# Three Special Stakeholders: Society, the Environment, and Government

## Corporate Law and Corporate Responsibility

### Learning Objectives

By the end of this section, you will be able to:
1. Explain how investors and owners benefit from doing business as a corporate entity
2. Define the concept of shareholder primacy
3. Discuss the conflict between shareholder primacy and corporate social responsibility
Corporate law, which enables businesses to take advantage of a legal structure that separates liability from ownership and control, was introduced in most states in the nineteenth century. The separation of ownership and liability means that, unlike sole proprietors and members of partnerships, owners of modern business corporations enjoy the advantage of limited liability for the corporation’s debts and other financial obligations, a concept at the heart of a U.S. economic system built on capitalism.

### The Advantages of Corporate Status

The concept of limited liability means that the owners (shareholders or stockholders) of corporations, as well as directors and managers, are protected by laws stating that in most circumstances, their losses in case of business failure cannot exceed the amount they paid for their shares of ownership (). The same protection applies to owners of some other business entities such as limited liability companies (LLCs). An LLC is similar to a corporation in that owners have limited liability; however, it is organized and managed more like a partnership. For purposes of granting owners the protection of limited liability, several types of entities are possible within each state, including a corporation, an LLC, a limited liability partnership, and a limited partnership.
Without state incorporation laws, business owners would be subject to personal liability for business losses, which could create several disadvantages. Ownership would be riskier, so owners could have more difficulty selling their ownership interests. They could also be subject to a pro rata share of income taxes. These types of personal financial liability could limit the ability of businesses to raise capital by selling stock. Limited liability, by reducing the amount a shareholder can lose from investing in a corporation by buying its stock, increases the investment’s attractiveness to potential new shareholders. Ultimately, corporate status increases both the potential number of willing investors and the amount of capital they are likely to invest. After all, would you be willing to invest your money in a business if you knew not only that you could lose the capital you invested, but also that you could be sued personally for any and all debts of the business?
Corporate status is conferred upon a business by state law (statute) when a state issues the business a charter of incorporation. The protective shield of corporate status enables businesses to socialize their losses in a way that traditional proprietorships and partnerships are not able to do. Socializing a loss is a means to amortize it or spread it out over society in general, so the owners do not absorb it individually. Amortization is similar to the idea behind insurance, in which many people bear a small share in a loss, rather than one or a few people bearing all of it. Therefore, it is accurate to say that society enables corporations to exist, both by passing laws that create them and by limiting the financial risk exposure of their owners. Since our society grants for-profit businesses the right to incorporate and make unlimited profits with limited liability, a reasonable person could conclude that corporations owe a debt to society in return. Corporations’ quid pro quo—a Latin term meaning this for that—is acceptance of corporate social responsibility, to benefit the many stakeholders to whom corporations may owe a duty, including customers, the community, the environment, employees, media, and the government ().

### Balancing the Many Responsibilities of a Corporation

A longstanding ethical debate about corporate social responsibility asks whether, in fact, a corporation owes a duty to society or only to its shareholders. The line of important court cases shaping this issue spans almost a century and includes a series of landmark cases involving the Ford Motor Company, the Wrigley Company, and Hobby Lobby.
In  (1919), the Michigan Supreme Court ruled in favor of shareholder primacy, saying that founder Henry Ford must operate the Ford Motor Company primarily in the profit-maximizing interests of its shareholders. In the traditional corporate model, a corporation earns revenue and, after deducting expenses, distributes the profits to shareholders in the form of dividends. Ford had announced that his company would stop paying big dividends to shareholders and instead would use its profits to achieve several other goals, including improving product quality, expanding company facilities, and perhaps most surprisingly, lowering prices. Shareholders then sued Ford, asking the court to order Ford Motor Company to continue allocating the lion’s share of profits to high dividend payments. (It is ironic that the named shareholders who sued Ford were the Dodge brothers, former Ford suppliers who had recently started their own car company.)
At the trial, Ford () testified that he believed his company was sufficiently profitable to consider its broader obligation and engage in activities to benefit the public, including its workers and customers. This was a unique position for the founder and primary owner of a large corporation to take in the early twentieth century. During the rise of capitalism in the United States, most owners sought only to maximize profits, because that was the primary basis of their ability to attract capital and to reinvest in the company. Most investors were interested in a healthy return on their investment, rather than any type of social good. Shareholders contended that the concern Ford expressed for his workers and customers was both improper and illegal. The court agreed, and Ford was forced to abandon his managerial goal of balancing profits and realizing broader social goals.
Ironically, in the same case, the court upheld the validity of a doctrine known as the business judgment rule, a common-law principle stating that officers, directors, and managers of a corporation are not liable for losses incurred when the evidence demonstrates that decisions were reasonable and made in good faith, which gives corporate management latitude in deciding how to run the company. Essentially, the business judgment rule holds that a court will not second-guess the decisions of a company’s managers or directors.
The legality and appropriateness of social responsibility as a business policy have followed a long and winding road since 1919. In the 1950s and 1960s, for example, some state courts rejected the shareholder primacy doctrine, instead ruling that a broad interpretation of the business judgment rule allowed managers discretion when it came to allocating company assets, including using them for programs demonstrating social awareness.
In 1968, in a highly publicized case, the court ruled that the board of directors of the Wrigley Company, of baseball and chewing gum fame, had a significant amount of discretion in determining how to balance the interests of stakeholders. The case of  (1968) revolved around William Wrigley Jr.’s ownership of the Chicago Cubs. The baseball team had steadfastly refused to install the lights necessary for playing night games at Wrigley Field, even though every other stadium in major league baseball had lights. Instead, the Cubs had respected the local community’s belief that night baseball games and their associated lights would negatively affect the surrounding neighborhood, creating more opportunities for crime. In the view of some investors, however, the Cubs’ decision was depressing profits for shareholders. The shareholders brought a challenge against the Wrigley Company, but the Cubs’ owners won the case.
The Wrigley case represented a shift from the idea that corporations should pursue only the maximization of shareholder value, as had been held in the Ford Motor Company case. As a follow-up to this case, lights were finally installed at Wrigley Field in 1988, but only after the owner, William Wrigley III, had sold the team (in 1981) to the Tribune Company, a large media conglomerate that fought for six years to install lights. However, the case stands as precedent for the ability of management to balance various interests and profits when making decisions.
Dodge v. Ford (1919) and Shlensky v. Wrigley (1968) established the dynamic nature of the debate over the shareholder primacy doctrine and indicated a shift in both legal thought and precedent toward allowing management greater latitude in deciding how to best manage a corporation. A more recent decision,  (2014), demonstrated what some may consider the double-edged sword of this latitude. In a 5–4 decision in favor of Hobby Lobby, the Supreme Court ruled that some corporations (those that are closely held by a few shareholders) can object on ethical, moral, or religious grounds to the Affordable Care Act’s rule that health insurance policies must cover various forms of contraception; such companies can elect not to offer such coverage.
The majority opinion in the case was written by Justice Samuel Alito, joined by Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, and Anthony Kennedy. In essence, the Court ruled that business owners could place their personal values first and follow their own agenda. The case received a great deal of publicity, some of it quite negative. Essentially, the Court held in this case that “corporate law does not require for-profit corporations to pursue profit at the expense of everything else,” similar to the ruling in the Chicago Cubs/Wrigley Field case.
The decision was a victory for the family that owns Hobby Lobby and has been praised by some and criticized by others for expanding the rights of corporate owners. Some analysts believe it represents more than just an expansion of management prerogative and enlarges the right of corporations to be treated as a “person.” The Hobby Lobby case can be interpreted to mean the people who control corporations (owners and/or management) may act on their own values in a way that might well be inconsistent with the interests of employees and other minority shareholders. In the majority decision, Alito wrote, “A corporation is simply a form of organization used by human beings to achieve desired ends. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.” Hobby Lobby is primarily owned by one family, and Alito’s comments seem to suggest that another interpretation would limit the applicability of the case to only closely held corporations, in which the majority of the stock is owned by a small number of shareholders.
Some might think Henry Ford’s attempt to forego profits in order to pay workers higher wages was a good choice but not find Hobby Lobby’s preference for limiting female employees’ health insurance benefits on religious grounds to be so. However, the law must be interpreted logically: If you give management the prerogative to put one social issue ahead of profits, should management not also be able to pursue any social issue of its choosing? An extension of the logic used in the Hobby Lobby case could lead to an expansion of the corporate rights of the personhood doctrine, for example, by allowing the individual right to privacy to become a shield against regulatory scrutiny by government agencies (although a corporation is not a natural person).
Another potential problem with giving management greater rights to pursue social agendas is protecting the interests of minority shareholders who disagree with the majority. Since corporation law is state law, the protections for minority shareholders vary widely, but owners of a small number of shares have little or no power to influence the choices the corporation makes. Some states allow cumulative voting for seats on the board of directors, which increases minority shareholder power. Others permit buyouts or dissolution statutes that apply to closely held corporations. However, in a traditional large corporation, none of these protections for minority interests are likely to apply. Of course, another option is for disgruntled shareholders to sell their shares.

