Laying the Foundation: Preparing the Field of Business and Society for Investigating the Relationship Between Business and Inequality

Laying Down the Empirical Foundation

If a consensus exists among the innumerable articles and books that offer advice on theory building, it is the sensible suggestion that one should first immerse oneself in the available information regarding the phenomenon of interest. If a theory is “a general principle or a collection of interrelated principles that is put forward as an explanation of a set of known facts and empirical findings” (Weick, 2007, p. 405, emphasis added), it behooves would-be theorists to begin by studying those relevant “known facts and empirical findings.” Furthermore, non-academic sources of information—journalistic accounts, personal experience—can also prove highly valuable for accumulating the necessary background for studying a particular topic (Mintzberg, 2007, p. 366). Williamson (2007), for example, credited the work he conducted for the government on anti-trust as an inspiration for his theory of transaction costs. Barney (2007) went further, warning that scholars who rely too heavily on received wisdom will not go beyond it, and therefore should actively seek phenomena that appear inconsistent with accepted theory (p. 297).

There is no evidence discernable in the published literature, however, that many business and society academics have acquired the kind of deep knowledge necessary for theorizing the relationship between either managerial theory or practices and macro-economic and/or broad social outcomes. Nearly four decades ago, Preston (1975) argued, “serious analysis of the corporation-society relationship requires rigorous and comprehensive conceptions of both the corporation and society” (p. 446). While some scholars have nominally endorsed this advice (Jones & Wicks, 1999), there are few examples of scholarship that actually reflect the kind of deep and broad knowledge required for creating “rigorous and comprehensive conceptions” regarding this topic (Preston, 1975, p. 446). Academics trained as doctoral students either within the field of management or the disciplines favored when hiring from outside business schools—psychology, micro-economics, organizational sociology, and, for ethicists, philosophy—are rarely exposed to an adequate share of the vast library of relevant empirical and theoretical work generated by the fields of sociology, political science, macro-economics, history, and law.

This apparent ignorance of the work of other disciplines is reflected in the literature generated by the field of business and society. While the KLD database has supplied the material for a few insightful studies (Berman, Wicks, Kotha, & Jones, 1999; Dawkins, 2002; Waddock & Graves, 1997), it has been over-relied upon in contrast to the almost complete neglect of the mountains of relevant data collected and analyzed by the various social sciences. Not only is the KLD database not subject to the methodological scrutiny typical of academic work, it is also not especially strong with regard to the distribution of income on the part of firms.

Furthermore, even the findings from academic research are often misapplied or misunderstood. Huselid’s (1995) widely cited piece on the impact of high performance human resource practices has, for example, been cited to support the notion that treating employees as valuable stakeholders is good for business performance (Goodstein & Wicks, 2007; Rehbein, Waddock, & Graves, 2004). Huselid, however, not only did not explicitly make this claim, but to impute it from his findings requires ignoring other management research that demonstrates that those human resource practices he labels “high performance” can actually work against employee interests under certain circumstances. Self-managed teams, for example, add, in some cases, to employee stress (Barker, 1993). Contingent pay can sometimes result in the reduction of employee compensation and with it, job satisfaction (Brown & Huber, 1992).

Even more troubling, some business and society academics have either neglected or disregarded readily accessible journalistic accounts that might cast some doubt on their championing of the stakeholder management of such companies as Starbucks, Citibank, Motorola, Caterpillar, and Shell Oil (Goodstein & Wicks, 2007; Lawrence, 2002; Post, Preston, & Sachs, 2002). In addition, once empirically questionable claims appear in print, they become legitimized and can be used to support equally shaky assertions made in later work. For example, all that Jones, Felps, and Bigley (2007) relied on for support of their claim that “some firms do seem to have broadly moral cultures” (p. 149) was Redefining the Corporation (Post et al., 2002), a non-academic book whose empirical claims are not consistent with journalistic accounts (Marens, 2006), plus another dated volume that lionizes Wal-Mart (Kotter & Heskett, 1992), a firm frequently criticized for its compensation practices (Leroy, 2005).

Even when the problems of American workers are raised, consideration of the empirical record is generally absent. For example, Westermann-Behaylo, Berman, and Van Buren (2014) criticized instrumentalist human resource policies in abstract terms for disproportionately rewarding the most usefully skilled employees. The low pay of unskilled workers, however, is hardly a recent phenomenon, and, in the American case, the significant contemporary trend in the rise of inequality is that in recent decades so many skilled workers, both blue-collar and professional, are no longer able to command either the share of economic gains or job security that they had earned in the past (Cappelli, 2012; Davidson, 2012; Hira & Hira, 2005; Lohr, 2009; Matloff, 2013; Mishel et al., 2012; Smith, 1990). Goodstein and Wicks (2007) went so far in ignoring the actual reported conditions of work in the United States that they argued that employees need to reciprocate the care of supposed stakeholder-embracing corporations, exemplified by Citigroup, which laid-off thousands of employees and replaced them with lower paid workers about the same time the article appeared in print (Enrich & Sidel, 2007).

