w6

 

read the articles and write a summary. These summaries should be no more than half a page.
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after writing each summary also answer these questions down below it “What did you find most interesting, unexpected, and disappointing.”

The Business Community and Poverty
Paul Steidlmeier, School of Management, State University of New York, Binghamton, NY 13901

ABSTRACT

The nature and causes of poverty are analyzed in terms
of the social responsibility of business. The
responsibility of a business enterprise to help
overcome poverty is assessed in terms of its own proper
action as a business as well as in terms of
participation in social policy. Systemic, corporate and
individual courses of action are discussed.

INTRODUCTION

sectors of business suffer from overcapacity, it is
important that the poor be brought into market
processes. To that end poverty must be eliminated.
A further reason for eliminating poverty is that, more
and more, modern economies require a highly skilled
labor force. The prospects for the poor developing
their capacities are not bright. Often their education
is inferior and they are not able to function within
the system.

In what follows I first clarify the nature and extent
of poverty. Following this I discuss its causes. I then
suggest a general social framework for eliminating it
and discuss specific potential contributions of the
business community.

As a social and economic system capitalism has produced
some dazzling successes. Historically, even relentless
critics such as Karl Marx conceded the point that
capitalism produced unprecedented wealth. Despite its
record of success, however, capitalism has not been
able to exorcise the specter of poverty. More than any
other issue, poverty provides the prism through which
the general public perceives the fairness of the free
market system and of corporate behavior.

Poverty is not something that most business people
think about. In strategic terms, it is part of their
remote environment. It is very important, however,
poverty on their agenda. There are, in fact, signs that
they are doing just that (Conference Board, 1987).
There are a number of reasons why. First, there are
moral concerns for the well being of others. It is
important to mention moral concern at the outset. Not
to do so amounts to accepting the caricature of
business people as amoral and unconcerned for others,
as if those who run a profitable business necessarily
have no social conscience. Many business people abhor
exploitation and have both a sense of compassion as
well as a sense of fairness (which market theory itself
presupposes).

There are also a number of motives which can be cast in
terms of mutual self interest between business and the
poor. First, the long term survival of the free
enterprise market system depends upon its integrity. It
is of the utmost importance that capitalism be
perceived as fair in order that people believe that the
system is good for them. For the integrity of the
system to be maintained it must be viewed as governed
by fair rules, where all participants in the
marketplace mutually benefit. If, instead, it is viewed
as a struggle between the poor and dispossessed with
the rich and powerful, the market becomes a zero-sum
game. In such a scenario, poverty itself becomes a
source of social instability both domestically and
internat ionally.

Another reason why ending poverty is in the interests
of business is market expansion. As it is, the poor do
not constitute an effective market for business. Their
needs do not translate into demand. At a time when most

CLARIFYING THE NATURE OF POVERTY

All of the above has forced a reexamination of the
basic nature and extent of poverty (Steidlmeier, 1987:
4-8). Experts themselves are polarized around two
notions: absolute and relative poverty. Following
Amartya Sen (1983), absolute poverty is predicated of
the failure to develop innate capacities of an
individual such as physical, intellectual, artistic and
occupational abilities and performance. Relative
poverty is diverse and is generally defined in three
ways (Townsend, 1979). Most fundamentally, it views
both what are described as basic needs as well as the
means necessary to meet them as culturally relative. In
this sense there can be no absolute notion of poverty.
The very notion itself is defined in terms of changing
cultural and historical parameters. In a second usage
of the term, the notion of relative poverty deals with
income. It does so in two ways. The first is to compare
the top xZ of income with the bottom x%. The result is
poverty defined in terms of proportional income shares.
Another approach rests on the establishment of poverty
lines in the context of public policy. These income
lines, such as $10,900 for a family of four, serve to
establish welfare entitlements. The latter two relative
definitions of poverty dominate discussions in the
United States.

One problem that has emerged with such definitions is
the implied priority of economics in the definition of
poverty. Income usually figures as the primary
indicator. There is a hard logic to all of this, for in
a market economy the goods and services people need are
either self-produced or purchased. It is this primarily
economic focus that seemingly provides the easy Jump to
a responsibility of business for poverty. Such a move
needs further examination.

Poverty includes economics but is much more. The
opposite of poverty is not so much wealth as power. In
the last decades emphasis in poverty analysis and
policy has been shifting to empowerment (Butler and
Kondratas, 1987: 56; Harrington, 1984: 207-229).
Empowerment is clearly rooted in an absolute notion of

329

poverty and also definitely includes an economic
component. The main issue in empowerment, however, is
behavioral dependency and the inability of people to
care for themselves. This category includes everyone
from the economically handicapped, to less talented
plodders, to those whose lives are emotionally
unmanageable. The idea of empowerment includes 1) the
nurturing of self-esteem and esteem by others in the
context of family and community and 2) education
together with the enabling development of capacities.
Empowerment is concerned with total human development
in the context of community. Viewing poverty in terms
of empowerment has the advantage of preserving its
economic component while directing policy toward a
broader spectrum of issues. Neglect of empowerment and
the concentration of policy on defining economic
entitlements and transfers is at the root of the
ineffectiveness of many programs.

Judging the extent of poverty has proven to be a
statistical minefield. It is usually done in economic
terms. The extent of underreporting is not known.
Partial studies abound. Comparisons across different
studies– which employ different base years,
methodologies, definitions and assumptions– has proven
to be especially difficult. All of this is further
complicated by the volatile politicization of the
issues, which affects the objectivity of analytical
frameworks themselves. Most observers seem to rely on
the Bureau of the Census for macro data. Micro data is
most often generated by grass roots organizations,
social workers and surveys. With all the caveats
implied above, I summarize some of the general data.