### The Two Sides of the Corporate Responsibility Debate

The issue of corporate social responsibility is the subject of high-level global discussion and debate among leaders in the public and private sectors, such as the World Economic Forum Annual Meeting in Davos, Switzerland. Numerous respected academic centers also hold forums on CSR, such as the Center on Democracy, Development, and the Rule of Law at Stanford University and the Harvard Law School Forum on Corporate Governance and Financial Regulation.
As we have seen, slow but steady acceptance of CSR as a legitimate business concept has led to the legal and ethical position that corporate directors and managers may exercise business judgment and discretion in running a corporation. This development has come about for multiple reasons: a) the fact that society allows LLCs to exist, b) the sheer magnitude of the economic power corporations possess, and c) the desire of corporations to act responsibly in order to avoid more extensive government regulation. Managers are usually accorded significant latitude as long as they can point to a rational interpretation of their actions as benefiting the corporation as a whole in the long term. The combination of economic and political power in the world’s largest corporations necessitates that executives consider the interests of a broader set of stakeholders, rather than only stockholders. Indeed, social, environmental, and charitable programs often create shareholder value rather than take away from it. And honoring obligations to all stakeholders in a corporation—including those who own no stock shares—is the moral minimum a firm must undertake to satisfy the base threshold for acting ethically.
A recent study by researchers at Princeton and the University of Texas indicates that corporations benefit from following CSR policies in multiple ways. These benefits are collectively called a “halo effect” and can add value to the business. As an example, consumers frequently take CSR spending as an indirect indicator that a company’s products are of high quality, and often they are also more willing to buy these products as an indirect way of donating to a good cause.
However, some economists, such as Milton Friedman, Henry Hazlitt, Adam Smith, and others, have argued that CSR initiatives based on environmental or social justice instead limit shareholder wealth. The Nobel Prize-winning economist Milton Friedman (1912–2006) believed shareholders should be able decide for themselves what social initiatives to donate to or to take part in, rather than having a business executive decide for them. He argued that both government regulation and corporate social initiatives allow an outside third party to make these choices for shareholders.
In Friedman’s opinion, too much power assumed by corporate management in pursuing a social agenda might ultimately lead to a form of corporate autocracy. Supporters of the profit maximization principle believe it is a waste of corporate resources to reduce air pollution below the level required by law, to require vendors to participate in a sustainable supply chain initiative, or to pay lower-level employees a salary above the legally mandated minimum wage. Friedman asserted that “doing good deeds” is not the job of corporations; it is the right of those people who want to do them but should not be imposed on those who do not. His philosophy asserts that socially oriented initiatives are analogous to a form of outside regulation, resulting in higher costs to those corporations that follow socially responsible policies.
When Friedman was laying out this position in the 1970s, it reflected the prevailing opinion of a majority of U.S. shareholders and commentators on corporate law at that time. In the years since then, however, Friedman’s perspective has fallen into disfavor. This does not invalidate his point of view, but it does demonstrate that public opinion about corporations is subject to change over time. The subjectivity or relativity with which we view companies along with their perceived rights and responsibilities is a major theme this text addresses.
Do corporate directors owe a specific fiduciary duty to shareholders? A fiduciary duty is a very high level of legal responsibility owed by those who manage someone else’s money, which includes the duties of care and loyalty. Some examples of relationships that include a fiduciary duty are those between a trustee of an estate and its beneficiary, and between a fund manager and a client. According to the American Bar Association, the business judgment rule states “that as fiduciaries, corporate directors owe the corporation and its shareholders fiduciary duties of diligence and fidelity in performing their corporate duties. These fiduciary obligations include the duty of care and the duty of loyalty . . . the duty of care consists of an obligation to act on an informed basis; the duty of loyalty requires the board and its directors to maintain, in good faith, the corporation’s and its shareholders’ best interests over anyone else’s interests.” So it would seem that the answer is yes, corporate directors do have a specific fiduciary duty to promote the best interests of the corporation. But what exactly does that duty entail? Does that specifically mean returning profits to shareholders in the form of dividends? As we have seen, these questions have frequently spilled over into the courts, in the form of shareholder lawsuits challenging the actions of directors and/or management.
UCLA law professor Steven Bainbridge wrote in the New York Times: “If directors were allowed to deviate from shareholder wealth maximization, they would inevitably turn to indeterminate balancing standards, which provide no accountability.” As support for his position, Bainbridge pointed to a 2010 case, , in which a Delaware court ruled that corporate directors are bound by fiduciary duties and standards that include “acting to promote the value of the corporation for the benefit of its stockholders.”
However, Lynn Stout, a professor at Cornell University Law School, wrote a contrasting piece in the New York Times in which she said, “There is a common belief that corporate directors have a legal duty to maximize corporate profits and shareholder value—even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.” Her opinion is based in part on the Hobby Lobby decision referenced above.
Thus, while ethicists may agree that corporations do indeed owe social responsibilities to society, legal experts still differ over this point. The fact that we have seen inconsistent decisions from the courts over the last century confirms the lack of legal consensus. Of course, both legal and ethical opinion are always in flux, so where the debate stands today in no way indicates where it will be in ten years. On this issue, public opinion, as well as that of politicians and even the courts, is like a pendulum swinging back and forth, usually between points of view that are center-right or center-left, rather than at the extremes. However, the pendulum is reset every so often, and the arc within which it swings may differ from era to era.
It is clear that many different stakeholders value corporate social responsibility, including some investors, shareholders, employees, customers, and suppliers. Indeed, some businesses look at CSR as providing a perfect long-term strategic opportunity to strengthen company fundamentals while contributing to society at the same time. Effective corporate leaders will get try to get investors on board with the idea of CSR, avoiding or minimizing the potential for any litigation related to maximization of profits. And innovative companies are finding ways to create value for both the business and society simultaneously.
Data analysis indicates that following a policy of corporate social responsibility does not have to mean losing money; on the contrary, many corporations that use an ethical approach to doing business are actually quite profitable. Mutual funds, recognizing that investors care about sustainable investing, now offer socially responsible funds, and third-party ratings companies, such as Morningstar, rate the funds so potential investors can evaluate how well the companies in them are meeting environment, social, and governance challenges. An example of such a fund is the Calvert Fund, which describes itself as a “leader in responsible investing with a mission to deliver superior long-term performance to our clients and to enable them to achieve positive impact.”
The chart below analyzes mutual funds and their rate of return over several different time periods; included are examples of both general index funds and “socially responsible” or social index funds (). If we compare the two general index funds at the top to the three funds at the bottom that invest in socially responsible companies, we see a competitive return on investment in the social funds. Social responsibility does not mean lower profitability.

### Summary

While some argue that corporations have a primary duty to maximize profits for the benefit of shareholders, others assert that businesses have a duty to the society in which they operate, a duty that serves as the basis of the CSR philosophy. Many court cases have addressed the issue, but it has not been conclusively resolved.
Despite the ongoing ethical debate, being a good corporate citizen is a goal toward which most contemporary corporations strive. An effective CSR policy usually means that companies have to commit to both an internal and external approach to ethics. Corporate social responsibility and good corporate governance are in reality just two sides of the very same coin. Social responsibility does not mean lower profitability.

### Assessment Questions

### Endnotes


# Three Special Stakeholders: Society, the Environment, and Government

## Sustainability: Business and the Environment

### Learning Objectives

By the end of this section, you will be able to:
1. Explain the concept of earth jurisprudence
2. Evaluate the claim that sustainability benefits both business and the environment
3. Identify and describe initiatives that attempt to regulate pollution or encourage businesses to adopt clean energy sources
Public concern for the natural environment is a relatively new phenomenon, dating from the 1960s and Rachel Carson’s seminal book Silent Spring, published in 1962. In 1992, Cormac Cullinan’s Wild Law proposed “earth justice” or “earth jurisprudence,” a concept underlying the law’s ability to protect the environment and effectively regulate businesses that pollute. The preoccupation with business success through investment in corporations, in contrast, is a much older concept, dating back at least to the creation of the British East India Company in 1600, and the widespread emergence of the corporation in Europe in the 1700s. If you were a business owner, would you be willing to spend company resources on environmental issues, even if not required to do so by law? If so, would you be able to justify your actions to shareholders and investment analysts as smart business decisions?

