Business and Society

1. Business and Society The Ethics of Business and Corporate Social Responsibility

2. How Are Business and Society Related? • Do organizations have morality? • Yes: Economic forces are insufficient to hold organization together (Wieland) • No: The firm operates mechanically, to reach a state of equilibrium (Maitland) • So, what is it? Competing views: • Market Capitalism • Dominance • Stakeholder • Which one is “correct”?

3. Market Capitalism • Based on these ideas: • Competition • “Individuals have the freedom to own and control property and to make economic decisions in their own interest” • “The ultimate goal is the good of the greatest number” • Let’s look at…. • Adam Smith • Milton Friedman

4. Adam Smith and The Wealth of Nations • It’s basic human nature to “truck, barter, and exchange” • It’s rational to exchange goods that you can produce efficiently for goods that you are less efficient at producing • In a voluntary exchange, both parties increase marginal utility; an item is worth what a willing seller will take and a willing buyer pay

5. Adam Smith, continued • There’s competition among sellers and buyers (if something is desirable, more than one person will want it and more than one will sell) • Thus, the law of supply and demand; the invisible hand will balance out, to a state of equilibrium (second corporate ethics article) • Competition also forces sellers to become more efficient, thus…

6. Division of Labor • The best way to increase efficiency • Also referred to as “deskilling” • Why? • By specializing, the worker becomes more skilled, or at least more efficient • Time not lost by switching among different tasks • Incentive to develop machinery

7. Adam Smith: Recap • “But man has almost constant occasion for the help of his brethren and it is in vain for him to expect it from their benevolence only” • By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it.”

8. Milton Friedman • “The Social Responsibility of Business is to Increase its Profits” • His reasoning…… • A corporation is an “artificial” person – thus, unlike a real person, it has no ethical or moral obligations (though …would disagree) • Managers are responsible to owners: “That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embedded in ethical custom

9. Freidman’s Reasoning, continued • Individual managers fulfill their private ethical / moral obligations from their personal resources • If managers are to spend money on public uses, they must be accountable, just as are politicians. The analogy here is with taxation; by spending money pf public uses, the manger is in effect taxing employees, customers and owners for the benefit of society as a whole • For Freidman, this is “socialist” -- using “political mechanisms, not market mechanisms…the appropriate way to determine the allocation of scare resources to alternate uses”

10. Friedman, Finale • Further, if business social spending (the specific expenditures) were a good ides (accepted by society), it would be a public responsibility and funded through taxes • However, an organization may legitimately spend money on what may be perceived as social responsibility, but where there is a benefit to the firm (for example, funding education) • Thus, corporations are judged solely by financial performance, as defined by the owners / shareholders

11. However……. • What about public goods ? • Things (such as education) where society believes that market forces are inappropriate • The question is, what are public goods?

12. Dominance • Businesses are controlled by a small elite group • These individuals are not elected and are unaccountable for their actions, especially as those affect the less powerful • Businesses will use their power for their own self-interest and disregard the interests of others • Theoretical underpinnings in Marxism

13. First, Malthus and Ricardo • Thomas Malthus • The food supply increases arithmetically, while population increases geometrically • Thus, the population will always increase up to the limit of resources • Ricardo extends this… • The consequence will be that workers’ wages will always be pushed to subsistence levels

14. Karl Marx • Marx takes Adam Smith’s “self-love” and turns it into “naked self-interest” • Self-interest is economic and individuals struggle in their self-interest, so… • Struggle becomes class struggle • A vast proletariat, a small bourgeois

15. Points on the Spectrum • The Simple Life Folks (granola crowd) • Large organizations, by their very existence, are destructive of human values • We should adopt a simpler lifestyle, freeing ourselves of the need for large businesses • We are interested in maximizing human potential • Redemption-May-Be-Possible • Large organizations exploit those without power (especially multinational firms and indigenous peoples) • Don’t abolish business firms, but major reform is needed • Critics from Within • Businesses have done a lot to earn their bad reputation • Responsible business leaders must begin cleaning out the stables

16. Do the Facts Justify Criticism ?? • Of the globe’s 100 largest economic entities, 51 are corporations; only 49 are countries • The 300 largest global corporations hold one-quarter of the entire globe’s productive assets • 72% of Americans say business has too much power over too many aspects of American life

17. The Top Ten

18. Can Any One Individual Make a Difference? • Solomon – people do have an ethical character, independent of circumstances • Harman – they don’t • Both cite Milgram experiments as evidence

19. Dynamic Forces Model • It’s a lot more complicated than the MC and D folks would like it to be • Business and society are connected to one another • Business and society influence one another • Survival requires responsiveness to the environment (society)

20. Some Applications of the Dynamic Forces Model • Concern with public image (for example, “cause-related marketing”) • “Doing well by doing good” • Michael Porter: “The Competitive Advantage of Corporate Philanthropy” • Basically, corporations, if they deliberately target contributions in areas that are of benefit to them, both the firm and the cause benefit • How-To? • Firm has expertise to select recipients • Bring in additional funding • Assist recipients to make most effective use of resources

