1. Session 12 The role of government and regulation
Sungkyunkwan University (SKKU) International Summer Semester (ISS) 2017
“Global Synergy: Innovating through Collaboration”
Business Ethics
Session 12
The role of government and regulation
Prof. J. G. Frynas
12 July 2017

2. Government as a stakeholder

3. What is the government?
The government consists of a variety of institutions and actors at different levels that share a common power to issue laws.
These institutions and actors include, for example, the office of the prime minister, government ministries, parliament, courts, police, state-owned companies etc.
Laws serve as a codification into explicit rules of the social consensus about what a society regards as right and wrong.
Courts and police enforce laws and regulations.

4. Government as a stakeholder (1)

5. Government as a stakeholder (2)
Unlike many other stakeholders, government in principle represents an entire community since it is either elected or tolerated by the citizens of a certain town, region, country or even continent.
Governments are very dependent on business
However, governments have contradictory interests versus business:
regulatory responsibilities (business may want to escape some regulation)
a self-interest to be re-elected (populist demands made against business)
an interest to maximize capital investments, job creation and tax from firms (whereas business wants to minimize costs and tax liabilities)

6. Regulation within a global context

7. Globalisation: changing contexts (1)
Free Trade / World Trade Organization and growth of international trade between multinational enterprises
Deregulation and privatisation / World Bank and International Monetary Fund
Growth of non-state actors (international organizations, non- governmental organizations, multi-stakeholder forums)
Intensification in competitive bidding between states - “regulatory arbitrage”.
MGT4226, Week 2, 2007

8. Globalisation: changing contexts (2)
Key consequences:
National level regulation less important in some areas
European & “transnational” regulation intensifying
Calls for more self-regulation to reduce ‘red tape’
Encouragement of a proactive approach from industry in achieving societal and environmental goals
More multi-stakeholder initiatives

9. International regulation
Sources of international regulations:
European Union
OECD
United Nations
International conventions/treaties/protocols
Bilateral/multilateral trade agreements
EU Directives
OECD Convention on bribery, Guidelines for MNEs
UN Framework Convention on Climate Change, Kyoto Protocol, Montreal Protocol
MARPOL, Ramsar
MGT4226, Week 2, 2007

10. Players in the regulatory game and selected examples of private regulatory efforts (source: Crane and Matten, 2016)
Regulation made by:
National governments
European Union
United Nations
International governmental organizations (WTO, IMF, World Bank, OECD, etc)
International treaties (NAFTA, Mercosur, etc.) 1
Business
Government 2 3 1
Regulation made by:
Business associations,
Chambers of commerce
Industry associations
Individual corporations
Supply chain members
Specific initiatives and programmes 2 5 4 3
EMAS
Self-commitments by industry 6
Marine Stewardship Council
Ethical Trading Initiative 4
Civil regulation,
made by:
NGOs (environment,
social, human rights, etc
Local community orgs
Trade unions 6 5
Multipartite agreements:
UN Global Compact,
European Alliance for CSR
OECD guidelines for MNCs
Dutch covenant approach
Voluntary Principles, Security & Human Rights
CSOs

11. Possible regulatory approaches
Department of Justice in U.S.
(e.g. FCPA)
Securities and Exchange Commission (e.g. FCPA)
TOVALOP/OPOL for oil spills
Most CSR falls in this category – no penalties
Criminal
penalty
Civil sanctions
Enforced self-regulation/
Restorative justice
Examples:
U.S. Criminal Code
For example, in 2013, owner of Absolute Fuels was sentenced to 15 years in prison and and ordered to pay more than $54.9 million in restitution for violating the Clean Air Act and Title 18 U.S. Criminal Code, for fraudulently selling non-existing bio-fuel by wire transactions
U.S. Foreign Corrupt Practices Act (FCPA)
e.g. Total charged for paying bribes to intermediaries of an Iranian government official who then exercised his influence to help the company obtain valuable contracts to develop oil and gas fields in Iran. Total agreed to pay $398 million to settle SEC and criminal charges in 2013.
TOVALOP/OPOL for oil spills
Most CSR falls in this category
Education/
Persuasion
Adapted from: Bertels et al. (2014). “A Responsive Approach to Organizational Misconduct: Rehabilitation, Reintegration, and the Reduction of Reoffense”, Business Ethics Quarterly 24(3), pp

