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Business and society ethics sustainability and stakeholder management 9e chapter 11

© 2015 Cengage Learning


Chapter 11
and Regulation

© 2015 Cengage Learning


Learning Outcomes
1. Articulate a brief history of government’s role in its
relationship with business.
2. Appreciate the complex interactions among business,
government, and the public.
3. Identify and describe government’s nonregulatory

influences, especially the concepts of industrial policy and
4. Explain government regulation and identify the major
reasons for regulation, the types of regulation, and issues
arising out of deregulation.
5. Provide a perspective on privatization versus federalization,
along with accompanying trends.
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Chapter Outline

The Pendulum of Government’s Role in Business
The Roles of Government and Business
Interaction of Business, Government, and the Public
Government’s Nonregulatory Influence on Business
Government’s Regulatory Influences on Business
Key Terms
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Business, Government,
and Regulation

The government tends to become involved in

business after serious problems arise, and
there has been no shortage of problems.

The first decade of the 21st century saw the
tech stock plunge, and the Enron, WorldCom
and other scandals. The collapse of the housing
market put the economy on the brink of

That decade swung the pendulum of
government involvement in business from
minimal to major player.
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The Pendulum of
Government’s Role in Business

The areas in which government regulates
change, and its varying roles increase the
complexity of its relationship with business.
Government can:

Determine the rules of the game

Be a major purchaser with buying power that
can affect a business’ or industry’s chances of

Strengthen some businesses and weaken others

Create new businesses and industries through
subsidization and privatization
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The Roles of
Government and Business

For effective management, government’s role as
a stakeholder must be understood.
What should be the respective roles of business
and government in our socioeconomic system?
If the role of business were simply production
and distribution of goods and services, business
would need little regulation.
But other goals exist – safe working
environment, equal employment opportunities,
fair pay, clean air, safe products – which business
does not automatically factor into the business
decision making process.
As a result, it falls to government to ensure
those goals are achieved.
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A Clash of Ethical Systems

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Interaction of Business,
Government, and the Public (1 of 2)
Government-Business relationship •

Government influences business through
regulation, taxation, and more.
Business influences government by lobbying,
and more

Public-Government relationship •

Public influences government through voting
and forming special interest groups.
Government influences the public with
politicking, public policy formation, and
other political influences.
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Interaction of Business,
Government, and the Public (1 of 2)
Business-Public relationship • Business influences the public through
advertising, public relations, and other
forms of communication
• The public influences business through
the marketplace, or by forming special
interest groups.

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Interaction Among Business,
Government, and the Public


• Interest
• Not buying
• Protests

Regulations and Other
Forms of Persuasion


• Political Process
• Voting
• Interest Groups
• Contributions

• Advertising
• Public Relations

• Politicking
• Political


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Government’s Nonregulatory
Influence on Business
Two major nonregulatory issues •Industrial policy • Concerned with the role of government
in a national economy.
•Privatization • Whether current public functions (e.g.,
public education, public transit, social
security, fire service) should be turned
over to the private (business) sector?
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Industrial Policy
Industrial policy •Every form of state intervention that affects
industry as a distinct part of the economy.
•A current trend toward stronger industrial
policy is likely to continue while the world
economy works to recover from the global
financial crisis.

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Privatization •The process of changing a public organization
to private control or ownership.
•The intent is to capture the discipline of the
free market and a spirit of entrepreneurial risktaking.
•Two functions a government might perform:

Producing a service

Providing a service
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The Privatization Debate
Pro-Privatization •Government has no comparative advantage in
many functions.
•Government is less efficient and less flexible.

Anti-Privatization •Some activities cannot be effectively handled
by the private sector.
•Privatization produces uneven results in
efficiency gains and cost savings.
•Privatization works best when the pursuit of
profits does not work against broader social goals
or public policy.
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Other Nonregulatory
Government Influences
Government is:

A major employer
A standard setter
One of the largest purchasers

Government influences business by:

The use of Subsidies
Transfer payments
Loans and loan guarantees
Monetary policy
Moral suasion
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Regulatory Influence on Business
• Government Regulation has become the most
controversial in the business-government
relationship, affecting every aspect of how
business functions.
• Most people agree that some regulation is
necessary to ensure that consumers and
employees are treated fairly, and not exposed
to hazards, and to protect the environment.
• However, businesses also think that
regulation has often been too extensive in
scope, too costly, and burdensome in terms of
red tape.
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Regulation - What Does It Mean?
Regulation •The act of governing, directing according to rule,
or bringing under the control of law or constituted
•A federal regulatory agency •

Has decision-making authority
Establishes standards
Operates principally on domestic business
Has members appointed by the President
subject to Senate confirmation
Has its legal procedures governed by the
Administrative Procedures Act
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Reasons for Regulation
Most regulation arises out of a market failure.

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Types of Regulation (1 of 2)

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Types of Regulation (2 of 2)

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Comparison of
Economic and Social Regulation

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Issues Related to Regulation Innovation may be affected –
•When corporate budgets must focus on “defensive
research” certain types of innovation are less likely to
take place.

New investments in plant and equipment
may be affected –
•To the extent that corporate funds must be used for
regulatory compliance, they are diverted from more
productive uses.

Small business may be adversely affected –
•Federal regulations can have a disproportionately
adverse effect on small firms because of the (lack of)
economies of scale.
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Deregulation Represents a counterforce - aimed at keeping
the economy in balance. A continual striving for
the balance of freedom and control for business
will be best for society.
Purpose of Deregulation • Intended to increase competition with hopes
for greater efficiency, lower prices, and
enhanced innovation.

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The Changing World of Deregulation
• Deregulation which began in the 1980s had
mixed results.
• Some prices fell, but more competitors were
unable to compete with the dominant firms.
• The savings & loan industry crisis cost the
government a $124 billion bailout.
• Repeal of the Glass-Steagall Act caused the
global recession that began in 2008.
• The dilemma is how to enhance competition
without sacrificing applicable social
regulations such as health and safety
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