Business, Government, and

Society

Chapter - 01
 WHAT IS BUSINESS?
• Business is a broad term encompassing a
range of actions and institutions. It covers
management, manufacturing, finance, trade,
service, investment, and other activities.

• Profit-making activity that provides products

and services to satisfy human needs.
 GOVERNMENT?
• Government refers to structures and processes
in society that authoritatively make and apply
policies and rules. Like business, it
encompasses a wide range of activities and
institutions at many levels, from international
to local.
 SOCIETY?
• A society is a cooperative network of human
relations, organized by flows of power and
relatively distinct in its boundaries from other,
analogous networks.
• Every society includes three interacting
elements:
(1) ideas,
(2) institutions, and
(3) material things.
• Ideas, or intangible objects of thought, include
values and ideologies.
• Values are enduring beliefs about which
fundamental choices in personal and social life
are correct. Cultural habits and norms are
based on values.
• Material things: Tangible artifacts of a society
that shape and are shaped by ideas and
institutions.
 Institutions?
• Institutions are formal patterns of
relations that link people to accomplish
a goal.
How Institutions Support Markets?
• WHY IS THE BGS FIELD IMPORTANT
TO MANAGERS?
 FOUR MODELS OF THE BGS
RELATIONSHIP

• The Market Capitalism Model

• The Dominance Model
• The Countervailing Forces Model
• The Stakeholder Model
 The Market Capitalism Model
• The market capitalism model depicts business
as operating within a market environment,
responding primarily to powerful economic
forces. There, it is substantially sheltered from
direct impact by social and political forces. The
market acts as a buffer between business and
nonmarket forces.
 Capitalism
• An economic ideology with a bundle of values
including private ownership of means of
production, the profit motive, free
competition, and limited government restraint
in markets.
 Managerial capitalism
• A market economy in which the dominant
businesses are large firms run by salaried
managers, not smaller firms run by owner
entrepreneurs.
The Market Capitalism Model
 laissez-faire
• An economic philosophy that rejects
government intervention in markets.
The perspective of the market capitalism model leads
to these conclusions about the BGS relationship:

(1) government regulation should be limited,

(2) markets will discipline private economic activity

to promote social welfare,

(3) The proper measure of corporate performance

is profit, and

(4) the ethical duty of management is to promote

the interests of owners and investors.
 Critics of capitalism and the market
capitalism model
• Bernard Mandeville (1670–1733), an intellect predating Adam
Smith, argued that markets erode virtue. The envy, avarice, self-
love, and ruthlessness that energize them are base values driving
out virtues such as love, friendship, and compassion.
• Karl Marx believed that owners of capital exploited workers and
promoted systems of rising inequality.
• The communist Vladimir Lenin (1870–1924) wrote that industrialists
masterminded imperial foreign policies to effect a “territorial
division of the whole world among the greatest capitalist powers.”
• Pope John Paul II (1920–2005) feared that markets place too much
emphasis on money and material objects and cautioned against a
“domination of things over people.
 The Dominance Model

• The dominance model is a second basic way of

seeing the BGS relationship. It represents
primarily the perspective of business critics. In
it, business and government dominate the
great mass of people. This idea is represented
in the pyramidal, hierarchical image of society.
The Dominance Model
 Those who subscribe to the model
believe that
• Corporations and a powerful elite control a system that enriches a
few at the expense of the many.
• Governments and leaders represent interests expressed by the
people, who are sovereign.
• Proponents of the dominance model focus on the defects and
inefficiencies of capitalism.
• Corporations are insulated from pressures holding them
responsible, that regulation by a government in thrall to big
business is feeble, and that market forces are inadequate to ensure
ethical management.
• Unlike other models, the dominance model does not represent an
ideal in addition to a description of how things are.
• For its advocates, the ideal is to turn it upside down so that the BGS
relationship conforms to democratic principles.
• Beginning in the 1870s, diverse groups of plain
people who found themselves toiling under
the directives of rich capitalists rejected the
market capitalism model and based a populist
reform movement on the critical view of
society implied in the dominance model.
 Populism
• Populism is a recurrent spectacle in which
common people who feel oppressed or
disadvantaged in some way seek to take
power from a ruling elite that thwarts
fulfillment of the collective welfare.
 The Countervailing Forces Model
• The countervailing forces model, depicts the
BGS relationship as a flow of interactions
among major elements of society. It suggests
exchanges of power among them, attributing
constant dominance to none.
The Countervailing Forces Model
• This is a model of multiple forces. The power
of each element can rise or fall depending on
factors such as the subject at issue, the
strength of competing interests, the intensity
of feeling, and the influence of leaders.
 What overarching conclusions can be
drawn from this model?
• First, business is deeply integrated into an open society and must respond
to many forces, both economic and noneconomic. It is not isolated from
any part of society, nor is it always dominant.

• Second, business is a major force acting on government, the public, and

environmental factors. Business often defeats labor, wins political battles,
and shapes public opinion. It consumes natural resources.

• Third, to maintain broad public support, business must adjust to social,

political, and economic forces it can influence but not control. Faulty
adjustment invites correction. This is the social contract in action.

• Finally, BGS relationships evolve as changes take place in the ideas,

institutions, and processes of society.
 The Stakeholder Model
• The stakeholder model in the corporation at
the center of an array of relationships with
persons, groups, and entities called
stakeholders . Stakeholders are those whom
the corporation benefits or burdens by its
actions and those who benefit or burden the
firm with their actions.
 Types of Stakeholders
• Primary stakeholders are a small number of constituents
for which the impact of the relationship is mutually
immediate, continuous, and powerful. They are usually
stockholders (owners), customers, employees,
communities, and governments and may, depending on the
firm, include others such as suppliers or creditors.

• Secondary stakeholders include a possibly broad range of

constituents in which the relationship is one of less
immediacy, benefit, burden, or power to influence.
Examples are activists, trade associations, politicians, and
schools.
• Exponents of the stakeholder model debate
how to identify who or what is a stakeholder.

• The stakeholder theory is at heart a political

ideology that regards traditional capitalist
corporate governance as akin to an
undemocratic political system in which the
“population” of stakeholders is not given
proper representation.
 Criticisms of stakeholder model
• An unrealistic assessment of power relationships between the corporation and
other entities.

• It seeks to give power to the powerless by replacing force with ethical duty, a
timeless and often futile quest of moralists.

• It sets up too vague a guideline to substitute for the yardstick of pure profit.

• Unlike traditional criteria such as return on capital, there is no single, clear, and
objective measure to evaluate the combined ethical/economic performance of a
firm.

• The interests of stakeholders so vary that often they conflict with shareholders
and with one another.
• Some puzzles exist in stakeholder thinking. It is not always clear who or what is a
legitimate stakeholder, to what each stakeholder is entitled, or how managers
should balance competing demands among a range of stakeholders.
The End