Write 300-350 words. Please refer to the attached PPT I uploaded.

1. Despite the historical preference for small government, American governments’ roles and responsibilities are constantly expanding. Why did this happen? What are the factors that lead to government expansion? What do you think are the effective ways of rightsizing or shrinking government?

2.  Which model of government-business relations do you believe is the most “realistic” and why (provide examples)? 

PA 315
Government Business Relations
Chapter 2

California State University San Bernardino

College of Business & Public Administration

Professor Sharon Pierce

Chapter review 1
Which of the following are generally thought to put pressure on society for the growth of government?
Wars
Special interests seeking special assistance
The complexity of society
All of the above
None of the above

Chapter 1 review
The two oldest roles of government, according to the text, are transportation and education.
True
False

Chapter 1 review
When governments provide public education, the text calls that role:
Safeguard against risk
Purchaser
Social architect
Service provider

Chapter 1 review
One of the areas which is commonly thought of as a strength (dubbed ‘the good”) of government is:
Requiring taxes
Creating monopolies
Providing economic stability
Preventing the collusion of power (manipulation by powerful interests)

Chapter 1 review
Altogether, the U.S. has approximately how many governments?
51
435
37,000
89,000
.25 million

Chapter 1 review
Government-business relations are largely defined by the:
Complementary roles
Cooperative roles
Conflicting roles
All of the above
None of the above

BIG GOVERNMENT
VS.
SMALL GOVERNMENT –
WHICH IS IDEAL FOR THE UNITED STATES?

What do you believe is the ideal role of government?

What do you believe is the ideal role of government?

Fall 2018

Spring 2018

WINTER 2018

FALL 2017

Less Government
“I believe the government should have less power as it is getting to the point where you almost have to ask permission to leave your house.”
“People should have more power than they have now.”
“Small government means the system is more flexible.”
“Although big government has benefits, it can get annoying paying more and more taxes for programs you will most likely never use.”
“We can’t be a ‘free’ country if we are going to restrict our freedoms or taken them away.”
“People should have more control…government sometimes interferes too much in the public life domestically but also internationally.”
“I want the power to make decisions for my family.”

Moderate Government
“Too little government would make society chaotic. The rules and regulations that the government implements helps stabilize society as a whole.”
“When it comes to a crisis, natural and unnatural, we need the government to help us out. But, in the case of owning a gun, weed, and things like that, I don’t think government should ever play that big of a role in it.”
“Things like natural disaster aftermath benefits from large government funding for example but things like checks and balances from small government could come together for form a successful moderate government.”
“Government should be neither big or small – small government is great because it is more efficient and flexible but big government is helpful after natural disasters.”
I think social programs are needed but there should be more controls in place so people don’t abuse the system. We should find another way to get social programs funded, everything should not be the government’s responsibility, however, that may mean that citizens should step up.”
“I believe the government is just right.”

More
Government
“Larger government could be more beneficial in the long run…an earthquake happening – the majority of people will then think or prefer the larger government is better.”
“Military expenses – I and most of society would want a bigger government for our safety.”
“I think a big government has more power and will be able to take action against big matters – some examples are a major disaster or war.”
“More social programs from this type of government are incredibly beneficial to the overall population…It also regulates people and businesses to act fairly in a socio-economic way; trying to benefit society/the planet/communities.”
“When we are in a crisis with our economy, the government is there to lift us back up…their role should be to use their power to help us in our time of need.”
“More government intervention in improving the quality of our lives.”
“A big government to serve & protect their citizens.”
“I believe we need more government because there are a lot of illegal business activity still happening,”

Chapter 2

Three models of government-business relations
Business centered approach
Shareholder model
Strategic Business model
Stakeholder model

Not a comprehensive list

The shareholder model
Considers only business interests
Emphasis on profit-making
Government and business should be separate – government as little as possible
Focuses on internal efficiency and competition (Adam Smith – free market)
Example: investment banks

What is a shareholder
A shareholder is any person, company or other institution that owns at least one share of a company’s stock.
Because shareholders are a company’s owners, they reap the benefits of the company’s successes in the form of increased stock valuation.
If the company does poorly, however, shareholders can lose money if the price of its stock declines.

Critique of the shareholder model
Market failure demands government vigilance and intervention.
Business’ demands for government and advantageous position to benefit from government
Too much emphasis on monetary and material gains
Does not focus on external issues – environment, community, etc.

SAMS club closed 63 stores
Shareholder model

What do you think about Sams club closing 63 stores?
Walmart is closed 63 Sam’s Club stores.
The closures span 24 states and Puerto Rico.
Illinois lost seven stores, the highest number of any state.
The Memphis, Tennessee Sam’s Club and nine additional stores were turned into e-commerce distribution centers.

The strategic business model
The model emphasizes competition
Most efficient and effective use of resources; playing the game well
Government with low taxes and few regulations, stable policies and strong performance, and protections in global competition
The model also emphasizes collaboration
Good strategies for a winning team – win win situations
Practical use of governmental resources – Boeing Corporation
Example of Strategic Business Model – Community banks/credit unions
Community focused – local needs and conditions
Strategic in managing the local connections

Critique of the strategic business model
More balanced and realistic than the shareholder perspective.
Yet,
Unclear and inconsistent
government and business relationship is a flow of complex exchanges of influence, which is subjected to multiple social, political, and economic forces.
Difficult to be strategic in market place.
Business is a major initiator of change through its interaction with government.

The stakeholder model
Corporation locates at the center of an array of mutual relationships with stakeholders:
Primary stakeholders have immediate, continuous, and powerful impact.
Secondary stakeholders have less mutual immediacy, benefit, burden, or power to influence.
The model is an ethical theory of management , in which the welfare of each stakeholder must be considered as an end

Corporation

Stockholders

Media

Competitors

Suppliers

Customers

Trade Associations

Political Interest Groups

Employees

Creditors

Political Parties

Communities

Religious Groups

Earth’s Biosphere

Governments

Future Generations

The Poor

Educational Institutions

Unions

The stakeholder model
While profits are important, business and social values are still important
Long term view is more important than short term view
Business perspective and value of reputation versus profit maximization
Better Business Bureau – 1912
Good Housekeeping Seal of Approval – 1909
Consumer Reports – 1936
Corporate Social Responsibility – 1979
Views community and environment as necessary factors to consider – not because of requirements
Focuses on customer confidence, employee loyalty, civic trust – (Commercials after oil-spills)
Many large corporations have adopted methods and processes to analyze their stakeholders and engage them.

Who are Stakeholders?
A stakeholder is any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization.
a. The key stakeholder is the company or group that is the center or focus of an analysis.
b. Primary stakeholders include owners, customers, employees, suppliers, stockholders and the board of directors.
c. Secondary stakeholders include all other interested groups, such as the media, consumers, lobbyists, courts, governments, competitors, the public, and society.

Critics to the stakeholder model
Unrealistic assessment of power relationships between the corporation and other entities
Too vague a guideline to substitute for the yardstick of profits
Not clear who or what is a legitimate stakeholder

Comparison of three models

Overview
The three models demonstrate that the choices involved in designing a country’s political and economic systems are not easy ones.
Therefore they provide some theoretical bases for our exploration of the question: how extensive a role government should play in a nation’s economic development.

