse of the apartheid regime. Governments may also order companies not to conduct business in another country because of a war, human rights violations, or lack of a legitimate government. These orders are called economic sanctions. As of 2018, the United States had imposed economic sanctions on the Balkans, Belarus, Myanmar, Cote D’Ivoire (Ivory Coast), Cuba, Democratic Republic of Congo, Iran, Iraq, Liberia, North Korea, Sudan, Syria, and Zimbabwe.7 Government’s Public Policy Role Government performs a vital and important role in modern society. Although vigorous debates occur about the proper size of programs government should undertake, most people agree that a society cannot function properly without some government activities. Citizens look to government to meet important basic needs. Foremost among these are safety and protection provided by the military, homeland security, police, and fire departments. 6 See George Lodge, Comparative Business–Government Relations (Englewood Cliffs, NJ: Prentice Hall, 1990) and Tom Lehman, “Six Arguments against Government Regulations,” www.capitalism.com. 7 See the Treasury Department’s Office of Foreign Asset Control, www.treasury.gov. 142 Part Three Business and Public Policy These are collective or public goods, which are most efficiently provided by government for everyone in a community. In today’s world, governments are also expected to provide economic security and essential social services, and to deal with the most pressing social problems that require collective action, or public policy. Public policy is a plan of action undertaken by government officials to achieve some broad purpose affecting a substantial segment of a nation’s citizens. Public policy, while differing in each nation, is the basic set of goals, plans, and actions that each national government follows in achieving its purposes. Governments generally do not choose to act unless a substantial segment of the public is affected and some public purpose is to be achieved. This is the essence of the concept of governments acting in the public interest. The basic power to make public policy comes from a nation’s political system. In democratic societies, citizens elect political leaders who can appoint others to fulfill defined public functions ranging from municipal services (e.g., water supplies, fire protection) to national services, such as public education or homeland security. Democratic nations typically spell out the powers of government in the country’s constitution. Another source of authority is common law, or past decisions of the courts, the original basis of the U.S. legal system. In nondemocratic societies, the power of government may derive from a monarchy (e.g., Saudi Arabia), a military dictatorship (e.g., Eritrea), or religious authority (e.g., the mullahs in Iran). These sources of power may interact, creating a mixture of civilian and military authority. The political systems in Russia, Libya, Tunisia, and other nations have undergone profound changes in recent times. And democratic nations can also face the pressures of regions that seek to become independent nations exercising the powers of a sovereign state, as has Canada with the province of Quebec. Elements of Public Policy The actions of government in any nation can be understood in terms of several basic elements of public policy. These are inputs, goals, tools, and effects. They will be illustrated using the example of distracted driving. Public policy inputs are external pressures that shape a government’s policy decisions and strategies to address problems. Economic and foreign policy concerns, domestic political pressure from constituents and interest groups, technical information, and media attention all play a role in shaping national political decisions. For example, a growing recognition of the dangers of distracted driving has pressured many state and local governments to ban or regulate the use of various electronic devices by drivers. Distracted driving may occur when a driver’s attention is diverted by personal grooming tasks, adjusting music or navigation settings, eating, reading, and assorted other activities. It has become an even greater threat to driver and passenger safety as technologies have advanced. More and more drivers are now able to make or receive calls, send text messages, and even browse the Internet—all while driving a car at high speeds, in heavy traffic, or during bad weather conditions.8 According to an annual National Safety Council study, for the first time since 2007 more than 40,000 people died in motor vehicle crashes in a single year. Experts point to numerous causes for this record-breaking data, but typically focus on one important potential contributor: distracted driving. According to a national Consumer Reports survey of 622 licensed drivers, 52 percent admitted to engaging in distracting activities while driving, even though they knew it was wrong. Of those drivers surveyed, 41 percent admitted using their hands to send a text, 37 percent to playing music on a smartphone, and 8 percent to watching videos on 8 “Windshield Devices Bring Distracted Driving Debate to Eye Level,” The New York Times, May 29, 2015, www.nytimes.com. Chapter 7 Business–Government Relations 143 their phone while driving. Teens were particularly vulnerable. According to data from the Insurance Institute for Highway Safety, 60 percent of teen drivers involved in fatal crashes were distracted immediately before the accident. In a survey conducted by Zendrive Research of 3 million drivers globally, they found that drivers used their phones during 88 percent of their trips. An Erie Insurance study found that 15 percent of drivers admitted they had engaged in “romantic encounters” while behind the wheel and 9 percent said they had changed clothes while driving.9 In response to this growing epidemic, government bodies—legislatures, town councils, regulatory agencies—need to consider all relevant inputs in deciding whether or not to act, and if so, how. Public policy goals can be broad (e.g., full employment) and high-minded (equal opportunity for all) or narrow and self-serving. National values, such as freedom, democracy, and a fair chance for all citizens to share in economic prosperity, have led to the adoption of civil rights laws and economic assistance programs for those in need. Narrow goals that serve special interests are more apparent when nations decide how legislation will allocate the burden of taxes among various interests and income groups, or when public resources, such as oil exploration rights or timber cutting privileges, are given to one group or another. Whether the goals are broad or narrow, for the benefit of some or the benefit of all, most governments should ask, “What public goals are being served by this action?” For example, the rationale for a government policy to regulate distracted driving has to be based on some definition of public interest, such as preventing harm to others, including innocent drivers, passengers, and pedestrians. The goal of distracted driving regulation is to prevent deaths and serious injuries resulting from drivers being distracted while driving. The factual data appears to be overwhelming. However, some members of the public have insisted on their right to use their phones for texting and other activities in their vehicles. Traveling salespersons, for example, depend on their phones as an important tool of the job. Some regulations have addressed this by permitting drivers to use hands-free devices that permit them to keep their hands on the wheel. But some government safety experts have disagreed, saying, “When you are on a call, even if both hands are on the wheel, your head is in the call, and not your driving.” The issue of banning the use of cell phones, hand-held or hands-free, for the sake of making our roads a little safer for all, remains at the forefront, but new technology has created even greater distractions. Devices can project information and data streamed from a smartphone onto the car’s windshield. Maps, speed, incoming texts, caller identification, and even social media notifications can be projected just above the dashboard of a car for the driver to read. The game Pokémon Go prompts drivers to search for virtual creatures on the highways or country roads. So, the goals of saving lives, reducing injuries, and eliminating health care costs are increasingly more urgent and the demand