### Environmental Justice

If a business activity harms the environment, what rights does the environment have to fight back? Corporations, although a form of business entity, are actually considered persons in the eyes of the law. Formally, corporate personhood, a concept we touched on in the preceding section, is the legal doctrine holding that a corporation, separate and apart from the people who are its owners and managers, has some of the same legal rights and responsibilities enjoyed by natural persons (physical humans), based on an interpretation of the word “person” in the Fourteenth Amendment.
The generally accepted constitutional basis for allowing corporations to assert that they have rights similar to those of a natural person is that they are organizations of people who should not be deprived of their rights simply because they act collectively. Thus, treating corporations as persons who have legal rights allows them to enter into contracts with other parties and to sue and be sued in a court of law, along with numerous other legal rights. Before and after the Supreme Court’s ruling in  (2010), which upheld the First Amendment free-speech rights of corporations, there have been numerous challenges to the concept of corporate personhood; however, none have been successful. Thus, U.S. law considers corporations to be persons with rights protected under key constitutional amendments, regulations, and case law, as well as responsibilities under the law, just as human persons have.
A question that logically springs from judicial interpretations of corporate personhood is whether the environment should enjoy similar legal status. Should the environment be considered the legal equivalent of a person, able to sue a business that pollutes it? Should environmental advocates have been able to file a lawsuit against BP (formerly British Petroleum) on behalf of the entire Gulf of Mexico for harm created by the 2010 Deepwater Horizon oil spill (discussed in more detail in the government regulation section of this chapter), which, at five million barrels, was ten times larger than the famous Exxon Valdez spill and remains the largest and most widespread ocean oil spill in the history of the global petroleum industry? Furthermore, the Deepwater Horizon spill affected not only thousands of businesses and people, but also the entirety of the Gulf of Mexico, which will suffer harm for years to come. Should the Gulf of Mexico have legal standing to sue, just like a person?
While U.S. jurisprudence has not yet officially recognized the concept that Earth has legal rights, there are examples of progress. Ecuador is now the first country to officially recognize the concept. The country rewrote its Constitution in 2008, and it includes a section entitled “Rights for Nature.” It recognizes nature’s right to exist, and people have the legal authority to enforce these rights on behalf of the ecosystem, which can itself be named as a litigant in a lawsuit.
Earth jurisprudence is an interpretation of law and governance based on the belief that society will be sustainable only if we recognize the legal rights of Earth as if it were a person. Advocates of earth jurisprudence assert that there is legal precedent for this position. As pointed out earlier in this chapter, it is not only natural persons who have legal rights, but also corporations, which are artificial entities. Our legal system also recognizes the rights of animals and has for several decades. According to earth jurisprudence advocates, officially recognizing the legal status of the environment is necessary to preserving a healthy planet for future generations, in particular because of the problem of “invisible pollution.”
Businesses that pollute the environment often hide what they are doing in order to avoid getting caught and facing economic, legal, or social consequences. The only witness may be Earth itself, which experiences the harmful impact of their invisible actions. For example, as revealed in a recent report, companies all over the world have for years been secretly burning toxic materials, such as carbon dioxide, at night. A company that needs to dump a toxic substance usually has three choices: dispose of it properly at a safe facility, recycle and reuse it, or secretly dump it. There is no doubt that dumping is the easiest and cheapest option for most businesses.
As another example, approximately twenty-five million people board cruise ships every year, and as a result, cruise ships dump one billion gallons (3.8 billion liters) of sewage into the oceans annually, usually at night so no one sees or smells it. Friends of the Earth, a nongovernmental organization (NGO) concerned with environmental issues, used data from the U.S. Environmental Protection Agency (EPA) to calculate this figure. The sewage dumped into the sea is full of toxins, including heavy metals, pathogens, bacteria, viruses, and pharmaceutical drugs (). When invisibly released near coasts, this untreated sewage can kill marine animals, contaminate seafood, and sicken swimmers, and no one registers the damage except the ocean itself. Many believe the environment should have the right not to be secretly polluted in the dead of night, and Earth should have rights at least equal to those of corporations.
Cormac Cullinan, an environmental attorney, author, and leading proponent of earth jurisprudence, often collaborates with other environmental advocates such as Thomas Berry, an eco-theologian, scholar, and author. Cullinan, Berry, and others have written extensively about the important legal tenets of earth jurisprudence; however, it is not a legal doctrine officially adopted by the United States or any of its states to date. The concept of earth justice is tied indirectly to the economic theory of the “tragedy of the commons,” a phrase derived from British economist William Forster Lloyd, who, in the mid-nineteenth century, used a hypothetical example of unregulated grazing on common land to explain the human tendency to act independently, putting self-interest first, without regard for the common good of all users. The theory was later popularized by ecologist and philosopher Garrett Hardin, who tied it directly to environmental issues. In other words, when it comes to natural resources, the tragedy of the commons holds that people generally use as much of a free resource as they want, without regard for the needs of others or for the long-term environmental effects. As a way of combating the tragedy of the commons, Cullinan and others have written about the concept of earth justice, which includes the following tenets:
Today, supporters of the environment assert that government has both a right and an obligation to ensure that businesses do not overuse any resource, and to mandate adequate environmental protection when doing so. In addition, some form of fee may be collected for using up a natural resource, such as severance taxes imposed on the removal of nonrenewable resources like oil and gas, or deposits required for possible cleanup costs after projects have been abandoned. As part of the growing acceptance of the concept of earth justice, several nonprofit educational organizations and NGOs have become active in both lobbying and environmental litigation. One such organization is the Center for Earth Jurisprudence (housed at the Barry School of Law in Orlando), a nonprofit group that conducts research in this area.

### Why Sustainability Is Good for Business

The notion that the environment should be treated as a person is relatively new. But given the prominence of the environmental movement worldwide, no well-managed business today should be conducted without an awareness of the tenuous balance between the health of the environment and corporate profits. It is quite simply good business practice for executives to be aware that their enterprise’s long-term sustainability, and indeed its profitability, depend greatly on their safeguarding the natural environment. Ignoring this interrelationship between business and the environment not only elicits public condemnation and the attention of lawmakers who listen to their constituents, but it also risks destroying the viability of the companies themselves. Virtually all businesses depend on natural resources in one way or another.
Progressive corporate managers recognize the multifaceted nature of sustainability—a long-term approach to business activity, environmental responsibility, and societal impact. Sustainability affects not only the environment but also other stakeholders, including employees, the community, politics, law, science, and philosophy. A successful sustainability program thus requires the commitment of every part of the company. For example, engineers are designing manufacturing and production processes to meet the demands of companies dedicated to sustainability, and the idea of company-wide sustainability is now mainstream. Many of the largest companies in the world see sustainability as an important part of their future survivability.

