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52. Paula Dwyer, et al., “The Big Board’s Blueprint: Done Deal?” BusinessWeek,

November 24, 2003, pp. 45–46.

53. Solomon and Craig, op. cit.

54. Susanne Craig and Ianthe Jeanne Dugan, “NYSE Begins Its Huge Overhaul,”

Wall Street Journal, November 9, 2003, p. C11.

55. Scot J. Paltrow, “Concerns About SEC Chairman Mount,” Wall Street Journal,

May 6, 2002, p. C1.

56. Michael Schroeder, “Regulator Under Fire: As Pitt Launches SEC Probe of

Himself, Criticism Mounts,” Wall Street Journal, November 1, 2002, p. A1.

57. See a book excerpt, “Arthur Levitt’s Crusade,” BusinessWeek, September 30,

2002, p. 74.

58. Robert Kuttner, “Wake Up, Wall Street: Eliot Spitzer Is a Hero,” BusinessWeek,

May 19, 2003, p. 24.

59. Henry and McNamee, op. cit.

60. Paul Dwyer, with Mike McNamee, Emily Thornton and Nanette Byrnes,

“Will It Matter?” Business Week, May 12, 2003, p. 31.

61. Wes Pedersen, “As Election ’04 Nears, New Calls for an Examination of the

Corporate Soul,” Public Affairs Review, annual report, 2004, p. 4.

62. Paul Nowell, “Execs Talk Corporate Integrity at Forum,” Associated Press

Online, March 2003.

63. John A. Byrne, “Restoring Trust in Corporate America,” BusinessWeek, June

24, 2002, p. 31.

64. Ads in Wall Street Journal, July 8, 2002, p. A5, and July 9, 2002, p. A11.

65. Jerry Useem, “From Heroes to Goats and Back Again? How Corporate Lead-

ers Lost Our Trust,” Fortune, November 18, 2002, p. 48.

66. Seymour Trachimovsky, “Sarbanes Oxley and Canadian Counterparts: Any

Prospects for Improved Corporate Ethics,” Management Ethics, Fall 2003, pp.

1–3.

67. Editorial, “Enron Justice,” Wall Street Journal, January 15, 2004, p. A14.

68. John R. Emshwiller, “Ex-Treasurer Is First Enron Officer to Go to Prison,”

Wall Street Journal, September 11, 2003, p. A3.

69. John R. Emshwiller and Alexei Barrionnevo, “U.S. Prosecutors File Indict-

ment Against Skilling,” Wall Street Journal, February 20, 2004, p. A1.

70. Ibid., p. A13.

71. John R. Rmshwiller et al., “Lay Strikes Back as Indictment Cites Narrow Role

in Enron Fraud,” Wall Street Journal, July 9, 2004, p. A1.

72. Alan Murray, “CEO Responsibility Might Be Right Cure for Corporate

World,” Wall Street Journal, July 13, 2004, p. A4.

73. “Lay Pleads Ignorance: CEOs Shudder,” Observations, a news

74. Susan Pulliam, “The ‘It Wasn’t Me’ Defense,” Wall Street Journal, July 9,

2004, p. B1.

75. Susan Pulliam, Almar Latour and Ken Brown, “Reaching the Top: U.S. In

dicts WorldCom Chief Ebbers,” Wall Street Journal, March 3, 2004, p. A1.

76. Keith Naughton and Barney Gimbel, “Martha’s Fall,” Newsweek, March 15,

2004, pp. 28–37. James Bandler, Kara Scannell, and Suzanne Vranica,

“Martha Opts for Jail Now,” Wall Street Journal, September 16, 2004, p. B6.

77. Deborah Solomon and Randall Smith, “Wall Street’s Deal Comes Under

Fire,” Wall Street Journal, May 8, 2003, p. C1.

78. Robert Kuttner, “Wake up, Wall Street: Eliot Spitzer Is a Hero,” BusinessWeek,

May 19, 2003, p. 24.

79. Deborah Solomon, “Morgan Stanley Remarks Draw Criticism by SEC,”

Wall Street Journal, May 2, 2003, p. C8; Amy Borrus and Mike McNamee,

402 I CHAPTER 14

“Commentary: Go Ahead, Make the SEC’s Day,” BusinessWeek, June 2,

2003, p. 27.

80. Ann Davis, “Bear Stearns Used Analyst to Tout IPO Despite Pact With Regu

lators,” Wall Street Journal, May 12, 2003, p. A1.