64%12%17%7%Class Poll Spring 2019Less GovernmentModerate GovernmentMore GovernmentNot sure
Chart1

Less Government
Moderate Government
More Government
Not sure

Class Poll
Class Poll Spring 2019
38
7
10
4

Sheet1

Class Poll
Less Government 38
Moderate Government 7
More Government 10
Not sure 4

Chart1

Less Government
Moderate Government
More Government
Not sure

Class Poll
Class Poll Winter 2019
61
21
10
8

Sheet1

Class Poll
Less Government 61
Moderate Government 21
More Government 10
Not sure 8

Chart1

Less Government
Moderate Government
More Government
Not sure

Class Poll
Class Poll Fall 2018
52
28
16
4

Sheet1

Class Poll
Less Government 52
Moderate Government 28
More Government 16
Not sure 4

Chart1

Less Government
Moderate Government
More Government
No Idea…

Class Poll
Class Poll
40
41
14
5

Sheet1

Class Poll
Less Government 40
Moderate Government 41
More Government 14
No Idea… 5

Chart1

Less Government
Moderate Government
More Government

Class Poll
24
54
22

Sheet1

Class Poll
Less Government 24
Moderate Government 54
More Government 22

Chart1

Less Government
Moderate Government
More Government

Class Poll
19
62
19

Sheet1

Class Poll
Less Government 19
Moderate Government 62
More Government 19

2 Theories about Business–
Government Relations in
Society

Case Scenario: ABC’s relocation 44

Introduction: The Theories of Business–Government
Relations 46

Models of Business and Society 46

When the Ideal Models Become Corrupted: Crony
Capitalism 59

Analytical Case: The Lewis Group of Companies 64

Practical Skill: Stakeholder analysis 66

Summary and Conclusion 67

CHAPTER CONTENTS

CASE 2 SCENARIO

ABC’s relocation

Zach’s father, Zeddic, was recently promoted to interim CEO of Acme Bottling
Company (ABC), a hi-tech manufacturing plant in Anyplace, about 15 minutes from
the City of Somewhere. ABC has a large presence in Anyplace, and packages natural
liquid and solid products in eco-friendly containers. In fact, ABC is how Zach and
Zoey met. Zoey’s friend Tyler had been working there part time, earning money for
college. Tyler introduced Zach and Zoey.

Zach’s dad had been the Chief Finance Officer at Acme Bottling for the past five
years and understood the operation of the company well. Zeddic had been excited
about becoming interim CEO and hoped to work it into a permanent position. Ye

t

his first month was unexpectedly challenging and overwhelming, especially regarding
the company’s decision to relocate.

ABC has operated for over 20 years in Anyplace. The company signed a long-
term lease for the land with the city. During the past two decades, because of the

rising real estate market, Anyplace has doubled the land rent, which increased
produc tion costs for ABC. Two years ago, a neighboring state established an
industrial park less than 100 miles away. To attract new businesses, especially
hi-tech ones like ABC, they were providing very favorable tax incentive packages,
and extremely low rent leases. The industrial park was also closer to two major
customers and one major supplier for ABC.

When the idea of relocation was proposed, Zeddic led a comprehensive
cost–benefit analysis as CFO that included all critical production factors—capital,
labor, land, utilities, taxes, logistics, etc. Knowing relocation could potentially reduce
production costs by 20 percent or more, ABC’s shareholder board was in favor of
the relocation and unanimously appointed Zeddic the interim CEO.

The rumor of relocation quickly spread and Zeddic suddenly found himself in a
lion’s den. He was confronted by concerned employees everywhere he went. They
felt the 100-mile drive to the industrial park was not a desirable commute; the majority
would have to move their families or resign. And even though the industrial park had
finished basic infrastructure construction, it was still not in a great residential area.
In a management meeting, the union leader spoke out about the possibility of a strike
in protest.

The Anyplace city government was deeply concerned about the idea as well. As
the city’s largest employer, ABC had over 800 employees; relocation of the company
could be devastating. For the past few years, Anyplace had worked closely with the
company and had accommodated many of ABC’s needs for land, infrastructure, tax
breaks, and so on. Several government officials and local politicians attempted to
persuade Zeddic to abandon the idea. The city manager was a personal friend of
Zeddic’s and he was growing increasingly annoyed. He even considered this a
betrayal of their friendship.

Neighboring community owners and land developers wanted to talk with Zeddic.
They were afraid the vacancy would affect the environment, security, and land value
of the neighborhood. Two local suppliers constantly called him for meetings. They
were concerned that relocation would add to their transportation costs. The own

er

of a restaurant where Zeddic often had lunch expressed regret that he would lose
him, and his employees, as major customers. Several local and national reporters
wanted to interview him about the relocation and employee compensation.

Even Zach’s mother, Zelda, would not give her husband a break. Several things
bothered her. A college professor working toward her tenure, the next few years
would be critical for her career. Her two youngest, Zach’s little brother and sister,
were now in schools that were located in a very good district; starting over again in
a new district would be difficult. Plus, Zach’s relationship with Zoey was going very
well and Zelda could see that her son was beginning to think seriously about a future
with her. Zelda had been very supportive of Zeddic in the past, but this time . . .

Zach’s father must make a decision that affects short-term profitability, long-term
strategy, and many stakeholders. While Zeddic thought at the time that the
cost–benefit analysis he conducted was thorough, he now realizes that many other
factors affect both the long-term strategy and the integrity of ABC. This chapter
explores a variety of perspectives of which managers must be aware if they are not
to be surprised and overwhelmed, as Zach’s father now is.

Business–Government Relations in Society 45

Introduction: The Theories of Business–Government Relatio

ns

There are many perspectives on business–government societal relations. For
simplicity, here we look at three views that capture some of the most important
differences. If we decide to narrowly look at the institution of business itself, largely
from an economic point of view, then we might assume a business-centric or
relatively “pure” shareholder model. If we decide to look at business in relationship
to other institutions with which it is in competition but with which it also shares
medium-term synergies, we might adopt a strategic model. If we decide to look at
business as a long-term means to a better society and quality of life over many
generations, rather than as simply a means of individual wealth, then we may use
a more socially or ethically based viewpoint or a stakeholder model.

A general point should be made about these three models: these models are not
a comprehensive list. When looking at business as institutions in society, for
example, we have focused primarily on the central role in Western business, which
emphasizes economic means of organizing society over religious or ideological
means. In theocratic states, religion may be viewed as more central to society than
business, and ideological states may focus more on the importance of social
harmony and equity than wealth creation. So while we will choose examples that
highlight specific perspectives, the reality is that the mix is generally more subtle
and complex.

Models of Business and Society

The Shareholder Model

The shareholder model tends to look at business in isolation and to emphasize
economic analysis and profit-making for individuals, proprietors, and in the case
of larger companies, shareholders. It tends to exclude other values and institutions
from consideration. Thus, internal efficiency and external market analysis leading
to dynamic competition and innovation are emphasized. Non-intervention by
government and other institutions in the affairs of business is valued so that there
can be a sharp focus on the business at hand. Implicitly, it advocates small
government in terms of ownership, taxes, regulation, and subsidies, and a relatively
unrestrained market. The principle duty of government is to ensure that markets
function properly, and to correct market failures if there are any, but to do so with
the least possible intrusiveness. See Exhibit 2.2 for a discussion of the causes of
market failures. Corporations should only respond to legal requirements and
government policies that affect their business.

The theoretical roots of this perspective can be traced to Adam Smith and his
book The Wealth of Nations (1776), wherein Smith shifted the focus in economics
from being state-centric under the formerly dominant mercantilist approach to his
market-based approach. He asserted that the greatest good for society comes when
businesses compete freely. In a perfectly competitive market, no single participant
is powerful enough to affect the prices or other terms of sale. Producers sell goods
to consumers who are attracted by products of the best quality and the lowest price.

