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Why are governments and businesses crucially important to a globalised society?

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The Critical Importance of Governments and Businesses:

Application in the Globalised Society

Presented to

Executive Summary

Many scholars hold that businesses solely focus on making profit, while it is the responsibility of the government to offer goods and services to its citizens. Governments have a duty to control the economy in such a manner that business operations and activities translate to the good of the globalised society. Businesses are perceived as actors, while governments as the sole political actors. However, this report holds the view that, under the globalised society, the strict division of labour between governments and businesses no longer hold. A great deal of businesses especially multinational corporations are increasingly embracing social and political duties that stretches beyond legal requirements. In addition, these requirements are considered to address the regulatory gap that has been created in global governance. This review of literature confirms that there are a large number of resources articulating the critical importance of governments and businesses in the current globalised society. Besides the mainstream role of producing goods and services to the public, businesses are also mandated to promote social responsibility, while governments regulate businesses, foster business/economic growth, invest, sponsor or finance businesses, and enhance businesses’ social responsibility.

Introduction

Governments and businesses play a critically important role of producing products and services and ensuring social responsibility to the global world. Businesses are neither ethical nor rational when they focus their goal solely on maximizing profits (Kolstad 2007, p. 138). Unlike a number of scholars, Kolstad argues that it can be in the best interests of the shareholders for corporate institutions to utilize part of the organisation’s returns for socially responsible causes. The author further agrees that the state alone might lack the will or capacity to attend to particular social challenges, but corporate institutions might possess the expertise and resources to effectively make a positive impact (Kolstad 2007, p. 140).

On the other hand, governments seek to create effective policies and frameworks for establishing appropriate business standards, reporting, auditing, monitoring and verification of business activities and practices. This report assumes the social responsibility perspective to review existing literature on sources covering the role of governments and businesses in globalisation. The primary purpose of the report is to articulate the critically importance of governments and businesses in the current globalised society.

Regulation of International Business

Globalization has resulted in a host of global economic, political, socio-cultural, legal, technological and environmental challenges that impede efforts to achieve sustainable development. For instance, increased economic growth associated with trade activities in developed and developing regions leads to over-exploitation of natural resources and mainly affects the less or developing countries, hence environmental degradation (White, 2013). Similarly, high scale industrialization requires a lot of raw materials’ that happen to be extricated from the natural environment. Consistent expansion in industrial activity has resulted to increased misuse of water and oil, and also minerals such as coal. Also, globalization has bred the global challenge of immigration where increased masses of people and goods are moving within and across the world.

Another menace facing governments and businesses is corruption – social injustices where some unscrupulous individuals or firms willing employ illicit strategies for personal gain or corporate profit (Chang, Li and Lu, X., 2015, p. 5). However, the existence of certain circumstances that fail to prevent, discourage or mitigate corruption sets the stage for the practice (Zaccai, 2012, p. 80). Good examples of such factors include lack of where insufficient or no policies for businesses to disclose their actual income, expenditure or activities as well as other parties involved might create room for corruption to thrive (Alt and Lasses, 2014, p.306). Child labour concerns reported at Nike’s supply chain; the execution of Ken Saro Wiwa by Nigerian Junta following expressing discontent against Shell; breech of human rights by Burmese military along the Unocal pipelines; and the disclosure of private information of dissidents by Yahoo to the Chinese government, among numerous other incidences (Scherer and Palazzo, 2011, p. 910).

Nevertheless, all these cases of previous inappropriate business practices justify the need for government regulation, hence denoting the critical importance of governments in streamlining business activities in the contemporary globalised society. Governments have to stipulate policies that can hold corporate institutions more accountable for problems of structural injustices to which transnational businesses account for by the actions they take, benefit from, they have encouraged or accommodated via their individual conduct. Anti-bribery and corruption policies and measures are a good example of how governments can attempt to pursue to regulate the activities and practices of multinational corporations (Steurer, 2010, p.49). Moreover, the critically importance of governments in the global world is justified by the need to regulate the globally expanded supply chains. Business enterprises have to be accountable for the actions and practices they pursue.

From a World System Theory perspective, the world’s nations are increasingly becoming interdependent and are currently connected in a worldwide system in which certain countries have unprecedented power and influence than others. However, Platteau criticizes the narrative of ‘free market economy’ on the ground that TNCs cannot allow such system. On the contrary, TNCs depend on influential governments to shelter them from free markets (2014, p. 73). From a Functionalist viewpoint, powerful nation states and large corporations can be a threat because they influence the formulation of policies and practices that can be contrary not only to cultural norms, but also contradict the prevailing political and economic reality. On the same line of thought, the Conflict Perspective criticizes the concentration of power among a few powerful actors on the premise that this trend can become a social challenge when a powerful actor perceives that it is not accessing equitable share of resources and start to push for something about it.

Therefore, the governments, especially for ‘poor’ countries, play a critical role of ensuring that such influential businesses do not violate their established code of business game and that their actions, practices and products comply with the needs and expectations of the society. They are tasked with creating and sustaining “fair” terms of trade in which: strict market regulations are created and implemented to protect the less powerful, not the strong actors; business firms pay sustainable prices, living wages, and ensure safe working conditions; foster a tradition of environmental sustainability; enact investment guideline and standards in local community development; facilitate access to the knowledge and expertise required for advancing and effectively competing in the global economy (Scherer, Palazzo and Trittin, 2015, p. 361).

