BUSINESS AND SOCIETY



There was a time in United States history, particularly during the late 1800s, when business owners' view of society was summed up in the immortal words of William Henry Vanderbilt, who said, "the public be damned." Vanderbilt, the president of the New York Central Railroad at the time, allegedly made the statement to reporters in an 8 October 1882 interview. Afterwards, he denied he said it, but the fact is that, until recently, business owners and society were two completely different entities, with little interest in one another's activities—as long as businesses made money and provided jobs for people.

In the eyes of business owners during the 19th century and the first half of the 20th, their role was to produce goods and services and make as much money as possible for themselves and shareholders. The public's duty was to buy the goods and services. It was not until the 1960s that the traditional roles changed and "stakeholders," i.e., anyone who has a vested interest in any action a company takes, began to play an important role in the relationship between business and society. Today, that relationship continues to evolve toward a symbiotic partnership between business, government, and the broader society.

Most business leaders now take it for granted that companies have obligations to communities and private-sector interests beyond simply providing jobs and delivering goods or services. Laws regarding environmental and social issues, for the most part, are placing heightened demands on corporations to honor widely held social values, such as enforcing fairness in the workplace and controlling the degradation of natural resources. Moreover, at the dawn of the 21st century many in society expect businesses not only to comply with such regulations, but also to exceed the letter of the law, uphold high standards of ethics in all dealings, and invest a portion of their profits in socially constructive ventures or philanthropy—behaviors that some have termed "corporate citizenship."

THE EARLY DAYS

Industry in the United States operated on a small scale prior to the Civil War (1861-65). The majority of manufacturers in the United States were located in the North. The war spurred those manufacturers to improve production techniques in order to provide the goods required by the Union armies. Once the war ended, entrepreneurs sought new ways to mass produce the goods that the country's growing population demanded.

Advances in mass production techniques facilitated by the war made possible an abundance of goods and services for the public. Need to operate in-plant machinery and to transport goods led to a reliance on petroleum products. The so-called "Captains of Industry," men like Andrew Carnegie, Andrew Mellon, John D. Rockefeller, J. Pierpont Morgan, and George Pullman, took advantage of the demands to provide the capital, transportation, oil, and other goods and services required to make the country grow and prosper. Few people gave any thought to what impact industry would have on the environment or society. All industrialists cared about was profits, and they had the federal government on their side, as well.

The government did not want to involve itself in the affairs of business during the late 1800s. It discouraged labor unions and in general gave business owners carte blanche in running their companies as they saw fit. After all, the public did not seem dissatisfied with the way businesses ran their affairs. That began to change, however, in the late 1880s.

Several monopolies existed in the United States toward the end of the 19th century. Industrial combinations controlled such commodities as whisky, oil, transportation, sugar, lead, and beef. Individual states, particularly those in the South and West, passed antitrust laws to regulate monopoly activities. However, they could not impact industries that crossed state lines. Thus, there grew a demand from the public to enact federal legislation to control interstate commerce.

The federal government was reluctant at first to involve itself in direct affairs of business. Slowly, though, it acceded to public demands. For example, in 1887 the House and Senate passed the Interstate Commerce Act, which created the first regulatory commission in U.S. history, the Interstate Commerce Commission (ICC). Three years later, the Sherman Antitrust Act of 1890 became law. It stated that "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal." The ambiguously worded act was hard to enforce, but it at least served notice that the federal government was taking an interest in business activities.

Still, not all business leaders required government intervention to express social norms through their policies. A notable early 20th century example was Henry Ford, whose company established an elaborate code of living for its workers. The Ford ideology, for a time supported by a sort of social-work unit called the Ford Sociological Department, set out to instruct factory workers in proper and moral living. To advance the cause, the company distributed pamphlets advising workers not to live in overcrowded urban settings, but to seek clean and comfortable family housing. The Ford literature even instructed employees on what the management considered were proper bathing habits. Ford was, in fact, intent on Americanizing his large immigrant work force. Beyond the negative stereotypes his policies assumed, however, they led also to more tangible drawbacks for workers who didn't fit the mold. Workers who didn't provide evidence of their wholesome living, mastery of English, and other valued traits were subject to lower pay or even dismissal.