### The Global 100 and Sustainability’s Strategic Worth

Corporate Knights is a Canadian research and publishing company that compiles an annual list called the Global 100, identifying the world’s most sustainable companies. The 2018 edition of the list, presented at the World Economic Forum in Davos, Switzerland, shows that an increasing number of major multinational companies take sustainability seriously, including many U.S. businesses. The highest-ranking U.S. company is technology giant Cisco, which ranks seventh on the Global 100 list. Other U.S. companies in the top twenty-five include Autodesk, Merck, and McCormick & Co. The countries with the best representation on the list are primarily from North America and Western Europe: the United States (18), France (15), the United Kingdom (10), Germany (7), Brazil (5), Finland (5), and Sweden (5).
You may expect that companies dedicated to sustainability would be less profitable in the long run as they face additional costs. In fact, data from the Global 100’s return on investment shows this is not the case. Let’s examine the evidence. If an investor had put $250 in Global 100 companies in 2005, it would have been worth $580 in 2015, compared to $520 for the same amount invested in a typical index fund. The Global 100’s cumulative return on high-sustainability firms is about 25 percent higher than a traditional investment.
Cisco Systems, number seven on the global list, is a good example of how green procurement and sustainable sourcing have become a regular part of the supply chain. At Cisco, according to a top-level supply chain executive, “we take seriously the responsibility of delivering products in an ethical and environmentally responsible manner.” Cisco relies on its Supplier Code of Conduct to set standards for suppliers so they follow fair labor practices, ensure safe working conditions, and reduce their carbon footprint, the amount of carbon dioxide and other carbon compounds released by the consumption of fossil fuels, which can be measured quantitatively (see the link below). Cisco is in the process of embedding sustainability into supply chain management at all levels.
Another company dedicated to sustainability is Siemens, which was ranked number nine on the 2018 list. Siemens is a multinational industrial conglomerate headquartered in Germany, whose businesses range from power plants to electrical systems and equipment in the medical field and high-tech electronics. Siemens was rated the most energy-efficient firm in its sector, because it produced more dollars in revenue per kilowatt used than any other industrial corporation. This is a standard technique to judge efficiency and demonstrates that Siemens has a low carbon footprint for a company in the industries in which it operates. The commitment of Siemens to sustainability is further demonstrated by its decision to manufacture and sell more environmentally friendly infrastructure products such as green heating and air conditioning systems.
Cisco and Siemens show that businesses across the globe are starting to understand that for a supply chain to be sustainable, companies and their vendors must be partners in a clean and safe environment. Do businesses simply pay lip service to environmental issues while using all available natural resources to make as much money as they can in the present, or are they really committed to sustainability? There is abundant evidence that sustainability has become a policy adopted by businesses for financial reasons, not simply public relations.
McKinsey & Company is one of the world’s largest management consulting firms and a leader in the use of data analytics, both qualitative and quantitative, to evaluate management decisions. McKinsey conducts periodic surveys of companies around the world on matters of importance to corporate leaders. In the 2010 survey, 76 percent of executives agreed that sustainability provides shareholders long-term value, and in the 2014 survey, entitled “Sustainability’s Strategic Worth,” the data indicated that many companies consider cost savings to be the number-one reason for adopting such policies. Cost cutting, improved operations, and efficiency were indicated as the primary reasons for adopting sustainability policies by over one-third of all companies (36%).
Other major studies have demonstrated similar results. Grant Thornton is a leading global accounting and consulting firm. Its 2014 report on CSR showed that the top reason companies cite for moving towards more environmentally responsible business practices is financial savings. Grant Thornton conducted more than 2,500 interviews with clients and business executives in approximately thirty-five countries to discover why companies are making a commitment to sustainable practices. The study found that cost management was the key reason for sustainability (67%).
A specific example is Dell Computers, headquartered outside Austin, Texas, and with operations all over the world. The “Dell Legacy of Good Plan” has set a goal to reduce greenhouse gas emissions from all facilities and operations by 50 percent by the year 2020, along with several other environmental goals. As part of this overall plan, Dell created the Connected Workplace, a flex-work program allowing alternative arrangements such as variable work hours to avoid rush hour, full- or part-time work at home flexibility, and job sharing. This sustainability initiative helps the company avoid about seven thousand metric tons of greenhouse gas emissions, and, directly related to the financial benefit of sustainability, it saves the company approximately $12 million per year.
However, adopting sustainability policies may require a long-term outlook. A recent article in the Harvard Business Review discussed the issue of sustainability and how it can create real cost savings (). “It’s hard for companies to recognize that sustainable production can be less expensive. That’s in part because they have to fundamentally change the way they think about lowering costs, taking a leap of faith . . . that initial investments made in more-costly materials and methods will lead to greater savings down the road. It may also require a willingness to buck conventional financial wisdom by focusing not on reducing the cost of each part but on increasing the efficiency of the system as a whole.”

### Sustainability Standards

The International Organization for Standardization, or ISO, is an independent NGO and the world’s largest developer of voluntary international business standards. More than twenty thousand ISO standards now cover matters such as sustainability, manufactured products, technology, food, agriculture, and even healthcare. The adoption and use of these standards by companies is voluntary, but they are widely accepted, and following ISO certification guidelines results in the creation of products and services that are clean, safe, reliable, and made by workers who enjoy some degree of protection from workplace hazards.
In the environmental area, the ISO 14000 series of standards promotes effective environmental management systems in business organizations by providing cost-effective tools that make use of best practices for environmental management. These standards were developed in the 1990s and updated in 2015; they cover everything from the eco-design (ISO 14006) of factories and buildings to environmental labels (ISO 14020) to limits on the release of greenhouse gasses (ISO 14064). While their adoption is still voluntary, a growing number of countries allow only ISO 14000-certified companies to bid on public government contracts, and the same is true of some private-sector companies ().
Another type of sustainability standard with which businesses may elect to comply is LEED certification. LEED stands for Leadership in Energy and Environmental Design, and it is a rating system devised by the U.S. Green Building Council to evaluate a structure’s environmental performance. The most famous example is the Empire State Building in New York City, which was awarded LEED Gold status (for existing buildings). The LEED certification was the result of a multimillion-dollar rebuilding program to bring the building up to date, and the building is the tallest in the United States to receive it. There are dozens of other examples of large commercial buildings, such as the Wells Fargo Tower in Los Angeles, as well as thousands of smaller buildings and residential homes. LEED certification is the driver behind the ongoing market transformation towards sustainable design in all types of structures, including buildings, houses, and factories.

### The High Cost of Inaction

According to estimates from the EPA, by the year 2050, Earth’s population will be about ten billion people. Dramatic population growth has had a very significant and often negative human impact on the planet. Not only are there more people to feed, house, and care for, but new technologies allow businesses to harness natural resources in unprecedented amounts. NGOs and government agencies alike have taken notice. For years, the Department of State and the Department of Defense have considered climate change to be a potential threat to the long-term security of the United States. If unmanaged, climate change could pose a risk to both U.S. security and Department of Defense facilities and operations. Other respected organizations are also alerting the public to the risks of ignoring climate change.
The Union of Concerned Scientists (UCS) has released a detailed report identifying approximately twenty serious risks that will be faced if the problem is not addressed in a substantial way. These risks include rising seas and increased coastal flooding, more intense and frequent heat waves, more destructive hurricanes, wildfires that last longer and produce more damage, and heavier precipitation in some areas and more severe droughts in other areas. In addition to extreme weather events, there would likely be widespread forest death in the Rocky Mountains and other mountain ranges, the destruction of coral reefs, and shifts in the ranges of plants and animals. Both military bases and national landmarks would be at risk, as would the electrical grid and food supply. The UCS, with a membership consisting of the world’s most respected scientists, bases its projections on scientific research studies that have produced empirical evidence of climate change. Its official position is that “global warming is already having significant and very costly effects on communities, public health, and our environment.”
Environmental protection and climate change issues receive varying degrees of support at the national level, depending on the commitment different presidents make to them. During periods in which the administration in Washington demonstrates a lower priority for climate change issues, such as the Trump administration’s announced intention to withdraw from the Paris Climate Accord, private companies may take the lead on actions to reduce global warming emissions.
For example, Microsoft founder Bill Gates recently announced the creation of a private initiative to invest $20 billion on climate-related research and development over the next five years. This is an example of government-funded early experimental research that a business may be able to turn into a commercially viable solution. If government steps back, private-sector companies concerned about long-term sustainability may have to take a leadership role. Ultimately, it requires the cooperation of public and private efforts to address climate change; otherwise, the impacts will continue to intensify, growing more costly and more damaging.”
Sustainability often requires the public and private sectors to cooperate. Inaction contributes to disasters like the 2017 devastation of Houston by Hurricane Harvey and of Puerto Rico by Hurricane Maria. There is often tension between developers who want to build and cities that try to legislate for more green space. Green space not only offers a place for recreation and enjoyment of nature, but also provides essential natural drainage for rain and flood waters, reducing the likelihood that developed areas will end up underwater in a storm.
U.S. government agencies, such as the National Aeronautics and Space Administration (NASA) and National Oceanic and Atmospheric Administration, have identified many challenges in which sustainability can make a positive contribution. These include climate change, decreasing supplies of clean water, loss of ecological systems, degradation of the oceans, air pollution, an increase in the use and disposal of toxic substances, and the plight of endangered species. Progress toward solving these challenges depends in part on deciding who should help pay for the protection of global environmental resources; this is an issue of both environmental and distributive justice.
One way to address the issue of shared responsibility between corporations and society is the implementation of a “cap and trade” system. According to the Environmental Defense Fund, cap and trade is a viable approach to addressing climate change by curbing emissions that pollute the air: The “cap” is a limit on greenhouse gas emissions—if companies exceed their cap, they must pay penalties—whereas the “trade” allows companies to use the free market to buy and sell pollution allowances that permit them to emit a certain amount of pollution.
At present, there are more questions than answers, including how much of the responsibility lies with governments, how this responsibility can be allocated between developed and developing nations, how much of the cost should the private sector bear, and how should these divisions of cost and responsibility be enforced. Private companies must bear part of the cost, and the business sector recognizes they have some responsibility, but many disagree on whether that should be in the form of after-the-fact fines, or before-the-fact fees and deposits paid to the government. Regulations may very well have to be international in scope, or companies from one country may abuse the environment in another.
Inaction on issues of sustainability can lead to long-term environmental consequences that may not be reversible (the death of ocean coral, the melting of polar ice caps, deforestation). Another hurdle is that it is sometimes difficult to convince companies and their investors that quarterly or annual profits are short-term and transitory, whereas environmental sustainability is long-term and permanent.