for regulation even more critical. Governments use different public policy tools to achieve policy goals. The tools of public policy involve combinations of incentives and penalties that government uses to prompt 9 “Rise in U.S. Traffic Deaths Reported for a Second Year,” The New York Times, February 15, 2017, www.nytimes.com; “Consumer Reports Tackles Distracted Driving and Calls Traffic Deaths a Public Health Epidemic,” Forbes, November 19, 2017, www.forbes.com; “Zendrive Research: Largest Distracted Driving Behavior Study,” The Fiscal Times, April 18, 2017, www.thefiscaltimes.com; and “Study Asks Just How Distracted Are Motorists?” Pittsburgh Post-Gazette, March 30, 2015, www.post-gazette.com. For updated information on distracted driving, see www.distraction.gov and the Insurance Institute for Highway Safety’s website at www.iihs.org. 144 Part Three Business and Public Policy citizens, including businesses, to act in ways that achieve policy goals. Governmental regulatory powers are broad and constitute one of the most formidable instruments for accomplishing public purposes. Federal action limiting cell phone use in the United States stalled, so state and local governments stepped in to ban the use of cell phones by drivers while operating their vehicles. By 2018, 16 states had completely banned the use of cell phones while driving unless using a hands-free device, 38 had banned cell phone use by novice drivers, and 47 had banned text messaging for all drivers. And this was not just a public policy issue for Americans. More than 45 nations, including Australia, China, France, Germany, India, Israel, Japan, Russia, Spain, Taiwan, and the United Kingdom, have banned calling while driving.10 Public policy effects are the outcomes arising from government regulation. Some are intended; others are unintended. Because public policies affect many people, organizations, and other interests, it is almost inevitable that such actions will please some and displease others. Regulations may cause businesses to improve the way toxic substances are used in the workplace, thus reducing health risks to employees. Yet other goals may be obstructed as an unintended effect of compliance with such regulations. For example, when health risks to pregnant women were associated with exposure to lead in the workplace, some companies removed women from those jobs. This action was seen as a form of discrimination against women that conflicted with the goal of equal employment opportunity. The unintended effect (discrimination) of one policy action (protecting employees) conflicted head-on with the public policy goal of equal opportunity. Different groups disagreed over the possible effects of distracted driving laws. Proponents obviously argued that the ban on cell phone use reduced accidents and saved lives. In fact, from 2012 to 2013, the number of deaths attributed to distracted driving nationwide declined nearly 7 percent, possibly due to the bans enacted by many states. Yet, these gains were short-lived as estimated deaths attributed to distracted driving rose 14 percent in 2014 and another 6 percent in 2016. Opponents pointed to numerous other distractions that were not banned, such as drivers reading the newspaper, eating, putting on makeup, or shaving. “People have been driving distracted since cars were invented. Focusing on mobile phones isn’t the same as focusing on distracted driving. Distraction is what has always caused car crashes and mobile phones don’t appear to be adding to that,” said a spokesperson for the Insurance Institute for Highway Safety.11 As the distracted driving examples illustrate, managers must try to be aware of the public policy inputs, goals, tools, and effects relevant to regulation affecting their business. As public issues emerge with significant negative consequences, such as death and injuries due to distracted driving, businesses should look for solutions. The automobile industry has increasingly done so, by introducing technologies that enable drivers to converse by phone or receive GPS directions and other notifications without removing their hands from the steering wheel or taking their eyes off the road. 10 For a complete listing of states that have regulated cell phone use while driving see the National Conference of State Legislators at www.ncsl.org. 11 Statistical information from “U.S. Motor Vehicle Deaths Surged 6% in 2016, NSC Says,” The Wall Street Journal, February 15, 2017, www.wsj.com; and “Study: No Evidence Cell Phone Bans Reduce Crashes,” Fox News, July 7, 2011, www.foxnews.com. Chapter 7 Business–Government Relations 145 Types of Public Policy Public policies created by governments are of two major types: economic and social. Sometimes these types of regulation are distinct from each another and at other times they are intertwined. Economic Policies One important kind of public policy directly concerns the economy. The term fiscal policy refers to patterns of government collecting and spending funds that are intended to stimulate or support the economy. Governments spend money on many different activities. Local governments employ teachers, trash collectors, police, and firefighters. State governments typically spend large amounts of money on roads, social services, and parkland. National governments spend large sums on military defense, international relationships, and hundreds of public works projects such as road building. During the Great Depression of the 1930s, public works projects employed large numbers of people, put money in their hands, and stimulated consumption of goods and services. Today, fiscal policy remains a basic tool to achieve prosperity, as the following example illustrates. In 2015, Chinese government leaders and economists were surprised by the country’s sharp economic decline and were increasingly worried about the potential risk of job losses throughout the country. The world’s second largest economy grew at 7 percent in the first quarter of 2015, the lowest rate since the global financial crisis in 2008–9. The leaders turned to fiscal stimulus to revive the growth of the country. The National Development and Reform Commission, China’s top planning agency, infused large amounts of funding in an attempt to speed up investment projects in several key sectors, including water conservation, environmental protection, power grids, and health care. In explaining this government spending, the chairman of China’s National Development and Reform Commission said, “China was on track to achieve its economic growth, employment, inflation, fiscal revenue as well as imports and exports targets, but the country was falling behind in its goals for investment and wooing foreign investors.”12 Another important kind of economic policy is trade policy, the rules that govern imports from and exports to foreign countries. Governments sometimes favor free-trade policies, allowing the relatively unrestricted flow of goods and services across national borders, and at other times erect various barriers to this flow, such as tariffs and duties. In early 2018, President Trump reported that he was considering imposing widespread tariffs on imports of various goods in an effort to help protect ailing U.S. industries. While many U.S. manufacturers hailed these actions as necessary, other business groups in the U.S. were opposed. Forty-five trade associations, representing a wide range of the U.S. economy, petitioned Trump’s administration to halt its plans to levy tariffs on China and to work instead with other nations to pressure China to end their trade restrictions. For the United States to impose heavy tariffs, said a letter written by the trade groups, “would trigger a chain reaction of negative consequences for the U.S. economy, provoking retaliation; stifling U.S. agriculture, goods, and service exports; and raising costs for businesses and consumers.”13 12 “China Hints at More Government Spending to Shore Up Economic Growth,” South China Morning Post, August 30, 2017, www.scmp.com. 13 “Trade Associations to Petition Trump Administration to Halt China-Tariff Plans,” The Wall Street Journal, March 19, 2018, www.wsj.com. 146 Part Three Business and Public Policy By contrast, the term monetary policy refers to policies that affect the supply, demand, and value of a nation’s currency. The worth, or worthlessness, of a nation’s currency has serious effects on business and society. It affects the buying power of money, the