The general legislative trend in first half of the 20th century was toward curbing businesses' clout and strengthening labor, investor, and consumer rights. This period emphasized legal remedies and safeguards for individuals who had direct dealings with companies as employees, shareholders, and customers, whereas later developments would add to that list the local communities and the broader society. The so-called Progressive Era (1890-1920), followed by the New Deal, ushered in the precursors to modern regulations in such arenas as food and drug safety and antitrust enforcement. The 1920s and 1930s also brought new labor laws that began to codify certain employee rights and employer responsibilities, including a minimum wage, as well as legislation that promoted the shareholder's right to reliable information. Key legislation included the Securities Act of 1934, the National Labor Relations Act of 1935 (the Wagner Act), the Food, Drug, and Cosmetic Act of 1938, and the Securities Exchange Act of 1934.

The second world war and shifting political tides during the 1940s and 1950s contributed to a slowdown in the U.S. trend toward engaging business in popular social policy. Some new laws of this period, notably the Taft-Hartley Act of 1947, actually dismantled certain pro-labor policies set forth by New Deal legislation.

THE NEW ERA OF SOCIAL
RESPONSIBILITY

Business executives, government officials, educators, and the public all took a new look at the relationship between business and society in the 1960s. The decade marked a new era in social awareness concerning virtually every aspect of life. People became more concerned with the environment, corporate profits, and a wide range of social issues. Educators implemented innovative courses defining the relationship between business and society and outlining business's social responsibilities. As a result, a new "contract" between business and society, based on the latest definition of public policy, fell into place.

Under the terms of the old "contract," the success or failure of a business was based on how much money it made and how many jobs it produced. People in the 1960s developed a new awareness of the environment and the effects manufacturing had on air, water, etc. They realized for the first time that there sometimes existed an adverse relationship between economic growth and social progress. Critics of the "business at any cost" policy pointed to a number of problems that had been ignored or overlooked for years unsafe workplaces, urban decay, discrimination in the workforce, and the increasing use of toxic substances in the production process. To combat these problems, activists pushed for a higher level of social awareness on the part of business and among the population in general. They advocated a reduction in the social cost of doing business. Their goal was not to negate the old contract. They recognized that businesses had to make profits in order to survive. What they promoted was simply the addition of new policies to the old contract. Their ideas created considerable debate over the concept of social responsibility.

THE DIFFERING VIEWS OF BUSINESS'
SOCIAL RESPONSIBILITY

Proponents of the new contract argued that it was in business' best interest to become conscientious "corporate citizens." They claimed that since business contributed to social problems, it should help resolve them. Doing so would give business a better image in the public's eye and benefit it in the long run. More importantly, it would help business avoid government regulation and provide business opportunities. After all, the proponents said, business has useful resources that it could employ to solve or alleviate social problems.

Opponents did not fully agree, they suggested that it was not business's responsibility to solve social problems, particularly from a free enterprise stand-point. In their viewpoint, honoring social responsibilities would put American businesses at a competitive disadvantage in the rapidly emerging international competitive arena and water down their responsibilities to shareholders. Second, they argued, corporations are not moral agents. Third, they claimed the very definition of social responsibility was so vague no one could state exactly what business's role in it would be. Finally, they stated that business simply did not have the skills or incentives to handle social problems. In effect, opponents said, business would be shooting itself in the foot if it assumed a role as a watchdog of societal problems.

Both sides presented viable arguments, and they did agree on one central issue: that the concept of social responsibility did not include clear guidelines regulating managerial behavior. Nor did it consider the competitive arena in which businesses functioned. For example, if an individual firm implemented its own social responsibility program that resulted in extra costs and reduced shareholders' profits, the company would be adversely affecting its ability to compete. Thus, individual companies were not willing to act unilaterally in meeting social responsibilities. As a result, business in general dragged its heels in formulating a united approach to social responsibility. Consequently, it was inevitable that the government would step in to set guidelines.

FEDERAL REGULATIONS STEPPED UP

Federal, state, and local government agencies concentrated on enacting and enforcing myriad regulations aimed at regulating business and social entities. Sometimes they acted individually; at other times they combined forces. As a result, business owners complained that government was driving them out of business and destroying the traditional capitalistic American economic system. The critics who complained that bureaucratic interference became too pervasive and comprehensive in the 1970s had a legitimate complaint. Government regulation of business literally became a growth industry of its own during that period.

