Sustainable Management Futures. Free Markets and Governments - Essay Example

? Sustainable Management Futures Business 1 FREE MARKETS AND GOVERNMENTS: The Free market is a Lockesian construct, access to which is considered an inalienable right in a democracy. It is an arrangement of buyers and suppliers where prices are determined by demand and supply and not an extraneous factor such as the government. As per the classical democratic social contract, the government’s only function in a state is policing; to ensure that no citizen is stripped off their right to engage in trade and commerce activities. Such a system prevails with an underlying assumption that every citizen will inevitably have access to all the necessities of life and that a free market will ensure this provision. Some scholars go to the extent that the government shouldn’t even engage in public spending on health, education and other necessities. ( Reisman, J., 1998) With such a non-egalitarian orientation, the government’s role in a free market system is confined to the role of a spectator while the market ensures that the efficient businessmen are rewarded with profits. -THE SOCIAL COSTS OF THE INVISIBLE HAND Classical economists such as Adam Smith claim that a free market is bound to create growth, that the invisible hand in an unregulated market fosters growth of efficient market mechanisms. Even after almost three centuries having passed by after the evolution of this notion, the free market is still deemed as an ideal model, but its promised benefits to society are now being viewed as rather utopian in nature. The dynamics of an unregulated free market are seen as quite reminiscent of Social Darwinism. The market favors the efficient few who own the means of production. ( Stiglitz, J., 2011) The free market functions in such a way that formation of separate classes is inevitable. Much attention has been paid to the rise of the industrial bourgeoisie and the proletariat. The former owning the means of production and making profits, while the former providing labor and earning wages. While the free market is said to have provided opportunities for both, the sheer magnitude of the unequal share of rewards has raised skepticism to the social benefits of a free market. -FREE MARKETS IN THE CONTEMPORARY WORLD The recent global economic crisis is said to have been the result of unregulated free markets. The role of governments is now being brought into perspective again, as the government is the very entity that is assisting in stabilizing the markets with massive bailout packages. The enormous growth rates exhibited during the pre-recession period were phenomenal, but a retrospective analysis suggests that they were unsustainable. The major fuel for recent economic growth has been the availability of capital. Lenient credit policies have paved way for expanding markets but not much attention has been paid to the costs of such confidence based growth. The common man, encouraged by growth-driven corporations has increased consumption, with the assumption that incomes will rise simultaneously. This spiral might exist for a limited time, but when it stops, the market eventually collapses. Unregulated economic growth has led to the resurfacing of a plethora of subprime lending and major Ponzi schemes. (Stiglitz, J.,2011 ) Economic growth does in fact lead to improving social indicators. Ever since capitalism has become the popular form of economic governance around the world, per capita inflation-adjusted income has risen from $5,400 in 1980 to $8,500 in 2005. (Shleifer, A., 2009) While educational and health figures have improved, the north-south orientation of this growth has been noticed as well. While social indicators have improved in some areas and strata of the population, other portions remain unaffected. For instance, the top 1% of the income earners in United States have 24% share in the overall incomes generated. (Timothy, N. 2010) -THE NEED OF A MEDIATOR- THE GOVERNMENT: The concept of a welfare state arises from the notion that the state’s responsibilities go beyond just policing, that the government is a regulator and provider of amenities to the public that include health, education and basic utilities. This calls for increased involvement of governments in financial systems to ensure that the gains from economic development are widely dispersed and not concentrated, and ultimately translate to improving social conditions for all of the citizens. Governments all over the world have to respond to increasing pressure from the public regarding economic reforms to ensure that all citizens of a country are guaranteed provisions of basic amenities and a better standard of living. The ‘occupy wall street movement’ is a manifestation of this paradigm shift of public opinion from unregulated free markets to relatively regulated markets. Conventional government involvement in a free market system has been confined to setting monetary policies through the manipulation of interest rates and other instruments. Many critics claim that government economic policies are a reflection of corporate lobbying and that in reality, there is no government influence as a separate regulatory entity. An ideal system of governance then would be one where the invisible hand of the market operates with a visible hand of the government. (Lam, N., K., 2000) Governments should respond to cyclical adjustments in the economy, stimulate it with public spending and come up with a realizable framework for welfare projects such as healthcare and education. While markets should be allowed to operate freely, increased corporate governance should be a part of the administration’s agenda to ensure that malpractices don’t go unheeded. In essence, a pure market approach cannot function well for the citizens of a country because it operates in way that favors an efficient few. The government being a representative of public interests has to ensure that the economic system caters to the needs of a majority. In essence, Equilibrium has to be found between laissez faire and government intervention. (Shciefler, A. 2009) 1.2 CORPORATE SOCIAL RESPONSIBILITY According to the Business dictionary, ‘Corporate social responsibility is a company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates.’ The given definition has several implications in the free market model that exists in today’s world. In light of the various scholarly pursuits that have been made towards providing a parameter for corporate social responsibility, there are several arguments that can be raised towards the validity of this very notion. One of the most influential personalities in directing the modern approaches towards corporate social responsibility, Milton Friedman, is second to none. Friedman argues whether corporations even have responsibilities. This argument stems out from the democratic social contract that exists in today’s society, permitting business operating entities to exist whose motive is to make profits independent of the owners. Thus in a free market, corporations cannot be obliged or coerced to exercise social responsibilities by any force outside the market. According to Friedmann, ‘I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"--this argument must be rejected on the grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures.’ Friedman then builds on the notions of a free market to suggest that the only social responsibility of a corporation is to ‘maximize profits’. Thus in a free market, a corporation survives if it’s able to operate efficiently and run a successful business. Since the focus lies on the end process of maximizing profits, this notion can be deemed as consequentialist in nature. And if this argument is taken on ethical notions of democracy, it must be noted that the corporate executives who decide what the shareholder money is spent on, are mere agents. Their responsibility would exist only if they are principals. Spending shareholders’ money for a purpose for which it was not given is unethical. And economically speaking, such money is spent is considered as a leakage from the economy because it could have been invested in profitable ventures, this perhaps can be defined as the opportunity cost of CSR initiatives. Thus according to Friedmann, for a society that has benefited greatly from free market enterprise, it is counterproductive to impose restrains on how corporations operate. (Shleifer, A., 2009) Much of the debate on corporate social responsibility has been plagued by rhetoric, with barely any substantial applicable framework being created. (Ruud, J., K., & Ruud, W., N., 2010) Thus, pro-CSR and anti-CSR lobbies are conveniently able to shift their debates according to use. But another feature that has to be kept in mind in a democratic society is the democratization of information. The key tool for this phenomenon has been the digital media. Thus, empowered by the information they possess, the consumers of today are very critical in their approach towards companies that don’t seem to be confirming to the notion of corporate social responsibility that are in the mainstream. (Kolstad, I., 2007) These days that would include issues like child labor, environment and labor issues. Thus in accordance with the principles of the free market, the consumers holding equal rights as the suppliers, can exercise the right of not demanding a product or service that doesn’t confirm to their notions. This creates a paradox in the markets of today where a corporations has to seek ways to maximize its profits while also ensuring that its image vis a vis its general standards of procedures, is in coherence with popular public standards of morality and ethics. Now that CSR practices have become part of the status quo, there are multiple theories in light of ethical reasoning that shed light on why such a paradigm shift occurred. It has been noticed that firms often calculate the return on investment ratios for the capital they’ve diverted towards CSR initiatives. This hints at an ulterior motive different from ethical obligations, providing the impetus for such investments. (Redman, E., 2005) Criticism aside, this practice is in conformance of free market notions, because the suppliers in a market are responding to the demands in the market, and eventually accomplishing the ultimate goals of profit maximization. Apart from work on CSR related theories in context of the free market and the government, there has been work based on purely ethical theories. Norman Bowie, a renowned scholar in the field of business ethics has formulated a Kantian framework for working on CSR initiatives. In this field, it is believed that individuals are to act in a certain way, because they believe it is their duty to do so. This translates to a moral obligation on corporate executives to act in a socially responsible way because it is their moral duty to do so. Theories like the stakeholder theory also assert that a corporation’s obligation isn’t confined to the shareholder, but to its stakeholders as well, who are members of the community the business operates in. (Nobel, P., 1999) Thus it follows that it is acceptable to spend other people’s money in light of public interest. (Hasna, J., 1998) Often our shortsightedness