stability and value of savings, and the confidence of citizens and investors about the nation’s future. This, in turn, affects the country’s ability to borrow money from other nations and to attract private capital. In the United States, the Federal Reserve Bank—known as the Fed—plays the role of other nations’ central banks. By raising and lowering the interest rates at which private banks borrow money from the government, the Fed influences the size of the nation’s money supply and the value of the dollar. During the Great Recession, the Fed’s action to lower interest rates nearly to zero—an example of a monetary policy— was intended to stimulate borrowing and help the economy get moving again. Other forms of economic policy include taxation policy (raising or lowering taxes on business or individuals), industrial policy (directing economic resources toward the development of specific industries), and trade policy (encouraging or discouraging trade with other countries). Spurred by the president of the United States, Congress passed a $1.5 trillion tax cut in 2017. The most sweeping U.S. tax bill since 1986 cut the corporate tax rate from 35 to 21 percent, with the intent of stimulating the economy. In the first quarter of 2018, 108 of the nation’s largest companies reported saving almost $13 billion in taxes, with nearly a third of the savings going to financial firms. AT&T and Comcast applauded the tax relief and promised to share the windfall by paying $1,000 bonuses to their more than 300,000 workers. Wells Fargo and Fifth Third Bancorp said they would raise their employees’ minimum wage to $15 an hour. However, Michael Dell, CEO of Dell Technologies, discovered that the new tax bill would prevent his company from deducting nearly $2 million it pays annually in interest on the company’s debt.14 Some thought that the tax reform would stimulate the economy, create jobs, and raise wages, but others cautioned that it would increase the national deficit, and that companies would be more likely use their windfalls to increase executive pay and shareholder dividends than to create jobs or pay workers more. According to economist Paul Krugman, while it is quite early to tell if the tax cut has been successful, “most voters say they haven’t seen any boost to their paychecks. To deliver on [the tax cut] backers’ promises, the tax cut would have to produce a huge surge in business investment—not in the long run, not five or 10 years from now, but more or less right away. And there’s no sign that anything like that is happening.”15 Yet, both critics and supporters say it will take months or years to draw conclusions on the law’s effects. Social Assistance Policies The last century produced many advances in the well-being of people across the globe. The advanced industrial nations have developed elaborate systems of social services for their citizens. Developing economies have improved key areas of social assistance (such as health care and education) and will continue to do so as their economies grow. International 14 “Trump Cheers GOP Tax Overhaul, Slams Democrats Who Opposed It,” The Wall Street Journal, December 20, 2017, www. wsj.com; “Thankful for Massive Tax Cut, AT&T, Wells Fargo Promise to Share the Wealth,” The Wall Street Journal, December 21, 2017, www.wsj.com; “For Heavily Indebted Firms Like Dell, Tax Bill Delivers a Downside,” The Wall Street Journal, December 21, 2017, www.wsj.com; and “Corporate America Is Saving Boatloads on Trump Tax-Cut Windfall,” Bloomberg, April 30, 2018, www.bloomberg.com. 15 “How’s That Tax Cut Working Out?” The New York Times, April 30, 2018, www.nytimes.com. Chapter 7 Business–Government Relations 147 standards and best practices have supported these trends. Many of the social assistance policies that affect particular stakeholders are discussed in subsequent chapters of this book. One area often addressed by social assistance policies is housing. Many governments have programs that subsidize rent payments, guarantee home loans, or provide housing directly for low-income citizens or military veterans. For example, Brazil’s Minha Casa, Minha Vida (“My House, My Life”) program has invested R$300 billion ($80.27 billion U.S.) in mortgages, provided by a governmentaffiliated bank, resulting in more than 4.2 million housing units authorized for construction and 2.6 million units delivered to low-income families since the program began in 2009. Many of the first units built by the program were intended to house families displaced by development for the World Cup and Olympic Games in Rio de Janeiro.16 One particularly important social assistance policy—health care—has been the focus for concern on the international front and for national and state lawmakers. As discussed later in this chapter, the United States government has wrestled with the need for better health care for its citizens and the challenge of how to pay for this care. Government Regulation of Business Societies rely on government to establish rules of conduct for citizens and organizations called regulations. Regulation is a primary way of accomplishing public policy, as described in the previous section. Because government operates at so many levels (federal, state, local), modern businesses face complex webs of regulations. Companies often require lawyers, public affairs specialists, and experts to monitor and manage the interaction with government. Why do societies turn to more regulation as a way to solve problems? Why not just let the free market allocate resources, set prices, and constrain socially irresponsible behavior by companies? There are a variety of reasons. Market Failure One reason is what economists call market failure, that is, the marketplace fails to adjust prices for the true costs of a firm’s behavior. For example, a company normally has no incentive to spend money on product safety or pollution control equipment if customers do not demand it. The market fails to incorporate the cost of product safety or environmental harm into the business’s economic equation, because the costs are borne by someone else. In this situation, government can use regulation to force all competitors in the industry to adopt a minimum safety or pollution standards. Companies that want to act responsibly often welcome carefully crafted regulations, because they force competitors to bear the same costs. This behavior is seen in the following example. In 2008, the European Union set regulatory standards for certain contaminants in foods, including maximum levels for lead, cadmium, and mercury. The EU explained, “in order to protect public health, to keep contaminants at levels which do not cause health concerns, maximum levels for lead, cadmium and mercury must be safe and as low as reasonably achievable based upon good manufacturing and agricultural/fishery practices.” These new regulatory standards affected food companies around the world that have business with or in Europe. Nestlé Purina 16 “Minha Casa Minha Vida Housing Program to Expand in Brazil,” The Rio Times, February 6, 2017, riotimesonline.com. 148 Part Three Business and Public Policy Petcare, a pet food subsidiary of Nestlé, the Swiss-based and world’s largest food and beverage company, welcomed these new standards, believing it provided them with a competitive advantage. The company released the following statement: “We use science to make quality and safe pet foods … We test for well over 150 substances, including arsenic, pesticides, lead, mercury and cadmium. … We do make an effort to source ingredients that contain lower levels of heavy metals. … We are committed to providing our consumers with accurate and transparent nutrition labelling based on sound science, regulation and law in a format that best helps them make informed, balanced and mindful product choice.”17 Negative Externalities Governments also may act to regulate business to prevent unintended adverse effects on others. Negative externalities, or spillover effects, result when the manufacture or distribution of a product gives rise to unplanned or unintended costs (economic, physical, or psychological) borne by workers, consumers, competitors, neighboring communities, or other business stakeholders. To control or reverse these costs, government may step in to regulate business action. In 2014 U.S. government regulators announced new rules to fight an increase in black lung disease, caused by breathing coal dust. These new regulations