Between 1970 and 1980, the number of federal employees engaged in social regulation increased dramatically. For example, according to figures presented by Melinda Warren and Kenneth Chilton, the number of government workers employed in consumer safety and health regulation rose 31 percent during that time. That was low compared to the employee increases in job-safety and other working-conditions regulatory agencies (144 percent) and environment and energy (298 percent). There were similar jumps in economic regulation agencies, although they were considerably smaller.

Warren and Chilton also revealed that the number of regulation-agency employees rose 56 percent in the field of finance and banking, 21 percent in industry-specific fields, and 33 percent in general business. Overall, there was a 62 percent increase in the number of such workers. The rapid increase bewildered business owners, who simply could not keep up with the number of new laws and regulatory agencies with which they had to deal.

The federal government had already involved itself in three types of regulation: competitive behavior, industry regulation, and labor-management relations. During the 1970s regulation of labor and a new category—what may be loosely termed "social"—took center stage. A look at a few of the agencies created by the federal government in the 1960s through the 1980s attests to the effect social legislation had on labor and management. For example, the Occupational Safety and Health Act of 1970, which created the Occupational Safety and Health Administration (OSHA) , had a major impact on working conditions in virtually every area of business. No longer did labor and management have to negotiate working conditions. OSHA oversaw conditions and had the power to levy heavy fines on businesses found to be in noncompliance with the agency's regulations. This had a potential major impact on companies' bottom lines, which was one of the reasons many business leaders objected to the new business-society contract.

Another federal agency that had a far-reaching impact on business operations was the Environmental Protection Agency (EPA) . The EPA became an official arm of the federal government in 1970, when President Nixon ordered that several existing agencies dealing with the environment be combined into one new, independent agency. The EPA's single purpose was to protect and enhance the physical environment. As the agency grew, its responsibility expanded to include the enforcement of several acts. Among them were

The variety of areas for which the EPA was responsible made real one of corporate America's biggest fears: extensive federal regulation of its activities.

Perhaps the most ambitious act implemented by the federal government was the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, also known as Superfund. CERCLA provided the EPA with the money it needed to oversee the cleanup of old and abandoned waste sites that posed a threat to public health or the environment. The law had two purposes: to provide the funds to clean inactive waste sites for which responsible parties either could not be found or were unwilling to do the cleanup themselves, and to create liabilities for parties associated with waste sites. Under the law, responsible parties could either perform the cleanup themselves or reimburse the EPA for the cost of the process. The government did not bear the entire burden. The chemical industry had to pay $300 million per year in special taxes as its share of the financial burden.

The Superfund bill expired on 31 May 1986, well before all of the sites in need of cleanup were completed. Five months later, President Ronald Reagan signed a new law, called the Superfund Amendments and Reauthorization Act (SARA), which allocated $9 billion more for cleanup projects—and set more stringent guidelines. Again, business had to provide matching funds. For example, petroleum taxes rose to $2.75 billion and a $1.4 billion tax was placed on chemical feedstocks. These were but two of many forms of taxation.

Another major policy area was ensuring the safety of consumer goods. For instance, one agency created during the 1970s was the Consumer Product Safety Commission (CPSC), which was established on 27 October 1972. Its purpose was to protect the public against unreasonable risks of injury associated with consumer products. This was but one more attempt by the government to protect the public from possible harm.

One prominent example of such a policy was the National Highway Traffic Safety Administration's (NHTSA) 1969 mandate that required the installation of air bags in all vehicles manufactured in the United States. The mandate did not set well with the automobile manufacturing industry, which managed to delay the law's implementation for over 20 years. In the end, though, it was a losing battle. The government and the public wanted laws to protect citizens from virtually every imaginable danger. That explains why agencies such as the CPSC were having such a dramatic impact on public policy.