In 1985 roughly 31% of blacks and 29% of Hispanics
lived below the poverty line. The position of blacks
improved slightly over 1970. Hispanics were some 7%
worse off in 1985 than in 1970. Some 13% of all those

TABLE ONE

United States Family Income Distribution,
1970-1986 (%)

TABLE TWO

Percentage of Persons Below The Official
Poverty Line, 1960-1985 (%)

Population
Group and

1986 Income

Highest 20%
> $50,370

Second
Highest 20%
$35,016-
$50,370

Middle 25%
$24,021-
$35,015

Second
Lowest 20%
$13,887-
$24,020

Lowest 20%
< $13,887

1970 1975 1980 1986 Change In
A n n u a l
Income
1973-1985*

40.9 41.1 41.6 43.7 0.3

23.8 24.1 24.3 24.0 -4.4

17.6 17.6 17.5 16.8 -7.6

12.2 11.8 11.6 10.8 -18.4

5.4 5.4 5.1 4.5 -32.3

Sources: U. S. Census Bureau as cited by McLeod
(1987) and by Danziger and Gottschalk
(1987).

* The d e c l i n e in mean income i s for
fami l i e s with children; income for 1973
and 1985 i s measured in 1985 constant
dollars.

YEAR

1960

1965

1970

1975

1980

1985

ALL
RACES

22.2

14.7

12.6

12.3

13.0

14.0

WHITE

17.8

22.2

9.9

9.7

10.2

11.4

BLACK

n.a.

41.8

33.5

31.3

32.5

31.3

SPANISH
ORIGIN

n.a.

n.a.

n.a.

26.9

25.7

29.0

Source: U. S. Census Bureau, 1987, p. 412

in poverty were children. In terms of total numbers,
69% of all those classified as poor were white. The
percentage of whites in poverty rose from 10% in 1970
to around 12% in 1985. With respect to income
distribution, only the top 20% have experienced growth
in real income from 1973 to 1985. The bottom 20%
suffered a decline of 32% while the second lowest
quintile declined by 18%.

SORTING OUT THE CAUSES OF POVERTY

For a country that is an acknowledged leader in
information age technology, our knowledge of the extent
of poverty is fragmentary indeed. It is not surprising
that there is little agreement regarding causes. Like
it or not, business has always been suspected by
critics of causing poverty. The debate linking business
to poverty is complex and wide-ranging (Hunt, 1972: 40-
88). The anti-business feeling, however, is nurtured by
more than “leftist” thinking. At present the private
enterprise system and its principal institution, the
corporation, are viewed with considerable mistrust by
•the public. In her study of The Businessman In American
Literature, Emily Stipes Watts (1982) chronicles the
predominance of negative literary portrayals of big
business. In recent years a number of religious
organizations as well as private interest groups have
grown increasingly critical of “capitalism.”

Members of the business community have found the above
sniping at capitalism difficult to put up with. They
counter that the number one antidote to poverty is the
private enterprise system itself (American Enterprise
Institute, 1984). No other system has produced greater
aggregate wealth. Furthermore, no other system can
boast that so many of its citizens are so well off.
Capitalism has championed the emergence, well being and
dominance of the middle class.

Why continue to bedevil capitalism with the specter of
poverty? The first reason stems from obvious cases of
exploitation of labor or of consumer fraud. These cases
reinforce the notion that the market represents a zero-
sum game rather than an environment of mutual benefit.

Secondly, the very success of capitalism has given
birth to rising expectations regarding progress and the
quality of life. The economic progress that capitalism
brought about made it more evident than ever that
poverty is not necessary; it can be overcome. This

330

observation leads to the conclusion on the part of some
that business should eliminate poverty. It also
reinforces the notion that the poor are somehow victims
of an anonymous system where they have no voice and do
not seem to matter.

Thirdly, the dynamics of markets themselves must be
considered. Both the instability of business cycles,
the continual presence of market imperfections and the
factor of market externalities suggest that short run
social disequilibria would be a rather constant feature
of capitalism.

The history of poverty in the United States is by no
means uniform. Two traditions have existed side by
side. The first is the American system as the land of
opportunity for the poor and downtrodden. This is the
immigrants’ story which has been repeated thousands of
times by peoples from every continent. This tradition
has profound roots in literature (Watts, 1982) as well
as in religion (Bellah, 1984). It directly answers the
quest for legitimacy in terms of the success
individuals have experienced in their lives as well as
in terms of God’s providence, which is played out in
terms of individual callings and the stewardship of
God’s gifts.

At the same time there is a tradition of the poor as
the underclass. Celebrated by Henry George in his The
Poverty of Progress, in the struggles of the depression
as captured in John Steinbeck’s The Grapes of Wrath,
and in Micahel Harrington’s The Other America, the poor
are seen as struggling uphill in a game where the rules
are stacked against them.

The first tradition has also focused a social optic on
the poor as somehow being the main cause of their own
problems, whether because of laziness, the lack of
thrift or defects of character. The second tradition
sees the poor as somehow deserving. Their plight should
evoke feelings of human solidarity if not a
preferential option for the poor. This latter feeling
has spawned the welfare tradition, which grew out of
the Englisg poor laws. (Interestingly enough, some who
think the poor undeserving will nonetheless support
welfare in order to defuse a potentially volatile and
unstable social situation). American welfare capitalism
has been most recently attacked by Gharles Murray in
Losing Ground and by Stuart Butler and Anna Kondratas
in Out Of The Poverty Trap. In each case the
argumentation is not so much about the poor themselves,
but about the inefficacy of government programs.

CRAFTING A SOLUTION: THE GENERAL SOCIAL FRAMEWORK

Although Marxist socialism has provided both the most
strident critique of the business/poverty interrelation
as well as the most radical solution, it is the so-
called “mixed economy” that has dominated strategy in
the West. The response to poverty has taken the form of
both charitable works by voluntary organizations as
well as legislation. I concentrate on the latter.
Legislation has first of all set out to curb the
exploitation of the ugly capitalists (if,indeed, such
people can be called capitalists). The focus has been
labor, consumer protection, the environment, anti-
trust, and bribery and corruption. Secondly,
legislation has focused upon economic welfare. In the
United States the primary policy has been based upon
the consumption function, primarily choosing income
supplements rather than price controls or rations as
socialists tend to do. This is significant, for such
policy conceives of poverty in terms of entitlements.

