BA364:

Introduction to Relationship Between Business and Society

In April 1995, CBS aired a documentary on the soccer ball industry in Sialkot, Pakistan. The documentary showed that the soccer ball industry in Sialkot, which manufactured 60% of the world’s total supply of soccer balls (Husslbee, 2000) for global sports companies, employed child labor. This CBS documentary, subsequently, received considerable attention in the United States and the global media. The result of this attention was the launching of a major international campaign against the companies in Sialkot that employed children and the big international names in sports goods and apparel that did business with these manufacturers.

Nike was one of the main targets of this international campaign. Nike’s initial response to these accusations added fuel to the fire, as Nike gave different versions regarding its awareness of the problem and steps taken by it to resolve the issue (Boje & Khan, 2013). In fact, in an interview with Michael Moore for his documentary The Big One, Phil Knight (Nike CEO) came out as unconcerned and callous when he commented that 14-year-olds working in factories that make Nike products, including soccer balls, did not bother him. As a result, activist and consumer pressure mounted on Nike. Eventually, Nike became part of a global initiative to remove child labor from this industry. Nike also took steps to create labor standards for its vendors and insisted that its vendors become part of the global initiative, and it took upon itself to monitor its suppliers who agreed to remove child labor in the soccer ball industry (Nadvi, 2008).

This brief description of the soccer ball controversy raises some crucial questions:

• As a U.S. company, is Nike responsible to the U.S. public?
• If Nike is accountable to the U.S. public, then as a U.S. company, what should be the limits of this responsibility?
• Is Nike responsible for its vendors, who may or may not treat their employees fairly or hire child labor? Is this not the responsibility of the government of that particular country?
• Can Nike make a difference in the working conditions of workers in those countries?
• Should Nike be concerned with child labor and other labor issues in the factories of its suppliers?
• Should we in the U.S. public be concerned about these and other ethical issues in the United States and in other countries?
• If we do think that the U.S. public should be concerned about these matters, then do we have, as individuals or as a society, the tools to make any difference? If so, then what are those tools?

The answers to all of the above questions lie in the realm of this course that looks at the role and place of business in society. The argument that this course makes is that business in the 21st century is one of the most powerful and dominant segments of society. Societies in different countries, especially in developed nations, have realized this, and they are debating the role of business in society to ensure that business performs its functions with the least negative impact on society. In essence, businesses today need to have a "license to operate" (Post et al., 2002) from society and, therefore, businesses need to be more cognizant of societal demands and concerns. However, society is composed of many entities, and organizations cannot and should not be expected to cure all ills in society. Hence, it is necessary for managers to have two capabilities: how to recognize stakeholders and how to interact with them. Stakeholder management aims to provide necessary tools to perform these functions. 

Learning Objectives

After completing this lesson, you will be able to do the following:

• Define "business" and "society."
• Define and appraise a pluralist society and the purpose it serves.
• Evaluate why businesses are criticized and construct the process of how organizations react to societal pressures.
• Define what the stakeholder approach to business is and explain why it is needed in the 21st century.

Lesson Readings and Activities

By the end of this lesson, make sure you have completed the readings and activities found in the Lesson 1 Course Schedule.

The Relationship Between Business and Society

Since the course is about business and society, we first need to define "business" and "society," especially in the context of this course.

• A business can simply be defined as “a commercial or industrial establishment” (Webster's New World College Dictionary, 2014).
• A society can broadly be defined as “all people, collectively, regarded as constituting a community of related, interdependent individuals” (Webster's New World College Dictionary, 2014).

The term "business" can be used to denote businesses of all sizes. However, for the purpose of this chapter and this course, "business" will mostly be used in a collective sense where it will denote all companies in various industries, large multinationals, corporate America, or global business.

"Society" could be seen as a small community or an entire nation but, generally, this term is used with reference to groups and entities that share certain values and traditions and have some level of interdependence and collective goals.