46 Introduction to Business–Government Relations

To do so, producers devote their energies to technological and management inno –
vations to improve productivity and to create values. Since consumers are
determined to maximize their benefit with the lowest cost, the choices of individual
consumers lead to the greatest benefit of the society. The market produces an
efficient economy that optimally allocates resources and spontaneously coordinates
activities among competitive producers.

Smith’s “invisible hand” of the market was not only important for domestic
exchange, but for international exchange as well. His intellectual successor, David
Ricardo, systematized this capitalist approach at the global level. His theory of
comparative advantage argued not only for specialization among individuals but
also for free trade among countries. He asserted that there is always benefit from
free trade, even if one party (e.g., a resource-rich country with highly skilled
workforce) is more productive in every possible area than its trading counterpart
(e.g., a resource-poor country with unskilled laborers). The key to realizing the
mutual benefits of trade is that each concentrates on the activities where it has a
relative productivity advantage.

The negative effects of wealth concentration following the industrial revolution
led to theories for more state-centric, or socialistic approaches, from milder forms
advocated by Saint-Simon and John Stuart Mill using government as a force for
poverty reduction and progressive improvement of society in a capitalist system,
to the more total forms of state domination for public good of Marx and Engels.

Business–Government Relations in Society 47

Crowd shot of a Walmart shareholders’ meeting in 2010

EXHIBIT 2.1

Source: Wikimedia Commons.

48 Introduction to Business–Government Relations

EXHIBIT 2.2

Market failure

Market failure is used to describe the problem when the allocation of goods
and services by a free market is not efficient. In theory, an economic situation
is efficient when no one can be made better off without making someone else
worse off.

Many reasons contribute to market failure:

• Public good. In economics, a public good, as compared to commercial good,
is one that is both non-excludable (impossible to prevent people who have
not paid for the good from using it) and non-rivalrous (one consumer does
not reduce its availability to others). Examples of public goods include fresh
air, national defense, knowledge, lighthouses, etc. Because of the nature of
public goods, even though they are in demand, the market does not create
incentives for their production.

• Information asymmetry. In transactions where one party has more or better
information than the other, it creates an imbalance of power and causes the
transaction to go awry. The problem of information asymmetry happens in
business transactions such as used-car sales, buying insurance, purchasing
real estate, etc.

• Non-competitive market. This includes monopoly, in that there is only one
provider of a produce of service; monopsony, in that there is only one buyer
in a market; and other defections in market structure.

• Principal–agent problem. In principal–agent relations, instead of being
motivated to act in the best interest of the principal, the agent may pursue
his or her own interests. For example, a patient (the principal) is not sure
whether her doctor (the agent) is recommending expensive treatment
because it is truly necessary for the patient’s health, or because it can bring
income for the doctor.

• Externalities. In economic theories, an externality is a cost (negative
externality) or benefit (positive externality) that is incurred by a party who
was not involved in the transaction of the goods or services that caused
that cost or benefit. Toxic air emitted by a manufacturing plant that pollutes
and affects the health of residents in a community is an example of
negative externality. An example of positive externality is the Research and
Development (R&D) by a company that discovered a new production
technique that can be adopted by other firms in the industry.

Market failure often leads to government intervention in a particular market.
For example, monopolies that emerged in the oil industry during the late
nineteenth century in the US led to a series of government anti-trust regulations.

These late nineteenth-century theories affected all governments in the early twentieth
century, until the excessive role of the state in economics was challenged by
Friedrich Hayek and the Austrian School in Europe, and later the University of
Chicago School of Economics in the US (founded by John D. Rockefelle

r)

, as
discussed in Chapter 1. With the conversion of the former Soviet Union and its
client states in the 1990s, as well as China and Vietnam adopting relatively capitalist
economies, the “age of the market” now dominates the world economic stage.
Its virtues include macro-level system efficiency, self-organization, consumer focus,
and robust innovation, among others.

Nonetheless, there are weaknesses in this purist approach to market capitalism.
One of them targets the imperfections of market. The perfectly competitive market
is rare. In reality, individuals’ pursuit of maximizing self-interest often leads to
various types of systemic fraud and corporate monopolies that are not efficient.
For critics, the prospect of market failure demands government vigilance and
intervention, such as regulations, wage and price controls, bailouts, and social
and corporate insurance programs as well as welfare stabilization programs.
Throughout the history of the US, the government’s role has expanded as a result
of correcting market failure (see Chapter 3).

Second, it is argued that although business often states that it wants small
government, in reality business is as demanding as any other special interest group,
and often more successful in reaping benefits (Carney 2011). For example, small-
government advocates in Congress are often vociferous about maintaining a large
defense establishment, and keeping military bases and weapons producers in their
districts open.

Finally, it is often argued that markets place too much emphasis on monetary
and material gains and, as a result, erode humanity. Society, they argue, does not
exist to promote business, but rather business is an avenue to promote a good society.
An excessive emphasis on the profit motive can lead individuals and corporations
to abuse legal loopholes, to exploit the disadvantaged, to pollute the environment,
and to eliminate opportunities for future generations by fiscal mismanagement or
ecological destruction.

An example of the relatively purist perspective can be observed by the Heritage
Foundation Economic Freedom Index. It ranks countries based on ten indicators in
four major areas:

• Rule of Law (property rights, freedom from corruption)
• Limited Government (fiscal freedom, government spending)
• Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
• Open Markets (trade freedom, investment freedom, financial freedom).

According to its 2015 ranking, the top countries are (in order): Hong Kong,
Singapore, New Zealand, Australia, Switzerland, Canada, Chile, Estonia,
Ireland, and Mauritius. The US, ranked 12, was brought down by the Limited
Government category. Note that over half of the countries with a higher
Heritage Foundation ranking have a lower per capita than the US and, notably,
Mauritius has a per capita GDP of less than one third. This indicates that it is the

Business–Government Relations in Society 49

capitalist principles, more than the effects of the system, that are paramount in

this mindset. While 10th place is still honorable (out of a list of 177 countries), the

gap between it and the two countries at the top is substantial (Heritage Foundation

2013). The following critique accompanied the ranking: “Restoring the US to a

place among the world’s ‘free’ economies will require significant policy reforms,

particularly in reducing the size of government, overhauling the tax system,

transforming costly entitlement programs, and streamlining regulations.”

An almost perfect example of the shareholder model in the US corporate arena

is investment banks. Examples of investment banks include JPMorgan Chase,

Goldman Sachs, Morgan Stanley, and investment arms of various mixed mega-

banks such as Bank of America and Citi. Investment banks underwrite securities,

assist in mergers and acquisitions, trade derivatives and equities, and provide other

financial services. They also advise others how to invest. Investment banks must

be careful to keep their privileged information confidential and not to use such

information to their own advantage (insider trading). Such institutions tend to be

very averse to any government intervention in their affairs, and welcome a volatile

market place where money can be made more quickly. In those rare instances in

which government stabilization or support may be considered by most as necessary,

this industry is generally not inclined to agree or be appreciative if it is the recipient

in positive terms. While these banks certainly take advantage of strategic govern –

ment interactions, such as the sale of government securities or the acquisition of

troubled competitors through governmental receivership, they do so on the best

terms they possibly can in order to make money, not to do good or improve their

reputation (other than being brutally competitive).

The Strategic Business Model

If the shareholder perspective reveres the market and the ideal of the owner and

stockholder, the strategic perspective admires individual companies and the teams

of people who make them work successfully. Put differently, the shareholder

model

tends to look at what it takes to have a successful world market using classical

economics as a matter of principle, and the strategic business model tends to look
at what it takes to have a successful company. Thus, one looks more at the theory
of capitalism, the other looks at the practice of it.