The entitlements/income transfers approach has some
validity; its weak point is that is does not tackle the
poverty mind-set which undergirds the lack of
empowerment either in society or in one’s own affairs.

The legislative approach to poverty stands in
distinction to market solutions, on the one hand, and
the role of private voluntary organizations and primary
communities, on the other. Clearly, if poverty is
concerned with personal development and social
empowerment. more than market activity is involved .

The market can only really handle the economic
component. It cannot directly handle problems of self
esteem or skill development. Nor can it handle those
who are only marginally present in the market. For
example, it will not immediately handle the problem of
10 million homeless children or of the elderly, for
they are not part of the work force. Nonetheless, the
market can handle certain components of the poverty
syndrome.

THE POTENTIAL CONTRIBimON OF THE BUSINESS COMMUNITY

There is no clear one-to-one relationship between the
business community and poverty. The causes of poverty
are diverse. It is worth examining two scenarios: 1)
when the existence or continuance of poverty is related
to a business’ activities, and 2) when poverty is
primarily socially or individually caused.

Certain types of poverty can be caused [wholly or
partially] by a number of business agents. First,
individual business persons who abuse their roles
(e.g., a particular business person who discriminates
against minorities, swindles or bilks the elderly out
of savings, etc.). Secondly, poverty may be linked to
corporate policy which exploits direct stakeholders
(e.g., wage policy which exploits cheap labor in
sweatshops, price fixing, redlining, etc.). Thirdly,
poverty can also be caused by the impact business
decisions have upon indirect stakeholders (e.g.,
relocating plants, depleting the ecological system,
taking capital out of a poor country, etc.).

In the second scenario, poverty is primarily socially
or individually caused. It may stem from a lack of
education, a mentality of personal defeatism based on
poor self-esteem, from social discrimination and lack
of opportunity, and from cultural factors (to name just
a few basic non-economic causes). The behavioral
dependency of the poor deserves special attention. The
primary focus has fallen upon primary communities, such
as family and community, on the one hand, and upon
education, on the other. The main issue is not
economics but empowerment.

Before suggesting what the responsibilities of business
are, it is necessary to relate the general causes of
poverty to some ethical principles. Poverty represents
a partial negation of the common good. It derives from
multiple causes (individual, group, systemic) and its
solution would seem to call for the co-action of many
diverse moral agents. Poverty represents, first of all,
a general problem of social ethics. In this sense it
raises the question of the justice of the system
itself. Secondly, within this social context it is a
problem of business ethics. On this score it evokes an
examination of actual business policies. Finally,
poverty raises questions of morally responsible
individual behavior. In this case the responsibility of
the poor themselves as well as other people is the
subject of moral scrutiny.

331

Regarding poverty, there is no “special ethics” for
business people as opposed to other members of society.
All members of society face the same moral imperatives:
1) to act responsibly and do no harm to others in one’s
actions and 2) to be responsive and to do good. If
there is anything special, it is the experiential
context in which business men and women make their
moral choices and topuch the lives of the poor.

The central issue of whether poverty serves the
interests of business must be squarely faced. On a
macroeconomic level I contend that it does not. First,
it augurs political instability. Second, the main
problem which contemporary capitalism faces is
overproduction and the lack of markets. Thirdly,
business needs a skilled and productive labor force. A
fourth reason business might be willing to combat
poverty is that it might generate the goods and
services necessary to do so. The poverty programs
become their customers, much as food stamps provide
income for the food industry. On all four points it is
in the general interests of business that poverty be
eradicated and the poor become empowered.

Insofar as business contributions to solving poverty
go, solutions are to be found at three levels: the
system, corporate policy and individual action. The
social responsibility of business differs according to
which poverty scenario one is dealing with.

Business people contend that the capitalist system
itself is an antidote to economic poverty. The logic,
on the one hand, is based upon entrepreneurs who can
identify market opportunities to create wealth. On the
other, it is based on accumulating an investible
surplus which would lead to growth and jobs. For this
scenario to work, however, society must prepare the
poor to participate either as entrepreneurs or as
workers. Capitalism presupposes 1) empowered
individuals 2) access to markets and information and 3)
the dispersion rather than concentration of power. The
principle responsibility of business at the systems
level is to ensure fairness in the marketplace, on the
one hand, and to strengthen to proper functioning of
other social institutions, such as education, on the
other. In this sense the corporation is involved in a
broad social ethic (as a co-active subject of the
common good). In a 1987 survey of 130 executives by The
Conference Board (1987: 3), education was ranked as the
main concern by 64% of respondents.

In discussing corporate policy regarding poverty, two
scenarios must be distinguished: 1) when business is a
contributing cause of poverty, and 2) when business is
not a cause but is called upon to help resolve the
problem. On the corporate level, the principle social
responsibility of business is not to either itself
cause or further contribute to the existence of poverty
as it goes about its business. It is important to also
state business responsibility in a positive way. An
efficient well-run business is itself a social
contribution to a healthy economy. In a general macro
sense, when business flourishes, poverty should
decline. Yet, as Michael Harrington pointed out in The
New American Poverty (1984), this economic logic has
changed. For much new investment is placed outside U.
S. borders and new technologies displace rather than
engage labor. The “flourishing economy” prescription
is, therefore, endangered by three factors: 1) the poor
are not educated to be capable of participating in the
modern marketplace, 2) new forces of international
economic production are at work and 3) with modern
technology new investment does not necessarily mean
more jobs. Nonetheless, a well run business itself
represents socially responsible behavior. Ethics on the
corporate level entails a particular responsibility for
a company’s policy and its consequences, for what the

corporation itself does or fails to do.
The second poverty scenario is more difficult for it is
not directly related to a firm’s principle business
policies and actions precisely as a business. The
problem business faces here is whether it can be
content to be a bystander. For poverty can be caused by
omission. In this case the poverty in question does not
so much result from an individual’s or a corporation’s
direct decision [as in the first scenario], but from
apathy or the lack of the willingness to use available
resources to make a positive contribution (e.g.,
investing in depressed areas, providing job training,
corporate philanthropy, etc.). This type of scenario is
clearly different from the first. Business is not seen
as cause but as part of the solution. The implication
is that it should make a contribution.