12. Classroom Task: Asbestos and uranium mining
Read the case Asbestos and uranium mining court cases
Please form a team of 3-4 students and answer the two questions:
Do you think the Cape plc and the R.T.Z. cases should have been heard in South African/Namibian or British courts? If yes, why? If not, why not?
The environmental safety in the Cape plc plant in South Africa and the health & safety of the R.T.Z. plant in Namibia were far from perfect, even though the operations of the plants were regulated by various government departments. Why do you think these companies were able to operate unsafe plants?
A company such as Cape plc or R.T.Z. could lose a lot of money because of stringent environmental government regulations (e.g. by paying fines). Can you think of examples where a firm can benefit from environmental regulations?

13. However: the government remains crucial
national legal systems continue to standardise the rules of the game in an economy (e.g. USA: innovative joint-ventures constrained beyond prototype, while encouraged in Japan)
national regulations continue to govern industry entry and exit and many other aspects of market activity (tax and incentives, labour laws, standard setting, etc.)
government as an actor continues to play a role in the economic system (e.g. mediator, state-owned companies, buyer of products and business services, public pension funds etc.)

14. Example: e-commerce regulation
Despite the idea of the “borderless cyberspace”, e- business is still hindered by national borders:
jurisdictional and contractual risks (different laws applicable to transaction; electronic signatures validity; customer’s consent to terms; limitation of damages)
intellectual property rights (example: business method patents in the USA vs. other countries)
internet and content-related risks (e.g. defamation risk; compliance with local law) (example: internet service providers in the USA vs. European Union)
tax (e.g. sales tax in the USA vs. European Union)
MGT4226, Week 2, 2007

15. Example: mandatory regulation on CSR
Governments turn CSR into mandatory laws, for example:
2007 Indonesian Law No.40/2007 on Limited Liability Companies states that companies in natural resource and related industries must practice CSR policies, the companies’ CSR budget must be part of the annual work plan and the impact must be reported in the annual report
2014 European Union Directive 2014/95/EU on disclosure of non- financial and diversity information – ca.18,000 companies with over 500 employees are required from 2018 to report on social, environmental, human rights, anti-corruption policies, and analyse risks and outcomes

16. Example: government strategies on sustainability
Scotland – 2016 strategy for a circular economy
Target for 33% waste reduction by 2025
Product design for longer life products
Encouragement of re-use activities
Stimulating growth of repair sector
Increase recycling
Develop new design and sustainability skills
France – 2016 proposals for the Mediterranean
Co-ordination of scientific networks
Preserving marine and coastal ecosystems
Pollution prevention on land
Pollution prevention in the sea
Sustainability of small islands

17. Conclusions?
In a global economy, there are various alternative approaches to regulating business – such as transnational regulation and multi- stakeholder CSR initiatives.
But you cannot have a successful state without the involvement of business (e.g. technical advice, efficiency gains etc.)
You cannot have a successful economy without the state (property rights, standard setting, competition policy, etc.)
However, the degree to which business should get involved in state activities is controversial

18. Ethical issue: Privatisation of government functions
Government/public functions now performed by business (e.g. public transport, utilities, health)
Privatisation of government functions can have a number of different harmful effects:
corruption during privatisation process and as part of regulation
less access for disadvantaged groups (e.g. rural areas access to services, poor communities, marginalized groups)
“natural monopolies” – competition may not be possible where services depend on delivery via networks (e.g. electricity-cables, railways-rails, water-pipes)