### Environmental Economics and Policy

Some politicians and business leaders in the United States believe that the U.S. system of capitalism and free enterprise is the main reason for the nation’s prosperity over the past two hundred years and the key to its future success. Free enterprise was very effective in facilitating the economic development of the United States, and many people benefited from it. But it is equally true that this could not have happened without the country’s wealth of natural resources like oil, gas, timber, water, and many others. When we consider the environment and the role of sustainability, the question is not whether our system works well with an abundance of natural resources. Rather, we should ask how well it would work in a nation, indeed in a world, in which such resources were severely limited.
Does business, as the prime user of these resources, owe a debt to society? The Harvard Business Review recently conducted a debate on this topic on its opinion/editorial pages. Business owes the world everything and nothing, according to Andrew Winston, author and consultant on environmental and social challenges. “It’s an important question,” he wrote, “but one that implies business should do the socially responsible thing out of a sense of duty. This idea is a distraction. Sustainability in business is not about philanthropy, but about profitability, innovation, and growth. It’s just plain good business.” On the other hand, Bart Victor, professor at Vanderbilt University’s Owen Graduate School of Management, wrote, “Business is far more powerful and deeply influential than any competing ideological force, political force or environmental force . . . business now has to see itself and its responsibilities and obligations in a new way.”
Using deontological or duty-based reasoning, we might conclude that business does owe a debt to the environment. A basic moral imperative in a normative system of ethics is that someone who uses something must pay for it. In contrast, a more utilitarian philosophy might hold that corporations create jobs, make money for shareholders, pay taxes, and produce things that people want; thus, they have done their part and do not owe any other debt to the environment or society at large. However, utilitarianism is often regarded as a “here and now” philosophy, whereas deontology offers a longer-term approach, taking future generations into account and thus aligning more with sustainability.
Should businesses have to pay more in fees or taxes than ordinary citizens for public resources or infrastructure they use to make a profit? Consider the example of fracking: West Texas has seen a recent boom in oil and gas drilling due to this relatively new process. Fracking is short for hydraulic fracturing, which creates cracks in rocks beneath Earth’s surface to loosen oil and gas trapped there, thus allowing it to flow more easily to the surface. Fracking has led to a greatly expanded effort to drill horizontally for oil and gas in the United States, especially in formations previously thought to be unprofitable, because there was no feasible way to get the fossil fuels to the surface. However, it comes with a significant downside.
Fracking requires very heavy equipment and an enormous amount of sand, chemicals, and water, most of which must be trucked in. Traffic around Texas’s small towns has increased to ten times the normal amount, buckling the roads under the pressure of a never-ending stream of oil company trucks. The towns do not have the budget to repair them, and residents end up driving on dangerous roads full of potholes. The oil company trucks are using a public resource, the local road system, often built with a combination of state and local taxpayer funds. They are obviously responsible for more of the damage than local residents driving four-door sedans to work. Shouldn’t the businesses have to pay a special levy to repair the roads? Many think it is unfair for small towns to have to burden their taxpayers, most of whom are not receiving any of the profits from oil and gas development, with the cost of road repair. An alternative might be to impose a Pigovian tax, which is a fee assessed against private businesses for engaging in a specific activity (proposed by British economist A. C. Pigou). If set at the proper level, the tax is intended as a deterrent to activities that impose a net cost—what economists call “negative externalities”—on third parties such as local residents.
This issue highlights one of many environmental debates sparked by the fracking process. Fracking also causes the overuse and pollution of fresh water, spills toxic chemicals into the ground water, and increases the potential for earthquakes due to the injection wells drilled for chemical disposal. Ultimately, as is often the case with issues stemming from natural resource extraction, local residents may receive a few short-term benefits from business activity related to drilling, but they end up suffering a disproportionate share of the long-term harm.
One method of dealing with the long-term harm caused by pollution is a carbon tax, that is, a “pay-to-pollute” system that charges a fee or tax to those who discharge carbon into the air. A carbon tax serves to motivate users of fossil fuels, which release harmful carbon dioxide into the atmosphere at no cost, to switch to cleaner energy sources or, failing that, to at least pay for the climate damage they cause, based on the amount of greenhouse gas emissions generated from burning fossil fuels. A proposal to implement a carbon tax system in the United States has been recommended by many organizations, including the conservative Climate Leadership Council (CLC). Exxon Mobil, Shell, British Petroleum, and Total, along with other oil companies and a number of large corporations in other industries, recently announced their support for the plan to tax carbon emissions put forth by the CLC.
Would this “pay-to-pollute” method actually work? Will companies agree to repay the debt they owe to the environment? Michael Gerrard, the director of the Sabin Center for Climate Change Law at Columbia University Law School, said, “If a sufficiently high carbon tax were imposed, it could accomplish a lot more for fighting climate change than liability lawsuits.” Initial estimates are that if the program were implemented, companies would pay more than $200 billion a year, or $2 trillion in the first decade, an amount deemed sufficient to motivate the expanded use of renewable sources of energy and reduce the use of nonrenewable fossil fuels.
Some environmental organizations, including the Nature Conservancy and the World Resources Institute, are also endorsing the plan, as are some legislators in Washington, DC. “The basic idea is simple,” Senator Sheldon Whitehouse (D-RI) said. “You levy a price on a thing you don’t want—carbon pollution—and you use the revenue to help with things you do want.” According to the senator, a U.S. carbon tax or a fee of $45 per metric ton would reduce U.S. carbon emissions by more than 40 percent in the first decade. This is an idea with global support, and it has already been tried. The World Bank has data indicating that forty countries, along with some major cities, have already enacted such programs, including all countries of the EU, as well as New Zealand and Japan.

### Summary

Adopting sustainability as a strategy means protecting the environment. Society has an interest in the long-term survival, indeed the flourishing, of ecological habitats and natural resources, and we ask and expect companies to respect this societal goal in their business activities.
When analyzing what a business owes society in return for the freedom to extract our natural resources, we must balance development and preservation. It may be easy to say from afar that a business should cut back on how much it pollutes the air, but what happens when that means cutting back on fossil fuel use and transitioning to electric vehicles, a choice that affects everyone on a personal level?

### Assessment Questions

### Endnotes


# Three Special Stakeholders: Society, the Environment, and Government

## Government and the Private Sector

### Learning Objectives

By the end of this section, you will be able to:
1. Identify three public health issues that might warrant government regulation
2. Explain what is meant by “revolving door” in a political context
3. Compare constitutional arguments for and against government regulation of industry
Ideally, all levels of government—local, state, and federal—should work with each other and with private-sector businesses to accomplish a fair and rational balance between their respective roles in maintaining a just society. Rarely does one actor alone solve a problem; more often, it takes either a state-federal or a government-business partnership to make a significant impact on a social or economic challenge. Such partnerships are often quite effective, according to Deloitte, a global consulting and accounting firm.
For example, the federal Clean Air Act of 1970 gives the EPA nationwide authority, but controlling air pollution, which does not recognize borders, also necessitates that state governments play a very significant role in enforcing environmental standards. In turn, about half the states also allow major cities to have their own air quality regulatory programs. “Think globally, act locally” seems to capture the essence of government regulation in air quality. For decades, California has had an air-quality program that not only attempts to comply with mandates in the federal program but also goes a step further to create state-specific rules, such as stricter auto emissions guidelines.
In another example, in May 2017, the Environment and Natural Resources Division of the U.S. Department of Justice, together with the EPA and the Texas Commission on Environmental Quality, announced a settlement with Vopak, a Houston energy company, related to air-quality violations by the company. Both federal and state government agencies had filed actions against Vopak, stating that the company failed to comply with Clean Air Act requirements to properly manage equipment at its on-site wastewater treatment facility, resulting in excess emissions of a variety of hazardous air pollutants, as well as volatile organic compounds, in an area classified as not meeting ground-level ozone standards. Per the settlement terms, the company, at considerable cost, “will install state-of-the art pollution controls at the wastewater treatment system and use infrared cameras” to detect otherwise undetectable air pollution from its chemical storage tanks. Additionally, Vopak will pay a $2.5 million civil penalty.