The CPSC was given responsibility to enforce a variety of laws, e.g., the Flammable Fabrics Act, the Refrigerator Safety Act of 1956, the Hazardous Substances Act of 1960, and the Poison Prevention Packaging Act of 1970. The agency's charter gave it sweeping regulatory powers over any article or component part produced or distributed for sale to a consumer or for the personal use, consumption, or enjoyment of a consumer. About the only exceptions were tobacco and tobacco products, motor vehicles and motor vehicle equipment, drugs, food, aircraft and air-craft components, and certain boats and certain other items. These were all covered by other federal agencies, such as the Food and Drug Administration (FDA), created in 1930, and the NHTSA, established in 1966.

The federal government did not restrict itself to regulating public safety, the environment, working conditions, etc. It also became involved in enforcing laws aimed at assuring equal rights for everyone regardless of race, creed, religion, etc. A series of acts aimed at equal opportunity were enacted in the 1960s and 1970s. Actually, many of them were offshoots of President Franklin D. Roosevelt's Executive Order 8802, issued in 1941. The order promoted equal opportunity as a matter of public policy.

Twenty years later, President John F. Kennedy issued Executive Order 10925, which established the President's Commission on Equal Employment Opportunity. It granted the commission the power to investigate complaints by employees and enforce a ban on discrimination by federal contractors. The order marked the first time the words "affirmative action" appeared in a public policy document.

A series of similar legislation ensued. Title VII of the Civil Rights Act of 1964 forbade discrimination in employment by an employer, employment agency, or labor union on the bases of race, color, sex, religion, or national origin in any term, condition, or privilege of employment. This act departed radically from Roosevelt's and Kennedy's executive orders, which applied strictly to employers working on federal contracts. It also established the Equal Employment Opportunity Commission (EEOC) —which had no enforcement powers. The government rectified that problem eight years later with the passage of the Equal Employment Opportunity Act of 1972.

The 1972 act broadened the EEOC's coverage and provided its power to bring enforcement action to the courts. It also allowed employees and job applicants to file discrimination charges on their own behalf. Moreover, it allowed for organizations to file discrimination charges on behalf of aggrieved individuals. As comprehensive as the amendment was, there were still a few groups exempted. For example, the EEOC did not have jurisdiction over private businesses with fewer than 15 employees, bona fide tax-exempt clubs, or local, national, and international labor unions with under 15 members.

A series of similar laws followed. These included the Pregnancy Discrimination Act of 1978, the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967, the Vocational Rehabilitation Act of 1973, and the Vietnam Era Veterans' Readjustment Assistance Act of 1974. Some of these acts applied only to businesses working under federal contracts. Regardless, there were very few people in the United States who did not fall under the protection of at least one of the public policy acts.

It should be noted that at the same time the federal government was passing act after act, state governments also became involved in business regulation. In 1945 New York became the first state in the union to pass a fair employment practice (FEP) act. Other states followed. Virtually every state now has FEP's on the books. The states also enacted their own EPA-type laws. In some cases, their laws duplicated federal legislation. In others, they superseded federal laws. In any case, they placed a more restrictive burden on business operators. However well meaning the legislation regulatory agencies were, the fact that the government was attempting to legislate business ethics disturbed many business leaders.

Critics contended that many of the new public policy laws interfered with the basic mission of business—to make as much money as possible for owners and shareholders. Wave after wave of reform affected business operations. There came in rapid succession the civil rights movement, the feminist movement, the onset of societal concerns about pollution, the war on poverty, and a rebirth of consumerism. There was also a new emphasis on workplace safety and ethical concerns over foreign practices and operations. Each wave led to new legislation. There was so much legislation, in fact, that business operators could not keep up with it. They had little choice but to react to it, though. Government intervention and societal activism forced companies to change the way they did business. The change had a profound effect on business's bottom line—and on society in general.

THE NADER EFFECT

The changes in public policy prompted business leaders to take a close look at the way their companies were structured and governed. Outside groups such as Ralph Nader's Center for the Study of Responsive Law tried to become part of General Motors' governance process, for example. Nader quickly became a thorn in GM's side—and became a symbol for outside involvement in corporate affairs.

Ralph Nader had set the stage for public awareness of corporate activities in his 1965 book Unsafe at Any Speed, which labeled the General Motors-produced Corvair as a poorly made, dangerous automobile. GM executives took exception and ordered an investigation of Nader. He, in turn, sued General Motors for invasion of privacy. The two settled out of court for $425,000. Nader used part of the money to establish the Center for the Study of Responsive Law.