81. Greg Ip, “Greenspan Issues Hopeful Outlook as Stocks Sink,” Wall Street

Journal, July 17, 2002, p. A1.

82. “A Survey of Capitalism and Democracy,” Economist, June 28, 2003, p. 16.

CONSTRUCTING A COMPETITIVE POLITICAL MARKETPLACE I 403

Chapter 15

Heed the Public Interest

The political marketplace is where public policy decisions are made.

These decisions provide the framework within which individual busi-

nesses operate and determine in what activities government should or

should not engage. Government protects the liberty of its citizens, sets

the rules of the game that businesses must follow, and operates a system

of economic institutions, such as private property. It is also generally

agreed that so-called public goods and services—such as police protec-

tion and national security, city streets, roads, and other facilities that

can’t be sold as individual units—should be provided by government.

Public policy decisions are guided by the criterion of what is in the

public interest. All participants in the public policy process, including

corporations and interest groups and not only government, claim that

what they seek is in the public interest. But what does that mean?

Henry Mintzberg in Power in and Around Organizations rightfully rec

ognizes that even regulatory agencies typically lack an adequate defi

nition of the public interest and are therefore unsure of what to do.

The public interest is simply defined as what is good for the public as a

whole. The ostensible concern is with broad societal interests rather

than private interests. Those representing the latter will, of course, ar

gue that what they seek is in the public interest. The distinguishing

feature of the public interest from a corporate viewpoint is that the

frame of reference is not the individual organization but what is exter

nal to it: the physical environment, the local community, and the wel

fare of society as a whole.

A generation ago the leading CEOs were public-minded statesmen

who were comfortable addressing big public policy questions about

business’s role in society. Reginald Jones, former chairman and CEO of

GE, was one of them, as his belief indicates:

404

Public policy and social issues are no longer adjuncts to business planning

and management. They are in the mainstream of it. The concern must be

pervasive in companies today, from boardroom to factory floor. Manage

ment must be measured for performance in noneconomic and economic

areas alike. And top management must lead.

This statement was part of the Business Roundtable’s October 1981

Statement on Corporate Responsibility, which said: “The Business

Roundtable issues this statement out of a strong conviction that the fu

ture of this nation depends upon the existence of strong and responsive

business enterprises and that, in turn, the long-term viability of the

business sector is linked to its responsibility to the society of which it is a

part.”

Reginald Jones was not blind to Wall Street pressures. Shortly af

ter retiring in 1981, he told U.S. News & World Report, “Too many man

agers feel under pressure to concentrate on the short term in order to

satisfy the financial community and the owners of the enterprise—the

stockholders.… Boards of directors have to understand that they must

shelter management from these pressures.” And he added, “They should

do it in the interest of the nation.”

Before the 1980s, CEOs seemed to listen more closely to their public

relations advisors, many of whom held vice presidential status and had

the confidence of the CEO. These advisors paid close attention to public

opinion and subscribed to Abraham Lincoln’s famous statement: “Pub-

lic sentiment is everything. With public sentiment, nothing can fail;

without it, nothing can succeed.” Public relations people spoke about

the importance of the intangible asset called goodwill,

which would

provide some respite from a bad press or a crisis. However, as Wall Street

pressures mounted, often accelerated by hostile takeovers of companies

that didn’t maximize profits sufficiently, public relations was chal-

lenged by marketing people and others whose focus was almost entirely

on the singular bottom line. It took at least another two decades for

companies to recognize the double bottom line, which added social re

sponsibility.

Helping to raise corporate awareness of the importance of the public

interest is the Public Affairs Council, an outstanding professional orga

nization that has recognized the necessity for greater corporate social

responsibility and ethical behavior. Its 45th Anniversary Report con

cludes with a section on “Ethical Guidelines” and ends with this admoni

tion: “The public affairs professional … understands the interrelation of

business interests with the larger public interests, and therefore:

• Endeavors to ensure that responsible and diverse external interests

and views concerning the need of society are considered within the

corporate decision-making process.

• Bears the responsibility for management review of public policies

which may bring corporate interests into conflict with other interests.

HEED THE PUBLIC INTEREST I 405

• Acknowledges dual obligations—to advocate the interests of his or

her employer, and to preserve the openness and integrity of the

democratic process.

• Presents to his or her employer an accurate assessment of the polit

ical and social realities that may affect corporate operations.”

In sum, the corporate attitude toward greater public responsibility

has changed. As stated by Lord John Browne, group chief of British Pe

troleum, “Companies can’t thrive in isolation. We are part of society and

we are dependent on its success. We have to invest in the development of

society if we want to ensure that we can do business successfully over

30 years or more.”