The upside of ignorance and neglect, however, is that these faults can be cured through a reasonable amount of effort. In the remainder of this section, I offer a number of suggestions aimed at interested scholars who wish to familiarize themselves with relevant material that they may never have encountered. These suggestions are not meant to be exhaustive, and they focus almost exclusively on American trends. This apparent American bias is, however, quite defensible. Cross-national comparisons are extremely difficult to conduct methodologically, generating issues ranging from the measurement difficulties when comparing very different data sources to omitting important variables, such as missing differences in institutional structures between distinct societies when the labeling is similar, with the predictable result of nearly endless disputes as to what exactly can be generalized across borders (Boushey & Price, 2014; Forbes, 2000). While scholars have certainly attempted to grapple with these difficulties, the results have been mixed, even among scholars maximally conversant with a topic (Forbes, 2000). Obtaining a deeper empirical background must begin somewhere, and the hope here is that other scholars more familiar with other nations can add their own recommendations in future articles. In addition, given the historical importance of American corporations in the global economy, as well as its influence on management research, starting with the United States is hardly an arbitrary choice. Furthermore, this American primacy is reflected in the way “the corporation” has been reified in the management literature. When management scholars speak abstractly of “the corporation” of unspecified nationality, the structural presumptions are typically American, with no acknowledgment of the possible presence of dual boards, works councils, interlocking supplier networks, powerful industry groups, or bank ownership of (rarely traded) corporate shares.

An excellent place to start for a scholar seeking to get “the lay of the land” is with the continuing efforts of Piketty and Saez (2003, but frequently updated), and Wolff (2011) to track the distribution of income and wealth, respectively. Here, it is necessary to emphasize the word “start.” Their work should not be regarded as the final word on either topic as any conscientious scholar would presumably follow citation trails that would encompass critical exchanges that cover inevitable measurement issues (e.g., the treatment of governmental transfer programs) and even definitional ones (e.g., are stock grants to executives to be classified as income or wealth? Piketty & Saez, 2014). The Economic Policy Institute, an organization respected for the integrity and thoroughness of its research even by some of those who take issue with its specific policy recommendations (Pearlstein, 2011), has been tracking the economic conditions of American workers for a generation, and it provides a summary of both its own findings and those of other researchers in its biannual State of Working America publication (Mishel et al., 2012). These volumes, which include extensive reference lists, helpfully parse trends in income and wealth into component variables such as occupation, labor’s share of national income, race, and the relationship between productivity gains and compensation.

Other empirical work has focused on a variety of specific issues relevant to understanding the nature of contemporary inequality. A number of published studies have focused on how the growth of financial activity has contributed to the rise in inequality. These include studies of compensation within a growing financial sector itself (Greenwood & Scharfstein, 2013; Krippner, 2005; Philippon & Reshef, 2012), the use of share buybacks initiated by top management to enhance their own compensation (Lazonick, 2014), the relationship between financial activity on the part of non-financial firms and the growth of inequality within these same firms (Lin & Tomaskovic-Devey, 2013), and the effect consumer debt has on the incomes of both debtors and creditors (Fazzari & Cynamon, 2013; Mian, Rao, & Sufi, 2013). The role of technological change in distributing income is another relevant topic that has been well studied. Technology can affect employees and occupations in complex, contingent, and diverse ways (e.g., dummying-down some tasks vs. demand for specialists) that are not captured in the excessively parsimonious skill-based technological theory (Autor, Katz, & Kearney, 2008; Kristal, 2013; Smith, 1990). Weeden (2002) examined the related issue as to how deliberate barriers to entering an occupation contribute to inequality between these occupations. The effect of outsourcing and encouraging immigration has also been examined for its effect on compensation within professions (Hira & Hira, 2005; Matloff, 2013), and there has even been work on the inequality of consumption, an obviously major consequence of inequality of earnings (Attanasio, Hurst, & Pistaferri, 2012). The post-Kunzet’s literature on how income inequality affects economic growth, while largely internationally comparative (Forbes, 2000), does include studies that focus on the United States (Boushey & Price, 2014; Panizzo, 2002).