The point needs clarification, for working to overcome
poverty is not the unique responsibility of business.
For example, while a corporation may be socially
responsive by providing job training or strengthening
education, the social responsibility of all the people
simultaneously entails that educators themselves do a
better job, that governments set in place appropriate
legislative and fiscal policies, that churches aid in
overcoming the psycho-social syndrome of poverty, that
unions afford equal opportunity, that the quality of
family life be improved, and so forth. Social ethics is
itself social both in theory and action. When it comes
to doing a social good (as opposed to simply not doing
harm), all members of society share alike in that
responsibility. There must be a fair sharing of the
costs. If, indeed, business is asked to do more in a
certain area because it is well placed to do so, it
must be supported in that effort by the public
(concretely, for example, with tax breaks).

Finally these prescriptions also apply to all
individual members of society, no matter what their
sphere of activity, not just to business. Many actions
that individuals may take are focused on improving the
way their principle institutions (such as a
corporation, a university or a church) behave in
society as well as improving the system itself.
Further, there is the individual commitment to treat
others fairly in interpersonal contacts and
transactions. This commitment goes beyond simply not
doing harm to setting aside some of one’s resources and
time to help those who are less fortunate. If
empowerment is a central problem of poverty, then it is
clear that personal care for one person by another is
an indispensible part of a solution. On this level of
personal regard for one’s neighbor, business people are
like any other member of society. A sense of caring and
concern for others is a sign of moral maturity.

CONCLUSION

Social ethics and business ethics are inherently a
social process as well as one of individual commitment.
Issues such as poverty are public and entail a social
process of public debate, choice and action. Within
that process the social responsibility of individuals
as well as of groups is defined.

If a society is to resolve poverty problems, it must be
recognized that the corporation is but one of many
social moral agents, although it is a very important
one. It has moral responsibility for its own proper
actions and omissions. It also has indirect
responsibility to foster the overall common good and
the justice of the social system and its institutions.

332

REFERENCES

American Enterprise Institute, 1984. The lav letter on
the economy. Washington, D. C.

Bauer, Peter, 1984. Reality and rhetoric. Cambridge:
Harvard University Press.

Bellah, Robert et al., 1984. Habits of the heart.
Berkeley: University of California Press.

Conference Board, 1987. Community affairs: 1987-90. New
York.

Danziger, Sheldon and Peter Gottschalk, 1987. Target
support at children and families. New York Times
March 22: Dl.

Freitag, Michael, 1987. New York is fighting spread of
sweatshops. New York Times. November 16: Al, B4.

Harrington, Michael, 1984. The new American poverty.
New York: Penguin Books.

Harrington, Michael, 1962. The other America. New York-
MacMillan.

Hvnt, E. K., 1972. Property and prophets: the evolution
of economic institutions and ideologies. New York;
Harper And Row.

McLeod, Ramon G. , 1987. U. S. rich got richer, poor
got poorer. San Francisco Chronicle. August 4: 7

Murray, Charles, 1984. Losing ground: American social
policy. 1950-1980. New York: Basic Books.

Seligson, Mitchell A., ed., 1984. The gap between rich
and poor. Boulder, CO: Westview Press

Sen, Amartya, 1983. Poor, relatively speaking. Oxford
Economic Papers. 35, 2: 153-169

Steidlmeier, Paul, 1987. The paradox of poverty: a
reappraisal of economic development policy. Cambridge-
Ballinger Publishing Co.

Townsend, Peter, 1979. Poverty in the United Kingdom.
London: Penguin.

United States Bureau of The Census, 1987. Statistical
abstract of the United States. Washington, D. C.

Watts, Emily Stipes, 1982. The businessman in American
literature. Urbana: University of Illinois Press

333

Social Crisis and
Corporate Response

BY DONALD P. KIRCHER

CORPORATE PARTICIPATION in solving

the problems of race, the central
city, education, and minority employ-
ment IS a currently popular topic which
has attracted the attention of some stu-
dents of the subject and many orators.
The more extreme examples of grandiose
rhetoric would have one believe that, all
else having failed, business was the last
best hope for solving every problem that
besets our society. Much of the hyperbole
which has attended discussions of the
subject is due to the striking contrast
between private affluence and public
squalor. Corporate business, as the prin-
cipal mechanism which has produced
private aflSuence, is seen as successful,
capable, vigorous, confident, optimistic.

The public sector simultaneously pre-
sents many unedifying vistas. The streets
of our cities are jammed and filthy; chil-
dren in the ghettos are badly educated;
the nationalized and semi-nationalized

transport systems in and around tbe cities
are barely operative; welfare systems,
while relieving distress, have institution-
alized poverty and dependence; and even
the relatively simple matter of delivering
the mail seems to strain both the capaci-
ties and the budget of the Federal Gov-
ernment. And hanging over everything is
the ominous cloud of the race problem.

The 1969 McKinsey Foundation Lectures,
entitled “Of Men and Markets—Diversi-
fication in a Worldwide Setting,” were
delivered recently at Columbia University
by DONALD P. KIRCHER, President of
The Singer Company. They will be pub-
lished next fall by the McGraw-Hill Book
Company. This article, drawn from the
last of the three lectures, appears here by
courtesy of the publisher and of the
Graduate School of Business, Columbia
University, co-sponsor of the lectures.

Is battling poverty, racism, and urban blight really the business of

husiness, as tbe rhetoric of tbe day suggests? This chief executive thinks

so—but he nams that corporate action programs must be kept consistent

with basic business disciplines, purposes, and performance criteria.

streaked occasionally with lightning
flashes of violence and riot. The public
sector thus presents many aspects of mal-
aise and decay, of uncertainty and pes-
simism, and areas of disruptive changes
and demoralization.