This pragmatic approach to business shifts the focus in two ways, which are

ultimately in some tension with each other. First, the strategic business model is a

competitive model. What do companies have to do to be competitive against rivals

and to make as large a profit for owners as possible? Of course, basic competitive

strategy looks at the most efficient and effective use of capital, labor, technology,

and innovation. In this aspect, business is fighting for survival and there is a

Darwinian sense of drama in businesses being created, competing, succeeding, or

vanishing as young companies thrive and adapt if factors are right, or fail. It

emphasizes “playing the game” well, coming in first, and/or eliminating dangerous

rivals to “corner the market” when possible. The business world is tough, and tough

companies must be competent and sophisticated in marketing, sales, recruiting talent,

50 Introduction to Business–Government Relations

international business, and other management areas and must be disciplined at

practicing these skills. Not surprisingly, the competitive company wants low taxes

and few regulations from government to maximize profits and compete inter –

nationally. It wants a stable economic policy and strong national performance

indicators to facilitate growth. Market size is important, so it wants government

protection where it is vulnerable to international competition, and trade barrier

reductions for foreign markets.

Yet a strategic approach is not just about competition, but also about collaboration

(Porter 1998). Good strategy will include networking, occasionally positioning

oneself to be a part of a winning team rather than a sole winner, and finding win-

win solutions. Networking provides market intelligence and goodwill. Being a

corporate team player allows better supply chain management, cooperative and

profitable ventures with other companies, and economies of scale, size, and com –

parative strengths. In many cases, it is not winning that is most important, but rather

it is not losing. A negotiated settlement may be more sensible than a long, drawn-
out legal or labor fight in which even the winning side is much weaker. Internally,

collaboration leads to better coordination, teamwork, and talent develop ment.

Externally, companies explicitly or implicitly depend on a collaborative environment

with government in numerous areas.

Governments purchase billions of dollars’ worth of goods and services, so many

businesses find it important to be savvy about government procurement and

contracts. The Department of Defense, the largest purchaser, spends about $300

billion in goods and services annually. Boeing Corporation is an example of a

company that lives and dies by government contracts despite its private sector

business (Carney 2011).

Governments play a key role in establishing an environment of high-quality

human resource availability through public education, job training programs, and

educational support via loans and subsidies. Governments play important roles in

creating a healthy environment via health care systems and in providing good

infrastructure for goods movement. Governments are also a critical part of powerful

market clusters (see Chapter 9), most noticeable for technology hubs today.

Likewise, governments help or hinder new business development, from programs

that assist business incubation and expansion to regulations that make launching

business start-ups daunting. Since government’s roles in this regard take resources,

business’s interest in low taxes is somewhat transfigured to an interest in good value

for taxes. Further, the interest in small government is converted into one of wanting

government to be large enough to be effective or supportive.

The dynamic tension of the competitive and collaborative roles that strategic

companies want is demonstrated in business groups such as Chambers of Commerce,

where goals for low taxes may contrast with the price of substantial services useful

for business. See the business-led Council on Competitiveness goals in Exhibit 2.3.

A strength of the strategic perspective to business–government relations is that

it is more balanced and realistic than the shareholder perspective. It embeds business

in the dynamics of society, while still giving business the central role. On the

negative side, the strategic perspective is so inclusive and relativistic that it is

Business–Government Relations in Society 51

52 Introduction to Business–Government Relations

difficult to know what it stands for because circumstances change so frequently and
dramatically. If the shareholder perspective can be rigid in its principle-based
orientation, the strategic perspective can be unclear, inconsistent, and ethically
dubious.

An example of the strategic approach at the international level is the World
Economic Forum’s Global Competitiveness Index, rating competitiveness in 144
countries (Schwab 2012). Its 12 “pillars” include both the role of government and
the state of business development in countries: quality of government institutions
(e.g., low corruption and reasonable taxes), infrastructure (e.g., roads and ports),
macro economic environment (e.g., low government debt), health and primary
education, goods-market efficiency, higher education and training, labor-market
efficiency, financial market development, technological readiness, market size,
business sophistication, and innovation. Switzerland ranked as the most competitive
in 2012–2013, with the US seventh. While little, entrepreneurially oriented island

EXHIBIT 2.3

An example of the expressed need for government to be
efficient yet active in promoting American business

The Council on Competitiveness is a business forum that includes some of the
major business leaders in the US. CEOs study trends to recommend national
policy directions to political leaders. Below is a statement of needs for 2012.

Where America Needs to Be

To drive US productivity, buttress our leadership in world markets, and raise
the standard of living for all Americans, the United States must:

• Immediately work to:
– Ensure lower cost, easy access to high-quality education and training for

all Americans
– Maintain long-term federal investments in science and technology

leadership
– Reform and simplify the tax code to stimulate investment and attract

global capital to the United States

• Over the next ten years:
– Create at least 21 million jobs
– Reduce unemployment to 5 percent
– Reduce government debt by $4 trillion to ensure America’s long-term

solvency
– Invest $2.2 trillion in infrastructure to maintain competitive advantage
– Double exports.

Source: Council on Competitiveness 2012, p. 4.

state Mauritius ranked ninth in the Heritage Foundation Economic Freedom index,
it slips to 54th (still good but much lower) in its ability to actually provide
competition. Russia and China are prominent examples of the differences in the
shareholder and strategic perspectives. While both do well in competitiveness—
with China at 29 and Russia at 67—these relatively authoritarian states drop—to
136 and 139, respectively—in the Economic Freedom Index, a hallmark of the
shareholder model.

At the state level, a similar index is the Beacon Hill Institute Competitiveness
Report (Moore 2013). In 2012, it gave the top ten rankings to: Massachusetts, North
Dakota, Minnesota, South Dakota, Utah, Colorado, Texas, Washington, Virginia,
and Kansas. Note that while low tax rate is a sub factor in the scale, a high-tax state
ultimately got the top spot. California was in the middle at 24th. While there are
various company competitiveness surveys, it is hard to surpass the stock market,
which keeps the pulse on the overall track record of companies in milliseconds.
Not only do increased profits drive up stock prices, so, too, do announcements of
new products, cooperative agreements with other companies, government contracts,
and inexpensive out-of-court settlements; similarly, it is not only low profits or losses
that signal lower comparative prices but also corporate scandals, increased tax
liabilities, onerous regulations (but note: not all regulations are onerous and some
actually stabilize markets and drive long-term profits up), and corporate feuds that
result in loss of energy rather than productivity gains through innovation.

An example of companies that practice a highly strategic approach are various
types of community and regional banks. Community banks are depository
institutions that are generally owned and operated locally. They have strong roots
in the community with local businesses and families, capitalizing on their under –
standing of local needs and conditions. Although they represent the bulk of all
banks by number, they are a relatively small part of the depository banking industry
(less than 15 percent), with mega-banks like Bank of America and Citi capitalizing
on their ubiquity and marketing prowess. Therefore, community banks are careful
to use their local connections strategically by having senior employees join
local professional organizations, sponsoring local events, and participating in local
nonpartisan policy-making. They often benefit by getting the business of the largest
local companies and agencies in the region because of perceptions by local
businesses of the importance to invest locally when possible.

