Business, Government and Globalization Professor Mike P. Moffatt Office: 3325; E-mail: mmoffatt@ivey.

ca Assistant: Kyla Brooks E-mail: kbrooks@ivey.uwo.ca Fall 2013

Business 4557

1. COURSE OVERVIEW This course explores the relationship between corporations and society, and the ways in which governments, corporations and civil society manage issues where the pursuit of private goals is deemed inconsistent with the public interest. There are two modules to the course: the first, which is common across all HBA2 Corporations and Society designated courses, examines these issues in the context of the natural environment and the social environment. The second module, which is specific to course 4557, considers how firms can actively manage their external, or non-market, business environment, with a focus on political and regulatory risk. Module 1: Corporations and Society Corporations are the modern engines of economic growth providing employment and income for individuals, goods and services for consumers, and taxation revenues for governments. Corporations are also important sources of new technology, innovation and entrepreneurship. In many ways, corporations underpin the high standards of living achieved in developed countries and improving standards in emerging parts of the world. Political philosophers and economists from Adam Smith to Milton Friedman have lauded the benefits of competitive markets and private enterprise. Yet unchecked actions by private corporations can have detrimental consequences too: companies with a dominant position in their industry may raise prices above competitive levels, harming consumers; manufacturing companies may cut corners on workplace or product safety standards, risking the welfare of workers and consumers. In other cases, corporate actions affect stakeholders outside the scope of their market-based interactions as

when polluting firms harm the health of a population or the natural environment. Profitmotivated corporate sector actions thus need not necessarily align with broader societal or public interests. The traditional role of government has been to regulate the excesses of corporate behavior and to strike a balance between private and public interests that improves overall societal welfare. NGOs and activists have adopted private politics strategies that also seek to shape and regulate corporate actions. Managers must thus wrestle with a variety of external pressures that can significantly affect financial performance, and make choices on how to best integrate these dimensions in business models and management systems. There is the potential for competitive advantage to be increasingly rooted in new capabilities such as pollution prevention, design for environment, social responsiveness, and stakeholder management. These capabilities draw on a number of functional areas, including marketing, human resources, operations, finance and strategy, to list several. In the first module of this course we will focus on the interactions between corporations and society, and between corporations and the natural environment. The first five classes examine in detail the relationship between corporations and the natural environment. An in-class simulation exercise, Fish Banks, illustrates how a failure in fundamental market conditions the tragedy of the commons generates non-optimal outcomes from an environmental perspective. In this case, when private property rights are not allocated or are unenforceable, a natural resource such as a fish population is exhausted through unfettered private sector actions. After that we consider how government regulation can mitigate market failure and limit such environmental degradation by the private sector, for instance through the creation of carbon markets and the allocation of tradable emissions permits. The class will investigate the mechanics of how carbon markets work, their impact on businesses in different industries, and their pros and cons relative to alternative policy instruments. The subsequent five classes of the first module explore some of the major tensions that can arise between corporations and societal interests when corporations pursue profit-maximizing strategies Two conceptual themes run throughout. The first is whether competitive, well-functioning markets produce outcomes that are perceived by society as being fair or equitable. This issue arises in various contexts, for instance in the public debates around corporate off-shoring and outsourcing strategies which have provoked claims of unfair domestic job losses, biased competition from developing countries, and exploitation of foreign workers. Another issue concerns the impact of intellectual property rights on the ability of individuals to access affordable health care and pharmaceutical products. The second conceptual theme is why some markets fail to function in a regular competitive manner and thus do not produce efficient outcomes thereby motivating government intervention to correct market failure. Negative externalities (resulting in over-pollution and environmental degradation) are just one example of a cause of market failure. We will use several cases to explore other causes of failure, specifically the presence of asymmetric information between buyers and sellers (e.g. in the financial services sector), and the