were the first major efforts since the 1969 Coal Mine Health and Safety Act, which established modern health and safety requirements in mines nationwide. Government health officials attributed increasing rates of the disease to new machinery that generated more dust, longer shifts for younger workers, and an increase in silica dust churned up when thinner coal seams were tapped after many years of mining at the same location.18 Natural Monopolies In some industries, natural monopolies occur. The electric utility industry provides an example. Once one company has built a system of poles and wires or laid miles of underground cable to supply local customers with electricity, it would be inefficient for a second company to build another system alongside the first. But once the first company has established its natural monopoly, it can then raise prices as much as it wishes because there is no competition. In such a situation, government often comes in and regulates prices and access. Other industries that sometimes develop natural monopolies include cable TV, broadband Internet service, software, and railroads. Ethical Arguments There is often an ethical rationale for regulation as well. As discussed in Chapter 5, for example, there is a utilitarian ethical argument in support of safe working conditions: It is costly to train and educate employees only to lose their services because of preventable accidents. There are also fairness and justice arguments for government to set standards and develop regulations to protect employees, consumers, and other stakeholders. In debates about regulation, advocates for and against regulatory proposals often use both 17 The European Commission legislation on heavy metals can be found at ec.europa.eu/jrc/en/eurl/heavy-metals/legislation and Nestlé Purina Petcare statement can be found at wjla.com, a report on company responses to the Washington, DC, ABC television station’s report on heavy metals in foodstuff. 18 “Black Lung Disease Spurs New Coal-Mine Rules,” The Wall Street Journal, April 23, 2014, online.wsj.com. Chapter 7 Business–Government Relations 149 economic and ethical arguments to support their views. Some issues have consequences that are so devastating that the government needs to step in and impose controls, as shown in the following example. In 2015 the U.K. government passed the Modern Slavery Act, the first piece of U.K. legislation focusing on the prevention and prosecution of modern slavery and the protection of victims. According to the International Labour Organisation (ILO), 25 million people around the world were trapped in some form of forced labor, including trafficking, debt bondage, and child labor. In the United Kingdom, instances of slavery were found in nail salons, the fishing industry, two London medical professional offices, and cannabis farms. The new law made businesses accountable for slavery and labor abuses occurring along their supply chain of operations. The goal was to ensure that there were no instances of slavery linked to any British products or services.19 Whether the actions are self-imposed by a company or forced on businesses by the government, the protection of the public is often the motivation for regulatory action. Types of Regulation Government regulations come in different forms. Some are directly imposed; others are more indirect. Some are aimed at a specific industry (e.g., banking); others, such as those dealing with job discrimination or pollution, apply to all industries. Some have been in existence for a long time—for example, the Food and Drug Act was passed in 1906— whereas others, such as the Wall Street Reform and Consumer Protection (or Dodd-Frank) Act of 2010, are of much more recent vintage. Just as public policy can be classified as either economic or social, so regulations can be classified in the same fashion. Economic Regulations The oldest form of regulation is primarily economic in nature. Economic regulations aim to modify the normal operation of the free market and the forces of supply and demand. Such modification may come about because the free market is distorted by the size or monopoly power of companies, or because the consequences of actions in the marketplace are thought to be undesirable. Economic regulations include those that control prices or wages, allocate public resources, establish service territories, set the number of participants, and ration resources. The decisions by the Federal Trade Commission (FTC) to prevent anticompetitive business practices illustrate one kind of economic regulation. The U.S. Congress responded to the global recession, in part, by passing the DoddFrank Act in 2010. This legislation was heralded as the most comprehensive financial regulatory reform measure since the Great Depression and intended to revolutionize many business activities. Among other things, the Dodd-Frank Act affected the oversight and supervision of financial institutions, created a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduced more stringent regulatory capital requirements, and implemented changes to corporate governance and executive compensation practices.20 In 2017, President Trump signed two executive actions that scaled back some provisions of the Dodd-Frank Act with the intention of making it easier for businesses to borrow money. 19 “The U.K.’s New Slavery Laws Explained: What Do They Mean for Business?” The Guardian, December 14, 2015, www.theguardian.com. 20 “The Dodd-Frank Act: A Cheat Sheet,” Morrison & Foerster, n.d., www.mofo.com. 150 Part Three Business and Public Policy Antitrust: A Special Kind of Economic Regulation One important kind of economic regulation occurs when government acts to preserve competition in the marketplace, thereby protecting consumers. Antitrust laws prohibit unfair, anticompetitive practices by business. (The term antitrust law is used in the United States; most other countries use the term competition law.) For example, if a group of companies agreed among themselves to set prices at a particular level, this would generally be an antitrust violation. In addition, a firm may not engage in predatory pricing, the practice of selling below cost to drive rivals out of business. If a company uses its market dominance to restrain commerce, compete unfairly, or hurt consumers, then it may be found guilty of violating antitrust laws. The two main antitrust enforcement agencies in the United States are the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission. Both agencies may bring suits against companies they believe to be guilty of violating antitrust laws. They also may investigate possible violations, issue guidelines and advisory opinions for firms planning mergers or acquisitions, identify specific practices considered to be illegal, and negotiate informal settlements out of court. Antitrust regulators have been active in prosecuting price fixing, blocking anticompetitive mergers, and dealing with foreign companies that have violated U.S. laws on fair competition. In Europe, the European Commission investigates antitrust violations for the European Union who may act to enforce EU laws, as seen in the Qualcomm example that follows. One example of the European Union's antitrust regulatory oversight was evident when they imposed a €997 million ($1.23 million) antitrust fine on the U.S.