Additionally, the critical importance of governments in the global world encompasses the duty of ensuring that ethical businesses. Government policies and regulation, for example in accounting disclosure, strive to ensure corporate institutions make ethics a strong component of their business strategy. Besides the common responsibility to produce goods and services to the global public, governments are expected to ensure that businesses must fulfill this mandate within the “ethical mores” of the society within which they operate (Porter and Kramer, 2007).

Also, Kolstad suggests that the ethical perspective of firms need to precede that of their individual staff based on the legal guidelines stipulated by the government (2007, p. 139). Although each employee joins the company with his or her personal sets of ideals, values, and belief systems, each has the mandate to consciously abide by the organizational culture during work. Perhaps the critical area the government can intervene in business activities regards the process of profit maximization. Despite being the ultimate goal of every business, governments must intervene in these processes especially where the fundamental rights and freedoms of the global society are violated (Albareda et al., 2008, p. 350). Businesses have to allocate their resources efficiently and share their benefits equitably among all stakeholders in order to realise optimal level of operation where marginal revenue equals marginal cost (Porter and Kramer, 2007). This practice will benefit both the firm and the global society at large.

Role of Businesses in Corporate Social Responsibility

In the globalized society, transnational corporations (TNCs) are fostering new international governance. The capacity of individual states to control economic conduct and to establish the checks and balances for market exchange is on a reducing trend. In order to respond the deepening regulatory gap accordingly, a political measure is of essence. That is, emergent governance initiatives have been established at all levels (including international, national, and local) by both private and public players in the attempt to compensate for the declining government power. Contrary to the hierarchical governmental structure, these new initiatives tend to depend on network-like relationships as stated by Detomasi (2007, p.17). These new forms of political control exist above and beyond the government level so as to reintroduce the political order (Scherer, Palazzo and Trittin, 2015., p. 357). A number of transnational businesses not only follow the societal standards from legal and ethical perspective, but they also play proactive roles in participating in discursive social and political processes whose primary objective is to resolve or redefine those standards in the dynamic, globalized society. The current activities those businesses are currently engaging in stretch beyond the conventional understanding of stakeholder responsibility and corporate social responsibility (Sethi and Schepers, 2014, p. 194).

Global governance – the definition and enforcement of standards and conduct with international reach is arising from enhanced cooperation between private actors and civil society coupled with the increasing activities of global institutions as new mechanisms for transnational regulation. Both public and private players including state governments and global regulatory bodies like the UN, ILO, and OECD, among others, work together to establish this new world order (Scherer, Palazzo and Trittin, 2015, p.358). The new forms of international governance manifested in the form of public-public, private-public, and private-private partnerships of initiatives involving multiple stakeholders that has been perceived as a “new form of global governance,” which have the capacity to bridge multilateral traditions and local activities by basing on a wide range of players including governments, businesses and civil society.

Nonetheless, just like governments, business firms play a critically important role in the globalised society. During the recent decades (with local, national and international reach) businesses have increasingly begun to participate in some activities that have been conventionally regarded a reserve for the government (Scherer and Palazzo, 2011, p. 918). This trend towards broadened scope of responsibility is vividly depicted especially in multinational corporations (MNC) that operate in this globalised society. They facilitate and provide a diverse range of these “governmental” duties such as public health, education, water and electricity, social security, as well as championing for respect and protection of fundamental human rights while in some occasions operating in countries with weak governments or even in failed state agencies (Matten & Crane, 2005, p. 170). Within this wide scope of responsibilities and activities businesses are assuming in the globalised world stretch to addressing social challenges like the AIDS pandemic, malnutrition, homelessness, poverty, and illiteracy.

Moreover, businesses are enlarging their responsibility to the globalised society to defining ethical codes of conduct and appropriate business behaviour, safeguarding the natural environment, and engaging in self-regulation in the attempt to fill vacuums in the legal regulation and moral orientation, as well as promoting peace and political stability especially in weak governments (Mahmood and Humphrey, 2013, p. 169). For example, more than 5,000 businesses abide by the UN Global Compact’s self-regulation so as to cover the regulatory gap that has arose due to the process of globalisation (Sethi and Schepers, 2014, p. 196).

Frynas and Stephens argue that these new forms of business activities and duties to the society do not conform to the economic role of business in the globalised society as viewed from the lens of the theory of the firm (2015, p. 485). The activities of the corporate institutions stretch beyond the widespread conceptualisation of corporate social responsibility as a conformity to the existing norms and expectations of the globalised society. Also, Steurer opines that this pattern reveals an increasing engagement of corporate institutions in international business regulation and in the production of goods and services for the global public (2010, p. 52).

