Corporate Social Irresponsibility

Paula Alexander

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317950691
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Wirtschaftssethik

Corporate Social Irresponsibility focuses on ethical failures in order to relate corporate responsibility to business ethics, corporate governance, and organization effectiveness. The book advocates a strategic approach to CSR – ethical management cannot, and should not, be divorced from effective management.

Corporate social responsibility has transitioned from oxymoron into a defining challenge of the twenty first century. Taking the recent financial crisis as a starting point, Alexander examines the underlying ethical and legal crises these events expose in the business world. The problems that have come to light go beyond issues of firm financial performance into the integrity of the manufacturing and marketing processes, and relations with consumers. As such, the book presents a model that resolves the apparent conflict between maximizing shareholder value, and meeting the interests of other firm stakeholders. Alexander presents a balanced view, contrasting her model with alternative approaches. The book also covers the impact of globalization on management, the ethics of outsourcing, the limits of regulation, as well as poverty alleviation and social entrepreneurship.

Blending a comprehensive theoretical framework with a broad range of cases, this book covers the latest major changes in US legislation, as well as recent corporate scandals making it a valuable accompaniment to any course in CSR, business ethics, or business, government and society.

Unit II

Chapters 5 through 12 are organized around the systems model of enterprise, considering in sequence: the relation of enterprise to its regulators, competitors, suppliers, customers, the environment, employees and shareholders (corporate governance).

5 Managing the Business–Government Relationship I Regulation of Business Enterprise and the Relation of the Enterprise to Its Competitors

DOI: 10.4324/9781315863108-7

Chapter Outline

• Laissez Faire Capitalism
  • The Industrial Revolution and the Rise of the Market-Driven Economy
• Justifications for Government Regulation of Business Corporations According to Laissez Faire Capitalism
  • Correcting Market “Failure”
  • Redistribution of Goods
  • Evolving/New Social Norms
  • Evolving/New Social Norms and Redistribution of Goods
• Government Authority to Regulate
  • Regulatory Agencies
• Anti-Trust Law: The Regulation of Competitor Relations
  • Sherman Anti-Trust Act of 1890
  • Amendments to the Sherman Anti-Trust Act
    • Clayton Anti-Trust Act (1914)
    • Federal Trade Commission Act (1914)
    • Robinson-Patman Price Discrimination Act (1936)
    • The Hart-Scott-Rodino Antitrust Improvement Act (1976)
  • The Role of Competitors
  • Unintended Consequences of Regulatory Enforcement
  • The Impact of Changing Technology
• End of Chapter Case 5.1: Microsoft Corporation and Anti-Trust Litigation: USA and EU
• End of Chapter Case 5.2: Corporate Personhood

Chapter Introduction

What are the justifications for government regulation in a market-driven, capitalist economy? Laissez faire capitalism favors only that regulation necessary to correct deficiencies to a competitive market. However, new regulation sometimes derives from changing social values and is often tied to historical events and accidents. Moreover, the complaints of competitors sometimes lead to enforcement actions of the regulator against the aggressive market tactics and strategies of an enterprise. Competitors played a key, and perhaps, decisive role in causing the United States Department of Justice to prosecute both AT&T and Microsoft under the United States anti-trust laws.

Chapter Goal and Learning Objectives

Chapter Goal: Describe the justifications for regulation of business enterprise by government in the context of a market-driven economy.

Learning Objectives

1. Discuss the evolution of laissez faire capitalism.
2. Discuss the market-failure justification for regulation of business enterprise, as well as other justifications for business regulation.
3. Debate monopoly power as an ethical issue; understand the development of anti-trust regulation.
4. Discuss the role of competitors vis-à-vis each other and in the enforcement of anti-trust and other law.
5. Discuss unintended negative consequences of regulation and the alternatives to regulation.

Laissez Faire Capitalism

We live in the age of the “market-driven” economies. Market-driven economies rely on the law of supply and demand. Adam Smith, in his classic work, An Inquiry into the Nature and Causes of the Wealth of Nations,¹ argued that the market should not be constrained by government regulation, characteristic of mercantilism. Mercantilism was the period of economic history during the Age of Exploration and European colonialism that regulated business by licenses issued by the monarch.² Adam Smith’s book, written in 1776, ushered in a period of economic history called laissez faire capitalism. According to laissez faire capitalism, the market should be guided by the “invisible hand” of supply-and-demand and enterprises should compete with one another in that market. Even the centrally planned economies of the former Soviet Union and of the People’s Republic of China, which relied on the government as planner and consumer of enterprise production, have transitioned to market-driven economies.