The contrast leads to the assumption
that corporate business can and should
bring its disciplines and capabilities more
precisely to bear upon tiie solution of
these social ills. I agree emphatically that
it can and should, but the manner of its
doing so requires more exact definition
than it has commonly received.

Tha Need to Keep in Character

In attacking social ills, business
should act within the framework of its
proven special abilities, skills, and dis-
ciplines. Only by acting in the manner
which has made it successful in its previ-

ously more narrowly defined sphere can
it be a meaningful force on the larger
stage upon which it is now called to play
a major role. This point is critical. All in-
stitutions have distinctive characteristics
which differentiate them from others and
which enable them to act effectively in a
certain specialized way. They have or-
ganic aspects—the fish out of water is an
apt analogue of the institution trying to
behave in a noncharacteristic manner.
For example, Jacques Barzun in his work
on the modem university ascribes no
small part of the present problems in the
large universities to the fact that society
has tended to use them as a convenient
dumping ground for a variety of essen-
tially noneducational problems, with the
resdt that their sense of identity and com-
mon purpose has become diffused, and
their ability to perform their prime func-
tions has been diluted.

What are the essential characteristics

of corporate business that make it an
effective mstrument”‘ These are critical to
assessing its proper role in a broader
sphere.

Shareholder Power

To begin with, I think corporate man-
agement has shown itself to be responsi-
ble in serving its prime constituency—
the owners of the enterprise. It is not an
uncontrolled mechanism serving the self-
aggrandizing ends of the individuals who
head it. Since the time of Berle’s early
work on the modem corporation, it has
been recognized that the general separa-
tion of ownership and control of large
corporations has created at least the
danger of divergent interests as between
owners and managers.

The control of management by share-
holders is, in fact, a complex process
which operates on a ntmiber of different
levels. First, there is the electoral process
itself, the process by which shareholders
elect the directors, who in tum appoint
the management While this is an im-
perfect process, the concurrence of stock-
holders in the selection of management
and on many important specific matters
must be sought and obtained. The efficacy
of this electoral process is aided by the
fact that responsible managements are
highly sensitive to the views and opinions
of individual shareholders, exactly as
politicians take quite seriously the views
of individual voters back home.

A second mechanism of control by
shareholders over management, and one
which is highly effective, derives from the
public reporting procedures. No other
body of men is called upon to report so
frequently, so publicly, ui such detail, and

in such precise quantified terms as are
corporate managers.

Furthermore, this detailed and fre-
quent reporting is against standards
which center around the necessity for the
enterprise to perform well. It must grow
in volume; it must grow in earnings; it
must grow in earnings per share. These
performance standards have been ac-
cepted not only at the top levels of the
corporate enterprise, but they have also
been disseminated throughout the entire
firm, with the result that they are a part
of the fundamental thinking of the mem-
bers of the organization—a thing given,
an accepted axiom, a major premise that
permeates the entire apparatus and influ-
ences daily action. The influence of fre-
quent and detailed public reports, com-
bined with commonly accepted standards
of performance in terms of growth, pro-
duces in effect a kind of public score-
board which makes highly visible the
success or failure of corporate manage-
ment-visible not only to shareholders
but to the financial community and the
public generally.

The influence of this process in guid-
ing the action of management is highly
effective in practice. It is also effective in
bringing about desirable changes in man-
agement and the requisite changes are
commonly made, by direct action of di-
rectors or as a consequence of dissatisfac-
tion in the ranks of management itself,
long before stockholder dissatisfaction
reaches the point of organized revolt.

It is perhaps not beside the point to
note that business is quite unique in this
respect. No other institution accepts as
normal the need to report and justify both
its actions and results so continually and
precisely. While other institutions, such
as foundations or universities or even de-

partments of the Government, may report
publicly, they are not required to account
for results in specified, quantified terms,
and it is this latter requirement which is
distinctive to business.

Explicit Endi and Diiciplined Means

The next attribute of corporate busi-
ness, which is important in the current
context, is the fact that corporations are
disciplined entities. I do not use the term
“disciplined” in a military or hierarchical
sense, but ratiier in the sense that corpo-
rations function by setting specific goals
and objectives and then acting in an or-
ganized manner to attain them. The en-
tire planning/budgeting/reporting cycle
in modem business operates to make the
enterprise a results-oriented mechanism.
It is the attainment of goals that is re-
garded as critical, not the steps which are
preliminary to this. No responsible busi-
nessman confuses the making of an
appropriation, for example, with the at-
taitunent of the objective of the appro-
priation, which may be a new and better
product on the market, or a new plant in
operation, or whatever. Another example
is the fact that the appointment of a com-
mittee to study some matter is not re-
garded as an end but a means, and usually
not a very good one.

Pervading everything in the modem
corporation is the discipline of the eam-
ings statement, the final, precise, unchal-
lengeable Scoreboard which tells whether
it is winning or losing. The discipline of
the earnings statement applies not only to
the total enterprise but also, in a well-run
company, to each of its operating seg-
ments. One of the most effective steps we
took in the rehabilitation of Singer was to

restructure the entire company into a
large number of profit-centered operating
units, thus bringing the discipline of the
earnings statement to all the segments
and units of the enterprise. In the per-
formance environment of the modem
corporation what counts is results, and it
is only seldom that the rhetoric of excuses
and explanations is accepted as a substi-
tute for performance.

Capacity for Change

An allied characteristic is the fact that
modem corporations are pragmatic and,
therefore, flexible. As they are concemed
with results, their structure and hierarchy
are regarded as means which are subject
to being rapidly changed when found not
to be suitable. In Singer, for example,
each of the recent years has seen one or
more major structural reorganizations as
we accommodated to some extemal or in-
ternal change, or to some new perception
of how we could more effectively accom-
plish the corporation’s purposes.

