Crane and Matten

Business Ethics (3rd Edition)

Chapter 11
Government, Regulation, and
Business Ethics

Lecture 11
 Overview
• The specific stake that governments have in corporate
activity
• The ethical issues and problems faced in business-
government relations
• The shifts in these issues and problems in context of
globalization
• Further develop the notion of corporate citizenship by
analysing the changing role of business and CSOs
• Challenges posed by sustainability to business-
government relations and show the importance of strong
governmental regulation for achieving potentially
sustainable solutions
Government as a stakeholder
 Defining government, laws, and
regulations
• Government
– variety of institutions and actors at different levels that share
a common power to issue laws
• Laws
– serve as a codification into explicit rules of the social
consensus about what a society regards as right and wrong
• Regulation
– rules that are issued by governmental actors and other
delegated authorities to constrain, enable, or encourage
particular business behaviours. Regulation includes rule
definitions, laws, mechanisms, processes, sanctions, and
incentives
 Government as a stakeholder of
business
Government as a
stakeholder of
business

Government as the elected Government as an actor (or

representative of citizen’s interests group of actors) with interests of
its own

Restricting Enabling Dependent Competing with

business business on business business
 Government as a representative of
citizens’ interests
• Unlike many other stakeholders, government in principle
represents an entire community since it is elected by the
citizens of a certain town, region, country or even
continent
• In this role as the elected representative of citizens’
interests
– Defines the conditions for the licence to operate of business
• Restricting business
• Enabling business
• Debate about the degree of governmental responsibility
for a functioning economy
– Laissez-faire vs. forceful role in industrial policy
Government as an actor (or group of
actors) with interests of its own
• Governments have a self-interest to be re-
elected
• Governments very dependent on business
• Governments also compete with business
 Ethical issues in the relation
between business and government
 Identifying the basic problems and issues:
legitimacy, accountability and modes of influence
• Main source of ethical problems stems from
fiduciary relation to society in general
• Government therefore in bipolar situation

Regulation that
Taxes, jobs, protects their
investment, etc. interests
Business Government Society
Profitable and Consent
stable economic
framework
 Legitimacy of business influence
• Business can have a significant influence on the
implementation and direction of governmental
policies. It is therefore to no surprise that the issue of
‘public sector ethics’ has gained enormous
momentum (Dobel 2007). The main ethical consideration
arising from this situation is twofold
– legitimacy of business influence;
– accountability.
• Is power and political influence of business leaders a
threat to democracy?
• To what degree is it legitimate for business to have
an influence in politics?
 Accountability to the public
• One may contend that since the government acts as
a representative of society’s interests, the public has
a right to be informed about governmental decisions
with other constituencies (such as business), and be
able to determine whether it is acting in its interests
or not
• Although both parties are able to influence each
other, the main concerns for business ethics are
where business has influence on government
 Modes of business influence
on government
• Numerous ways that business can influence
government
• Oberman (cited in Getz 1997:59) distinguishes among
different ways, using following criteria:
– Avenue of approach to decision-maker
• Direct
• indirect
– Breadth of transmission
• Public
• private
– Content of communication
• Information orientated
• Pressure orientated
Business influence on government
 Lobbying
• Lobbying represents a direct, usually private attempt
by business actors to influence governmental decision-
making through information provision and persuasion.
– It is considered a weak form of influence (McGrath 2005)
• Different types of lobbying:
– Atmosphere setting
– Monitoring
– Provision of information to policy-makers
– Advocacy and influencing
– Application of pressure
 Party financing and individual
conflicts of interest
• Donations to parties by business can raise conflict of
interest problems
• Prospect of preferential treatment
• The situation is a dilemma: having good relations with
political parties seems necessary, but party financing
has dangers
– It gains influence
– but it could severely harm the company’s image and perhaps
encourage questionable behaviour on the part of employees
• Overlap of posts between business and government
– ‘Revolving doors’ common globally (e.g., US, Europe, Japan)
– This raises substantial conflicts of interest
Corruption of governmental actors by
business
• Corruption is the abuse of entrusted power for private
gain (Transparency International)
– Main issue of government corruption in relation to business
is activities where private firms shape the formulation,
implementation, or enforcement of public policies or rules by
payments to public officials and politicians
• State capture is a situation where private firms shape
the formulation of regulation by payments to public
officials and politicians
– Where state capture becomes a ‘universal law’ (Kant), a
normally functioning economy becomes nearly impossible
 2008 Corruption Perception Index for
selected countries
Note: Score relates to perceptions of the degree
of corruption among government officials as
seen by business people and risk analysts, and
ranges between 10 (highly clean) and 0 (highly
corrupt)