19. Business influence on government

20. Key ethical issue: Business influence on government
Business can have significant influence on the implementation and direction of government policies.
Business – like any other group – is entitled for its voice to be heard by government.
However, what if the business influence interferes with the mandate of government to act in the interests of its citizens?
Examples:
lobbying for de-regulation that curtails labour rights
lobbying against environmental legislation
colluding with government officials to maintain a market monopoly

21. Types of business influence on government
Lobbying: Communicating, persuading government with regards to issues that are relevant to business.
Party and political financing: Supporting politicians, political parties and political campaigns with financial contributions.
Personal political ties: Personal relationships between government officials/politicians and individuals within companies.
Overlap of posts between business and government: government officials moving into private sector careers, and vice versa.
Corruption of government actors: Making illegal financial payments to politicians, political parties and political campaigns.

22. Some examples of ethically questionably practices
Lobbying: Businesses lobbying the European Union Commission for lower emission standards in their industry.
Party and political financing: Financing of US politicians by American Rifle Association and American arms manufacturers.
Personal political ties: Ties between Angolan government officials and a senior banker in a large American bank.
Overlap of posts between business and government: US secretary of state Rex Tillerson – former CEO of ExxonMobil.
Corruption of government actors: Wal-mart in India.

23. Example: Business responses to climate change
The debate on climate change regulation has been a key political topic.
CO2 reductions can represent a threat for some industries.
In Australia, Canada and the USA, business lobbied against action:
Examples: “Global Climate Coalition” to lobby against regulation; US oil companies influencing the Republican Party in the United States
Result: President Bush withdrew from Kyoto Protocol in 2001; Keystone XL pipeline in 2016; President Trump withdrew from Paris Accord in 2017
In Europe, public appetite for action, firms lobbied to shape regulation:
Example: business lobbying to shape carbon trading schemes in Europe
Result: ETS introduced in 2005 – flexible market mechanisms and some concessions to business over implementation

24. Is business influence on governments good for business?
The influence of business on government can be both lawful (e.g. Public Action Committees in the United States, EU business representations) or unlawful (e.g. Wal-mart in India)
Taken from the perspective of business: is Corporate Political Activity (CPA) always effective?
Political strategies by Wal-mart in India /watch?v=W8ymIfZPWlE

25. Corporate Social Responsibility versus Corporate Political Activity

26. Relationship between CSR and CPA (1)
In some situations, Corporate Social Responsibility (CSR) and Corporate Political Activity (CPA) can complement each other and can substitute for each other.
Companies may use CSR to enter foreign markets, to obtain new business opportunities, to avoid risk of a political backlash in the case of a political revolution etc.
Social strategies by Unilever in India
tch?v=xut8RIwS4gk

27. Relationship between CSR and CPA (2)
Source: Frynas, J.G., Child, J. and Tarba, S., ‚Editorial: Nonmarket social and political strategies’ British Journal of Management, forthcoming 2017

28. Relationship between CSR and CPA (3)
Three types of relationships between CSR an CPA:
1) CSR and CPA are complementary
e.g. CSR help to gain and maintain political access (e.g. pet project of politician)
2) CSR substitutes for CPA
e.g. CSR to substitue for political ties in politically unstable countries
3) CPA subsititutes for CSR
e.g. some firms donate less to charity since they have good political connections

29. The structure of external affairs is important
In most large companies, the development of CSR or CPA practices is not left to an individual or a department, but instead occurs under the umbrella of a broader legal, external affairs or even public relations function. Compare:
Lufthansa (German airline)
external affairs offices in Brussels (headquarters of the European Union) and Washington, D.C. (the US capital)
both social/environmental and political strategies for engaging with legislators and administrators, international organizations, NGOs and trade associations
Tata Consultancy Services (Indian consultancy firm)
external affairs office in Brussels (headquarters of the European Union)
remit largely limited to social and environmental activities (not political)

30. Classroom Task: CSR as a political strategy
Please discuss the question: Do you think it is ethical for companies to use socially responsible initiatives for political advantage?