Nader's attack on GM disturbed the company's leadership, which was used to the traditional model of corporate governance in which shareholders controlled the corporation and were the major factor in the governance process. The old saying went, "As General Motors goes, so goes the nation." In this instance, GM had to adopt a new approach to business and its role in an increasingly complex society in response to public pressure. Once GM made this change in approach, other leading companies followed.

To protect itself from Nader, GM founded a nominating committee to select members for its board of directors. Such strategies did not sway Nader and his fellow activists, however. They were more interested in bypassing traditional power sources and establishing a stakeholder form of governance, not only at GM, but in businesses in general, something most executives did not want to see happen.

R. Edward Freeman, in his book Strategic Management: A Stakeholder Approach, defined the stakeholder model as "any group or individual who can affect, or is affected by, the achievement of a corporation's purpose. Stakeholders include employees, customers, suppliers, stockholders, banks, environmentalists, government and other groups who can help or hurt the corporation." The fact that so many disparate groups had an interest in business operations caused business leaders to sit up and take notice. They realized that they had to come to grips with a new approach to doing business. They embarked on a program of reform.

REFORM BECOMES A KEY ISSUE FOR
MANAGEMENT

Business executives adopted a series of new strategies to adapt to the demands of public policy. For example, many companies instituted public responsibility committees at the board of directors level. The committees had several responsibilities, chief of which was to show employees and the public that the companies they served were indeed committed to becoming upstanding corporate citizens. They dealt with a diverse array of issues, including, but not limited to, affirmative action, workplace safety, government relations, pollution, and product quality and safety. Their role was important to the companies they served, since they acted as watchdogs in the vital area of public policy.

Companies also redefined the role of the chief executive officer (CEO). In some cases, the CEO became more of a specialist in government affairs than the hands-on leader of the company. The CEO also became the one person who defined the level of the company's commitment to public policy issues. The public measured just how serious individual companies were about public policy based on the CEO's actions, rather than rhetoric. The CEO's attitude filtered down through the workforce and influenced changes at the different levels of management.

Management throughout the business world underwent substantial changes. A new breed of specialists emerged in the management ranks. Companies developed affirmative action specialists, environmental control managers, workplace safety engineers; in short, a cadre of people trained to respond to the public policy demands of the late 20th century.

Companies also paid a lot more attention to the legal aspects of their operations. In the early days of American business, lawsuits filed against businesses by government agencies or consumers were few and far between. However, as the public became more aware of environmental, product safety, and other concerns, and the government enacted more public policy laws, lawsuits became more common. The new laws provided for stiff financial penalties against public policy offenders and opened the door for more private citizens and agencies to sue corporations. Thus, companies had to protect themselves against possible heavy financial losses while acting socially responsible. The possibility of monetary losses definitely influenced business' strategic planning.

For the first time, business executives were forced to include in their strategic plans issues such as how to dispose of hazardous waste, ensure product safety, eliminate unsafe work conditions, and establish and enforce affirmative action plans. These issues meant a possible reduction in funds previously allocated for research and development, capital expenditures—and profits. Businesses had to balance their finances carefully to satisfy the public policy watchdogs and ensure profits. In order to do this, they had to be able to measure their performance. To many, the solution was a process called the social audit.

THE SOCIAL AUDIT

The social audit is an internal management tool designed to ascertain whether a company's resources are being used effectively in dealing with public policy issues. It can be used to measure the performances of individual managers, report to the board of directors and stakeholders on a company's progress and provide an overall picture of the company as a responsible corporate citizen. The social audit process is by no means scientific, however.

The social audit is a generalized tool used by businesses to give them a broad idea of how they are performing. The measurements they use are subject to interpretation by government agencies and private citizens. Government officials and the general public have become more aware of the need for concrete proof that businesses are acting in a socially responsible manner.

THE ROLE OF ACTIVISM

One consequence of the increased emphasis on social responsibility has been the growth of many organizations aimed at protecting the public from pollution, poorly made products, unsafe workplaces, and the host of other problems, that affected citizens. These organizations have placed businesses in the proverbial "fishbowl," where they are under the scrutiny of an ever-watchful public.