The relationship between business and society is a multilevel phenomenon. It can be understood at different levels, such as

• local businesses and their relationship with the local community where they operate;
• national-level businesses dealing with local communities where they operate, states where they have presence, and national-level groups and entities; and
• multinational corporations dealing with local communities in different countries, states and countries where they have a presence, and global or international-level groups and entities (e.g., International Labor Organization, United Nations, UNICEF, GATT, etc.).

In essence, businesses today have to face and deal with multiple entities at different levels. 

What Is a Pluralistic Society?

In this chapter and in the course, the assumption is that society as a whole represents the environment in which businesses exist and operate. In the previous section, we have seen that by implication, businesses today have to interact with numerous entities within the society. The important question at this point is that if society represents the overall business environment, then what are the key elements of the society, and what are its constituting units?

Society as a Macro-Environment

At the broadest level, society as a macro-environment is divided into four interrelated and overlapping segments:

1. social environment (population demographics, culture, values, and traditions);
2. economic environment (the overall nature of the economy, e.g., labor intensive vs. capital intensive, and the direction of the economy);
3. political environment (laws, court systems, political processes, type of government, and inclination of governments, e.g., pro business or pro labor); and
4. technological environment (level of technology, use of technology, and speed of technological changes).

These four macro-environments do overlap and can be further subdivided into several sections. The main purpose of this delineation is that it proposes that the society is composed of many segments, and if we want to understand the relationship of business and society, then we do need to have an understanding of the constituents of the society.

A Pluralist Society

Each segment of the society can be composed of several entities. For example, the social environment can be composed of organizations that represent different ethnicities, religions, races, and genders, e.g., women's rights groups, civil rights groups, etc. Social environment can also be subject to change; for example, the U.S. workforce is increasingly becoming diverse. For organizations, this demographic change means that they should create policies that avoid discrimination, and they should create structures and organizational cultures that will allow the minorities in the workforce to be more productive. The economic environment is represented by different industries that make up the economic outlook of a country.  In essence, societies in most developed and industrialized nations represent many groups and their interests, making them pluralist societies. 

The term "pluralism" comes from the discipline of political science. Scholars who have written on democracy have exalted pluralism and its benefits for establishing viable democratic systems. Robert Dahl, in his seminal work Pluralist Democracy in the United States (1967), enumerates the following attributes of a pluralist society: 

• multiple centers of power where no one section of the society is wholly sovereign over others (this feature will diffuse power in the society and allow consent to arise from the tug-of-war between different interests, and would lead to peaceful conflict resolution),
• procedural consensus (culture of constitutional democracy),
• cross-cutting solidarities (somewhat like today’s situation of multiple memberships and loyalties of individuals to different causes),
• open access to the political arenas, and
• balance of power (sufficiently large number of groups so that no one group can dominate).

The main benefit of pluralism is that it diffuses power into several power bases; hence, it restricts concentration of power into one or a few groups.  Under pluralistic conditions, democratic societies will thrive as a pluralist society, as it 

• prevents concentration of power in few hands,
• allows freedom of expression,
• creates a system with inherent checks and balances, and
• creates diversified sets of loyalties that allow for no one leader of any organization to get out of control. 

On the other hand, a pluralist society can also become a special interest society, where a society becomes a collection of groups that only pursue their specific interests (e.g., different types of advocacy groups). Interest groups do make a pluralist society more complicated and make decision-making slow and difficult; however, this downside is compensated with the benefits that come from the absence of tyranny.

Applied to our course, this would mean that societies in most democratic and industrialized nations today have become increasingly plural. This means that there are several entities in the society that may be interested in what businesses are doing, and they may try to affect businesses or influence them to cater to their specific needs and interests. By extension, this would mean that if we are looking at the relationship between business and society, from the business point of view, this relationship becomes increasingly complex because of the multiplicity of parties and entities that exist in the macro-environment of the society.