A concomitant of this characteristic
is that circumstances in recent years have
made it necessary for corporate business
to acquire the ability to manage change
in an orderly fashion. Someone has ob-
served that the great social changes which
have occurred in history have tended to
destroy the societies in which they oc-
curred. Our problem today is to bring
about major changes in our society with-
out destroying the fabric in the process.
A principal reason that corporate busi-
ness has a large measure of the ability to
bring about major change in an orderly
fashion and without destmctive effects is
that in the postwar period it has had to
accommodate itself and all of its pro-

cesses to a period of the most rapid tech-
nological change in human history. This
broad statement is frequently made but
little understood outside the ranks of
business and those engaged in the phys-
ical sciences and technology. For ex-
ample, in the recent past, the entire large
segment of industry concerned with elec-
tronics has twice revolutionized itself
technically. The replacement of the vac-
uum tube by discrete solid slate devices
was the first revolution. The second is
only now occurring—the replacement of
transistors and other discrete solid state
units by integrated circuits. In previous
periods a change of the magnitude of
either one of these would have occurred
only over the period of a generation. To-
day the periodicity of such fundamental
changes has been reduced to a few years.

Another example is the following: In
one of our own major operations we have
planned for and are currently introducing
a major new product, the product life of
which is planned to be precisely 18
months, at which time it will be succeeded
by another major product change These
are not mere model changes, but the
products mvolved are fundamentally dif-
ferent and of new design. Corporate man-
agement lives with rapid technical
change as a daily condition and, as a re-
sult of this, has learned, sometimes pain-
fully, how to manage such change without
tearing apart the fabric of the organiza-
tion itself. This means that large corpo-
rate organizations must always be pre-
pared to transform themselves in terms
of organization structure, in terms of in-
dividual managerial responsibilities, and,
of course, in all the marketing and other
functional areas of the business.

In our own company a decade ago a
change in one of the principal sewing

machine models was a convulsive event
for the entire organization. Now in the
course of a year, across all our various
product lines, we make a hundred prod-
uct changes of equal or greater magni-
tude with hardly an organizational ripple
to mark these events

The importance of this almost unique
and recently learned ability is that the
societal problems in many areas cry out
for basic and rapid change, and the so-
cietal danger is that such change will
have a destructive effect upon society
itself, the fabric of which is already seen
to be torn and rent in places and cer-
tainly tattered at the edges.

Influence for Liberalization

The next characteristic of the mod-
ern corporation to note is that, in action,
it may well be the most potent liberaliz-
ing force in the society. This may seem a
startling idea to some—especially those
whose views of large corporations were
formed in the prewar period or from the
history of the era I myself have never
been able to read the history of the New
Deal era without a feeling almost of
despair that the business attitude at that
time was so universally one oi negativ-
ism. Although the condition of the coun-
try was desperate, the business position
was one of opposition to nearly every
project which emanated from Govem-
ment or other groups to attempt to deal
with the situation. Whatever the reasons
may have been for this attitude of the
Thirties, the picture today is entirely dif-
ferent. The ideological conflicts of the
Thirties have largely been resolved and
there is little disposition today to oppose,
merely for the sake of opposition, the

current efforts to attack the social prob-
lems of today.

More importantly, the business en-
vironment has become increasingly lib-
eral. It is preeminently an open society.
Its need for talented men is great and in-
creasing. Its emphasis upon performance
is one of its principal characteristics and
the entire thrust of its personnel policies
is to ask not who a man is or what his
background is, but simply whether he
can perform or not. As a result, the busi-
ness society is open and mobile, with pro-
motion, influence, and power coming
rapidly to those who can perform. In the
old phrase, it is a “career open to talents.”
It is open not only to talented men but to
new ideas. Accommodation to constant
change means that dogma and conven-
tion have insufficient time to take root
and exert their stultifying influence. Its
emphasis upon problem solving and the
pragmatic attainment of measured re-
sults are liberalizing influences. Structure
and status give way to accomplishment.
Its current state of optimism and confi-
dence in the future are exemplary of the
liberal idea that the condition of man can
and should be improved.

We must never forget that we are the
heirs and practitioners of the Industrial
Revolution and its current phase—the
Technological Revolution—and that these
have been truly revolutionary in the im-
provement they have brought in the con-
dition of man in all the Western coun-
tries. In the long reach of history it was
only a brief time ago that poverty was the
almost universal condition of man The
industrial system has been so successful
in elevating man from poverty that our
society and those of other Western na-
tions are now able seriously and practi-
cally to decide that we intend to elimi-

nate poverty from the relatively small
areas of our society where it remains.
This is no mean or ignoble task, nor is it
an overstatement to call it the most liber-
alizing movement in the modern era.

I would assert, therefore; (1) that
modem large corporations have shown
themselves to be responsible and respon-
sive to the interests of their prime consti-
tuency, their stockholders; (2) that they
are accustomed to act in a disciplined
and orderly fashion for the attainment of
specified goals; (3) that they are prag-
matic and structurally flexible; (4) that
they have shown themselves to be ac-
complished in managing rapid change,
and, finally, that in action, if not in stated
philosophy, they are a major liberalizing
influence.

Strategy for Success

In many respects these can be seen
as characteristics that would make them
effective instruments in attacking our
major social problems; and, generally, I
would agree, with one important proviso.
If they are to be effective in this en-
deavor, they must bring to the task the
special characteristics which have
brought them their current success; and,
most importantly, they must brmg their
primary internal and external discipline,
that of the earnings statement. It has
been suggested by some that in the attack
on current social problems, corporations
should organize a separate nonprofit de-
partment or division which would then
function, I suppose, somewhat similarly
to the manner in which a charitable foun-
dation functions To me this would re-
quire a corporation to act in this field like
something which it is not. It is no more

capable of acting effectively as a founda-
tion than would a foundation be able to
act effectively as an industrial corpora-
tion. If it attempted to do so, a corpo-
ration would lose its discipline and one
of its principal sources of strength.