Source: Taken from Transparency International

Corruption Perception Index, 2004
(www.transparency.org)
 2008 Corruption Perception Index for
selected countries
Country Country CPI Country Country CPI
score rank score
rank Score relates to
perceptions of the degree 40 South Korea 5.6
1 Denmark 9.3
of corruption among 45 Czech Republic 5.2
1 New Zealand 9.3
public officials and 54 South Africa 4.9
1 Sweden 9.3 politicians as seen by 55 Italy 4.8
4 Singapore 9.2 business people, country
57 Greece 4.7
5 Finland 9.0
experts, and risk
58 Lithuania 4.6
analysts, and ranges
5 Switzerland 9.0
between 10 (highly clean) 58 Poland 4.6
7 Iceland 8.9 and 0 (highly corrupt). 58 Turkey 4.6
7 Netherlands 8.9 147 Russia 2.1
9 Australia 8.7 18 Japan 7.3 166 Zimbabwe 1.8
9 Canada 8.7 18 USA 7.3 171 Congo, Democratic Republic 1.7

11 Luxembourg 8.3 23 France 6.9 171 Equatorial Guinea 1.7

12 Austria 8.1 23 Uruguay 6.9 173 Chad 1.6

26 Slovenia 6.7 173 Guinea 1.6
12 Hong Kong 8.1
27 Estonia 6.6 173 Sudan 1.6
14 Germany 7.9
28 Spain 6.5 176 Afghanistan 1.5
14 Norway 7.9
32 Portugal 6.1 177 Haiti 1.4
16 Ireland 7.7
33 Israel 6.0 178 Iraq 1.3
16 United 7.7
Kingdom 35 United Arab Emirates 5.9 178 Myanmar 1.3
18 Belgium 7.3 39 Taiwan 5.7 180 Somalia 1.0

Source: adapted from Transparency

International’s 2008 Corruption Perception Index
 Ethical issues in the context of
privatization and deregulation
• Privatization profits
– Key issue is a fair price
• Citizens turned consumers
– Economic basis for decisions, rather than political
• Natural monopolies
– Can lead to over-charging or delivering poor quality
• PPPs, Public-private-partnerships
– Private sector profit-maximization tends to dominate
at the expense of quality and effectiveness for
citizens
Globalization and business-
government relations
 Globalization and business-government
relations
• Globalization defined as “the progressive eroding of
the relevance of territorial bases for social, economic,
and political activities, processes, and relations”
• British political scientist Anthony McGrew has
described this in terms of a transition from a
traditional to a global context, which he calls ‘the
post-Westphalian’ setting (Held and McGrew 2000)
 From the national to the global
context
• When globalisation deterritorializes social, economic
and political action, the significance of these nation
states is weakened.
• This transition is summarized as:
– Society
– Holder of political power
– Manifestation of political activity
– Addressee of regulation
– Intensity of regulation
– Democratic control of political power
 Globalization, government, and
business: changing context
National context Globalized context
(Westphalian setting) (Post-Westphalian setting)

Society Nation World Society

Holder of Monopoly by national governments Multitude of governmental, civil society,

political power and private actors
Manifestation National regulation (laws) Systems of transnational negotiations (e.g.
of political EU directives, codes of conduct)
activity
Addressee of Social actors Nation states (e.g. EU member states)
regulation (e.g. domestic companies, citizens) Private transnational actors (e.g. MNCs)
Intensity of Decreasing Increasing
regulation (e.g. deregulation, privatisation)
Democratic Higher Lower
control of
political power
Globalization, government, and business:
changing roles

National context Global context (Post-

(Westphalian setting) Westphalian setting)

Role of the Dominant Dependent

state (as Regulator) (as addressee of regulation)

Role of the Dependent Dominant

company (as addressee of regulation) (e.g. corporate power of withdrawal)

Types of Imperative regulation Nation states: imperative regulation

regulation Private transnational actors: private, self-controlled
regulation
Business as an actor within the national
context (Westphalian setting)
• Businesses are still located within nation
states and they are therefore still subject to
national law, which we have called imperative
regulation
• Problematic: Situations where business
becomes an actor in authoritarian and
oppressive regimes
Business as an actor in the global context
(post-Westphalian setting)
• On a global level, corporation assume a more
dominant role while governments – bound by
their confinement to territorial boundaries –
have only limited influence beyond national
boundaries
• Result is so-called ‘race to the bottom’
 Business-government relations in
international trade regimes
• Several transnational government institutions have
significant impact on business
– Regional bodies: EU, NAFTA, ASEAN
• EU is particularly significant, due to its strong legislative powers
– Global players: WTO or World Bank
• Role of these bodies is to enable trade and exchange
of goods and services
• Double-edged sword:
– They can enable access to cheap labour and larger markets
– But the same institutions increase competition and in some
ways limit business
Corporate citizenship and regulation