-technology giant Qualcomm. The EU antitrust regulators accused Qualcomm of paying Apple billions of dollars over a five-year span, from 2011 to 2016. These payments were made to restrict Apple from purchasing from Qualcomm's rivals, those firms that sold chips that connected smartphones and tablets to cellular networks. “These payments were not just reductions in price—they were made on the condition that Apple would exclusively use Qualcomm's baseband chipsets in all its iPhones and iPads,” said Margrethe Vestager, EU antitrust chief.21 If a company is found guilty of antitrust violations, what are the penalties? The government may levy a fine—sometimes a large one, as the EU did against Qualcomm. In the case of private lawsuits, companies may also be required to pay damages to firms or individuals they have harmed. Sysco and U.S. Foods Holdings, two of the largest U.S. food distribution companies, joined retailer Winn-Dixie Stores, in filing lawsuits for undisclosed damages against the chicken industry, accusing Tyson Foods, Pilgrim’s Pride, Sanderson Farms, and other poultry suppliers of manipulating wholesale chicken prices.22 In addition, regulators may impose other, nonmonetary remedies. A structural remedy may require the breakup of a monopolistic firm; this occurred when (the old) AT&T was broken up by government order in 1984. A conduct remedy, more commonly used, involves an agreement that the offending firm will change its conduct, often under government supervision. For example, a company might agree to stop certain anticompetitive practices. Finally, an intellectual property remedy is used in some kinds of high-technology businesses; it involves disclosure of information to competitors. All these are part of the regulator’s arsenal. Antitrust regulations cut across industry lines and apply generally to all enterprises. Other economic regulations, such as those governing stock exchanges, may be confined to 21 “Qualcomm Is Slapped with $1.23 Billion EU Fine for Illegal Payments to Apple,” The Wall Street Journal, January 24, 2018, www.wsj.com. 22 “U.S. Food Distributors Allege Tyson Foods, Rivals Fixed Chicken Prices,” Reuters, January 31, 2018, www.reuters.com. Exhibit 7.A The AT&T–Time Warner Merger of 2018 In 2018, a federal judge handed down what many economists believed to be a sweeping victory against governmental antitrust regulation by approving AT&T’s $85 billion acquisition of Time Warner. Judge Richard Leon ruled that the government—which had tried to block the merger—had failed to prove that the telecom company’s acquisition of Time Warner would violate antitrust law by leading to fewer choices for consumers and higher prices for television and internet services. With this final roadblock removed, the merger was expected to create a media and telecommunications powerhouse, reshaping the landscape of those industries. The combined company would join Time Warner’s library, including HBO’s hit “Game of Thrones” and channels like CNN, with AT&T’s vast distribution reach through wireless and satellite television services across the country. Media executives supported the AT&T–Time Warner merger deal, arguing that content creation and distribution had to be combined to compete successfully against technology companies like Amazon and Netflix. Although those companies had just started producing their own shows during the past several years, they were now spending billions of dollars a year on original programming. Their users could stream the video on apps in homes and on mobile devices, putting pressure on traditional media businesses. Yet, Makan Delrahim, the top antitrust official at the Justice Department said, “We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner.” Antitrust experts predicted that the court ruling would lead to a flood of new merger proposals. Just days after the AT&T–Time Warner decision, Comcast bid to acquire 21st Century Fox, challenging Disney, which previously had bid for 21st Century Fox’s assets. In response, Disney increased their offer to acquire 21st Century Fox. Both Comcast and 21st Century Fox made bids on acquiring Sky, a European media company. Sources: “AT&T Wins Approval for $85.4 Billion Time Warner Deal in Defeat for Justice Department,” The New York Times, June 12, 2018, www.nytimes.com; and “Judge Approves $85 Billion AT&T–Time Warner Deal,” CNNMoney, June 13, 2018, money.cnn.com. specific industries and companies. One recent example of a conflict over the application of antitrust laws to a proposed merger is discussed in Exhibit 7.A. Social Regulations Social regulations are aimed at such important social goals as protecting consumers and the environment and providing workers with safe and healthy working conditions. Equal employment opportunity, protection of pension benefits, and health care for citizens are other important areas of social regulation. Unlike the economic regulations mentioned above, social regulations are not limited to one type of business or industry. Laws concerning pollution, safety and health, health care, and job discrimination apply to all businesses; consumer protection laws apply to all relevant businesses producing and selling consumer goods. The Chilean government declared war on obesity in 2018. “They killed Tony the Tiger. They did away with Cheetos’ Chester Cheetah. They banned Kinder Surprise, the chocolate eggs with a hidden toy,” accounts The New York Times article. The Chilean government imposed multiple marketing restrictions, mandatory packaging redesigns, and labeling rules on the nation’s food producers and retailers aimed at transforming the eating habits of 18 million Chilean residents. Nutrition experts said this was the world’s most ambitious attempt to remake a country’s food culture and could be a model for how to turn the tide on a global obesity epidemic that researchers say contributed to 4 million premature deaths a year.23 23 “In Sweeping War on Obesity, Chile Slays Tony the Tiger,” The New York Times, February 7, 2018, www.nytimes.com. 151 Exhibit 7.B The Affordable Care Act: Health Care Coverage Mandated for Americans In 2010, led by President Obama, Congress passed the Affordable Care Act, often referred to as “Obamacare.” The basic purpose of the law was to hold insurance companies accountable for their costs and services to their customers, lower the rising health care costs, provide Americans with greater freedom and control over their health care choices, and ultimately improve the quality of health care in America. Its provisions would be rolled out over 10 years. In 2010, the government began giving subsidies to small businesses that offered health coverage to employees, insurance companies were barred from denying coverage to children with preexisting illnesses, and children were permitted to stay on their parents’ insurance policies until age 26. The health care reform law aroused strong passions on both sides. Proponents of the law argued that the more than 5.1 million people on Medicare would save over $3 billion in prescription drugs costs, 105 million Americans would no longer have lifetime dollar limits on their health care coverage, and approximately 54 million Americans would receive greater preventative medical coverage. Health care fraud would decline by $4.1 billion annually due to new fraud detection measures, and 2.5 million young adults would retain health care coverage under their parents’ plan. Most importantly, most Americans would now have health insurance coverage. But, opponents challenged the new law as filled with myths, untruths, and harmful consequences. Some believed that the act would do nothing to bring down the cost of health care. Business leaders worried that the burden of providing their employees with health care insurance would result in bankruptcy or cause employers to reduce the level of health care coverage for their employees. Many worried that the mandate infringed on individual rights—including the right to go without health insurance if they chose. Several states sued, saying the law violated the constitution. In 2017, repeated attempts by Congress to repeal all or part of the Affordable Care Act failed. By 2018, 11.8 million Americans had selected marketplace plans or been automatically enrolled under the act. Under the act, millions more Americans received preventive services, such as vaccines, cancer screenings, and annual wellness visits at no out-of-pocket cost, than ever before. In addition, Americans could no longer be denied or dropped from coverage because of preexisting conditions or because they hit an annual or lifetime cap in benefits. Josh Peck, co-founder of the pro-ACA group Get America Covered, said, “While enrollment remained steady because of high consumer satisfaction and more affordable premiums for those who qualify for tax credits, enrollment would have outpaced previous years’ if the administration had focused on signing people up instead of derailing open-enrollment efforts.” Sources: “What’s in the Bill,” The Wall Street Journal, March 22, 2010, online.wsj.com; “Get the Facts Straight on Health Reform—A More Secure Future,” The White House, n.d., www.whitehouse.gov; and “The Affordable Care Act Is Working,” Department of Health and Human Services, www.hhs.gov. The quote by Josh Peck is from “Nearly 12 Million People Enrolled in 2018 Health Coverage under the ACA,” The Washington Post, April 3, 2018, www.washingtonpost.com. The most significant social regulation in the United States since the 1960s was the comprehensive reform of health care coverage passed by