An example of btisiness functioning
effectively in one current problem area is
that of minority employment. Bringing
people into the labor force and training
them is an essential part of the regular
functioning of any enterprise. In our own
case we have done this not only in the
U.S. but in all the countries abroad. We
have established new factories in up-
country areas in underdeveloped lands
where the entire labor force which had to
be recruited and trained came from im-
poverished and illiterate farm workers in
the neighborhood.

As a world enterprise whose employ-
ees and customers were of every color,
race, and nationality, the Singer Company
had for a long time maintained a policy of
nondiscrimination in employment. In the
early Sixties the policy was restated in
more precise terms and its enforcement
was organized in a more vigorous way.
As a result, minority employment in-
creased, but some time ago, in common
with many other companies, we realized
that the results of even a rigidly enforced
nondiscrimination policy were unlikely to
meet the requirements of the situation.
We therefore organized an affirmative
effort to bring into our employment ranks
minority people who, in the absence of
special training, could not have qualified.
This effort was meticulously organized
with training programs for personnel peo-
ple and supervisors and vigorous follow-
up by the top management of the com-
pany.

The results of this affirmative, or-

ganized effort have been to accelerate the
rate at which members of minority groups
are entering our work force. Simulta-
neously, we have provided support for a
variety of new minority businesses and
for such ventures as day care centers for
the children of working mothers. Other
large companies have had similar experi-
ences, and I cite ours here not because it
is so distinctive, but as evidence of the
fact that when a large corporation organ-
izes an effort such as this and establishes
it as a visible program, it can attain re-
sults. Furthermore, it is important to
understand that this is not a charitable
effort, even though it is quite costly.
Rather it is business performing, with
sharpened focus and effort, its traditional
function of recruiting and training new
employees with the intention of making
them fully productive employees who
will eam their way and make their con-
tribution to the success of the enterprise.

Tha Singer Eiperience

Needs create markets and corporate
business exists to serve markets. One of
the needs of our society is vastly im-
proved vocational training and educa-
tion. What our company is doing in this
field provides an example of how I be-
lieve large corporations in serving mar-
kets within their competence can con-
tribute effectively to the solution of social
problems. Singer has had a long back-
ground of experience in a narrow seg-
ment of vocational training. As the dis-
tributor of the first mechanical device to
be used in the home, our predecessors
had long ago organized sewing schools
and provided instruction for generations
of girls and women all over the world.

We taught the world to sew, and today
the newest generation of family seam-
stresses is leaming the sewing skill from
thousands of Singer teachers around the
globe.

Less than a year ago, against this his-
torical background, we analyzed the total
training and education market and our
own diverse capabUities in this field. As
a result, last fall we established an Edu-
cation and Training Group as one of our
seven operating groups and gave it a
broad charter in this field. The initial
composition of the Group consisted of a
number of operating units serving seg-
ments of this field which had formerly
been organizationally separated. These
included a unit operating in the field of
audiovisual equipment; another which
prepared and distributed to schools film-
strips, instructional material, and similar
educational software; a unit which oper-
ated a Job Corps Center at Camp Breck-
inridge in Kentucky; another in the field
of designing and producing closed circuit
TV equipment for school use; and the
Link Division, with a long record of
leadership in computerized simulation
equipment for training pilots, astronauts,
and auto drivers.

Since the organization of the Group,
we have been awarded the task of oper-
ating the Delta Project in Mississippi,
which is a retraining program for dis-
placed agricultural workers, largely
black. Organized as a centrally directed
operating Group, the corporation thus
has a very wide range of ability in this
total field with prime emphasis upon vo-
cational training. It ranges from very
complex large computer systems for sim-
ulation all the way to the less technical
but equally difficult techniques of bring-
ing high school dropouts back into pro-

ductive society. We have learned a lot
and are leaming more, not only about the
standard aspects of training and educa-
tion, but also about the specialized prob-
lems of training disadvantaged people.
At our Job Corps Center at Camp Breck-
inridge we have been able to train high
school dropouts with greater effective-
ness and at less cost than the university
which managed the camp before we did.

We believe that we are making a con-
tribution to the solution of the country’s
educational problems, and we intend to
make a greater contribution in the future.
In addition to expanding our existing op-
erations, we are now studying the possi-
bility of establishing Singer Schools or
Leaming Centers to which we would
bring all of the latest techniques to bear
upon the problem of obtaining more ef-
fective education at lower costs. We are
also studying the question of whether we
can effectively participate in the vast
training and educational requirements of
the underdeveloped countries in the
Southern Hemisphere.

The essential thing to note is that our
Education and Training Group is a fuUy
operational profit-making segment of the
total company, which is serving markets
resulting from society’s need for better
education and training. It brings to this
field the same disciplines that our other
operating groups bring to their respective
markets. We are acting like a business
corporation, not like a charity or founda-
tion, or a welfare department; and our
effectiveness in this area will continue to
be dependent upon our doing our own
thing and not somebody else’s.

To sum up, we can hardly over-
stress the importance of every corpora-
tion positioning itself in a positive and
interactive way with the basic economic

and social trends of the present and
future. There is no doubt in my mind
that today this requires positive partici-
pation by large corporations in serving
actively the current and emerging needs
of our society, but acting always within
the framework of its special skills and

disciplines. The large modern American
corporation is a powerful and effective
instrumentality, and those of us who
have leadership responsibilities in this
area will be called upon in future to face
even more complex problems of exercis-
ing that power responsibly.

10

SPOTLIGHT: TAX AND DEVELOPMENT

Corporate responsibility and paying tax
TTHHnas Scheiwltler •••- ‘ Susan Symons ‘ nrewatertiouseCoopers*

ANGLO
COM

Children in a crèche near Landau

colliery in South Africa, Anglo

American mining group says two

thirds of its tax payments are made

in developing countries.

Some major businesses are starting to

view taxation as a mainstream [>art of

their corporate social responsibilities.