Business as key player in the

regulatory game
 Corporate citizenship and regulation:
business as key player in the regulatory game
• Debate over how to improve rulemaking
• Business involvement through self-regulation
or ‘reflexive regulation’ and corporatism
• Reasons for new forms of regulation:
– Encouragement of a proactive approach from
industry
– And the hope/assumption of
• Cost-effectiveness
• Faster achievement of objectives
 Players in the regulatory game and selected
examples of private regulatory efforts
Regulation made by:
1 • National governments
Government Business • European Union
• United Nations
2 • International governmental organizations
1 3 (WTO, IMF, World Bank, OECD, etc)
• International treaties (NAFTA, Mercosur, etc.)
Regulation made by:
2 • Business associations,
• Chambers of commerce
• Industry associations
5 • Individual corporations
• Supply chain members
4 • Specific initiatives and programmes
• EMAS
3 • Self-commitments by industry
• Marine Stewardship Council
4 • Ethical Trading Initiative
6 • See Figure 10.6
Civil regulation, Multipartite agreements:
made by: 5 • UN Global Compact,
• NGOs (environment, 6 • European Alliance for CSR
social, human rights, etc • OECD guidelines for MNCs
• Local community orgs CSOs • Dutch covenant approach
• Trade unions • Voluntary Principles, Security & Human Rights
 Examples of regulatory outcomes on
different levels in a multi-actor setting
Regulatory actor Government Business Business Business Business
group involved + Government + CSO + Government
+ CSO

(Segment in Fig. 11.4) (1) (2) (3) (4) (5)

Local/regional level Regional ‘imperative’ Codes of conduct for Regional agreements Regional agreements Regional multipartite
regulation, e.g. SMEs or local with government, e.g. with CSOs, e.g. agreements and
 Anti pollution subsidiaries of  Environmental  Local Agenda 21 projects, e.g.
 Waste management corporations, etc. alliance in Bavaria projects  Business in the
(“Umweltallianz  Mediation projects, Community (BITC)
Bayern) e.g. noise reduction initiatives
 Industrial symbiosis Frankfurt airport  Local development
Kalundborg, Denmark projects
National level National ‘imperative’ Country wide self Country wide Country wide Country wide
regulation, e.g. regulation, e.g. agreements with agreements with CSOs, multipartite agreements
 35hr week in France  BDI (Confederation of government, e.g. e.g. and projects, e.g.
 Dual waste German Industry)  Irish farm plastic  Trade union  Covenant for Work in
management in commitment to recycling scheme agreements in France Germany
Germany (Green Dot) reduce greenhouse  Various voluntary Germany, and other  Dutch covenant
 Closure of nuclear gases environmental European countries approach in
power stations in  Financial market agreements in nearly  Marine Stewardship environmental
Sweden regulation by the FSA all EU countries council management
in UK
International/ International Global industry codes of Global industry codes, Global industry codes of Global industry
global level ‘imperative’ regulation, conduct, e.g. negotiated with conduct, self- multipartite projects,
e.g.  Chemical industry: governmental commitments or codes, self-
 GATT Responsible Care organisations, e.g. agreements, negotiated commitments, or
 EU regulation on Programme,  EMAS (environmental with CSOs, e.g. agreements, e.g.
European works  ISO 14000 management system  Forest Stewardship  UN Global Compact
councils  ISO 26000 standard) Council  European Alliance for
 Sporting goods  Ethical Trading CSR
industry codes of Initiative  OECD, ILO codes of
conduct conduct for
multinational
corporations
Governments, business and
sustainability
 Global climate change legislation and
business responses: Support vs. obstruction
• The debate on climate change regulation has been a key
political arena of sustainability
• CO2 reductions represent a big threat for some industries
– Result: Global Climate Coalition, to lobby against regulation
– Variable success (and the coalition has been disbanded)
– In Europe, public appetite for action, so firms lobbied to
shape the regulation that emerged. ETS introduced in 2005
• Strictest approach, but uses market mechanisms, flexibly
– In Australia, Canada, USA, lobbying was against action
• Global supply of food and water is another key issue
– Bolivian example of ethical issues in water privatization
– Volatility of global markets for wheat and rice, exacerbated
by rise of biofuels
 Summary
We have:
• Looked at the stake held by government in business and
set out how the role of government and its central task of
issuing regulation for business, affects this stakeholder
relationship
• Discussed the complex role of governments and the
interdependencies and mutual interests that they have
with business
• Looked at the way globalisation shifts the role of
business and government in regulating issues of
relevance to business ethics
• Seen how sustainable development can clash too
strongly with short-term profit goals of business to be left
to merely voluntary approaches