purposive creation of dominant market positions through industry consolidation (mergers and acquisitions). In each of the case studies we use we will explore these issues from two perspectives, that of the corporation and that of society at large. Module 2: Political and Regulatory Risk The second module is an advanced strategy mini-course that focuses on how firms can actively manage political and regulatory pressures outside their market place i.e. in the non-market business environment rather than simply take them for granted. The module thus builds on the first module by asking how firms can productively manage their relationships with governments, activists, NGOs and other stakeholders. While a firms competitive advantage is created in large part through developing and exploiting difficult-toimitate capabilities and resources in the market environment, the non-market environment in which the firm operates also presents important risks and opportunities for business leaders. The non-market environment consists of the laws, regulations, norms and institutions that shape the nature of competition within markets. Governments, regulators, courts, the media, non-governmental institutions, international treaties and cultural norms all affect how firms compete and which capabilities are valuable. For instance, barriers to entry, new product introduction, global competition, and operating practices can all be enhanced or constrained by the formal and informal rules of the game. This is true for many industries, from energy to mining to retail. Yet these rules are not simply exogenously given. They are instead the outcome of competition between businesses and other organized groups within policymaking arenas. In many industries, corporate activity in the policy making process is a key element in creating or maintaining a companys competitive advantage. The challenge for managers is to determine how to lead the company to success in the marketplace as well as in the non-market environment. However, the problems that managers face in the non-market environment are different in nature from the problems faced in markets. First, policy issues can arise unexpectedly, creating uncertainty in political and regulatory environments about the evolving direction of rules of the game. Second, policymarkets and policy-making institutions typically behave differently and have different objectives from consumers, suppliers and competitors. Third, firms that compete in the marketplace may cooperate as allies in policy arenas, and vice-versa. Firms can also confront entirely new opposition in the non-market environment from stakeholders not directly involved in the firms product or service markets. The focus of this module is political risk. We analyze the risks and rewards both in stable and political unstable countries, and the relationship between risk and reward. We develop a toolkit and use it to examine seven broad themes of political risk.

Types of Political Risk Source: The Fat Tail by Bremmer and Keat. Main types of risk events shocks Geopolitical Examples International wars Great power shifts Economic sanctions and embargoes Political decided supply and demand issues Destruction of property Kidnapping/hijackings Revolutions Civil Wars Coup detat Nationalism Social unrest (strikes, demonstrations) Confiscations of property Creeping expropriations Government frustration or reneging of contracts Wrongful calling of letters of credit Currency controls Politically motivated credit defaults and market shifts Repatriation of profits Discriminatory taxation Corruption Effects of global warming Effects of demographic changes Political events that cannot be foreseen

Global Energy Terrorism Internal Political Strife

Expropriations Breaches of Contract

Capital market risks, currency, and repatriations of profits

Subtle discrimination and favoritism Unknowns/uncertainty

For the purposes of this course we will add Regulatory Risk to our types of political risk. The course examines each of these main types of risk event shocks:

Main types of risk events shocks Geopolitical Global Energy Terrorism Internal Political Strife Expropriations Breaches of Contract Capital market risks, currency, and repatriations of profits Subtle discrimination and favoritism Unknowns/uncertainty Regulatory Risk

Class Topic Sherritt Cuba, AES, Blood Bananas Oil Sands, AES Blood Bananas BHP Potash, AES Sherritt Cuba Aguas Argentinas Aguas Argentinas BHP Potash Oil Sands Pizza Wars

2. COURSE OBJECTIVES Module 1 Appreciate the reasons why corporate and societal objectives may or may not coincide, and the issues where conflicts tend to arise Understand the ways in which government, corporations and civil society attempt to resolve conflicting objectives Module 2 Develop an understanding of the seven types of political risk and assess their impact on business operations. Understanding and be able to analyze the opportunities and risks inherent in expanding into newly liberalizing countries with government privatization.

3. EVALUATION Summary of Evaluation Scheme 1. Mid-term Exam (331/3%). There will be an individual, closed-book, written exam that will test comprehension of the topics covered in the first module of the course on October 23rd.

2. Classroom Contribution (331/3%). This will be assigned based on the quality and frequency of your contribution to class discussion this semester. In keeping with Ivey best practice, part of your grade for classroom contribution will be based on evaluations by your classroom peers. Poor attendance will be penalized heavily. Students who miss 25% or more of the classes will receive a contribution grade of less than 50/100 and will not be permitted to submit the final written project. 3. Non-Market Strategy Project (331/3%). A written assignment on a non-market issue facing a company or organization (see details below). Students can either do the project individually or in groups of two. Reports should be submitted on eZone by December 12th. Mid-term Exam Please note that attendance at the mid-term exam is mandatory. Failure to take the exam on the scheduled day/time will result in failure of the exam and possible failure of the course. Make-up exams are only permitted for medical and compassionate reasons reviewed and approved by the HBA Program Services office. The HBA Program Office will only consider requests for a make-up exam for serious student illness, death of an immediate family member, participation in an official Ivey case competition, or participation as a team member in a varsity sport event. Independent professional documentation must be submitted within 48 hours of the exam to support a request. In the case of participation in an official Ivey case competition or a varsity sports event, a request and supporting independent documentation must be submitted 4 weeks prior to the exam. Review, acceptance of any documentation, and the decision to grant a make-up exam are at the sole discretion of the HBA Program Services Office. Any exam grade appeals must be submitted and explained in writing within one week of the return of the exam.