The Industrial Revolution and the Rise of the Market-Driven Economy

Laissez faire capitalism coincided with the rise of manufacturing and the Industrial Revolution. The Industrial Revolution ³ represented a transition from agriculture and handicraft production of goods to mass production of goods. The rise of manufacturing, followed by the conversion of manufacturing technology from cottage industry to capital-intensive, mass production of goods, was based on a series of inventions, including the cotton gin, improvements in weaving that supported the growth of the textile industry in England and the steam engine, for example.⁴

Alvin Toffler, in his book The Third Wave,⁵ identified the factors underlying and facilitating the Industrial Revolution. He called these factors “the code of the second wave.” According to Toffler, the Industrial Revolution is based on the following “code”: 1) standardization (of parts), 2) specialization (of labor), 3) synchronization (of tasks), 4) concentration (of capital), 5) centralization (of decision making), and 6) maximization (of profits). Two other factors, the discovery and harnessing of electricity enabling the mass production or high volume production of goods using capital equipment,⁶ and the development of railroads, enabled the distribution of the mass produced goods to remote markets, far away from the site of production.⁷

The Rise of Corporations. Corporations were chartered during the period of mercantilism as entities licensed by the monarch to claim the lands discovered by expeditions and to exploit the natural resources of the newly discovered and claimed lands. Modern corporations derived from the British trading companies. One of these trading companies, the British East India Trading Company, played a significant role in both the Indian sub-continent and American history. The Boston Tea Party, which was a factor leading to the American war of rebellion against Britain, was instigated by the tea tax levied by the British East India Trading Company.

Prior to 1844, corporations were chartered by the crown or by special act of Parliament.⁸ The passage in England in 1844 of the Joint Stock Companies Act of 1844 and then The Limited Liability Act of 1855 facilitated the development of the modern business corporation, organized specifically for economic purposes. The Joint Stock Companies Act of 1844 provided a mechanism for the establishment of a corporation (a joint stock company) without a charter from the crown or special enactment by Parliament. The Limited Liability Act of 1855 provided that the financial exposure or liability of members of a joint stock company would be limited to their investment, thus managing and limiting the risk of undertaking new ventures. Corporations became the vehicle for the emergence of new ventures, including steamship lines, railroads, and other enterprises that furthered economic development during the Industrial Revolution.

The Civil War further spurred the growth of industrial enterprise. In the post-Civil War United States, corporations were recognized as legal persons. In the decision Santa Clara County v. Southern Pacific Railroad Company, the United States Supreme Court case decided in 1886, corporations came to be recognized as legal persons.⁹ The taxes levied by Santa Clara County on the fences along the railroad tracks were at issue in the Southern Pacific Railroad case. The Southern Pacific Railroad was part of the complex of railroad networks that created the transcontinental railroad. At the time, railroads threw sparks along the tracks, which sometimes caused fires. It was the practice to construct fences along the railroad’s right of way to protect the adjacent lands. The railroad argued that the fences were not taxable and that the taxes levied by the county violated the rights of the railroad to equal protection of the laws, guaranteed to persons under the Fourteenth Amendment.¹⁰ The implication that corporations are legal persons is that the rights extended to persons by the Fourteenth Amendment of the United States Constitution, including equal protection and due process, are granted to corporations.

The application of the Fourteenth Amendment to corporations was an unanticipated legal development of the law. All the rights and privileges extended by the United States Constitution to persons were thereby applied to corporations. For example, one of the basic rights of persons under the Constitution of the United States is the right of free speech. The right of Nike Corporation to free speech was at issue in the Nike v. Kasky case, discussed in Chapter 7. Nike asserted that it did not operate sweatshops and Kasky argued that Nike must be held to a “truth in advertising” standard. Nike countered that it was engaged in political speech, where opinions are permitted, rather than commercial speech, where a “truth in advertising” standard is applied. The participation of corporations in the political process, also guaranteed to persons under the First Amendment, is discussed in Chapter 6.

Justifications for Government Regulation of Business Corporations According to Laissez Faire Capitalism

Laissez faire capitalism prefers that markets be regulated by the laws of supply-and-demand, rather than legislation. Laissez faire in fact means “leave to act,” a rough translation from the French. Therefore, regulation under laissez faire capitalism must be justified by special circumstances. Market “failure” is a justification for regulation under laissez faire capitalism.

Correcting Market “Failure”

The justification for government regulation of corporations under laissez faire capitalism is to correct situations where the laws of supply and demand fail to operate in a given market. In The Wealth of Nations, Smith promoted the benefits of the “invisible hand,” the operation of the laws of supply and demand as the best way to promote economic development and prosperity, rather than the customary government regulation of enterprises of his day, including trading companies, under the mercantilist approach.

“Market failure” happens when the assumptions underlying a free market do not operate in reality. A free or rational market rests on the assumption of many firms competing among each other. Such firms absorb all costs of production, without externalizing their costs. The decision-making processes of such firms are based on complete information, and they act to maximize profits.¹¹ The profit-maximizing choices are based on means-ends rationality, whereby those means are always chosen that are best adapted to attaining desired goals. The free market rests on an assumption of labor force mobility, whereby workers are free to move to those firms that offer the best terms of employment, even if geographic relocation is involved. The assumption of a free market also assumes that there are no transaction costs to choices; for example, that workers who move to those firms that maximize their wages assume no costs in doing so. The assumptions of a “free” or rational market economy are given in Table 5.1.

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Table 5.1 Assumptions of a “Free” or Rational Market Economy

The assumptions of a “free” or rational market economy include:

(1) no monopoly power;

(2) no external costs;