The Stakeholder Model

While the shareholder perspective sees itself as separate from society and the
strategic perspective sees itself as a part, and at the center of, society, the stakeholder
perspective sees itself as subordinate to society (Freeman 1984). While profits are
important and one of the mainstays of business, they do not crowd out other
business and social values in the stakeholder view. Profit maximization, the driving
force in other business perspectives, is by nature a short-term view, and does not
fully take into account either long-term equity interests or the value of reputation.
Furthermore, the stakeholder view consistently looks at community and environment
as necessary factors to consider, not just when legally required or advantageous to

Business–Government Relations in Society 53

54 Introduction to Business–Government Relations

EXHIBIT 2.4

The Boeing Company

Founded in 1916 by William Boeing, the Boeing Company is an American
multinational aerospace and defense corporation. Today, Boeing is not only
the second largest government contractor (second to Lockheed Martin) based
on defense-related revenue, but also the largest exporter by value in the United
States.

Ever since the company’s existence, the business of Boeing has been
strongly connected to and influenced by government activities and policies. In
1917, when the US entered World War I, Boeing started to build seaplanes for
the Navy. When the war ended in 1918, Boeing was incapable of selling new
airplanes because a large surplus of cheap, used military planes flooded the
market. Instead of going out of business, Boeing started selling other products,
such as dressers, counters, furniture, and Sea Sleds, a kind of flat-bottom boat.

In the 1920s, Boeing won government contracts for mail planes, and
consequently created an airline. However, the Air Mail Act passed by Congress
in 1934 prohibited manufacturers and airlines from being under the same
corporate umbrella, so the company had to split into three smaller companies—
Boeing Airplane Company, United Airlines, and United Aircraft Corporation.

During World War II, Boeing built a large number of bombers for the Army
and its production was largely scaled up. After the war, as orders for bombers
were discontinued, around 70,000 employees of Boeing lost their jobs. In the

A replica of the original “Red Barn” where the Boeing Company started.
Source: Wikimedia Commons.

do so. A collaborative style that emphasizes a win-win approach is not case specific,
as in the strategic perspective, but adopted as a preferred mode of operation.
Competition is not eliminated, but success is comprehended as a product of quality
and hard work rather than cleverness or market manipulation.

A long-term perspective encourages an attitude of sportsmanship in competition,
with the accent being on getting better rather than simply winning in the short-term.
Thus the semi- and intangible benefits of customer confidence, employee loyalty,
and civic trust are valued more highly as genuine practice rather than merely as
sales pitches. Civic and government organizations are more likely to be perceived
as partners in social productivity rather than impediments to business success. While

Business–Government Relations in Society 55

1950s, with government support in R&D, Boeing diversified its products and
became a leader in commercial jet manufacture.

In the 1970s, Boeing survived a series of strikes, including the decline in
military spending after the Vietnam war, the revamping of the space programs,
the economic recession, and the shrinking of government financial support for
the development of new aircraft.

In the 1980s as passenger air traffic increased, Boeing was facing intensified
competition, mainly from Airbus, a European commercial airline manufacturer
established in 1969. As both parties became concerned about the subsidies
paid by government to the large civil aircraft manufacturers, the European
Community and the US started bilateral negotiations for the limitation of
government subsidies to the industry. Negotiations led to the EC–US Agreement
on Trade in Large Civil Aircraft in 1992, which imposed stricter rules than the
World Trade Organization (WTO) on government support.

After several decades of success, Boeing started to lose ground to Airbus
and its lead in the airline industry in the 2000s. The two competitors also entered
into a series of disputes related to government subsidies. On September 15,
2010, WTO ruled that Boeing had received illegal subsidies, such as R&D aid
from the National Aeronautics and Space Administration (NASA) and the
Defense Department as well as tax-related export subsidies and tax incentives
from the states of Illinois, Kansas, and Washington.

Given the fact that the company’s business largely depends on government
contracts and policies, Boeing has been consistently building political con –
nections and contributing to political campaigns. For example, in the 2008
presidential campaign, candidate Obama received $197,000 in contributions
from the company, by far the largest campaign contribution from Boeing
employees and executives (Carney 2011). The investment pays off well for
Boeing. For example, United States diplomats are notorious marketing agents
of Boeing. They often help push sales of jetliners to other countries. As a result,
Boeing sells about 70 percent of its commercial planes to foreign buyers and
is the single largest exporter of manufactured goods in the United States
(Lipton, Clark, and Lehren 2011).

Source: Based on the history of Boeing at www.boeing.com.

http://www.boeing.com

this view is sometimes considered the ethical view, it is also a more holistic view
that enhances accountability and avoids cost-shifting onto others in society or into
the future.

The pursuit of a good reputation for pragmatic purposes and the importance of
business ethics are ancient concepts. At the beginning of the twentieth century,
notable attempts were made to encourage self-regulation. The Better Business
Bureau was founded in 1912 to advance reputation certification and self-
enforcement, and to discourage scams and wrongdoing. Other early efforts to
provide voluntary industry standards were the Good Housekeeping Seal of Approval
(launched in 1909) and Consumer Reports (started in 1936). A new renaissance of
business ethics began in the 1970s with the expanded use of the concept of corporate
social responsibility (Carroll 1979), which looks at social accountability as a
necessary component of corporate behavior. This topic is dealt with in detail in
Chapter 6.

When examined from a corporate point of view, a wide variety of indicators can
be used, depending on the breadth and emphasis of the perspective. Businesses can
be more mindful of employee relations, often providing more services and stability
for employees than is required by the market. Businesses can improve their
reputations based on environmental practices that limit habitat destruction, reduce
waste, encourage recycling, diminish one’s carbon footprint, and so forth (Birchall
2006). They can also try to ensure that lower-cost foreign labor is not exploited in
the drive for profit maximization. They can provide good corporate governance and
openness when publicly traded, and direct philanthropy or indirect service to the
community via employees or the company itself.

There are numerous rankings that look at these various factors, but one that
focuses on social responsibility is the journal Corporate Responsibility, which
provides an annual list of the 100 Best Corporate Citizens based on impact on the
environment, climate change behaviors, avoidance of human rights abuse, quality
employee relations, open corporate governance, community-based philanthropy, and
financial integrity. The top ten major corporations in the 2013 report were (in order):
AT&T; Mattel; Bristol-Myers Squibb; Eaton; Intel; The Gap; Hasbro; Merck;
Campbell Soup; and Coca-Cola Enterprises. On the other hand, there are also
organizations that track and publicize bad behavior, such as the Public Eye Awards
(aka The Most Despicable Corporation Awards) that are given each year as a
counter-event at the World Economic Forum. While Goldman Sachs was ranked
34 in the CR awards, it also was slammed despite being the most powerful
investment house in the world and was placed in the Public Eye’s Hall of Shame:

Goldman Sachs is the vampire of finance capital. Never one to waste a crisis—
whether a subprime mortgage bubble, a bank collapse or a Euro-failure—
Goldman Sachs makes good money from most of them. And the company does
not shy away from deals that might ruin entire countries. Between 1998 and
2009 Goldman Sachs pocketed horrendous fees to hide half of Greece’s public
deficit by means of accounting tricks. These financial constructions eventually
ruined Greece and plunged the EU into a financial crisis with no end in sight
even now—another crisis from which Goldman Sachs has already profited

56 Introduction to Business–Government Relations

Business–Government Relations in Society 57

handsomely and will continue to do so: so far Goldman’s profit is at least
600 million dollars and Greece owes the bank 400 million per year until 2037,
for a total of more than 10 billion dollars at the expense of European taxpayers.
Goldman Sachs is the epitome of a money machine with an opaque and
matchless network of allies in top positions such as ECB-chief Mario Draghi.
Governments come and go. Goldman Sachs stays. (Public Eye 2013)

The stakeholder perspective is sometimes used to rate and rank countries as well,
but with some adaptation of the focus. The “employee loyalty” aspect becomes
“quality-of-life” measures, such as with the UN Human Development Index that
looks at life span, per capita income, and years of schooling. The wealthier countries
of Europe and the Anglophone world (e.g., the US, Australia, Canada, New Zealand,
but not South Africa) do well in this measure, Russia is in the upper middle ranks
and China is in the lower middle ranks, while African countries tend to dominate
the bottom.