### Sustainability and the Public Interest

For two centuries, businesses have profited from using and selling the nation’s natural resources. The tradeoff in a free but regulated economic system such as that in the United States is to allow the continued extraction of natural resources but to require a commitment to protection of the environment in return. This bargain promotes long-term sustainability by balancing the interests of the environment, state and local governments, and users of natural resources. However, this public-private collaboration is not without controversy.
When discussing the topic of sustainability as a function of responsible and sustainable business conduct, we consider not only environmental health but also public health. Polluting the environment is bad for public health, but so too are a wide variety of inherently dangerous products from alcohol to tobacco to guns to drugs. The World Health Organization estimates that alcohol is the cause of close to 7 percent of all deaths each year globally, or about 3.5 million people, and total global sales of alcohol are well over $1 trillion per year. The question is whether society should allow businesses to market, sell, and profit from a product that causes so many deaths and creates a significant public health problem. The same question can be asked about tobacco, on which businesses make over half a trillion dollars annually and which the United States has struggled to regulate for years. Some businesses are acting on their own to rein in the sale or use of harmful products. In 2014, CVS, a drugstore and health care giant, chose to stop selling tobacco products, because such sales do not support its corporate mission.
Few issues are the source of as much public debate as guns, but it is clear that gun violence in the United States is a major public health challenge. There are about 35,000 deaths per year in the United States due to firearms, and another 75,000 nonfatal firearm injuries. However, thousands of businesses profit from gun sales. Annual revenue in the gun and ammunition manufacturing industry is close to $14 billion, producing a profit of $1.5 billion, whereas the annual revenue of gun and ammunition stores is an additional $3 billion, resulting in a profit of $500 million. Based on these facts, should the sale of guns remain relatively unregulated, or, in the interest of public health, should the government increase regulatory efforts in this area? On the corporate front, after the most recent fatal mass shooting at a high school in Parkland, Florida, several companies took action without waiting for the law to change. Dick’s Sporting Goods announced it will no longer sell semi-automatic assault rifles, such as the AR-15, as has Kroger, which owns Fred Meyer stores. Walmart has announced it will no longer sell guns to anyone under twenty-one years of age.
Another pressing social issue is opioid abuse. In 2016, there were approximately sixty thousand deaths due to drug overdoses, almost double the number of gun deaths. Profits from the sale of these drugs are in the tens of billions of dollars, and the pharmaceutical industry spends $100 million lobbying Congress not to regulate it more stringently. Some local government entities are suing opioid drug manufacturers, and, in the private sector, CVS recently announced it would now fill opioid prescriptions with supplies for only seven days. While opioids are legal and often legitimately prescribed for pain management, a large part of the problem is that they are also overprescribed. Given these facts, should pharmaceutical corporations be allowed to profit from this product? What ethical or legal responsibilities do those in the medical community have for the problem?
Although sustainability discussions justifiably focus on the protection of human life and public health issues, a related ethical issue close to the hearts of many citizens is animal rights. Businesses have begun to take notice of public demands in this area, as evidenced by a 2017 Fortune article about the Yoox Net-a-Porter Group. Net-a-Porter is a large, online retailer (with $2 billion/year in sales) that markets top-line brands such as Prada, Gucci, and Michael Kors. After a survey of its customers showed that a significant majority want the company to forgo fur products, it decided to forbid the use of fur in its entire line. Other big-name brands such as Armani, Hugo Boss, North Face, Nautica, and Timberland have followed Net-a-Porter’s lead and recently announced fur-free policies.
Related developments are taking place in the cosmetics and food industries. Many cosmetics companies have announced cruelty-free product testing policies for products ranging from makeup to hairspray. In the food industry, the U.S. Department of Agriculture recently reported that cage-free eggs account for approximately one-quarter of the wholesale shell egg market. Why? Sales and profits are the answer, along with sustainability. According to research conducted by Walmart, over 75 percent of the retail giant’s customers said they would be more likely to shop at a store that improves its policies related to animal welfare. Thus, not only Walmart but also supermarket chains such as Kroger have announced the gradual implementation of cage-free egg-buying policies, as have fast food giants such as McDonald’s and Burger King. Such changes are often prompted, if not driven, by the influence of informed consumer stakeholders who are demanding the products they want to buy.

### The Revolving Door between Government Regulation and the Private Sector

While private companies may take the initiative in response to public demand, and intergovernmental cooperation can accomplish many good things, sometimes the solution is for a private-sector company or industry to work directly with the government, as we saw with the example of Space X. Given the pressure on federal, state, and local agencies to reduce their budgets, many have increasingly turned to public-private partnerships, or P3s, as a means to solve problems.
Sometimes, however, the relationship between business and government can become too close, as when executives from the private sector leave their jobs to work for government agencies, becoming the regulators rather than the regulated, and then return to industry in a kind of “revolving door” effect. For example, Goldman Sachs, one of the world’s largest financial services firms, has seen many of its executives take senior leadership positions in the presidential administrations of both Democrats and Republicans, including the present secretary of the treasury, Steven Mnuchin. The same trend is occurring on a global level; Mario Draghi, the president of the European Central Bank, was previously a vice chair and managing director of Goldman Sachs International, and Mark Carney, the governor of the Bank of England, worked for Goldman Sachs as well. The large number of executives from one of the biggest investment banks in the world moving in and out of government service causes some critics to warn of the “fox guarding the hen house” approach to regulation. Is the relationship between government and the private sector sometimes too cozy? Does this revolving door in fact result in bad policy?
Of course, it would be incorrect to assume, because multiple executives of a firm landed in government positions, that the firm is automatically guilty of wrongdoing. Goldman Sachs has created several programs with ethical goals. The company encourages clients to consider environmental and sustainability issues, and it backs green bonds, which are used to fund projects that have positive environmental and/or climate benefits. In truth, our government would find it difficult to function without the expertise from the private sector supplementing that of the public sector in public service positions.
Research by the Federal Reserve Bank of Kansas City demonstrates how regulation and legislation in this area must strike a balance between encouraging and discouraging executives from the private sector to serve in high-level government positions. Our system of government service does not want to run the risk of undermining “the ability of regulatory agencies to seek and retain top level talent, but at the same time we do not want to impair the independence of government policy-makers.”
A quick look at some figures indicates the scope of the problem. A 2008 General Accounting Office survey of fifty large defense contractors revealed that almost ninety thousand people who had left the Department of Defense in the preceding eight years were afterwards employed by private-sector companies doing business with the government as contractors. While legal restrictions exist to limit the revolving door effect, most relate only to direct government contracting. Private-sector companies seeking to acquire talent by hiring former employees of the federal government must be aware of the statutory and regulatory restrictions and their associated penalties.
One rule says former senior government employees may not make any communication with or appearance before their former agency, with the intent to influence the agency, for one year after leaving service. The ban is extended to two years for certain “very senior” officials. Penalties for violations can include fines of up to $50,000 per violation and/or twice the amount of compensation received. On a company level, the penalty can be up to $500,000 per violation and/or twice the amount of the contract. Moreover, individuals who intentionally violate the law may be subject to criminal penalties, which can include up to five years in jail.
In 2009, shortly after he took office, President Obama issued an executive order requiring all executive agency appointees to take an ethics pledge as a prerequisite for accepting appointment. The pledge included a lobbying ban and restrictions on appointees and lobbyists entering and leaving the government. For instance, appointees entering the government had to agree not to participate in any matter both “directly and substantially” related to their former employer or clients for two years. However, because these ethical restrictions were implemented by way of executive order, not federal statute, they may vary from president to president. Ethical questions have been raised about traditional conflict of interest concepts in the present administration, because people currently serving in it have retained ownership of private companies rather than selling them or placing them in blind trusts.
Of course, the relationship between government and business is an important one, and expertise in a field can be extremely valuable to both sides in a business-government partnership. However, this collaboration should be transparent and subject to public scrutiny, as noted by the Brookings Institution, one of the oldest nonprofit public policy think tanks. In a report entitled “Amateur Government: When Political Appointees Manage the Federal Bureaucracy,” the Institution warns against the potential for conflicts of interest stemming from allowing too many industry executives to move into government service, set overtly pro-industry policies, and then go back to their higher-paying, private-sector jobs. The key is to seek a balance.

