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Calling companies to account

Updated Thursday 25th May 2006

Big business has a reputation for abusing its power. This course extract from An Introduction to Business Studies explores the tactics used to call companies to account.

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Business has a lot of power within both the national and the global context: the power to achieve many positive things, but also the power to do harm. It is an important part of a rounded understanding of business to be aware of these issues.

While businesses undoubtedly have a lot of power in various forms and can sometimes be found to be exploiting it, their power does not necessarily go unchallenged. There are several possible avenues through which business power can be controlled:

  • voluntary action on the part of businesses
  • government regulation
  • consumer action
  • direct action from pressure groups

These are discussed in more detail below.

Voluntary action by businesses
Business ethics involves businesses conducting their activities in accordance with generally accepted ethical norms. From this derives the idea of corporate social responsibility (CSR); that is, that businesses need to take responsibility for the social consequences of their actions. They should try to minimize and mitigate negative consequences as much as possible.

It has been argued that taking corporate social responsibility can have various benefits for businesses themselves, in addition to benefits for stakeholders and society at large. Businesses with a good social image may find it easier to attract high quality employees.

Customers may like their responsible stance and prefer to buy from them and other stakeholders may also lend their support, which may lead to a more positive treatment by government agencies and regulators. This can lead to reduced costs as the business is less likely to face legal claims, for example, and to improved profits due to better performance by employees and increased sales. Thus, good corporate social responsibility is thought to lead to enhanced financial performance.

However, if customers or stakeholders were not concerned with the social performance of business, they would be unlikely to take an interest in CSR. The actions of these stakeholders are therefore highly important.

This is because in the last 20 years, there have been several high profile examples of how the market mechanism does not always provide the information and warning signals that shareholders and stakeholders expect. The Maxwell Communications, BCCI, Polly Peck, Enron, Worldcom, Global Crossing and Parmalat scandals revealed that auditing procedures alone were insufficient in ensuring responsible corporate governance.

In short, voluntary action on the part of the business may be unlikely to happen in the absence of government, customer and/or stakeholder concern.

Government regulation
Government regulation is often considered the main form of external control of businesses. Business is subject to numerous laws, relating to issues such as:

  • the legal form businesses may take
  • how they account for their finances
  • how they deal with employees, consumers and other stakeholders
  • their impact on the natural environment

"abuses of power can happen much more easily in countries with weak governments"

These laws are often enforced through specific regulatory agencies, such as the Environment Agency in the UK. There is often a lot less enforcement of business regulation in poor countries, giving businesses operating in them greater power to act as they see fit. Abuses of power, for which multinationals are often criticised, can happen much more easily in countries with weak governments.

Consumer action
Another avenue of controlling business power is through consumer action. Increasing numbers of consumers do not only want to buy products that are of high quality, stylish, durable, and so on, but want to buy from businesses that act in socially responsible ways.
Consumers can take two forms of action to influence companies. They can boycott products:

  • they consider to be unethical in some ways (e.g. animal furs)
  • that are made by businesses they consider to act in irresponsible ways (for instance those with a bad human rights record)
  • that are made by businesses who use business practices that they find unacceptable

An example of this might be the RFID chip. An RFID chip is a way of tracking consumer goods through the store and they can be read locally with a scanner. Consumers are concerned about the fact that RFID chips, when implanted into consumer packaging, provide a unique identifier which can be tracked in real time, even when the products leave the store.

With smart home appliances, consumer preferences can be tracked, with or without their knowledge. RFID tags have also been implanted into car number plates, pets and even human beings to track their whereabouts.

On the other hand, consumers can actively seek out products and companies with a positive ethical image (for example, coffee that is certified as Fair Trade). Sometimes these consumer actions have shown considerable influence in shaping business behaviour. For instance, consumer boycotts in Europe effectively eliminated the trade with baby seal furs and hence the killing of seals in the 1980s.

"consumers have little influence over relatively unknown companies "

In the UK, consumers have shown great interest in buying fairly traded products and the market for these has expanded greatly in recent years. However consumer action will normally only affect those companies whose products and activities are very visible in the market. Consumers have little influence over relatively unknown companies or those that don’t sell to consumers at all.

Pressure groups
These are a further monitor and influence on business power. Pressure groups work in several different ways to influence business behaviour.

They appeal to citizens and consumers, making questionable business activities known and hoping to influence citizens to either demand government action or to act themselves through their consumer actions (see above).

Pressure groups also lobby government to take policy action that controls business power. For instance, environmental groups respond to government consultations and approach government with requests and proposals, making the case for legislation that protects the environment, often against short-term business interests.

Often pressure groups (for example, Greenpeace) employ tactics that will gain media attention, thereby hoping to make their case to citizens and policy makers. Increasingly, pressure groups also work directly with businesses, perhaps by working in partnership with businesses that have shown an interest in taking responsibility for the social and environmental consequences of their activities.

Direct action can either be confrontational or constructive. Confrontational action involves, for example, protesting outside the headquarters of a business, sabotage (the damaging of industrial equipment) and road blocks.

Controlling business power
There is no single, perfect solution to the control of business power. A mixture of voluntary action, government control, consumer interest and scrutiny by pressure groups is most likely to work. With these checks and balances, business contributes positively to economic development and makes a profit for its owners, without causing too many negative social and environmental side effects.

There are different viewpoints and contexts surrounding current business practice. This is also true of past practice, and past views of that practice. Events happening in the last century can often be linked to perspectives on business, and the emergence of particular sets of theories.

Moreover, it is also important to realize the importance of power in this process. Power is conceived at three levels:

  • individual level
  • organizational – cultural- structural level
  • societal level

At the top two levels of analysis, power rests upon the ability of certain groups to mobilize resources in their favour and establish norms and legitimacy surrounding their actions.

Some actions of business have been shown to cause harm to the environment, community and society. There are various ways in which corporate power can be challenged or resisted: through voluntary CSR; governmental regulation, consumer action, or direct action by pressure groups.

One thing is certain. Capitalism is the dominant normative system in the western world, and in parts of the developing world too. Any debates about corporate power will always be dominated by the power balance between government and business. Moreover, if we are to develop as critical business thinkers, it is important to recognize that business is underpinned by power and politics within and between organizations, as well as between individuals and groups.

About this article

This article is based on extracts taken from the Open University Business School course, An Introduction to Business Studies (B120).
 

For further information, take a look at our frequently asked questions which may give you the support you need.

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