Congress in 2009. It is described in Exhibit 7.B. Who regulates? Normally, for both economic and social regulation, specific rules are set by agencies of government and by the executive branch, and may be further interpreted by the courts. Many kinds of business behavior are also regulated at the state level. Government regulators and the courts have the challenging job of applying the broad mandates of public policy. Figure 7.1 depicts these two types of regulation—economic and social—along with the major regulatory agencies responsible for enforcing the rules at the federal level in the United States. Only the most prominent federal agencies are included in the chart. Individual states, some cities, and other national governments have their own array of agencies to implement regulatory policy. There is a legitimate need for government regulation in modern economies, but regulation also has problems. Businesses feel these problems firsthand, often because the regulations directly affect the cost of products and the freedom of managers to design their 152 Chapter 7 Business–Government Relations 153 FIGURE 7.1 Types of Regulation and Regulatory Agencies FERC, DOE FCC TR EA , o, TV Radi es, phon e cabl n tio ta usi r , SC CP FPB C, C FT DA, F En v me ironpro nta Ve tec l sa hicle fety and tio n economy , CF SEC er um on ns cti Co rote p ion TC Sec gu re ial Soc ety Saf alth he and A, OSH A, H MS S HH la t urit ie inv and s est me nt Discrimination EEOC, DOL Antitrust ion lat ss ne u eg Nuc l indu ear stry rib mi c Ag E co no DA ns a Tr US r po Energy FTC, DOJ A, FA OT, D TSB N NRC F SU RB, R F Y ED DIC DE PT DI , ., EM AC Ba nk s FR r bo es La ctic a pr RA tion Taxa B, , OL FL D R NL EP A NHTSA Economic regulatory agencies Nuclear Regulatory Commission NRC Federal Aviation Administration FAA Federal Communications Commission FCC Federal Energy Regulatory Commission FERC Federal Reserve Board FRB Commodity Futures Trading Commission CFTC FREDDIE MAC Federal Home Loan Mortgage Corporation Department of Transportation DOT Department of Agriculture USDA Department of Justice DOJ Department of Labor DOL Federal Labor Relations Authority FLRA Social regulatory agencies EEOC Equal Employment Opportunity Commission OSHA Occupational Safety and Health Administration MSHA Mine Safety and Health Administration FTC Federal Trade Commission HHS Department of Health and Human Services IRS, BATF FTC SEC NLRB IRS BATF FDIC DOE NTSB Federal Trade Commission Securities and Exchange Commission National Labor Relations Board Internal Revenue Service Bureau of Alcohol, Tobacco, Firearms and Explosives Federal Deposit Insurance Corporation Department of Energy National Transportation Safety Board CPSC FDA EPA NHTSA CFPB Consumer Product Safety Commission Food and Drug Administration Environmental Protection Agency National Highway Traffic Safety Administration Consumer Financial Protection Bureau 154 Part Three Business and Public Policy business operations. In the modern economy, the costs and effectiveness of regulation, as well as its unintended consequences, are serious issues that cannot be overlooked. Each is discussed below. The Effects of Regulation Regulation affects many societal stakeholders, including business. Sometimes the consequences are known and intended, but at other times unintended or accidental consequences emerge from regulatory actions. In general, government hopes that the benefits arising from regulation outweigh the costs. The Costs and Benefits of Regulation The call for regulation may seem irresistible to government leaders and officials given the benefits they seek, but there are always costs to regulation. An old economic adage says, “There is no free lunch.” Eventually, someone has to pay for the benefits created. An industrial society such as the United States can afford almost anything, including social regulations, if it is willing to pay the price. Sometimes the benefits are worth the costs; sometimes the costs exceed the benefits. The test of cost–benefit analysis helps the public understand what is at stake when new regulation is sought. Figure 7.2 illustrates the increase in costs of federal regulation in the United States since 1960. Economic regulation has existed for many decades, and its cost has grown more slowly than that of social regulation. Social regulation spending reflects growth in such areas as environmental health, occupational safety, and consumer protection. A rapid growth of social regulation spending occurred in the 1960s and again in the 2000s, but has slowed somewhat recently. The cost of regulation has its critics, especially when the costs to small businesses or manufacturing firms are considered. In addition to paying for regulatory programs, it takes people to administer, monitor, and enforce these regulations. Although the numbers have gone up and down, depending on the approach of various administrations, the overall trend has been toward growth of the regulatory apparatus of government. In 1960, fewer than 60,000 federal employees monitored and enforced government regulations; by 2015, this number had grown to more than 277,000 employees. John J. DiIulio Jr., of the University of Pennsylvania and the FIGURE 7.2 Source: Susan Dudley and Melinda Warren, “Regulators’ Budget Increases Consistent with Growth in Fiscal Budget,” Regulatory Studies Center, The George Washington University and Weidenbaum Center, Washington University in Saint Louis, May 2015, regulatorystudies.columbian. gwu.edu; and regulatorystudies. columbian.gwu.edu. 60000 Social 50000 Constant (Real) 2009 Dollars Budgetary Costs of Federal Regulation, 1960–2018 Economic 40000 30000 20000 10000 0 1960 1970 1980 1990 2000 Years 2010 2015 2018 Deregulation in the United States, Starting in 2017 Exhibit 7.C In 2017, the Trump Administration began a policy toward deregulation across many industries. • The Office of Management and Budget suspended a rule that required wage reporting broken down by ethnicity and gender, claiming it was too costly to companies. • The lessening of the Volcker Rules that restricted banking activities. This change permitted banks to conduct fewer audits of individual securities and derivative transactions, and generally to have more freedom to buy and sell securities. • The Dodd-Frank Act of 2010, which attempted to guard against another financial crisis, had its restrictions seriously minimized when about two-dozen regional banks were released from strict rules requiring them to maintain large capital reserves. • Under the leadership of the White House, the Republican-led Congress reversed a rule that made it easier for consumers to bring class action lawsuits against banks by requiring that consumers use arbitration to resolve disputes. • President Trump froze the implementation of a rule that said contract poultry and livestock farmers would be able to sue dealers without having to prove that a practice harmed the entire industry, just showing harm to their specific business. • The Transportation Department withdrew a rule proposed by the Obama Administration that would require airlines to disclose baggage fees to consumers along with fare and schedule information. • The Labor Department froze a rule that would tighten standards for workplace exposure to beryllium, a lightweight metal used in manufacturing that is dangerous if inhaled via dust or fumes or if it is exposed to the skin. Source: “How Donald Trump Has Remade the Rules for Business,” The Wall Street Journal, January 17, 2018, www.wsj.com. Brookings Institution, criticized the size of government regulation when he said, “Today’s government is indeed big—3.5 times bigger than five and a half decades ago, but dispersed to disguise its size.”24 Continuous Regulatory Reform The amount of regulatory activity often is cyclical—historically rising during some periods and declining during others. Businesses in the United States experienced a lessening of regulation in the early 2000s—deregulation, then experienced a return of regulatory activity in the late 2000s and early 2010s—reregulation. The cycle continued as the pendulum swung back to deregulation in the late 2010s under the Trump administration. Deregulation is the removal or scaling down of regulatory authority and regulatory activities of government. Deregulation is often a politically popular idea. President Ronald Reagan strongly advocated deregulation in the early 1980s, when he campaigned on the promise to “get government off the back of the people.” Major deregulatory laws were enacted off and on in the United States from the 1980s to today, mostly dependent upon whether there was a Republican administration in power. Recently efforts to promote deregulation in the United States are described in Exhibit 7.C. Proponents of deregulation often challenge the public’s desire to see government solve problems. This generates situations in which government is trying to deregulate in some areas while at the same time creating new regulation in others. Reregulation is the increase or expansion of government regulation, especially in areas where the regulatory activities had previously been reduced. The scandals that rocked corporate America in 24 ‘Big Government’ Is Ever Growing, On the Sly,” National Review, February 25, 2017, www.nationalreview.com. 155 156 Part Three Business and Public Policy the 2000s—and the failure or near-failure of a number of big commercial and investment banks in the late 2000s—brought cries from many stakeholder groups for reregulation of the securities and financial services industries. Regulation in a Global Context International commerce unites people and businesses in new and complicated ways, as described in Chapter 4. U.S. consumers routinely buy food, automobiles, and clothing from companies located in Europe, Canada, Latin America, Australia, Africa, and Asia. Citizens of other nations do the same. As these patterns of international commerce grow more complicated, governments recognize the need to establish rules that protect the interests of their own citizens. No nation wants to accept dangerous products manufactured elsewhere that will injure its citizens, and no government wants to see its economy damaged by unfair competition from foreign competitors. These concerns provide the rationale for international regulatory agreements and cooperation. At times, the issues themselves cut across national borders, so international regulation is needed. In 2016, the International Civil Aviation Organization, representing more than 190 countries, adopted The Aviation Plan, designed to reduce the climate impact of international jet travel, which accounted for about 2 percent of the world’s emissions of greenhouse gases. The measure would require air carriers to take major steps to improve fuel economy in their routes and fleets, very likely accelerating the purchase of newer, more efficient planes. The plan was scheduled to take effect in 2021. “This measure addresses a growing source of global emissions, demonstrates the international community’s strong and growing support for climate action in all areas and helps avoid a patchwork of potentially costly and overlapping regional and national measures,” said John Kerry, then the U.S. Secretary of State.25 At other times, political conflicts spill over into economic regulatory actions, as described next. In 2017, Iran, a long-time adversary of the United States, sanctioned 15 American companies in retaliation for restrictions imposed by the Trump administration on companies and people allegedly connected with Iran’s ballistic-missile program. Iran’s sanctions targeted American defense companies, including defense contractor Raytheon, and two firearms manufacturers, Magnum Research and Lewis Machine and Tool, for allegedly helping Israel and contributing to regional instability, according to the Islamic Republic News Agency. Future business dealings with these companies were prohibited by the Iranian government and their assets in the Islamic Republic were frozen, a common tactic used by the United States against companies from doing business with Iran.26 Whether at the local, state, federal, or international levels, governments exert their control seeking to protect society through regulation. The significant challenge involves balancing the costs of this form of governance against the benefits received or the prevention of the harms that might occur if the regulation is not in place and enforced. Businesses have long understood that managing and, if possible, cooperating with the government regarding regulation generally leads to a more productive economic environment and financial health of the firm. 25 “EU Halts Carbon Emission Fees for Airlines,” The Hill, November 12, 2012, www.thehill.com; and “Over 190 Countries Adopt Plan to Offset Air Travel Emissions,” The New York Times, October 6, 2016, www.nytimes.com. 26 “Iran Slaps Sanctions on 15 U.S. Companies as Animosity Grows,” The Wall Street Journal, March 26, 2017, www.wsj.com. Chapter 7 Business–Government Relations 157 Summary ∙ Government’s relationship with business ranges from collaborative to working at arm’s length. This relationship often is tenuous, and managers must be vigilant to anticipate any change that may affect business and its operations. ∙ A public policy is an action undertaken by government to achieve a broad public purpose. The public policy process involves inputs, goals, tools or instruments, and effects. ∙ Regulation is needed to correct for market failure, overcome natural monopoly, and protect stakeholders who might otherwise be hurt by the unrestricted actions of business. ∙ Regulation can take the form of laws affecting an organization’s economic operations (e.g., trade and labor practices, allocation of scarce resources, price controls) or focus on social good (e.g., consumer protection, employee health and safety, environmental protection). ∙ Antitrust laws seek to preserve competition in the marketplace, thereby protecting consumers. Remedies may involve imposing a fine, breaking up a firm, changing the firm’s conduct, or requiring the disclosure of information to competitors. ∙ Although regulations are often very costly, many believe that these costs are worth the benefits they bring. The ongoing debate over the need for and effectiveness of regulation leads to alternating periods of deregulation and reregulation. ∙ The global regulation of business often occurs when commerce crosses national borders or the consequences of unregulated business activity by a national government are so large that global regulation is necessary. Key Terms antitrust laws, 150 cost–benefit analysis, 154 deregulation, 155 Dodd-Frank Act, 149 economic regulation, 149 fiscal policy, 145 market failure, 147 monetary policy, 146 natural monopoly, 148 negative externalities, 148 predatory pricing, 150 public policy, 142 regulation, 147 reregulation, 155 social assistance policies, 147 social regulation, 151 trade policy, 145 Internet Resources www.cato.org www.consumerfinance.gov www.economywatch.com www.federalreserve.gov www.ftc.gov www.mercatus.org www.reginfo.gov www.regulations.gov www.un.org/en/law www.usa.gov Cato Institute U.S. Consumer Financial Protection Bureau Economy Watch Board of Governors of the Federal Reserve System U.S. Federal Trade Commission Mercatus Center, George Mason University U.S. Office of Information and Regulatory Affairs Regulations.gov International Law, United Nations Online Guide to Government Information and Services 158 Part Three Business and Public Policy Discussion Case: Should Facebook Be Regulated? In 2018, Facebook, the social media behemoth, faced public outrage over breaches of its users’ privacy. A British political consulting firm hired by the Trump campaign, Cambridge Analytica, was accused of accessing the private data of 87 million Facebook users in an attempt to influence the 2016 presidential election. The consultants had partnered with a psychology professor at Cambridge University, who developed a Facebook app that offered a personality survey. When people responded, the app harvested private information from their profiles and those of their friends. The professor then shared this information with Cambridge Analytica, which used it to target political ads to Facebook users. In the wake of these revelations, the U.S. Congress and European Parliament both held hearings on how to better protect the personal information of social media users. These hearings raised the question: Should Facebook, and other social media platforms, be more strictly regulated by the government to prevent future breaches of this kind? While it was not publicly known how much revenue online political advertisements generated for Facebook in 2018, the firm made it clear that Facebook was spending so much money hiring moderators to review political ads that it would cancel out the revenue those ads were