### Government Regulation and the Constitution

Over the past decade, many politicians have run for office on a platform of reducing government regulation. There are at least two closely related positions on reducing federal government regulation. The first is essentially a states’ rights position that seeks to limit the powers of the federal government to those very specifically enumerated in the Constitution. It is based on principles embodied in the Tenth Amendment and on a narrow interpretation of the Commerce Clause. The Tenth Amendment reserves to the states any right not specifically delegated to the federal government. The Commerce Clause is the part of the Constitution that gives the federal government the right to regulate commerce between states.
The second, related view of government regulation holds that “less is better” at all levels, whether state or federal. Its followers simply seek to reduce the size of government and regulation at every level. Some might attribute this position to a libertarian or “small government” philosophy.
These two philosophies might be characterized as less government regulation vs. no government regulation, other than military defense. The preference for state regulation is often based on a belief in the business community that many states are softer on regulation that the federal government, or that states are closer to the problems businesses face and are more efficient at addressing them. However, there is little clear evidence that one branch of government is more efficient than another. The real challenge is weighing the benefits of regulation against the costs, and finding the right balance between over- and under-regulation. Weak regulation can allow a business to cut corners. For instance, auto emission regulations intended to go into effect by certain dates have been delayed multiple times during the 1980s and the early 2000s. The Obama administration announced plans to enforce tougher rules, but the current administration has said it plans to delay implementation. Auto emission regulations have become politically charged, constantly changing depending on the party in power, and some states have responded with their own legislation instead of waiting for the federal stalemate to end. Regulation that is consistently enforced in the effort to achieve the long-term goal, such as cleaner air, is preferable to a moving target.
A third position is that government is not necessarily a bad thing. Such a “federalist” philosophy might assert that centralized government provides an array of benefits for citizens. For example, in the Federalist Papers, Alexander Hamilton emphasized that a well-intentioned central government was not the enemy of liberty but rather the best means of securing the rights achieved through the passage of the Constitution. He and others also pointed out an advantage of federal over state government—a large republic such as the United States would actually benefit from a larger electorate and a larger pool of qualified leaders, and competing state and regional interests would be more balanced under federal regulation.
Acceptance of one or the other of these philosophies may lean an administration towards more or less regulation, as well as calibrating its response to aggressive lobbying by industries seeking to reduce regulation they view as burdensome. The results for the environment and/or public health can sometimes be disastrous.
Questions of regulation and political influence have become even more sensitive in recent years, following the decision in Citizens United v. Federal Election Commission (2010). In , the U.S. Supreme Court ruled 5–4 that laws preventing corporations from using general treasury funds for political advertising violated the First Amendment’s guarantee of freedom of speech. In other words, the government may not prevent corporations from spending money to support or oppose candidates in elections. With this decision, the Court invalidated numerous campaign finance reform laws. Many commentators think the decision opened the floodgates for special-interest groups to spend without limit in U.S. elections.
What does Citizens United mean for businesses? Business entities may now seek to persuade the voting public by spending an unlimited amount of money on political ads, whether through social media or traditional print and broadcast media. Businesses opposed to government regulation can spend without limit to help elect candidates whose position on reduced regulation is the same as theirs, thereby increasing the pressure on Congress to deregulate. Many think the profusion of money in U.S. politics is one cause of the partisan divide that often paralyzes the legislative branch and unduly influences the executive branch.
One of the sponsors of the corporate governance law known as the Sarbanes-Oxley Act (SOX), Senator Paul Sarbanes (D-MD), is among those who would like to see financial limits on business lobbying groups and political action committees, several of which are attempting to repeal current regulations such as SOX, which is tough on business fraud. Sarbanes-Oxley, passed in 2002 in response to several highly publicized corporate fraud cases that took down companies such as Enron and WorldCom, mandates reporting transparency in areas ranging from finance to accounting to supply chain activities. Essentially, it ensures that we now consider it both unethical and illegal to deceive shareholders, creditors, and the public at large.
Sarbanes-Oxley applies to publicly traded companies and is enforced by the Securities and Exchange Commission. It covers multiple topics such as the independence of corporate boards and outside certified public accounting firms that audit corporations. The law also makes the CEO and CFO personally responsible for errors in annual audits—thus making it harder to “cook the books.” Finally, it prohibits company loans to executives and grants protection to whistleblowers.
Some critics thought compliance with SOX might be too costly. However, after more than a decade of enforcement, it is now clear to most that Sarbanes-Oxley was, and is, a necessary regulatory step. It has allowed for significant progress to be made in slowing down the kind of unethical conduct that led to the Enron fraud. Although SOX technically applies only to publicly traded companies, many private companies also adopt SOX-style internal controls and transparency, as do not-for-profits such as universities and hospitals.

### Summary

One challenge in a free enterprise system is balancing the need for government regulation and private-sector corporate managers’ need for independence in running their businesses. The Sarbanes-Oxley Act tries to strike this balance by mandating transparency in corporate governance. This debate also includes the question whether businesses operating in the private sector ought to do public good on their own, regardless of whether the government mandates it. For example, many companies make a commitment to keep the environment clean, and to do so by going above and beyond what the law requires.

### Assessment Questions

### Endnotes


# The Impact of Culture and Time on Business Ethics

## Introduction

Ethics is a construct of considerable significance to human beings. Some suggest ethics emerged to allow families and clans to cooperate in harsh environments. Others point to its use in governing trade and commerce, even simple bartering. Still others say ethical behavior is wired into the cognitive structures of the brain, explaining why we find codes of ethics and morality in texts as diverse as the Code of Hammurabi (a Babylonian code of law nearly four thousand years old), the Bible, the Napoleonic Code, and The Analects of Confucius, all of which outline ways for people to live together in society.
Whatever its origin, ethics has almost certainly existed throughout human time and varied with language, culture, history, and geography (). Are there underlying values that transcend time and place, however? If so, do the protocols of business ethics embody these values? For instance, we see respect for others in Dubai, where tea accompanies negotiations; in Tokyo, where formal words and bows come first; and in Lima, where polite inquiries about the family precede business. Is respect, therefore, a universal value?
In short, to what degree is any code of business ethics conditioned by culture, time, and geography? Given that individuals are responsible only for their own behavior, is it possible for business ethics to be universal?


# The Impact of Culture and Time on Business Ethics

## The Relationship between Business Ethics and Culture

### Learning Objectives

By the end of this section, you will be able to:
1. Describe the processes of acculturation and enculturation
2. Explain the interaction of business and culture from an ethical perspective
3. Analyze how consumerism and the global marketplace might challenge the belief system of an organization
It has been said that English is the language of money and, for that reason, has become the language of business, finance, trade, communication, and travel. As such, English carries with it the values and assumptions of its native speakers around the world. But not all cultures share these assumptions, at least not implicitly. The sick leave or vacation policies of a British investment bank, for instance, may vary greatly from those of a shoe manufacturer in Laos. Because business and capitalism as conducted today have evolved primarily from European origins and profits are measured against Western standards like the U.S. dollar, the ethics that emerges from them is also beholden primarily (but not exclusively) to Western conceptions of behavior. The challenge for business leaders everywhere is to draw out the values of local cultures and integrate the best of those into their management models. The opportunities for doing so are enormous given the growing impact of China, India, Russia, and Brazil in global commerce. The cultures of these countries will affect the dominant business model, possibly even defining new ethical standards.