A wide variety of environmental issues are ranked by the Environmental
Performance Index (2012). Richer countries tend to do better in environmental

Protestors holding a banner: “U.S. Treasury Under New
Management” (Washington, DC)

EXHIBIT 2.5

Source: Wikimedia Commons.

rankings, but the US falls to 49 as a “modest performer” behind far poorer countries.
Doing much more poorly are the transitioning states of Russia (106) and China
(116), whose focus on growth has overwhelmed environmental consciousness.

“Public reputation” becomes configured as “domestic freedoms” or assistance
to the most vulnerable. Examples of rankings of the democratic rights are Freedom
House and the Index of Freedom. Again, the European and Anglophone countries
tend to do very well here, with the US normally near the top. On the other hand,
Russia, China, and the oil-rich states of the Middle East (e.g., Qatar, United Arab
Emirates, Saudi Arabia) do very poorly as authoritarian regimes.

Vulnerability is measured by income disparity, known as the GINI coefficient,
in which the lower the fraction of 1, the more equally national income is distributed.
For example, Switzerland has a very low GINI coefficient of .296, the US has a
moderately high GINI coefficient of .45, and a handful of Latin American and
African countries have GINI coefficients above .50, such as South Africa, Haiti,
and Brazil. Another index of national philanthropy, foreign aid, is the annual
OECD survey of aid donors. While the US gives the most because of the size
of its economy, as a percentage of gross national income, it ranked 19th out of 24
in 2013.

Below, Exhibit 2.6 gives some examples of how different countries are ranked
in the three perspectives that we have examined. The US is often at or close to the
top in terms of shareholder and strategic business approaches. It is given stiff
competition by northern European countries, Singapore, Hong Kong, Korea, and
some oil-rich countries in these capitalistic dimensions. The US also does well in
most civic surveys that emphasize national income and political freedoms, as do
northern European countries. However, in terms of other social responsibility
indicators, its performance is lower, falling to the middle in terms of environmental
protection and 95th in terms of income distribution, in contrast to a public perception
that it is either a classless or middle class society. Some countries like Russia have
improved economic competitiveness (after its financial collapse in 1985) despite
poor rankings in economic and political freedoms. China, too, has moved from one
of the least competitive countries in the world after World War II to one of the most
competitive. On the other hand, it has only modestly provided more freedom, the
benefits of its financial expansion have been largely limited to the top third of its
population, and its environmental record has actually declined.

In terms of highly stakeholder-oriented industries, development banks are a pure
example of the model. Development banks can be international, such as the World
Bank, or local, such as community development banks, which will be our focus
here. Community development banks are still commercial banks in the US, but their
mission is to generate economic development for moderate- and low-income
individuals and regions. They generally target financially underserved individuals
and businesses, consciously try to do good, and not only involve stakeholders, but
try to improve the lives of the most vulnerable ones. Such banks are certified by
the US Treasury as meeting appropriate guidelines. Examples of such banks in the
US include Carver Federal Savings Bank in New York, ShoreBank in Chicago,
Hope Community Credit Union in Jackson, MS, and Neighborhood National Bank
in San Diego. Internationally, the most famous example of a massively successful

58 Introduction to Business–Government Relations

Business–Government Relations in Society 59

community bank is Grameen Bank of Bangladesh, which made microfinance to the
very poor a model of success and earned the founder a Nobel Peace Prize.

In summary, a comparison of the three models indicates that they fall along a
spectrum. In its purist form, the shareholder model emphasizes the complete-as-
possible separation of business and government, would even shun assistance from
government, and implicitly wants as small a government as possible, with nearly
all services being provided by the private sector and an absolute focus on wealth
creation. At the other end of the spectrum, the stakeholder model asserts that
business interests should never be at the expense of society’s long-term interests,
cooperation for social benefit is for everyone’s benefit, and that when business self-
regulates there can be less government. Somewhere in the middle is a more strategic
approach, which is probably the most common because of its pragmatic implications.
The strategic approach accepts the role of government as a given and as generally
useful, utilizes the many opportunities to prosper from the sale of products, services,
and various types of cooperation with government, uses its influence to ensure that
government policies are as favorable as possible, and ultimately appreciates
government for doing those things that are not very profitable. These roles are
summarized below in Exhibit 2.7.

When the Ideal Models Become Corrupted: Crony
Capitalism

Each of the models already identified is ideologically distinct, and, for discussion
purposes, assumes that business–government relations are transparent, fair to all
groups in society, and relatively free of corruption. However, these “ideal” models
are often degraded to varying degrees, and when this is so, the type of model reported

A comparison of four countries and their economic,
competitiveness, and civic responsibility rankings shareholder
model: EPI/Human Development Index

Country Heritage Global Human EPI GINI
Economic Competitive- Develop- (2012; Coefficient
Freedom ness Index ment 132 of Income
(2012; (2012–13; Index countries) Distribution
177 144 (2012; (World
countries) countries) 186 Factbook;

countries) 136 countries)

Switzerland 5 1 9 1 19

US 10 7 3 49 95

Russia 139 67 55 106 84

China 136 29 101 116 107

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to be important by the regime may be less important than the level and types of
business influence functioning at the expense of the public good. We identify this
general problem as crony capitalism. Crony capitalism refers to an economy, or
parts of an economy, in which there are close relationships between business and
government that lead to favored treatment of individuals, companies, or even entire
industries at the expense of the public good. For this discussion we include crony
socialism (e.g., in contemporary China) and related terms that are sometimes used
to identify power collusion by elites such as decadent capitalism, no matter whether
the country has leanings toward being a plutocracy (ruled by wealth) or kleptocracy
(ruled by theft). The effect of crony capitalism is to stifle competition and distort
the market using government power for the few.

Crony capitalism can be thought of as a spectrum, from blatant biases toward
business and/or family elites who forcefully dominate both government and the
economy, to subtle biases that simply give elites a substantial but long-term edge
over start-up innovators, poorly financed companies, or localized businesses wanting
to break into national markets. The most blatant version is the strongman model in
which a domineering leader and his/her allied group occupy the government by force
or rigged elections. This model is common in dictatorships and quasi-dictatorships
common to South America, Africa, the Middle East, and central Asia. Such countries
witness occasional criminal charges against successful business people to eliminate
competition, and the jailing of political competitors who want a more fair political
and legal system. While such countries are a part of the capitalistic system generally,
a key feature is the erratic enforcement of vague laws, giving government officials
opportunities for bribes. Russia is an example of such a country.

A second version that is only somewhat subtler is the fused political-bureaucratic
elite model. This is an aristocratic model where family or in-group asset owners
tend to dominate both business and politics. Generally bribery and corruption are
rampant. Examples of this model include Indonesia, China, Mexico, Brazil, India,
and many other developing countries.

The subtlest version is the economic elite dominance model where economic elites
do not have full control but do have outsized influence because of the power of
money. Those with a lot of money will always have some additional power, but
unchecked, that power can become overwhelming and thereby distort the market
and create unhealthy imbalances in civil society. Five of the means by which
powerful financial interests in society can corrupt the economic-political system
are identified below.

