BUSINESS ETHICS

CIA 1

PART A

Submitted to: Prof Manikandan M K M

Submitted by: Nandini Rathi

1923255
Business, Government and society together form the foundations of the world. A business
which fulfils human requirements of goods and services with the objective of profit making.
Government is a structure of society that forms and applies plans and rules. Society is a
community of individuals which is associated with each other for spatial, institutional for
material things.

BGS is a study of the correlation and interdependence among these three entities of business,
government and society and the importance these models hold for a manager. The 4 BGS
models i.e. The Market Capitalisation Model, The Dominance Model, Countervailing Forces
model, and Stakeholder model provide a general framework and offers us different ways of
looking at how business, government and society interacts.

Market Capitalisation Model

As described by Adam Smith, this is a classic capitalisation model. This model suggests that
business is rooted within the market environment which acts an intermediary between the
business and socio-political forces. This model operates on the principle of Laissez faire i.e.
minimum intervention by the government. Government intervention is judged to be unwanted
as it would alter the market, not following it to reach its natural equilibrium. This model is
based on the assumption that businesses work within the moral and ethical restraint. They
ensure operational growth and profitability by producing quality products and while keeping
in mind the changes in market forces. The key features of this model are: 1. Business are
assumed to be benevolent as markets discipline them to promote social welfare, 2.
Government intervention is kept minimal. 3. It is managements ethical duty and
responsibility to promote shareholder’s welfare, 4. Profit are the measure of corporate
performance

Dominance Model

The Dominance model is a critique of the capitalism model as it focuses on the defects and
inefficiencies of capitalism. According to this model, capitalism encourages greed and
business ruthlessness by developing a system that enriches a few at the expense of many. In
the Dominance model, businesses and government dominate the masses of public and lead to
development of a system which is undemocratic. This model highlights the reality that
business that enjoy monopoly or oligopoly position in the market can and do abuse their
power. This concentration of power enables such businesses to dominate politics and bring in
force pro-business public policies that often result in exploitation of the interests of society.
Thus, there becomes an existence of a hierarchical division in society where the powerful
elite exert their power over the common workers.
Countervailing Forces Model

According to this model, power is fluid i.e. no one entity (business, government or society)
has complete dominance. The Countervailing Forces Model suggests that there exists several
environmental catalysts that directly or indirectly impacts all the 3 entities. These forces
possess the capability to cause the power of any entity to rise or fall. It differentiates from the
dominance model as this is a model suggests the existence and influence of multiple forces
and rejects the ideology of absolute supremacy of business. This model advocates business to
be flexible in nature as they can never be in full control of the changes in the operating
environment.

Stakeholder Model
The fourth and last model is the Stakeholder Model. A stakeholder is an entity who actions
either benefit or strain the business or who is benefitted or strained by the actions of the
corporation. The stakeholder model is a symbolic representation of the relationship that exists
between the business and its stakeholders which the business at the centre of web of mutual
relationships. A corporation can be divided into 2 categories i.e. primary and secondary
stakeholders. Primary stakeholders include entities who are in a mutually immediate or
powerful relationship with the corporation, these include stockholders, customers, employees,
communities and government. On the other hand, secondary stakeholders are those entities
whose relationship with the organisation is less significant. These include media, competitors,
creditors, suppliers politically interested groups, unions, religious groups, educational
institutes etc. According to this model, corporation has a responsibility towards all of its
stakeholders and it manage its business keeping in mind their interests as well.

Identify the model that fits well in today’s context to bring out ethical transformation
in the society.

According to me, the Countervailing Model is the one which fits well in present day’s context
and brings out the ethical transformation in the society. In order to justify why the
Countervailing Model is the most suitable, let us first discuss why the other three models are
not.

Several critics have called the Capitalism model too optimistic a view as there exist numerous
flaws that inevitably appear in the market. The model suggests minimum intervention of the
government, however if these flaws are not corrected in time, these flaws will get amplified
and result in frauds, monopolies, conspiracies etc. Although capitalism has created
managerial progress but the adverse side of this progress is unflagging as elevated prosperity
comes at the cost of increased inequality. Adam Smith himself had reservations about this
model as he doubted that it can cause not only unwanted idolization of the haves and virtues
being eroded. He believed that in the society there must be a coexistence between the traits of
self-interest and benevolence.

When it comes to the Dominance Model, this model is rejected by the principles of populism,
as periodic political pattern in world history in which the common public who feel exploited
by the elite seek to take power from them. This model talks about the reality of how large
corporates can dominate the political economy of a country, subordinate the democracy for
personal gain and thus lead to creation of a democratic gap in the society. These populist
movements also led to the ideology of Marxism which advocates a worker revolution against
the exploiting capitalists and overturn capitalism in favour of communism. Thus, it can be
said that the dominance model does not represent an ideal as it results in exploitation of the
societal interests.
Coming to the Stakeholder Model, several critics have argued that this model represents an
unrealistic judgement of the power relationships that exists between the organisation and
other entities. Unlike traditional guidelines like return on capital, the guidelines set up in this
model are too ambiguous to be taken as a criterion for assessing true profit. There is lack of
an objective measure to evaluate the economic or ethical conduct of an organisation which
leads to difficulty in making rational decisions. Furthermore, there is often conflict between
the interests of stakeholders and shareholders. Another reason why this model is not ideal is
because instances of impractical ethical sensitivity have also been observed which sometimes
rise above legal duty of the firm

However, the Countervailing Forces model is most suitable in the present scenario as it
stands for the principle that no single entity (business, government or society) can ever have
full dominance as there exists multiple forces. Thus the countervailing model is in clear
opposition of the dominance model as it rejects an absolute supremacy of business. If we
consider today’s scenario, we can see that business is deeply integrated into the society and
must respond to both economic and non-economic forces. This model suggests that power is
something that is fluid and all the entities existing in the economy possess influence over
each other. For example, markets have the power to regulate human actions and can operate
independently of corporate dominance. Similarly, the demand of public can benefit some
businesses, penalises others and can also force innovation. Government also has considerable
influence on shaping the market as it has the power to restrict buyers and sellers over the time
and place of exchange. Furthermore, business is sizable force acting on the public,
environmental catalysts and the government. It has often defeated labour, won political
battles and shaped public opinion.
CASE STUDY

During the late 19th century, the Dominance Model obtained a following when large firms
like Standard Oil cropped up and started monopolizing the markets, exploiting workers,
increasing income disparities etc. This lasted for a while but the beginning of 1870s
witnessed several populist reform movements by diverse groups of workers who
stood up against the rich capitalists and rejected this model. The United Nations also
observed an impulse of socio political movements with the aim of limiting the power of
Eastern business organisations who they believed were the cause of their social illnesses.
Besides America, other industrialising nations like Japan also witnesses similar populist
movements with the aim of amending the BGS relationship to a democratic ideal. The
ideology of Marxism also emerged in Europe which opposed industrial capitalism.

In the American Society, it was believed that among the power grouping of the society, it is
business which commands and dominates. However, various ambush, compromises and
power sharing were noticed. For several years, American business subdued the labour unions
but eventually it was realised that in order to maintain extensive public support, business
must conform to social, political and economic forces it can shape but not control.

Finally, as changes took place in the ideas and processes of society, the BGS relationships
evolved. After the 2008 Bubble Burst, government took unprecedented steps by taking
extensive ownership shares in large corporations, firing the CEO of General Motors, and
governing executive salaries. Such actions transformed the nature of capitalism as practiced
in the US in a way that decreased the power of business. The countervailing forces
model is a general reflection of the way BGS relationship exists in the United
States and other Western industrialized nations.