Classroom Contribution The daily classroom discussion represents a unique opportunity for you to develop and enhance your confidence and skill in articulating a personal position, reacting "on the spot" to new ideas, and receiving and providing critical feedback from a group of assertive and demanding colleagues. This is an opportunity that is encouraged for all to engage in. Class attendance is mandatory. You are expected to come to each class, with the case and/or readings prepared and to contribute to the class discussion, either by starting the class session or by building on the contributions of others to move it ahead. Your contribution to the learning of others, through the experience and insights you have, is a key part of this learning process. To build on the comments of others requires you to listen and to consider the timing of your contribution. Classroom contribution will be evaluated on the following scale: 90-100 applies, analyzes, synthesizes course material is willing to take risks in attempting to answer difficult questions offers relevant, succinct input to class that advances the discussion provides constructive feedback to group discussion demonstrates ability to analyze/apply course material offers clear, concise information relevant to class assignments occasionally offers topical information of limited relevance is not regularly in class (misses 25% or more classes) provides little or no contribution to discussions is disruptive or distracting to class fails to follow flow of conversation input is irrelevant, unrelated to topic or non existent

80-89 70-79 60-69 0-59

Primary emphasis is on the quality of the contribution to the discussion as opposed to quantity. However, being a regular and active contributor to the classroom discussion is expected. Students who attend all classes but do not contribute to any discussions can expect a contribution grade of 45. Non-Market Strategy Project The focus of the group written project is on applying the insights from the second module to a company or organization confronting a non-market issue. You should adopt the perspective of an analyst (or evaluative/investigative journalist), and develop a briefing about a specific firms opportunities and outcomes regarding a particular non-market issue. Reports should be submitted on eZone by 12 December at 4pm. You are required to choose one specific company of interest and one non-market issue connected to topics that we have discussed in the second half of the course. The report should be framed as addressing a specific question, for example, How should Porter Airlines deal with the opposition of local activists in its proposal to operate at the Toronto City Centre Airport? You may wish to choose a company with which you are already familiar, for instance if you have worked with the company or intend to do so in the future.

However, your report must not be repetition of other course work. The report should include the following points: A discussion of the issue, its stage in the policy life cycle, and its degree of importance to the firm (and competitors) Analysis of the interests that have a stake in the issue; the preferences of interested stakeholders on the non-market issue; their degree of organization and the level of support or opposition for the firm in non-market arenas; their effectiveness in shaping the issue Analysis of the institutions involved in determining the non-market issue outcome Discussion of plausible non-market strategy options that could enable the firm to cope with the issue. Implications for the firms market-based competitive strategy. Coherent, logical recommendations on the best non-market strategy to adopt.

The content and style of managerial publications such as Business Week, Fortune and the Globe & Mail should serve as a guide for the written report. Students are expected to use companies annual reports, media reports, analyst reports, independent studies, and other reputable sources to conduct their analysis (please fully cite all sources). Stronger reports might also include your findings from short interviews with one or more managers, industry or other experts. Course concepts should be used in both the analysis and the recommendations. The report must be your own original work, written specifically for the course. You may not use existing published case study material or reports. The report is to be a maximum of 3000 words (single-spaced pages, 12-point font), plus any exhibits. You should find that a report of this length is very easy to assembleyour challenge is to write an insightful analysis of the nonmarket environment and to develop a plausible action plan. For larger firms, focusing on a single line of business should help you to focus your report. Naturally, I expect to see sufficient depth to demonstrate your understanding of key course concepts. 4. OTHER IMPORTANT MATTERS

Materials Cases are compiled in a case book for the course. Where possible, electronic versions of readings are posted on eZone. Appointments If you wish to meet with me, you can approach me after class to set up a time, send me an e-mail, or contact my assistant. Schedule Our class schedule and assignments by session appear on eZone and are the most up-todate version of our course. Please check the course site regularly for this information and other course news. Expectations You are expected to be fully engaged in the entire learning process. This means devoting time and energy to preparation before class, including team meetings, listening to others during class discussions and engaging in class discussions. Collective reasoning and