1. Powerful economic elites can have the ability to change critical administrative
rule-making because of the long-term resources they wield, leading to a
condition called regulatory capture. At its most complete, regulatory capture
means that the primary function of regulatory bodies is to keep newcomers out,
rather than monitor established industries or license holders. This is most prone
to happen in licensing and in heavy state involvement of “rent-seeking” sectors
such as large-scale transportation, energy production, commercial real estate,
and defense (via government contracts) at the corporate level, or high-end
professions at the individual level. For example, when licensing becomes more

Business–Government Relations in Society 61

about ultra-high standards, it may actually be more beneficial to the members

of the profession to reduce competition rather than for the good of the public.

Another example is where economically advantaged groups have the ability to

exert excessively expansive patent rights, holding competitors up in the courts

for years as JPMorgan did in the budding electric industry with Westinghouse

in 1895.

2. Powerful economic interests can exert immense influence via outright control

of media or through paid political and policy messaging. Such messaging

sometimes bombards the public with direct arguments for policy issues or

political stances. However, it is also often to disseminate information that is

purposely confusing or highly distorted, or to make complaints about largely

fictitious challenges being faced by industries that are actually financially very

well off.

3. Powerful economic interests have increased opportunity to be members of the

political establishment (rather than just influence it) when the cost and challenge

of running for major offices is more difficult. For example, while the poor can

run for the US Senate, the average Senator was worth about $2.7 million in

2012, excluding any private residences and pensions.

4. Powerful economic interests can buy access based on economic support of

candidates as well. This can lead to not-so-subtle government intervention.

A famous example was exposed in the Charles Keating scandal that erupted in

1989. Keating amassed a fortune in the poorly regulated savings and loan

industry, but went on to make enormously risky business decisions with

depositors’ savings and bondholder investments. As he saw his decisions

leading to greater and greater losses unknown to the public, his contributions

to five US congressmen grew. When regulators began to look at taking the

bank over, he asked the congressmen to intervene in his behalf in 1987, and

all of them did to varying degrees, which resulted in the initial investigation

being halted. By the time Keating’s savings and loan finally failed, it cost

taxpayers $3 billion to support depositor savings and left an additional 23,000

bondholders without recourse. Subsequently, three of the congressmen were

formally reprimanded and two received informal reprimands because of the

extraordinary damage caused by their unwise intervention. While this case

became public, American history is also famous for cases in which big

money has been quietly successful, such as the presidential election victory

of McKinley who was heavily financed by tycoons like Andrew Carnegie and

John D. Rockefeller.

5. Powerful economic interests can sometimes have the ability to “buy off”

portions of the electorate with threats (e.g., loss of employment) or by making

unwise concessions to the public that will return to haunt the country later. Greek

tycoons, in league with Wall Street and the government of the day, kept the

Greek economy floating with usurious loans despite unsustainable public

expenditures. When the financial downturn occurred in 2008, the public received

a rude awakening when it learned that it had a heavy price to pay in terms of

reduced services, pensions, and public sector workforce.

62 Introduction to Business–Government Relations

Business–Government Relations in Society 63

Crony capitalism based on billionaire wealth invested in
government-regulated industries in 2014 (structural) versus
perceptions of public sector corruption

Ranking Crony Capitalism Based on Crony Capitalism Based on
Wealth Concentrated in Public Perceptions of Outright
Government-Regulated Corruption (Comparing the Same
Industries Countries)

Source: Author-constructed table based on The Economist and Transparency International
data.

1 Denotes 2013 Transparency International ranking of 175 countries.

Notes: Shading denotes countries in the top ten Economist ranking and top ten of the same
grouping for Transparency International Corruption Perception Ranking.

Does not account for undue business influence in non-government regulated industries,
and does not account for wealthy, but non-billionaire ownership.

1 Hong Kong Ukraine (1441)

2 Russia Russia (127)

3 Malaysia Indonesia (114)

4 Ukraine Mexico (106)

5 Singapore Argentina (106)

6 Philippines Thailand (102)

7 Mexico Philippines (94)

8 Taiwan India (94)

9 India China (80)

10 Indonesia South Africa (72)

11 Argentina Brazil (72)

12 South Africa Malaysia (55)

13 Brazil Turkey (53)

14 Turkey South Korea (46)

15 Britain Poland (38)

16 Thailand Taiwan (36)

17 United States France (22)

18 Poland United States (19)

19 China Japan (18)

20 France Hong Kong (15)

21 Japan Britain (14)

22 South Korea Singapore (5)

EXHIBIT 2.8

It is important to remember that none of our ideological models of business–
government relations is exempt from crony capitalism. Strongly shareholder-
oriented countries such as Hong Kong and Singapore have still allowed virtual
monopolies of government controlled areas to flourish, driving up the cost of
living. Strongly strategic-oriented countries such as Russia and Mexico have been
unable to find a moral balance as the economic drivers favor crony businesses while
government corruption flourishes. Even countries that utter a strongly shareholder-
oriented philosophy, such as China and Greece, have evolved agendas that seem to
have little to do with helping the poor in the long-term, but are rather aimed primarily
at aiding the richest in society.

Where does the United States stand on various rankings of its level of crony
capitalism? If one looks at outright government corruption, the US stands as the
19th least corrupt out of 175 countries; that is a relatively low level and is primarily
aimed at political corruption rather than administrative bribery. Another perspective
is to look at the level of wealth in sectors in which government regulation gives
insiders (those with established wealth) an edge; in a ranking by The Economist,
the US was the 17th most prone to crony capitalism based on rent-seeking industries
rather than entrepreneurial industries. For this survey, this means that the US still
has more of its super-wealth in entrepreneurial industries such as the booming
technology sector. Some other examples of countries high in both types of crony
capitalism include Russia, Ukraine, Indonesia, Mexico, and the Philippines. Hong
Kong is an unusual case in which outright corruption is very low, but the lack of
an anti-competition law until very recently has resulted in numerous, well-
entrenched oligopolies; despite its tiny size, the special administrative region is home
to 45 billionaires as of 2013 (Forbes 2014). Japan and South Korea are examples
of where neither of these surveys fully picks up the governmental influence of
Japanese or South Korean informal conglomerates (called keiretsu and chaebol,
respectively) because despite their anti-competitive power domestically, they remain
highly competitive industries on the global stage. The government-controlled
industry perspective versus the corrupt government perspective is illustrated in
Exhibit 2.8 above.

A final perspective is the relative spread of income distribution across the
population as a proxy for the product of crony capitalism. In other words, from this
perspective, when the distribution of wealth in a country is moderate and there is
a strong middle class, crony capitalism is in check; when there is a large lower
class, a small middle class, and a super-rich upper class, crony capitalism is
likely operating. The data here shows that the gap between rich and poor has
been increasing around the world since the 1980s, including the US where
policies have encouraged what some have labelled winner-take-all philosophies
(Piketty 2014).

ANALYTICAL CASE: THE LEWIS GROUP OF COMPANIES

The Lewis Group of Companies (LGC) (http://www.lewisop.com) is a privately
held real estate development corporation which focuses on mixed-use planned

64 Introduction to Business–Government Relations

http://www.lewisop.com

Business–Government Relations in Society 65

communities and residential subdivisions in California and other states, as well as
building and owning rental communities, shopping centers, office parks, and
industrial buildings. Founded in Claremont, California in 1955, LGC has developed
thousands of homes, apartments, retail, office, and industrial space for the city
and its surrounding areas, as well as elsewhere in California and other states. Real
estate development is a multifaceted business. It typically involves a process where
a developer purchases a parcel of land, determines the marketing of the property,
develops the design and building programs, obtains financing, builds the structures,
and leases, manages, or sells it. The company tries to make relationships with local
officials prior to committing to projects to ensure support (or steer clear of the project
early on) with the officials who will inspect plans and buildings countless times,
the transportation department with regard to infrastructure, the zoning department
with regard to use permission, and the state environmental protection agency with
regard to an environmental impact assessment. Should Native American remains be
discovered or water run-off adversely affect other properties, additional government
officials will be on site quite quickly!