21. The Stakeholder Approach • How do we solve the problem of the free rider? • Organizations and people are bound together in a network of mutual relationships • Stakeholders • Those people or groups essential to an organization’s success • Those people or groups affected by what an organization does • People with a “legitimate interest” • An organization is obligated (duty) to consider the interests of stakeholders

22. Who Are the Stakeholders? • Primary and secondary (how close are they to the organization?) • Who? • Management • Employees • Owners • Local community • Suppliers • Customers

23. The Models and Values MC S $ DF D

24. The Models and Change

25. DF The Models and Society D Society S MC

26. A Pyramid of Values Philanthropic Responsibilities: Be a good corporate citizen. Contribute resources to the community; improve quality of life. Ethical Responsibilities: Be ethical. Obligation to do what is right, just and fair. Avoid harm. Legal Responsibilities: Obey the law. Law is society's codification of right and wrong. Play by the rules of the game. Economic Responsibilities: Be profitable. The foundation upon which all others rest.

27. Why Does Business Get Such A Bad Reputation? ?

28. Stock Market Operators of the 19th Century • Cornelius “Commodore” Vanderbilt (1794-1877) • Early involvement with steamboats • Organized travel to California during gold rush (1849) • Daniel Drew (1797-1879) • Began with cattle (invented “watered stock”) • Jim Fisk (1834-1872) • Worked in a circus, flamboyant Wall Street operator • killed by Edward Stokes, over Josie Mansfield • Jay Gould (1836-1892) • Surveyor, tanner, speculator (“Mephistopheles of Wall Street”) • Later controlled over half of western railroads

29. The Erie Wars (I) • Vanderbilt owned the NY Central and Hudson River RR • In 1867 Vanderbilt attempted to buy the Erie RR (to eliminate competition) • Drew (Erie treasurer) decided to fight back • Drew, Gould, and Fisk printed 100,000 unauthorized shares of Erie stock and sold these to Vanderbilt • Vanderbilt attempted to have Fisk, Gould, and Drew arrested in New York

30. The Erie Wars (II) • So, Fisk, Gould, and Drew fled to New Jersey with armed guards • Gould purchased NY legislators to make the watered stock sale legal • Drew, Fisk, and Gould profited ($7 million); Vanderbilt lost about $1.5 million

31. John D. Rockefeller and Standard Oil: The Beginnings • Rockefeller born in 1839 in modest circumstances • Began work as a clerk, donating 10% of earnings to charity • Oil discovered in Titusville, PA in 1859; kerosene became very popular for lighting (no need for gasoline yet) • By 1859, Rockefeller saved enough to go into business for himself • 1863: Rockefeller got into oil business with first refinery

32. John D. Rockefeller and Standard Oil: Building the Trust • 1870: Rockefeller organized Standard Oil Company • By 1872, Standard Oil controlled nearly all the refining firms in Cleveland • How? • South Improvement Company and railroad rebates • Squeezing out competition • But, also lowered prices and improved quality • 1882: all Standard Oil properties were merged in the Standard Oil Trust • 1892: the trust dissolved by a court decision in Ohio

33. John D. Rockefeller and Standard Oil: Busting the Trust • 1890: Sherman Antitrust Act • 1892: formation of the Standard Oil Company of New Jersey (NJ permitted parent company structure) • Estimated 75% to 90% of the petroleum business in the U.S. in 1890s. • 1896: Rockefeller retired from active leadership of the company • 1902: Ida Tarbell’s exposé • In 1911 the U.S. Supreme Court found the Standard Oil trust to be in violation of the anti-trust laws and ordered the dissolution of the parent New Jersey corporation (but was it really dissolved….) • 1913: Ludlow massacre • Philanthropy and politics

34. Triangle Shirtwaist Fire (1911)

35. More Triangle Shirtwaist Source: http://www.csun.edu/~ghy7463/mw2.html

37. Mill employees, Georgia * * photo from about 1900, but similar to sketches from early 1800’s Source: http://www.historyplace.com/unitedstates/childlabor/index.html

38. Sweated Homework “Mrs. Battaglia, Tessie (age - 12 years), Tony (age - 7 years), 170 Mulberry St. Rear house, 5th floor. Garment workers. Husband crippled by a fall, tends to basement. Mrs. Battaglia works in shop except Saturdays, when the children sew with her at home. Get 2 or 3 cents a pair finishing men's pants. Said they earn $1 to $1.50 on Saturday. Father disabled and can earn very little. New York, 01/25/1908” Source:http://arcweb.archives.gov/arc/arch_results_detail.jsp?&pg=1&si=4&nh=1&st=b

39. Coal Mining “Welch Mining Co., Welch, W. Va. Boy running "trip rope" at tipple. Overgrown, but looked 13 years old. Works 10 hours a day. Welch, W. Va. , 09/1908” Source:http://arcweb.archives.gov/arc/arch_results_detail.jsp?&pg=1&si=4&nh=1&st=b