### Business Encounters Culture

To understand the influence of culture on business ethics, it is essential to understand the concepts of enculturation and acculturation. In its most basic anthropological sense, enculturation refers to the process by which humans learn the rules, customs, skills, and values to participate in a society. In other words, no one is born with culture; all humans, regardless of their origin, have to learn what is considered appropriate behavior in their surrounding cultures. Whereas enculturation is the acquisition of any society’s norms and values, acculturation refers specifically to the cultural transmission and socialization process that stems from cultural exchange. The effects of this blending of cultures appear in both the native (original) culture and the host (adopted) culture. Historically, acculturation has often been the result of military or political conquest. Today, it also comes about through economic development and the worldwide reach of the media.
One of the earliest real estate deals in the New World exemplifies the complexity that results when different cultures, experiences, and ethical codes come into contact. No deed of sale remains, so it is difficult to tell exactly what happened in May 1626 in what is now Manhattan, but historians agree that some kind of transaction took place between the Dutch West India Company, represented by Pieter Minuit, the newly appointed director-general of the New Netherland colony, and the Lenape, a Native American tribe (). Which exact Lenape tribe is unknown; its members may have been simply passing through Manhattan and could have been the Canarsee, who lived in what is today southern Brooklyn. Legend has it that the Dutch bought Manhattan island for $24 worth of beads and trinkets, but some historians believe the natives granted the Dutch only fishing and hunting rights and not outright ownership. Furthermore, the price, acknowledged as “sixty guilders” (about $1000 today), could actually represent the value of items such as farming tools, muskets, gun powder, kettles, axes, knives, and clothing offered by the Dutch. Clearly, the reality was more nuanced than the legend.
The “purchase” of Manhattan is an excellent case study of an encounter between two vastly different cultures, worldviews, histories, and experiences of reality, all within a single geographic area. Although it is a misconception that the native peoples of what would become the United States did not own property or value individual possession, it is nevertheless true that their approach to property was more fluid than that of the Dutch and of later settlers like the English, who regarded property as a fixed commodity that could be owned and transferred to others. These differences, as well as enforced taxation, eventually led to war between the Dutch and several Native American tribes. European colonization only exacerbated hostilities and misunderstandings, not merely about how to conduct business but also about how to live together in harmony.
Two major conditions affect the relationship between business and culture. The first is that business is not culturally neutral. Today, it typically displays a mindset that is Western and primarily English-speaking and is reinforced by the enculturation process of Western nations, which tends to emphasize individualism and competition. In this tradition, business is defined as the exchange of goods and services in a dedicated market for the purpose of commerce and creating value for its owners and investors. Thus, business is not open ended but rather directed toward a specific goal and supported by beliefs about labor, ownership, property, and rights.
In the West, we typically think of these beliefs in Western terms. This worldview explains the misunderstanding between Minuit, who assumed he was buying Manhattan, and the tribal leaders, who may have had in mind nothing of the sort but instead believed they were granting some use rights. The point is that a particular understanding of and approach to business are already givens in any particular culture. Businesspeople who work across cultures in effect have entered the theater in the middle of the movie, and often they must perform the translation work of business to put their understanding and approach into local cultural idioms. One example of this is the fact that you might find sambal chili sauce in an Indonesian McDonald’s in place of Heinz ketchup, but the restaurant, nevertheless, is a McDonald’s.
The second condition that affects the relationship between business and culture is more complex because it reflects an evolving view of business in which the purpose is not solely generating wealth but also balancing profitability and responsibility to the public interest and the planet. In this view, which has developed as a result of political change and economic globalization, organizations comply with legal and economic regulations but then go beyond them to effect social change and sometimes even social justice. The dominant manufacture-production-marketing-consumption model is changing to meet the demands of an increasing global population and finite resources. No longer can an organization maintain a purely bottom-line mentality; now it must consider ethics, and, therefore, social responsibility and sustainability, throughout its entire operation. As a result, local cultures are assuming a more aggressive role in defining their relationship with business prevalent in their regions.
Had this change taken place four centuries ago, that transaction in Manhattan might have gone a little differently. However, working across cultures can also create challenging ethical dilemmas, especially in regions where corruption is commonplace. A number of companies have experienced this problem, and globalization will likely only increase its incidence.

### Balancing Beliefs

What about the ethical dimensions of a business in a developed country engaging in commerce in an environment where corruption might be more rampant than at home? How can an organization remain true to its mission and what it believes about itself while honoring local customs and ethical standards? The question is significant because it goes to the heart of the organization’s values, its operations, and its internal culture. What must a business do to engage with local culture while still fulfilling its purpose, whether managers see that purpose as profitability, social responsibility, or a balance between the two?
Most business organizations hold three kinds of beliefs about themselves. The first identifies the purpose of business itself. In recent years, this purpose has come to be the creation not just of shareholder wealth but also of economic or personal value for workers, communities, and investors. The second belief defines the organization’s mission, which encapsulates its purpose. Most organizations maintain some form of mission statement. For instance, although IBM did away with its formal mission statement in 2003, its underlying beliefs about itself have remained intact since its founding in 1911. These are (1) dedication to client success, (2) innovation that matters (for IBM and the world), and (3) trust and personal responsibility in all relationships. President and chief executive officer (CEO) Ginni Rometty stated the company “remain[s] dedicated to leading the world into a more prosperous and progressive future; to creating a world that is fairer, more diverse, more tolerant, more just.”
Finally, businesses also go through the process of enculturation; as a result, they have certain beliefs about themselves, drawn from the customs, language, history, religion, and ethics of the culture in which they are formed. One example of a company whose ethics and ethical practices are deeply embedded in its culture is Merck & Co., one of the world’s largest pharmaceutical companies and known for its strong ethical values and leadership. As its founder George W. Merck (1894–1957) once stated, “We try to remember that medicine is for the patient. We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.” Culture is deeply rooted, but businesses may make their own interpretations of its accepted norms.
Our beliefs are also challenged when a clash occurs between a legal framework and cultural norms, such as when a company feels compelled to engage in dubious and even illegal activities to generate business. For example, the German technology company Siemens has paid billions of dollars in fines and judgments for bribing government officials in several countries. Although some local officials may have expected to receive bribes to grant government contracts, Siemens was still bound by national and international regulations forbidding the practice, as well as by its own code of ethics. How can a company remain true to its mission and code of ethics in a highly competitive international environment ()?
Business performance is a reflection of what an organization believes about itself, as in the IBM and Merck examples. Those beliefs, in turn, spring from what the individuals in the organization believe about it and themselves, based on their communities, families, personal biographies, religious beliefs, and educational backgrounds. Unless key leaders have a vision for the organization and themselves, and a path to achieving it, there can be no balance of beliefs about profitability and responsibility, or integration of business with culture. The Manhattan purchase was successful to the degree that Minuit and the tribal leaders were willing to engage in an exchange of mutual benefit. Yet this revealed a transaction between two very different commercial cultures. Did each group truly understand the other’s perception of an exchange of goods and services? Furthermore, did the parties balance personal and collective beliefs for the greater good? Given the distinctions between these two cultures, would that even have been possible?

### Consumerism and the Global Marketplace

To paraphrase the ancient Greek philosopher Heraclitus (c. 535–475 BCE), the one constant in life is change. Traditional norms and customs have changed as the world’s population has grown more diverse and urbanized, and as the Internet has made news and other resources readily available. The growing emphasis on consumerism—a lifestyle characterized by the acquisition of goods and services—has meant that people have become defined as “consumers” as opposed to citizens or human beings. Unfortunately, this emphasis eventually leads to the problem of diminishing marginal utility, with the consumer having to buy an ever-increasing amount to reach the same level of satisfaction.
At the same time, markets have become more diverse and interconnected. For example, South Korean companies like LG and Samsung employ 52,000 workers in the United States, and many U.S. companies now manufacture their products abroad. Such globalization of their domestic markets has allowed U.S. consumers to enjoy products from around the world, but it also presents ethical challenges. The individual consumer, for instance, may benefit from lower prices and a greater selection of goods, but only by supporting a company that might be engaged in unethical practices in its overseas supply or distribution chains. Producers’ choices about wages, working conditions, environmental impact, child labor, taxation, and plant safety feature in the creation of each product brought to market. Becoming aware of these factors requires consumers to engage in an investigation of the business practices of those parties they will patronize and exercise a certain amount of cultural and ethical sensitivity.
In considering the ethical challenges presented by the outsourcing of production to lower costs and increase profits, let us return to the example of IBM. IBM has a responsibility to provide technology products of high quality at affordable prices in line with its beliefs about client success, innovation, and trust. If it achieved these ends in a fraudulent or otherwise illegal way, it would be acting irresponsibly and in violation of both U.S. and host country laws and as well as the company’s own code of ethics. These constraints appear to leave little room for unethical behavior, yet in a globalized world of intense competition, the temptation to do anything possible to carve out an advantage can be overpowering. This choice between ends and means is reminiscent of the philosophers Aristotle and Kant, both of whom believed it impossible to achieve just ends through unjust means.
But what about consumer responsibility and the impact on the global community? Western consumers tend to perceive globalization as a phenomenon intended to benefit them specifically. In general, they have few compunctions about Western businesses offshoring their manufacturing operations as long as it ultimately benefits them as consumers. However, even in business, ethics is not about consumption but rather about human morality, a greater end. Considering an expansion of domestic markets, what feature of this process enables us to become more humane rather than simply pickier consumers or wasteful spenders? It is the opportunity to encounter other cultures and people, increasing our ethical awareness and sensitivity. Seen in this way, globalization affects the human condition. It raises no less a question than what kind of world we want to leave to our children and grandchildren.

### Summary

Culture has a tremendous influence on ethics and its application in a business setting. In fact, we can argue that culture and ethics cannot be separated, because ethical norms have been established over time by and make sense to people who share the same background, language, and customs. For its part, business operates within at least two cultures: its organizational culture and the wider culture in which it was founded. When a business attempts to establish itself in a new environment, a third culture comes into play. With increasingly diverse domestic and global markets and the spread of consumerism, companies must consider the ethical implications of outsourcing production and resist the temptation to look the other way when their values are challenged by the reality of overseas supply or distribution chains.

### Assessment Questions

### Endnotes