As such statements suggest, management is increasingly under pres

sure to heed the public interest. This chapter discusses three major strat

egies to achieve that goal: (a) embracing corporate social responsibility,

(b) engaging in stakeholder relationships, and (c) incorporating the pub-

lic interest in corporate governance.

EMBRACING CORPORATE SOCIAL RESPONSIBILITY

Definitions of corporate social responsibility (CSR) are often similar to

the concept of the public interest. Writing about business and society,

Keith Davis and Robert L. Blomstrom said, “The idea of social responsi-

bility is that decision-makers are obligated to take actions which protect

and improve the welfare of society as a whole along with their own in-

terests.”

In one way or another, most definitions state that the objec-

tives and values of society must be considered in conducting a

company’s business.

Unfortunately, however, CSR has largely been

viewed as an autonomous activity unrelated to business operations that

was associated with “do good” programs and philanthropy; for exam

ple, writing checks to worthy charitable organizations and their causes.

At best such gestures served to improve a company’s and CEO’s image,

which in turn was said to help sell products, recruit workers, and aid

lobbying.

During the 1980s, this mainly altruistic type of philanthropy was re

placed by the new concept of strategic philanthropy. Every contribution

was measured against the test of whether it advanced corporate goals.

Mutual benefit—not only helping various beneficiaries but also the

company—became the chief justification of social expenditures. When

ever possible, a company would also seek to reap “private benefits”

rather than benefitting all companies, especially the “free loaders.”

However, to some managers and academics even this version of stra

tegic philanthropy inadequately addressed corporate self-interest be

cause its connection to a company’s business was vague or tenuous.

Instead of talking about generating goodwill and positive publicity and

boosting employee morale, the goal of strategic philanthropy should in

stead be to enhance a company’s ability to compete, declared Michael

406 I CHAPTER 15

Porter of the Harvard Business School. He says that true strategic giving

“addresses important social and economic goals simultaneously, target

ing areas of competitive context where the company and society both

benefit because the firm brings unique assets and expertise.”

Even

cause-related marketing lacks strategic intent, he says, because it is es

sentially a form of strategic philanthropy used to improve the reputa

tion of a company by “linking its identity with the admired qualities of a

chosen non-profit partner or a popular cause.”

Porter’s more focused

approach acknowledges the importance of CSR and anticipates some of

the criteria a company should use in applying it. The larger significance

of modern strategic philanthropy is that CSR has been reconnected to

overall management decision making.

Climbing the Pyramid of CSR

Many approaches have been taken to describe the specifics of CSR. For

example, in his Corporate Social Responsibility, Chris Marsden lists these

imperatives: (a) running business activity safely, legally, and effec-

tively; (b) minimizing adverse impact on community and society (i.e.,

do no harm); and (c) do good by addressing those social issues that im-

pact the corporation’s activity, are within the corporation’s competence

to influence, and offer opportunities for mutual benefit.

Expanding on

this scheme, the pyramid of CSR, as shown in Box 15.1, places the

meanings of CSR on five levels of corporate involvement, ranging from a

minimum level of simply performing its basic economic function to

heeding the public interest in the fullest sense.

Each step up the pyramid represents an advance in corporate social re-

sponsiveness to the surrounding environment. As Robert W. Ackerman

and Raymond A. Bauer recognized, it takes many years for management

to recognize a problem, formulate new policies, engage in specialized and

administrative learning, and, finally, change the organization.

Level 1: Perform Basic Economic Function. Forty years ago,

widely respected conservative economist Milton Friedman stated,

“There is one and only one social responsibility of business—to use its

resources and engage in activities designed to increase its profits so long

as it stays within the rules of the game, which is to say, engages in open

and free competition, without deception or fraud.”

Making as much

money for their stockholders was the sole objective of business; doing

more was a fundamental subversive doctrine. This exceedingly limited

view of social responsibility does not even recognize society’s expecta

tions of business, namely, to provide goods and services.

Perhaps his ideal model of a CEO would be Albert J. Dunlap, a former

parachuter, who symbolized the benefits and perils of a fixation on the

bottom line and stockholder value (see Box 15.2).

The 1980s mistakenly extended Friedman’s singular corporate goal

of making money for stockholders into a “greed is good” ideology. For

HEED THE PUBLIC INTEREST I 407

408

Box 15.1 The Pyramid of CSR

5. Support

public policies that

areinthepublicinterest.

4. Make social investments to

strengthen society’s infrastructure.