Environmental organizations such as Greenpeace, the Sierra Club, and the National Wildlife Federation take an active role in monitoring the environment and forcing businesses to pay careful attention to public policy. Such private interest groups hire their own lawyers, scientists, and other public interest professionals who provide the expertise necessary to conduct research, litigation, and advocacy on the complex issues involved in public policy. These non-profit, nonpartisan advocacy groups investigate problems, educate the public about solutions, and lobby locally, statewide, and nationally for reforms aimed at preserving the environment and protecting consumers. Often, they work in conjunction with government agencies to oversee business activities, which has caused them to incur the wrath of industry leaders and has led to costly, prolonged battles over the use and fate of certain products.

For example, in February 1994, the Environmental Protection Agency (EPA) suggested that an addition be made to the nation's Clean Water Act mandating a strategy for "substituting, reducing or prohibiting the use of chlorine and chlorinated compounds." The Chemical Manufacturers Association (CMA), an industry trade group, expressed outrage at the suggestion. The EPA backed down once the CMA flexed its muscles. Instead of an outright ban, it modified its stance to include only a study and a pledge to work with the industry on the issue. That did not mollify private advocacy groups.

Environmental groups continued to press for an outright ban on chlorine in all forms. They squared off against industry specialists. The battle was reminiscent of other fights over controversial products. The issues were frequently similar: environmentalists suggested they were harmful to wildlife, the atmosphere, and life in general, while manufacturers insisted that the products were safe when used in moderation. The government often stood somewhere in the middle, but occasionally initiated the squabbles through legislation or regulations.

CURRENT TRENDS

Whereas a few generations ago the typical business executive felt assured that his company's social obligations were met fully by being profitable and obeying the law, these qualities are insufficient today. Instead, businesses are involved in a host of socially beneficial programs both within and beyond the enterprise. Recent innovations have focused on making the corporation more friendly to families and diversity. Levi Strauss & Co., for example, won an award in 1997 for its anti-racism program. Spurred by the 1993 Family and Medical Leave Act, most large companies have liberalized their policies on such family issues as parental leave and even hours of labor. For many mid- and large-size companies, social responsibilities extend well beyond the corporate walls; their management considers it a basic duty to be involved in community-oriented initiatives like granting scholarships, donating products or funds for causes, and organizing their employees and customers to participate in community service projects.

The posture of social concern, if not the reality of it, is so intrinsic in corporate America that even perennial targets of social and environmental activists are much less likely to ignore social controversies they are implicated in or issue blanket denials without addressing the concerns. Rather, they may convey their commitment to the underlying social value and offer evidence of how they've promoted it. This is the public relations aspect of corporate citizenship, or what some call enlightened self-interest. Indeed, a 1998 Industry Week report on well-managed companies asserted that it was an "important competitive asset." While certainly not all community-friendly gestures by corporations can or should be interpreted as self-serving, this dimension explains in part what one analyst described figuratively as the "exponential" growth of corporate philanthropy during the 1990s.

[ Arthur G. Sharp ]

FURTHER READING:

Beauchamp, Tom L. Case Studies in Business, Society, and Ethics. 4th ed. Englewood Cliffs, NJ: Prentice Hall, 1997.

Business and Society Review, quarterly.

Castro, Barry, ed. Business and Society: A Reader in the History, Sociology, and Ethics of Business. New York: Oxford University Press, 1996.

Freeman, R. Edward. Strategic Management: A Stakeholder Approach. Marshfield, Massachusetts: Pitman, 1984.

Hood, John M. The Heroic Enterprise: Business and the Common Good. New York: The Free Press, 1996.

Miller, William H. "Citizenship: A Competitive Asset." Industry Week, 17 August 1998.

Nader, Ralph. Unsafe at Any Speed: The Designed-in Dangers of the American Automobile. New York: Grossman Publishers, 1972.

Warren, Melinda, and Kenneth Chilton. The Regulatory Legacy of the Reagan Revolution: An Analysis of 1990 Federal Regulatory Budgets and Staffing. St. Louis, MO: Washington University Center for the Study of American Business, 1989.



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