On the international front, it is becoming apparent that neither individual governments nor international institutions cannot solely adequately control the global economy and to produce and provide goods and services to the globalised society (Albareda 2008, p. 349). Rather, global governance, is not only a polycentric process, but also a multilateral process to which diverse actors such as businesses, governments, the civil society groups, and global institutions make joint contributions in the form of knowledge and resources (Detomasi, 2007, p. 325). However, contrary to governments’ monopolistic of power and the capacity to implement controls upon private stakeholders within the national jurisdiction, international governance builds on voluntary contributions and failed, weak or lack of mechanisms for implementation.

Scherer and Palazzo posit that there is insufficient integration of the new “political” role of businesses and multinational corporations in the existing theorizing on the firm in the CSR literature. In actuality, numerous understandings of CSR rise up out of the overwhelming economic paradigm that grapples on a stringent division of political and economic undertakings and an especially instrumental point of view of corporate governmental issues (2011, p. 903). In their review of recent corporate ethics and CSR literature from the several studies that focus on globalization and CSR provide insights into the outcomes of globalization, and suggest a new perspective of what they term “political corporate social responsibility.” In their conceptualization, political CSR depicts an extended framework of governance within which corporate institutions contribute immensely to the global regulation and provision of goods and services to the global society (Scherer and Palazzo 2011, p. 912).

Drucker presents a comprehensive debate about the impacts businesses can bear on the society and its social responsibility (2008, 2). The scholar divides the effects of business to the society into what businesses do to the society and what businesses do for the society, and suggests that since businesses operate within society, they must acknowledge and understand their impacts and have a duty to mitigate them. Also, Calabrese et al. contend that general social challenges that corporate institutions can creatively change into business opportunities can translate to positive consequences for both the globalised society and the firm (2013, p. 52). For those that might not present business opportunities, Drucker still holds that firms must address them. The scholar concludes that if businesses are profitable and healthy, yet the society is sick, the symptoms of this sickness will eventually manifest in the companies. Despite social challenges not constituting major concerns of business firms, Drucker strongly counters this observation by claiming that these issues will not disappear on their own and eventually might graduate into challenges that plague the corporate institutions (2008, p.3).

Porter and Kramer believe that since the globalised society has been considerably keen and vigilant of business actions and expresses their satisfaction and dissatisfaction of those actions, firms have no choice but to incorporate social responsibility as a priority component of their strategy (2007, p. 3). A corporation engages in business behavior the society deems inappropriate is subject to societal sanctions, which the scholars describe as boycotts of their goods and services and adverse word-of-mouth. The ultimate impact of these “punishment’ will be decreased profits and detrimental consequences to their shareholders. Therefore, they suggest that business firms have to create Social responsibility Strategy that will help them to figure out how to use their efforts appropriately (Porter and Kramer, 2007, p. 8). Although businesses might lack the expertise to address the overall general challenges facing the global world, they must consider the social impacts of their operations and products to avoid financial suffering.

Conclusion

From this review literature, the globalization of society compromises existing ideas regarding division of labour between the economic and political fronts and necessitates a new perspective about the crucial importance of governments and businesses in the contemporary globalised society. For instance, a number of multinational corporations are increasingly changing the primary role they play in the globalised society from the traditional role of simply abiding by the rules to a new perspective of establishing the rules to govern the economic game. In fact, they are already embracing responsibilities that have been traditionally relegated to the government. Through the new paradigm of social responsibility, current transnational businesses engage in the provision of public products and services (such as public health, water, electricity, and education), and in self-regulation to fill voids that exist in international legal regulation, besides committing themselves to promoting political stability and peace in the society.

The narrative of profit maximization means that businesses are mandated with a “special responsibility” not only toward their owners that takes the precedence over other stakeholders, but their duty extends to the globalised society within which they operate. The government alone might lack the will or capacity to attend to particular social challenges confronting the society, but corporate institutions might possess the expertise and resources to effectively make a positive impact in the globalised world. In light of this statement, it therefore becomes imperative that both the government and corporate institutions have a responsibility to create and sustain social responsibility to the global public. The first step to addressing this duty is by figuring out and studying the impacts of their actions and practices on the society in which they operate. Particularly, they do not have to perceive social responsibility as a mere liability; rather they need to mind the interdependence of business, government/regulation and society.

In addition, businesses can invest in innovation in order to create better, improved strategies to make products and services that lead to cost savings or consumer-friendly prices, innovating new products that meet the needs and expectations of the globalised society, or seeking new ways of utilizing existing products. Businesses can expedite their responsibility to the global society by producing at optimum levels. This observation demonstrates the financial and social benefits of companies efficiently producing goods and services and conducting their businesses in a way that is in tandem with the needs and expectations of the global society.

References

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Alt, J.E. and Lassen, D.D., 2014. Enforcement and public corruption: evidence from the American states. Journal of Law, Economics, and Organization, 30(2), pp.306-338.

Calabrese, A., Costa, R., Menichini, T., Rosati, F. and Sanfelice, G., 2013. Turning Corporate Social Responsibility‐driven Opportunities in Competitive Advantages: a Two‐dimensional Model. Knowledge and Process Management, 20(1), pp.50-58.

Chang, L., Li, W. and Lu, X., 2015. Government engagement, environmental policy, and environmental performance: Evidence from the most polluting Chinese listed firms. Business Strategy and the Environment, 24(1), pp.1-19.

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