3. Help solve social problems.

2. Minimize the social costs imposed on society.

1. Perform basic economic function of producing goods

and services for society, and, thereby, also provide jobs.

Box 15.2 “Chainsaw Al”: A Narrow View of Social Responsibility

Albert Dunlap was known as “Chainsaw Al” because his prescription for

achieving results was to apply what The Economist called “the patented

two-pronged strategy” of firing half the workforce then berating the

other half. After taking over Scott Paper in 1994, he fired 11,200 em-

ployees, about a third of the workforce. But benefits abounded for

stockholders: In only 20 months, Dunlap sold Scott Paper to

Kimberly-Clark at a price that gave stockholders a 225% increase in the

value of their stock. His disdain of corporate responsibility was symbol-

ized by his cancellation of a charitable gift to the Philadelphia Museum.

As Dunlap said, “If you want a friend, get a dog.” His view is reflected in

the title of his book, Mean Business. His approach was so highly re-

garded on Wall Street that when it was announced that Al Dunlap had

been hired as CEO of Sunbeam, the company’s share rose by half.

Although some of this downsizing was necessary to make companies

more competitive in the global marketplace, it can be argued that man

agers were relying too heavily on the time-tested remedy of cost cutting

rather than inventing new remedies and attempting to transform their

companies. Even Wall Street retreated from the chainsaw approach as it

saw its limitations. At first Wall Streeters like billionaire financier Ronald

O. Perelman and influential mutual-fund manager Michael Price

cheered him on and placed him in charge of the underperforming Sun

beam. Here Dunlap repeated the old pattern. Stock prices immediately

jumped nearly 50%, from $12 ½ to $18 5/8, and in about 8 months

reached a high of $52. After 2 years in office, the board fired him. Al

though he succeeded in slashing cost—eliminating about half of

12,000 jobs—he wasn’t able to deliver on his promise to transform the

company into a high-growth profit machine. Stock prices had tumbled

to $8 13/16 about a week after his departure, below the level when

Dunlap took over.

gotten was Friedman’s condition that the rules of the game be followed,

without deception or fraud. Freedom from moral constraints led to a

national scandal of the savings-and-loan industry in the mid-1980s,

causing the biggest financial mess in U.S. history.

Loose morality also

led to deceptive practices by some well-known companies, such as Pru

dential Insurance of America, the nation’s biggest insurer, and Metro

politan Life Insurance, the nation’s second biggest life insurer. These

insurance company scandals revealed how agents allegedly defrauded

their policyholders through a practice called churning, whereby agents

persuade customers who have old policies with built-up cash value to

take out new, bigger policies on the false promise that the added cover

age will cost little, if anything.

One of the basic meanings of social

responsibility was violated: not doing harm to others.

Level 2: Minimize Social Costs. Business can usually make higher

profits by ignoring the harm done to others and to the environment as it

obtains resources and engages in manufacturing. The concept of social

costs considers the social consequences of corporate products and ac-

tions, such as the impact of a product on the health of people or the im-

pact of excessive sex and violence in movies and television on social

morality and stability. Mostly, however, the emphasis has been on envi-

ronmental damage.

In the early days of the Industrial Revolution, plant location was of-

ten decided on the basis of cheap ways of disposing of the wastes of pro-

duction and little if any thought was given to the depletion of natural

resources. As the authors of Natural Capitalism point out, “Humankind

has inherited a 3.8-billion-year store of natural capital. At the present

rates of use and degradation, there will be little left by the end of the next

century.”

Their concept of natural capitalism states that “the environ-

ment is not a minor factor of production but rather is ‘an envelope con-

taining, provisioning, and sustaining the entire economy.’”

A company’s responsibility to address environmental damage was

recognized by British Petroleum group chief executive Lord John

Browne in a speech given at Stanford University on May 19, 1997. In

addressing the global warming issue, he remarked, “It is a moment for

change and a rethinking of corporation responsibility.” Although ac

knowledging that the scientific evidence about the link between green

house gas emissions and an increase in temperature is inconclusive, he

said the risk was great enough to “take precautionary action” and that

under his watch, British Petroleum would help take “responsibility for

the future of the planet.”

Level 3: Help Solve Social Problems. Society’s social problems are

numerous and tenacious. They include such problems as drug and alco

hol abuse, illiteracy, poverty, unemployment, employment discrimina

tion, inadequate housing, crime, poor transportation, and deficiencies

HEED THE PUBLIC INTEREST I 409

in the educational system. One use of issues management is to identify

urgent social problems. Under the old division of labor in society, these

problems were assigned to government and nonprofit organizations.