expected to generate in the 2018 election cycle. CEO Mark Zuckerberg explained, “We’re essentially going to be losing money on running political ads, because the company is hiring ‘thousands’ in advance of the 2018 elections. … That cost is going to be greater than the money that we make.” Zuckerberg responded to the growing social outcry by making himself publicly available to legislators in both the United States and Europe. Zuckerberg was questioned for almost 10 hours by U.S. senators of the commerce and judiciary committees over the company’s privacy and data mining policies. Zuckerberg explained, “I believe it’s important to tell people exactly how the information that they share on Facebook is going to be used. … Every single time, there’s a control right there about who you’re going to be sharing it with. … It was my mistake, and I’m sorry. I started Facebook, I run it, and I’m responsible for what happens here. It’s clear now that we didn’t do enough to prevent these tools from being used for harm.” Two weeks later Zuckerberg appeared before the European Parliament, pledging to be more diligent in protecting his users’ individual information. He explained, “Europeans make up a large and incredibly important part of our global community. Many of the values Europeans care most deeply about are values we share: from the importance of human rights and the need for community to a love of technology, with all the potential it brings.” As in his congressional testimony, Zuckerberg admitted to making mistakes that needed to be corrected, but again argued against government regulation of the industry, claiming that companies could effectively address any problems themselves. “I believe deeply in what we’re doing. And when we address these challenges, I know we’ll look back and view helping people connect and giving more people a voice as a positive force here in Europe and around the world,” stated Zuckerberg. In response to the Cambridge Analytica incident, Facebook introduced a centralized system that enabled its users to control their privacy and security settings. The system, available globally, provided users with a single location where they could change their settings, rather than the old system, which was spread out across 20 separate locations on Chapter 7 Business–Government Relations 159 the social media platform. Facebook’s chief privacy officer said, “We’ve heard loud and clear that privacy settings and other important tools are hard to find, and that we must do more to keep people informed.” Facebook also announced that it would curb information that it exchanged with companies that collected and sold consumer data for advertisers. It ended an ad-targeting option called Partner Categories that allowed data brokers to target specific groups of Facebook users—people who had bought a certain product, for example—on behalf of their ad clients. Graham Mudd, product marketing director at Facebook, posted that shutting that system down would “help improve people’s privacy on Facebook.” Many thought Zuckerberg’s pledge to do better was not enough and legislation was required. This was not the first time in recent years that the public turned to the government to protect their privacy. In 2010, the Do Not Track Bill, intended to give American consumers more control over what personal details companies collected from them and how the data was used, was introduced in Congress. In addition, in 2012 then-President Obama unveiled a comprehensive Consumer Privacy Bill of Rights, which would empower consumers to know what personal information was collected, stored, and possibly sold to other businesses. Neither of these efforts generated sufficient political support to become law. In 2018, the European Union passed the General Data Protection Regulation. This regulation defined personal data as proprietary—that is, owned by the individual—and required that any use of that data by other parties had to be authorized by permission. A consumer would have to affirmatively “opt in” (rather than “opt out”), after receiving a request written in clear language, not legalese, from a business seeking to use their information. In response to the Facebook-Cambridge Analytica incident, calls for new legislation in the United States appeared. Some of the potential legislative and regulatory strategies considered included ∙ Legislation could be passed to protect the data of individuals. These laws would focus on how companies collect, share, and use user data, like the European Union’s 2018 General Data Protection Regulation. ∙ New regulation could restrict how consumer data was used, including the sale of this information to other businesses. It could require social media sites, like Facebook, to provide the government, or its users, with additional information on who purchased users’ information. These steps would increase the transparency regarding the sale of consumers’ information. ∙ New regulation might also target how the consumers’ information in used for online political advertising. Facebook said it would support legislation to require large digital platforms to keep a public library of paid political ads that had appeared on their sites. Proposals suggested that tech companies be required to confirm the identities and locations of the sponsors of political advertisements on their sites. ∙ Facebook, Google, and other technology firms could be held responsible for the unethical or illegal behavior of those who used their platforms. This effort targeted the actions by organizations like Cambridge Analytica—or even foreign governments—that might try to influence political elections through advertisements on social media. ∙ Governmental investigations, likely by the nation’s chief privacy regulator, the Federal Trade Commission (FTC), could be conducted, with the FTC given sweeping access and enforcement powers. 160 Part Three Business and Public Policy How did the public feel about these proposals? In a 2018 survey, only 37 percent of Americans said that Facebook, Twitter, and other social platforms were not regulated enough, and 14 percent of those polled said they were already regulated too much. While many were worried that a Cambridge Analytica-type incident might occur again, and that personal information was not well protected, they were uncertain if governmental regulation was the right answer. Sources: “How Calls for Privacy May Upend Business for Facebook and Google,” The New York Times, March 24, 2018, www.nytimes.com; “Facebook Introduces Central Page for Privacy and Security Settings,” The New York Times, March 28, 2018, www.nytimes.com; “Facebook Limiting Information Shared with Data Brokers,” The Wall Street Journal, March 28, 2018, www.wsj.com; “As Mark Zuckerberg Prepares to Testify, Here’s How Washington Could Regulate Silicon Valley,” The Wall Street Journal, April 9, 2018, www.wsj.com; “The Key Moments from Mark Zuckerberg’s Testimony to Congress,” The Guardian, April 11, 2018, www.theguardian.com; “No Overwhelming Support for More Online Regulation, Poll Finds,” The Wall Street Journal, April 16, 2018, www.wsj.com; “Facebook Gears Up to Lose Money on Political Ads,” Ad Age, May 2, 2018, adage.com; “Read Mark Zuckerberg’s Prepared Remarks for his Meeting with EU Lawmakers,” CNBC, May 22, 2018, www.cnbc.com; and “Facebook and Cambridge Analytica: What You Need to Know as Fallout Widens,” The New York Times, March 19, 2018. Discussion Questions 1. Do you believe the government (in the United States and other countries) should regulate Facebook to protect its users’ privacy? Why or why not? 2. Do you believe that Facebook’s actions so far exemplify working in collaboration with, or in opposition to, government? Why? 3. What elements of the public policy process are seen in this case: public policy inputs, goals, tools, and effects? 4. Of the reasons described in this chapter to justify government regulation: market failure, negative externalities, natural monopolies, and ethical arguments, which reasons are relevant in this case? 5. Since Facebook and other social media platforms are global in nature, is there a need for international regulation to protect consumers’ privacy worldwide? If so, what organization could provide this global regulatory protection? 6. What level of responsibility do individuals who use Facebook and other social media sites have to protect their own personal information?
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