discovery are critical to the successful application of the case method. Prior to any case discussion, engaging in discussions with (or examining notes from) others who may have already experienced a case is a clear violation of Ivey norms. As a professional school, we place great emphasis on keeping regular commitments such as arriving to class and other events on time, attendance at every class, appropriate preparation for class, and submission of assignments on time. Our experiential learning process is premised on an expectation that a student will attend all scheduled classes and other assigned events that are part of the program. We believe that missing a class cannot be fully compensated by an individual student, even if we ensure that the student has done the relevant individual and learning team preparation. As a professional courtesy, if you cannot be in class, please let me know in advance. Under University regulations, I may determine at what point absenteeism has become excessive and thus can prevent you from passing the course. Using your computer during class for personal activities such as reading/writing email, writing letters, surfing the Web, playing games, etc. is distracting, counter productive and violates Ivey norms. Please refrain from such activities. Plagiarism Students must write their essays and assignments (at Ivey this includes case exams and reports) in their own words. Whenever students take an idea, or a passage or material from another author, they must acknowledge their debt both by using quotation marks where appropriate and by proper referencing such as footnotes or citations. Plagiarism is a major academic offence (see Scholastic Offense Policy in the Western Academic Calendar). All required papers (at Ivey this includes case exams and reports) may be subject to submission for textual similarity review to the commercial plagiarism detection software under license to the University for the detection of plagiarism. All papers submitted will be included as source documents in the reference database for the purpose of detecting plagiarism of papers subsequently submitted to the system. Use of the service is subject to the licensing agreement, currently between The University of Western Ontario and Turnitin.com (www.turnitin.com).

Name: Date: Peer Grading for HBA2 Corporations and Society Course (Prof. Holburn)

You have been chosen this morning as a peer grader of oral co ntribution for todays class. Please feel free to move your seating position for today to the back row corner where you will have a good view of the whole class. On the reverse of this memo is a class seating chart that you will use to note your peers contribution performance. In judging contribution performance, please note the following instructions below.

1. 2.

Mark each person who is absent from todays class with Absent. Score the contribution of each comment made by a participating student (see below).
Category (Frequency) Outstanding Rare (0-10%) Components of in-class contribution The comment adds substantial value to the discussion. Demonstrates willingness to take risks in attempting to answer difficult or unpopular questions. Breaks new ground and raises the flow of discussion to a higher level, often by synthesizing material and applying multiple lenses or techniques. The comment adds value to the discussion, beyond case facts. There is evidence of analysis rather than just the expression of opinion (although some espousal of opinion is acceptable, even desirable in certain circumstances). Comments are linked to those of others, facilitating the flow of the discussion. Demonstrates knowledge of readings and other relevant course material. Incorporate relevant insights from other courses or current affairs. The comment advances the flow of the discussion (including responses to questions from the instructor). Demonstrates clear grasp of case material. Information presented is relevant to the discussion. Lack of preparation for class discussion; failure to listen. Criticisms are directed at others versus towards their ideas. Defensive behavior (e.g., aggression or withdrawal) is exhibited. Drains energy from class goals.

Point Value 3

Significant Frequent (10-30%)

Good Common (50-70%) Unsatisfactory Rare (0-10%)

-1

The highest contribution mark per class will be utilized as an assessment of the students contribution to that classs discussion. While I know that it will be difficult to contribute to todays class discussion while doing peer grading, this is the only day of the course tha t you will be asked to do this. Thank you for your assistance.

Module 1: Corporations and Society Class and Topic Schedule

Corporations and the Natural Environment Case / guest / exercise 1. Corporations and Society Topic Course objectives, overview and introduction Environmental externalities and market failure

2, 3. Fish Banks, Ltd. (simulation game) 4. Carbon Markets and Permit Trading

Government regulation

Corporations and Society Case / guest / exercise 5. 6. Hitting the Wall: Nike and International Labour Practices Life, Death, and Property Rights: The Pharmaceutical Industry Faces AIDS in Africa The Taxi Industry in Four Cities Around the World Labelstock Inside Job Topic Globalization, labour standards and offshoring Public health and intellectual property rights Markets versus governments Competition policy, mergers and acquisitions Regulation and innovation in the financial sector Reform in Canadas banking sector

7.

8. 9.

10. Guest Speaker: Marco Petta, Managing Director, Royal Bank of Canada

Module 2: Business Strategy in a Political World Class and Topic Schedule

The Non-Market Environment of Business: Analysis and Strategy Case / guest / exercise 11. Canadas Pizza Wars in the Era of Free Trade 12, 13. BHP Potash 14. Trade and Investment Sanctions: Sherritt International, the United States and Cuba 15. Oil Sands Case TBD 16, 17. AES in the Republic of Georgia Topic Intro to Political Risk, Regulatory Risk Internal Political Strife, Favoritism Geopolitical Risk, Expropriations Global Energy, Climate Change Geopolitical, Global energy, Favouritism, Internal Political Struggles Breaches of Contract, Capital Market Risks Terrorism, Geopolitical Major lessons from the course

18. Aguas Argentinas: Settling a Dispute

19. Blood Bananas: Chiquita in Colombia 20. Summary and Wrap-up