Others should follow their example.

ii’we look back 20 years or so, we can see
how aspects of corporate responsibility
have developed and become embedded
in the mainstream. Health and safety is a
good example. Today, workers’ heaith and
safety is a core and well-regulated aspect
of good business management, with clear
benefits in employee welfare and reduction
of working days lost. But this was not always
the case. Twenty years or so ago, health

and safety was only just beginning to be
considered as a core business responsibility,
following some high profile industrial
accidents, with campaigning groups
arguing that tougher regulation and better
business practices were required.

Today we see that paying tax is already
being looked at as an element of corporate
responsibility, so it is interesting to ask the
question: how might this develop in the
future? The recession and the financial
crisis have deepened the lack of public
trust in business and led to much wider
public interest in what tax companies
pay. Campaigning groups are active, with

numerous reports from non-govemment
and non-profit organisations in the past year
or two calling for more transparency and
regulation over companies’ tax affairs. And
some corporations are taking leadership
positions and treating tax as an element of
their approach to corporate responsibility.

There is no universally agreed definition of
“corporate responsibility”. For the leading
companies in the area, we suggest it is
simply about how their business adds value.
now and in the fixture, for shareholders,
but also for other stakeholders, including
employees, customers, government and the
wider community. Johnson and Johnson,

OECD Observer No 276-277 December 2009-|anuary 2010 27

the US-based wortdvnde consumer
healthcare group, state this clearly in “Our
Credo”, a set of operating principles that
they have followed for over 60 years. In
the Credo, they put their responsibility
to shareholders after that to customers,
employees and communities, believing that
if they follow these principles, tbe business
will survive and shareholders will receive a
fair long-term retum.

Paying tax into public finances is clearly
part of how business contributes to society.
Looked at simply, companies affect the
community in three dimensions-social,
environmental and economic. Paying tax is
dearly part ofthe economic dimension, and
how companies contribute to the creation
of prosperity and to stability. Taxes provide
essential public revenues for governments
to meet economic and social objectives.
Other aspects ofthe economic dimension
include creating jobs and employment, and
generating business for suppliers.

However, we would argue that taxes in
this context involve much more than just
the corporate income tax on companies’
profits: they also include all the other taxes
corporations pay. such as employer taxes
and property taxes, and those they generate
and administer through their economic
activity, such as VAT, and employee
taxes deducted through the payroll. Our
work, using our Total Tax Contribution
Framework, has shown that on average
in the UK, companies bear nine different
taxes, and collect four others; and that
corporate income tax is less than half (47%)
of their tax cost. In Switzerland, the average
figures are 18 taxes bome and 10 taxes
collected; corporate income tax is 30,2% of
taxes bome (see references).

What campaigners want
Some ofthe groups campaigning on tax
would like to see a change in reporting
standards to require multinational
companies to report their tax affairs in
much more detail in their audited accounts,
essentially a profit and loss account, assets
and tax charge for every country where

they operate, known as country-by-country
reporting. The campaigners want this
because they believe it would give greater
transparency to tax avoidance and alleged
profit shifting by multinationals, particularly
out of deveioping countries.

These proposals would clearly involve
a great deal of cost and effort for many
companies, which business may be
concemed about. Also it is not clear what
the benefit would be for users of financial
statements through such detailed reporting,
or whether tbe proposals would achieve
their aim of increasing tax revenues in
developing countries. Nevertheless, such
proposals dearly reflect a lack of public trust
in corporate behaviour and show that tax is
a complex area, and difficult for the non-tax
expert to understand.

Greater transparency has been a theme
of many previous corporate responsibility
campaigns. The extractive industries
have been at the forefront ofthe country-
by-country reporting campaign. Mining
companies often operate in resource-rich
developing countries, and there is naturally
much interest in their tax and other
payments to government, as part of their
licence to operate and the price for natural
resources.

It is therefore interesting to see how some
mining companies have already taken on
the challenge of greater transparency on tax.
In their Report to Society. Anglo American,
the UK-based global mining company,
discuss their payments with government
(including tax) alongside other aspects
of their corporate responsibility. Anglo
American report their total tax contribution
by country as part of their economic
value added, or the economic dimension,
induding all the different taxes that they pay
and collect, such as corporate income tax,
royalties, employer’s sodal contributions,
and employee taxes deducted through the
payroll. They explain how all these taxes are
generated across the life-cycle of a mining
project, and show that two thirds of their tax
payments are made in developing countries.

This type of reporting is quite different from
the country-by-country proposal, which
focuses solely on corporate income tax and
the tax charge in the financial statements.
Arguably, it better reflects how taxes are part
ofthe economic benefits that companies
bring to sodety.

We believe that paying tax has already
started to develop as a corporate
responsibility issue. We suggest that large
companies, if they have not already done
so, should start to think about where tax
fits into their approach and strategy on
corporate responsibility. Not all companies
will want to be a leader in this area, but not
to have a position could well be a risk.

We also suggest that more companies
need to take up the challenge of greater
tax transparency and how better to
communicate their tax affairs. While
there could be risk in providing more
information, there may also be value in
corporate reputation.

‘Thomas Scheiwiller and Susan Symons are
PricewaterhouseCoopers partners based in Zurich and
London respectively. They have spent over 20 years
advising clients and have combined their expertise to
consider corporate responsibility (Thomas) and paying
tax (Susan).

Visit www.pwc.com
I

References

An^o American (2008), Report to Society, see
www.angioamerican.co.uk

Johnson and Johnson (1943), Our Credo, see
www.jnj.com

Pricevt/aterhouseCoopers AG [2009), Tolol Tax
Contnbutior) Study: How much do major companies
pay m Switzerland?

PricewaterhouseCoopers LLP (2008), Total Tax
Contribution Study for The Hundred Group of
Finance Directors.

The Task Face on Financial Integrtt/ and EcOfxxnic
Deveiopment (2009), Country-by-Country Reporting:
Holding multinational companies to account
wherever they are. available at
www.finanüattaskforce.org

28

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