lies in viewing corporate growth and CSR initiatives as mutually exclusive and therefore incompatible with each other. To analyze the situation from a panoramic view, four separate entities should be seen interplaying in today’s world: The government, the corporations, the consumers and the media. The government is responsible for the formation of a legal framework where corporations aren't allowed to exploit; the objects that could be subject to exploitation could include the commons1, labor practices and internal frauds. The media will help in enforcement of these regulations by keeping a check on corporate activity. The public being responsive to the the practices of the corporate world will ensure that only those practices which confirm to notions of social responsibility are heeded, while the rest are dropped. While the corporations exercising their rights to earn profits, will respond to the publics’ needs and make profits by providing the market what is required, even in terms of practices. 2 WALMART: A SOCIAL RESPONSIBILITY ANALYSIS -WALMART: A PLETHORA OF CONTROVERSIES If there is a brand name that is synonymous with retailing, Walmart would undoubtedly come to mind. Being the biggest retailer in the world, the American based company is the biggest public corporation in the world in terms of revenue and also the biggest private company in terms of the number of employees. Founded in 1962, the company has operated with the underlying philosophy of low costs as the differentiation factor. Walmart has tapped in to the price sensitive section of the market in the US and worldwide, operating on the concept of economies of scale. According to Sam Walton, the founder of Walmart, ‘Each Wal-Mart store should reflect the values of its customers and support the vision they hold for their community.’  This comment highlights the philosophy of Walmart, to provide all of its consumers a variety of products at very affordable prices. This notion is very utilitarian in nature because it emphasizes on the maximum amount of satisfaction for a maximum number of people. While being accredited with making a lot of products accessible to a portion of the population who wouldn’t otherwise be able to afford them, Walmart has been able to increase its customer span by diversifying its customer portfolio. After years of experience, Walmart has optimized its process of cost cutting by working on its supply chain and trimming its energy use and other practices. But there has been much skepticism towards the ethical soundness of Wal-Mart’s practices. Inevitably, Labor practices were found as an area Walmart has exploited. This includes wage issues, lack of employee benefits, overworked employees and dismal working conditions internationally. Among other issues, undue influence over suppliers, environmental sustainability and discrimination can also be counted (Standford University, 2007) The controversies have been so intense that according to RepRisk, a Swiss corporate image monitoring company, Walmart lies on the third position among the global top ten of the most environmentally and socially controversial companies. According to their report the top issues at Walmart are: Violation of labor standards Supply chain (E,S,L issues) Human rights abuses and corporate complicity According to a report from the NY times, ‘Wal-Mart agreed to pay at least $352 million, and possibly far more, to settle lawsuits across the country claiming that it forced employees to work off the clock.’ The same report also highlights the major discrimination lawsuits being filed by over a million of Walmart female workers over its policies. The other issue facing Walmart is the rising sense of nationalism among its customers in the US and how Walmart is taking away jobs from the country. ‘Making change at Walmart’ is an NGO which epitomizes the string of controversies surrounding Walmart and the intensity of the negative sentiments. If seen from a strictly free market perspective, there is nothing wrong with Wal-Mart’s practices. It is providing commodities that are in high demand in the economy and resultantly, it is achieving efficiency and optimizing its process of production and logistics. By virtue of grossing huge revenues, it is contributing a substantial amount to a number of international GDPs. But this is speaking from a strictly Friedman perspective, the consumers of Walmart and the public in general have now become more concerned with the means rather than just the end. Thus Walmart is stuck in a situation where CSR initiatives aren't just an ethical obligation; they are a need if the company is to survive. This sets the precedent for present and future CSR practices and Walmart and suggests that the issue has now become beyond ethics, it’s about saving the company. -WALMART’S RESPONSE: FROM REACTIVE TO PROACTIVE: As a response to the rising criticism from all fronts, Walmart has intensified its public relations efforts in line with its sustainability projects and other initiatives. There have been two major issues that have been at the centre of Wal-Mart’s CSR initiatives: Environmental and Social. ENVIRONMENTAL ISSUES: Amidst a host of controversies, Walmart has formulated a strategy which aims at tackling environmental issues on a long run. This is important because of the rising influence of environmental NGOs which have strong lobbying power to back them. Thus, Walmart has come up with long term environmental sustainability goals rather than short term ad-hoc policies. According to former Lee Scott, former CEO of Walmart, “Being a good steward of the environment and being profitable are not mutually