Real estate development is critical to a community, because it affects the
appearance, the mix of land uses, the infrastructure (such as roads, water, sewer –
age, drainage systems, and utilities), and ultimately the economic condition of
the community. It is one of the riskiest yet most profitable businesses because
there is a long investment period without positive cash flow, and economic down –
turns or unexpected problems can scuttle projects with enormous loss of sunk
costs.

The Lewis company currently hires over 400 employees in a variety of areas. The
development process requires skills of many professionals, such as architects and
civil engineers to address project design; market consultants to determine demand
and a project’s economics; attorneys to handle agreements and government
approvals; environmental consultants to analyze a site’s physical limitations and
environmental impacts; inspectors and title companies to provide legal descriptions
of a property; lenders to provide financing; and public relation experts to deal with
issues related to media and the communities. The top management of the company
is also heavily involved with strategic planning in all the jurisdictions in which the
company operates.

Questions for Discussion and Analysis

1. With what issues does LGC have to deal with government? How important are
good relations with government officials in LGC’s industry?

2. If you were the CEO of LGC, which model would you adopt to develop BGR
strategies? Why? Visit the company’s website. Based on information from the
company’s website, what BGR model do you think the company has used? What
is the evidence?

3. Who are the stakeholders of LGC? What are the “stakes” they have with LGC,
and vice versa?

66 Introduction to Business–Government Relations

PRACTICAL SKILL

Stakeholder analysis

Stakeholder analysis refers to the process of identifying the individuals and
groups that are likely to affect, or be affected by, a proposed course of
action and analyzing their impact on the action, as well as the impact the
action will have on them. It is a technique that is widely used in decision-
making, project management, and conflict resolution.

Stakeholder analysis is used when there is a need to clarify the
consequences of the envisioned change to ensure the successful outcomes
of the action. There are a variety ways of conducting stakeholder analysis.
Generally speaking, all of them include two components:

1. Identifying stakeholders. Any proposed course of action may involve a
multitude of stakeholders that can be impacted or cause an impact on
the action. In a given situation, the primary stakeholders are those who
are ultimately affected, either positively or negatively, by the action.
Secondary stakeholders are those who are indirectly affected by the
action. It is critical to identify all stakeholders, to comprehensively
understand the implications of a proposed action.

2. Mapping stakeholders. The potential list of stakeholders for any pro posed
action may exceed the capacity of analysis; therefore, it is more feasible
to focus on the important stakeholders. To map stake holders is to
develop a table or picture by categorizing the members and assigning
priorities in certain ways. Some commonly used dimen sions for catego –
rizing (and degrees to prioritizing stakeholders) include power/influence
(high, medium, low), attitude/support (positive, neutral, negative), and
need/interest (strong, medium, weak) (Mitchell, Agle, and Wood 1997).

The map is often presented in a matrix format with two dimensions
of interest. A third dimension can be added by integrating color scheme,
font size, or symbols.

For example, a stakeholder map may look like:

The table will help decision-makers better understand the impact of the
action, set up priorities, balance the cost and benefits, and ultimately
make a wise decision.

Positive Attitude Neutral Attitude Negative Attitude

High Power Stakeholder A Stakeholder B Stakeholder C

Medium Power Stakeholder D Stakeholder E Stakeholder F

Low Power Stakeholder G Stakeholder H Stakeholder I

SUMMARY AND CONCLUSION

1. Theories about business, government, and society are numerous. We examined
three common business-centered approaches that often underlie public dis –
cussions of what proper business–government relations should be. We also
examined a business–government model in which relations have been corrupted.

2. The first of two business-centric perspectives was the shareholder model. It
considers only business interests, and asserts that the two sectors should be as
separate as possible, with the implicit assumption that government should also
be as small as possible. Its strength is its focus on economic principles of a pure
market and the dynamism and innovation that such a focus can ideally lead to.
Its weaknesses are that, pragmatically, business only wants government to step
aside in terms of short-term gains, and rarely accounts for external effects and
long-term effects, even negative ones for the market itself.

3. The second market-based perspective was the strategic model. It assumes that
business is but one of many players, and looks at maximizing business’s success
in a competitive and political world. From a long-term perspective, it also includes
a subordinate consideration of collaboration for both profit maximization from
joining core competencies, as well as for public trust-building and public relations.
Its weakness is that there is no ethical framework, and so ethical lapses may
become common unless clear rules are spelled out in law (which limits flexibility).

4. The third market-based perspective was the stakeholder approach. It assumes
that business is a fully integrated element of society, and must give as much
attention to the interests of internal and external stakeholders as it does to owners
or shareholders. It emphasizes the idea that society must balance both democratic
as well as economic principles to be just and ensure social cohesion. Its strengths
are that it reintegrates the social values that we were brought up to cherish and
takes a long-term perspective toward business interests. Its weakness is that it
is often argued that it, too, frequently goes beyond the appropriate realm of
business, which is simply to make a profit and create jobs.

5. Understanding these different models of business and society is useful to sort
out complex debates and conflicting assertions. Often those involved in debates
are essentially talking past one another because they have fundamentally different
assumptions. However, even more importantly, those making arguments often

Business–Government Relations in Society 67

Skill Exercise: Stakeholder analysis of ABC’s relocation

Read the opening case scenario: ABC’s relocation. Create a list of
stakeholders for ABC’s relocation, identifying who are the primary,
secondary, and key stakeholders (if there are any). Using the power–attitude
matrix above, map the stakeholders.

Discuss how the analysis may inform you and how you would resolve
the issue, if you were Zach’s father, Zeddic.

change their assumptions to suit the specific argument, thereby having an eclectic
and incoherent approach. Since government is not a monolith, but rather an
enormous set of complex operations, it is also important to be able to understand
the three major ways that it attempts to fulfill the American public’s expectations.
For example, the US Security and Exchange Commission is committed to the
shareholder perspective by guaranteeing a fair playing field, the US Trade
Representative’s office fights for the strategic position of American products, and
the US Department of Health and Human Services is an advocate for the various
constituents that make up society as represented in the stakeholder approach.
A more sophisticated understanding of government, and the multiple approaches
it is expected to embrace, allows business people to interact with government
with both more comfort and effectiveness.

6. Finally, it is also important not to confuse the three different approaches listed
above with crony capitalism, which is when any of these models becomes
distorted and corrupted to provide unfair advantages to small elite groups in
society, using government as a primary tool. Crony capitalism ranges from the
flagrant variety exhibited in dictatorships to the subtler varieties found in all
democracies. While crony capitalist tendencies can never be eradicated, they can
be enormously reduced, which ultimately is both critical for maintaining the trust
of society in its business and government institutions, as well as for the long-term
good of a healthy market economy.

68 Introduction to Business–Government Relations

Competitiveness index
Economic freedom

index
GINI coefficient
Government

“ownership”

Regulation
Shareholder model
Stakeholder
Stakeholder analysis
Stakeholder

model

Strategic business
model

Subsidies
Tax breaks

KEY TERMS

STUDY QUESTIONS

1. What are the issues that cause market failure? How can/does government deal
with each of the issues?

2. What are the government policies that have affected the business of Boeing?

3. What are the advantages and disadvantages of using each of the three business-
oriented approaches (the shareholder, strategic, and stakeholder models)?

4. What do you think the balance of the three government-oriented models
(ownership, regulation, financial leverage) should be? What do you think the
balance actually is? What direction do you think it is going? Discuss with
examples.

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