Not surprisingly, the relationship between the decline of unionization and the rise of inequality has generated its own literature, in part because the American system of labor relations, largely established during the Depression, was intended to encourage the sharing of economic gains in return for maintaining managerial autonomy and social peace, while stimulating consumer markets. Declining unionization has been linked to reduced compensation, not only among formerly unionized employees but also for employees in rarely unionized occupations or working for non-union employers, a result of the reduction of social pressure to match union gains (Western & Rosenfeld, 2011). While the causes of this decline in union membership appear to be numerous, some unintended or even self-inflicted, scholars have demonstrated that deliberate managerial policies have helped accelerate it (Brofenbrenner, 1994; Logan, 2002), whether out of perceived necessity or personal preference.

Grappling with both the dynamics of the corporate–government relationship and the impact on social and economic outcomes has been another issue neglected by management scholars, despite the fact that the relationship between business and government was once considered a major subfield within the field of business and society. Unfortunately, management scholarship in general typically starts with the axiomatic assumption that profits are the result of competition within competitive markets. Even the major exception, the nascent literature on non-market strategies, virtually never examines such practices as government procurement and privatization, although both of these have affected trends in inequality, albeit sometimes in opposite directions, as discussed below (Melman, 1987; Ravitch, 2013).

Fortunately, scholars working outside American business schools have examined how government policies have affected the distribution of income in significant ways that may be less direct or intentional than tax or income transfer policies. Even before the rise of the military-industrial complex or the social welfare programs of the Great Society, federal and state governments had repeatedly assisted the growth and prosperity of American business in a number of ways, assistance that often rebounded to the enhancement of broadly shared economic gains. The railroad system was promoted by a vast array of government actions, and it in turn made incalculable contributions to infrastructure, finance, business organization, technology, and demand for industrial output (Chandler, 1977; Roy, 1997; Standiford, 2005). Both the (militarily justified) Interstate Highway Act and the building of the Internet backbone were more recent examples of similar government expenditures that generated both direct demand for a variety of goods and services and the infrastructure necessary for creating innumerable new niches for entrepreneurs. Furthermore, even before mid-20th-century military and space programs generated the technology that made possible such post-war marvels as television, jets, computers, the Internet, plastic football helmets, and Velcro, government spending contributed to the development of such commercial technologies as the telegraph, pre-Ford mass production, improved steel, typewriters, radio, and adding machines (Marens, 2008).

Historically, government has also supported the growth of American business in ways other than spending tax dollars. Tariffs protected nascent industries over a century ago, while Indian wars, free land, and land-grant colleges created an enormous class of commercial farmers/consumers largely without precedent anywhere. Even regulation, such as those involving meat packing and workers’ compensation, often rebounded to the competitive advantage of a large segment of firms and their employees (Barkan, 1985; Weinstein, 1968). Legal changes lobbied for by corporate promoters to limit liability while removing restrictions on mergers actually made the large publicly traded corporations legally possible (Roy, 1997). And while many of these interventions created jobs and white-collar corporate careers that might not have existed otherwise, state violence or the threat of violence, in the form of soldiers, national guardsmen, police, and state-deputized Pinkertons prevented many of these employees of the new large corporations from demanding too large a share of firm success (Cooper, 1980; Lindsey, 1964) by initiating what a presidential commission called “the bloodiest and most violent labor history of any industrial nation in the world” (Taft & Ross, 1969, p. 221).

Government–business relations, however, go both ways. Not only does government affect businesses through spending, taxing, and regulations, but both investors and corporate executives attempt to influence both political outcomes and the regulatory process, with significant ramifications, not always intended, for employment and compensation levels. Relevant research covers such topics as corporate influence on public policy proposals (Burris, 2008; Callahan, 1999), the operation of corporate political action committees (Clawson, Neustdatl, & Weller, 1998), the impact of campaign contributions on governmental policy choices (Burris, 2001; Ferguson, 1995), the relationship between corporate lobbying on profits (Hill, Kelly, Lockhart, & Van Ness, 2013), and the formulation and impact of tax policy on different groups (Johnston, 2003). There is also an extensive literature on the overall impact of government spending including military procurement (Cypher, 2007; Melman, 1987), support of both the computer and Internet industries (Newman, 2002), and the medical and pharmaceutical industries (Moses, Dorsey, Matheson, & Thier, 2005), practices in which rents may or may not be shared with employees depending on such variables as the strength of unions and the tightness of relevant labor markets. There are also state-level programs that employ tax incentives and even direct subsidies designed to assist businesses with the expressed purpose of creating or saving jobs (Slivinski, 2007), frequently with disappointing results (Leroy, 2005). Another government–business transaction with distributional impact is the privatization of governmental services, a process that often results in lower compensation levels for workers who inherit the work formerly entrusted to civil servants (Gold, Mason, & Hamburger, 2011; Herivel & Wright, 2008; Hira & Hira, 2005; Ravitch, 2013).