However, this approach is inadequate for three reasons: (a) business is

sometimes the cause of some social problems, (b) it is affected by some of

them, and (c) it can help address some of them.

A particular company must determine which problems to address

alone and which require a partnership with other companies and with

government and nonprofits. Companies have developed guidelines to

help them choose the social problems that are most relevant to them and

that—by virtue of their line of business, resources, and competen

cies—they are best equipped to handle.

Level 4: Make Social Investments. Social investments refer to pro

grams that replenish and strengthen the community’s and society’s in

frastructure; that is, the external resources that business depends on to

conduct business. Included are physical resources like roads and other

transportation facilities, water and other utilities, a sound educational

system that provides a pool of labor, housing, medical facilities, and so-

cial services. The meaning of infrastructure has expanded over the

years, so that it includes such assets as cultural amenities that improve

the quality of life.

Responsibility for major infrastructure, such as roads, falls mainly

on government because of the huge funds required and the nature of

“public goods”; that is, they are available to all and would be difficult to

charge for. Oil and mining companies know, however, that when they

must locate in remote regions where resources are found, the responsi-

bility for all infrastructure is theirs. In underdeveloped areas, compa-

nies may also bear some costs for infrastructure they need. After

discovering oil in the sub-Saharan country of Chad, an ExxonMobil-led

consortium spent $3.5 billion to build an entire community and a

663-mile pipeline from Kome, Chad, to a port in neighboring Camer

oon.

In China, a high-tech company agreed with a local mayor to pave

roads and build bridges because the community could not afford these

projects.

Business can help build society’s infrastructure. The life and health

insurance industry, for example, has for many years followed the social

policy of setting aside some funds to be used for what they explicitly call

social investments. These were defined as “those which would not oth

erwise be made under the company’s customary lending standards, or

those in which social considerations played a substantial part in the in

vestment decisions.” These funds were made available at lower than

market rates. Projects included an inner-city health center that provides

24-hour emergency service; rehabilitation of several hundred vandal

ized homes, providing housing for inflation-squeezed middle-income

families; and preservation and restoration of a historic marketplace.

Other examples of social investments are described in Box 15.3.

410 I CHAPTER 15

Level 5: Support Policies That Are in the Public Interest. Acom

pany can support policies that are in the public interest and generally

agreed on in society, such as energy conservation and human rights.

Manufacturers of appliances, for example, would strive to achieve max

HEED THE PUBLIC INTEREST I 411

Box 15.3 Examples of Company Social Investments

Cisco Systems invested in the Cisco Networking Academy, with the

objective of training computer network administrators. Michael Porter

says it exemplifies the powerful link between a company’s philan

thropic strategy, its competitive context, and social benefits. The pro

gram is relevant because Cisco, as the leading producer of networking

equipment and routers used to connect computers to the Internet,

was able to address a limiting factor to its growth, namely, the prob

lem of a chronic shortage of qualified network administrators. After

working with a high school near its headquarters it developed a Web-

based distance-learning curriculum to train and certify secondary and

postsecondary school students in network administration. It also

worked with the United Nations to expand the effort to developing

countries, adding to their infrastructure. With its obvious specialized

expertise, Cisco was able to create a high-quality curriculum rapidly

and cost-effectively. Several leading technology companies joined the

effort by donating or discounting products and services of their own,

such as Internet access and computer hardware and software. After 5

years, it operated 9,900 academies in secondary schools, community

colleges, and community-based organizations in all 50 states and in

147 countries.

Pfizer donated its cost-effective treatment for the prevention of tra-

choma, the leading cause of preventable blindness in developing

countries. Working with the Edna McConnell Clark Foundation and

world health organizations, it created the infrastructure needed to pre-

scribe and distribute the treatment to previously relatively inaccessible

populations. The program was expanded when the Bill and Melinda

Gates Foundation and the British government joined as partners.

FleetBoston Financial launched its Community Renaissance Initia

tive to help in the inner-city economic revitalization, especially in its

major markets in older East Coast cities. It combined its philanthropic

contributions with its expertise in financial services, such as small

business services, inner-city lending, home mortgages, and venture

capital. The bank’s foundation chose six communities where the bank

had a presence and committed $725,000 to each and built a coalition

of local community, business, and government organizations to work

on issues identified by the community as central to its revitalization.

The foundation amplified its own $4.5 million investment by attracting

$6 million from private and municipal sources.