Chapter 2: Theories about Business Government Relations

1. Chapter 2: Theories about Business Government Relations

2. Agenda • Three models of government-business relations • The shareholder model • The strategic model • The stakeholder model • Crony Capitalism

3. Why Study Theories? • Helpful in understanding complex social realities • Simplify and organize knowledge by describing patterns and regularities • Offer different perspectives regarding the interactions between business and government. • In practice they define the strategies, operations, and outcomes of businesses

4. Three Models of Business and Society • Business centered approaches • Shareholder model • Strategic business model • Stakeholder model • Note that there are other important “players” in society, in particular, religion

5. The Shareholder Model • Emphasizes economic principles • Views business in isolation • Emphasizes economic analysis and profit-making for direct or indirect owners • Emphasizes the invisible hand at the micro level • Stresses the importance of dynamic market • Promotes non-intervention by government • Contends the principle duty of government is to ensure that markets function properly, and to correct market failures

6. Examples of shareholder model • Economic freedom Index (Heritage Foundation) • Rule of law • Limited government • Regulatory efficiency • Open markets • (Top in 2015: Hong Kong, Singapore, NZ, Australia, Switzerland, Canada, Chile, Estonia, Ireland, and Mauritius) • Domestic example: Investment banks

7. Various critiques of the Shareholder Model • Downplays market imperfections • Ignores the need for government vigilance and intervention to protect market failure • In practice, tends to ignore the reality of business’ demands on government and the advantages frequently provided by government • Too much emphasis on monetary and material gains

8. The Strategic Business Model • Emphasizes the practice of business and success • One element: being highly competitive • Most efficient and effective use of resources; • Competing to win through hard work and cleverness • Playing the game well • The model also emphasizes collaboration • Joining other strong competitors, networking, creating goodwill, focusing on comparative strengths • Pragmatically, it wants: • Moderate taxes and moderate regulations, stable policies, and protections in global competition • To pragmatically use/exploit governmental resources

9. Examples • Council on Competitiveness Where America Needs to Be To drive US productivity, buttress our leadership in world markets, and raise the standard of living for all Americans, the United States must: • Immediately work to: – Ensure lower cost, easy access to high quality education and training for all Americans – Maintain long-term federal investments in science and technology leadership – Reform and simplify the tax code to stimulate investment and attract global capital to the United States • Over the next ten years: – Create at least 21 million jobs – Reduce unemployment to 5 percent – Reduce government debt by $4 trillion to ensure America’s long term solvency – Invest $2.2 trillion in infrastructure to maintain competitive advantage – Double exports • Global Competitiveness Index; Community Banks

10. Critique of the Strategic Business Model More balanced and realistic than the shareholder perspective, but • Unclear and inconsistent • How do you decide your values when they compete and evolve?

11. The stakeholder model • This perspective sees business as critical to but nonetheless subordinate to society • Stakeholders include not only investors, partners and employees, but also customers, the community, government, and other groups in society affected by business (e.g., environmental groups)

12. The stakeholder model • Creates duties toward multiple constituents of the corporation • While profits are important and one of the mainstays of business, they do not crowd out other business and social values in the stakeholder view • A long-term perspective encourages an attitude of sportsmanship in competition, with the accent being on getting better rather than simply winning in the short term • Pursuit of a good reputation for pragmatic purposes • Requires business management raise its gaze above profits to see and respond to a spectrum of other values

13. Examples, company level • Annual listing by Corporate Responsibility • impact on the environment, • climate change behaviors, • avoidance of human rights abuse, • quality employee relations, • open corporate governance, • community-based philanthropy, and • financial integrity • Development banks

14. Examples, at the country level Three stakeholder perspectives: quality of life, environmental concern, equity • Human Development Index (UN) where US is very high • Environmental Performance Index where US is upper middle • Wealth distribution: Gini Coefficient (from .25 to .70 with low fraction as the most equal); US in the lower middle

15. The stakeholder model • Critics to the stakeholder model • Unrealistic assessment of power relationships between the corporation and other entities • Too vague a guideline to substitute for the yardstick of profits • Not clear who or what is a legitimate stakeholder

16. Comparison of three models

17. When the Ideal Models Become Corrupted: Crony Capitalism • Crony Capitalism • Close relationship between business and government leading to favored treatment to individuals, firms, or industries at the expense of the public

18. Spectrum of Crony Capitalism 1. Strongman model • Dominance of leader and his/her group (i.e., dictatorships or quasi-dictatorships) • Vague laws; laws instituted abruptly by dominant figure • Example: • Russia under Putin

19. Spectrum of Crony Capitalism 2. Fused political-bureaucratic elite model • Dominance by family or small group of large asset owners (rather than strongman or despot) • Rampant bribery and corruption • Example: • Second red/official generations in China

20. Spectrum of Crony Capitalism 3. Economic elite dominance model • Dominance by economic elites because of the power of money; often more subtle • Market distortion and unhealthy imbalances in civil society (Source: http://seanmarske.wordpress.com/2012/07/10/whos-running-the-show-introducing-the-criminal-elite/)

21. Economic elite dominance model • Powerful financial interests can corrupt the society through • Ability to change critical administrative rulemaking • Exerting influence via control of media • Increased opportunity to be elected officials • Buying access based on economic support of candidates • Ability to influence the electorate with threats • To some degree in all developed capitalist countries; Issue: when does elite dominance become overweening? • Example: US.

22. Conclusion • The three “pure” types of business-government model ungird many of our public discussions. However, the elements are often muddled and so we talk past one another. • Exaggerating for clarity, they emphasize business efficiency, business pragmatism, and business ethics • Government itself has elements that emphasize these elements too! • Securities and Exchange Commission • US Trade Representative • US Department of Health and Human Services

23. Crony capitalism is a distortion of “pure” types • It includes various subtypes: • Strongman • Fused political-bureaucratic elite • Economic elite-dominance model • While crony capitalism tendencies can never be fully eliminated, they can be reduced by wise policies in order to retain the trust and respect of society for both government and business in creating a fair society and a healthy market economy.