A Stakeholder Approach to Business

 

Critique of Business

In recent years, increased education, affluence, and awareness in the general public have put more societal pressure on businesses to improve their social performance and become better corporate citizens. Impetus for this movement has also come from numerous corporate scandals since the beginning of the 21st century and the 2007 recession, which has been blamed on corporate greed by many economists and analysts.

It has also been realized that corporations, through their products, advertisements, and political activities, affect our lives probably more than any other entity in our society. Take the example of fast food. In the 1980s, fast food changed the way we eat. Companies like Apple and Microsoft have changed the way we communicate, work, and even socialize. Therefore, businesses affect society and individual lives in many ways and in several spheres, i.e., economic, social, individual, technological, environmental, and political. This realization of the influence and power of business, with the recent knowledge of major corporate ethical debacles, has created an environment in which different groups and entities in the society have taken upon themselves to criticize and pressurize businesses to be socially responsible and pursue sustainable business practices.

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Business Response

As illustrated by the Nike case, businesses do detect a change in their environment and understand that several entities and groups within the society want to influence them. Therefore, to maintain a good relationship with the society, firms have made efforts to understand and cater to the reasonable demands of societal entities.

One way of understanding and meeting societal demands is to understand the social contract between the business and the society. A social contract represents a set of reciprocal expectations between institutions or groups. In our case, this means reciprocal expectations between the society and corporations. But we have seen that society is composed of many entities, and it would be safe to assume that societal expectations of business, based on myriad interests of different entities, are dynamic and change all the time. Therefore, the important question is that if the business environment is composed of several entities, and their individual interests result in a dynamic set of demands from business firms, then what should be the business strategy to deal with this ever-changing environment? 

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Stakeholder Management

The answer to the above question comes from stakeholder management. Edward Freeman, in his seminal work Strategic Management: A Stakeholder Approach (1984), argues that the business environment has become extremely volatile. He further argues that the business environment is now composed of several entities that are interested in what firms do. As a result, the boundaries of business organizations are not as sacrosanct as they used to be. These entities that he calls "stakeholders" individually and sometimes collectively attempt to influence organizations and put pressures on them to cater to their interests. Finally, according to Freeman, business organizations can deal with their environment more effectively and strategically if they are more cognizant of their multiple stakeholders and are able to ascertain their interests and find ways to reconcile organizational interests with them.

Stakeholder management argues that it provides managers tools to interact with their dynamic environment. More precisely, stakeholder management guides managers in identifying and recognizing organizational stakeholders. Once identified, it further guides managers in how to interact with stakeholders in a way that managers create value for the firm and the stakeholders.

Finally, it must be appreciated that stakeholder management is a complex process. Organizational stakeholders can be numerous with demands that might coincide or contradict each other. This issue will be discussed later in Lesson 3. Here it is sufficient to outline principal stakeholders and their interests, as given in Table 1.

Table 1.1: Stakeholders and Their Expectations

Principal Stakeholders	Main Interests & Expectations
Shareholders	Profits (stock valuation, dividends)
Managers	High compensations and fringe benefits
Employees	High salaries, wages, and benefits
Customers	Value for their purchases
Suppliers	Continuous profitable business relationships
Government (Federal, State, and Local)	Business following regulations, receiving taxes
Community	Employment, social contributions from firms

 

References

Boje, D. M., & Khan, F. R. (2009). Story-branding by empire entrepreneurs: Nike, child labour, and Pakistan’s soccer ball industry. Journal of Small Business & Entrepreneurship, 22(1), 9–24.

Editors of the Webster's New World Dictionaries (2014). Webster's new world college dictionary, 5th edition. Boston, MA: Houghton Mifflin Harcourt.

Husselbee, D. (2000). NGOs as development partners to the corporates: Child football stitchers in Pakistan. Development in Practice, 10(3–4), 377–389.

Nadvi, K. (2008). Global standards, global governance, and the organization of global value chains. Journal of Economic Geography, 8(3), 323–343.

Post, J. E., Preston, L. E., & Sachs, S. (2002). Redefining the corporation: Stakeholder management and organizational wealth. Stanford, CA: Stanford University Press.