exclusive. They are one and the same.” In 2005, Walmart launched its sustainability program with three clear goals, : • Be supplied 100 percent by renewable energy • Create zero waste • Sell products that sustain people and the environment  These goals are being realized by involving environmental protection agencies and consultants to identify areas of improvement and come up with feasible solutions. (Heying, A., & Sanzero, W., 2009) For their waste management program, Walmart follows the three R’s approach-Reduce, Reuse and Recycle. It has drastically reduced its solid waste and is working to cut on it even more. The pressure from environmental lobbies has worked in Wal-Mart’s favor because it has been forced to find more eco-friendly and cost effective solutions. Thus this approach has had two pronged advantages. Thus, Walmart has been able to come out of the circle of environmental critique. SOCIAL ISSUES: Walmart has always been and still continues to be under fire for its labor policies. Allegations of discrimination, child labor and below standard working terms and conditions are rampant. Even though Walmart is constantly devising strategies to tackle these issues but it hasn’t yet demonstrated a realizable framework or practical results for that matter. Law suits continue to pile up while the dearth of a clear cut solution is evident. According to current CEO, Mike Duke, "The culture of our company can work among the cultures of every country." Among the many initiatives taken by Walmart, the effective ones are: -$4 million to assist nearly 1 million low income tax payers -$6 million to help women gain employment -$50 million to fund education programs in communities across the US Walmart has also strived towards increasing internal transparency; this was evident when they disclosed a case of internal corruption to the Securities and Exchange Commission of United States. (As reported by the NY times) The controversy over labor reforms persists, especially in the international market where Walmart has been accused of child labor and substandard working conditions. (Arnold, G, D., & Bowie, N, E., 2003) With their being less stringent labor policies and provision of cheap labor in developing countries, that is an area where most Multinational corporations have tapped in. And the constant outsourcing and shifting of jobs from host countries also creates controversial nationalist sentiments against Walmart. This provides a crunching dilemma because this globalized strategy is pivotal in pushing costs down otherwise Wal-Mart won’t be able to compete efficiently. CSR AT WALMART: Up until the early 1980’s, CSR initiatives at Walmart were unheard of. (Standford University, 2007) It was only after a host of public complains created an unavoidable situation of policy shift, that Walmart sought to to being change. Since NGO activities are a new phenomena, there wasn’t much pressure on Walmart earlier because these issues were only highlighted in selected circles. But after access to information became easier and the media became highly involved Wal-Mart had to push it efforts from mere ‘acting up’ to serious projects with accountability. This leads us to an interesting inference, the CSR efforts at Walmart aren't a manifestation of ethical obligations situated inside the company’s policy, but rather a public obligation to keep the business running. They had to translate their utilitarian principle to their processes as well, and not just the services they were providing. The public dealings of Walmart reflect their efforts as results of deontological ethics. This might be true to a certain extent, but would Walmart adopt these policies of sustainability had it not been for mounting public pressure. The label of a product being sustainable is also a good method of attracting more customers and a deeper share of their products. This ‘window dressing’ strategy as Friedman calls it has been adopted by a number of companies and Walmart has made use of it as well. Wal-Mart’s CSR efforts are inevitable; they’ve been catalyzed by a series of rather uncontrollable factors and will continue to persist in the future if Wal-Mart is to maintain a good public image. Increasingly important to cement their efforts will be their public dealings and communication. They have to make their efforts visible and also create a level of transparency so that the interested parties are assured. Whether corporate social responsibility should exist in a free market is still debatable, but the truth is that it does exist and if a company is to radiate a positive brand image it needs to confirm to the public requirements of these efforts and duly oblige. Wal-Mart is a similar case of a major corporation that has had to focus on its CSR initiatives to heal dented public image and continue boosting its enormous growth backed by public confidence. Bibliography ARNOLD, D., G., & BOWIE, N., E., 2003, ‘Sweatshops and respect for persons’, Business Ethics Quarterly, 13, 2 CLIFFORD, S., 2011, ‘ Wal-Mart Discloses an Internal Inquiry’, New York Times, 9th december FRIEDMAN, M., 1970 'The Social Responsibility of Business is to Increase its Profits’ , The New York Times Magazine . HASNAS, J., 1998, ‘The Normative theories of Business Ethics: A guide for the HEYING, A., & SANZERO, W., 2009,’ A Case Study of Wal-Mart’s “Green” Supply Chain Management’http://www.reprisk.com/downloads/mccreports/7/Most%20Controversial%20Companies%20Jan-June%2008.pdf Accessed on 26th March 2012 KOLSTAD, I., ‘Corporate Social Responsibility OF Multinational Corporations’, CMIBRIEF, 6, 2. 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