In one respect, a deeper understanding of how many firms rely on or at least benefit from extracting rents from government ought to prove grist for the mill of ethics wing of business and society as the professional orientation of ethicists is not to merely understand trends in the manner of social scientists but also to actually change them to heighten the overall level of ethical conduct. In short, they are reformers, broadly defined, and the role that governmental policies have played in generating business success suggests the possibility of using such policies as either carrots or sticks to raise the ethical level of business outcomes, including the distribution of income. The Depression-era Davis-Bacon Act provides a rare example from an earlier era in its requirement that “prevailing wages” be paid on federal government construction projects although it has been riddled by numerous exceptions over time. Similarly, Tobin’s proposed tax on financial transactions, which has been implemented in other nations, aims to incentivize the kind of long-term thinking so commonly advocated by business ethicists that would presumably favor satisfying employees over cutting compensation costs to the bone.

Precedent provides a reason for expecting some degree of efficacy out of such an approach. One business ethicist has asserted that over the last generation of the 20th century, corporate management has dramatically improved its ethical performance in the areas of discrimination, pollution, and product safety (Velasquez, 2003). All three of the realms he notes, however, were subjected to more stringent regulation over the last half century, which not only punished transgressors but also helped legitimize new norms for acceptable behavior. By contrast, no comparable extension of government intervention has occurred in the realm of compensation and job security over the same time period. In the areas of labor relations, pension protection, “economic” layoffs (as opposed to cause-based dismissals), unemployment insurance, and minimum wage, de facto and sometimes even de jure legal protections have not improved over the last generation and have actually weakened in some respects (Lafer, 2013). Although existing regulations earn an occasional mention in the business ethics or business and society literature, advocating additional legal constraints on corporate decision making has been virtually non-existent, with very few exceptions (Werhane & Radin, 2004). It is time for business ethics to accept that advocating new legal obligations, perhaps attaching these to the receipt of government contracts or subsidies, is as legitimate an academic enterprise as urging the voluntary adoption on the part of management of one or another set of ethical principles.

Reconsidering Theory

Although familiarity with empirical work relevant to the relationship between business and economic outcomes for individuals is crucial for obtaining a background capable of stimulating theory, it is not the only area in which more thorough preparation may help scholars engage with this topic. As Kurt Lewin (1951) famously noted, there is nothing so practical as a good theory, and whether a scholar’s purpose is to understand the world as a social scientist, or to change it incrementally as a business ethicist, there are ways of constructing theory that may prove more valuable than the form of theory building typically favored by business school academics.

There is a vast literature that offers advice on constructing theory, and there is certainly disagreement within it, but one can find a general consensus that there are at least two different types of theory, even if there is no universal agreement as to what precisely distinguishes these two types. The ways the two approaches to theories are distinguished vary, ranging from substantive and formal theory (Glaser, 1978), to middle range and grand (Boudon, 1991), to ideographic and nomothetic (Przeworski & Teune, 1970), but there appears to be some common ground as to what does divide them, more as two ends of a continuum than a strict dichotomy. At one end of the spectrum, theory is parsimonious, global, generally unencumbered by explicit limits of time or space, and focused on prediction. At the other end, theory is richer in detail, more contingent on circumstances, and focuses on explaining phenomenon, especially puzzling ones that defy “common sense.” These differences are not absolute. A well-constructed substantive theory implicitly predicts similar outcomes arising under similar conditions, and most formal theory at least implies some temporal and geographic limitations to its applicability.

Neither end of the theory spectrum is inherently superior to the other. Appropriateness depends on the nature of the topic and the type of questions being asked by the researcher. Organizational behavior, for example, a field established by experimental psychologists, might tend to investigate questions with the expectation that these are answerable through the formulating and testing of parsimonious global hypothesizes. Or the quasi-experimental approach might be preferred when comparing firms or groups of firms operating within the same time and place and distinguishable by a limited number of variables, allowing the assumption of ceteris paribus.

Tsoukas (1989), however, argued that the more formal and parsimonious type of theory, because it was developed for relatively closed systems, (typically laboratory experiments) rarely produces more than unsurprising generalities when applied to open systems embedded in ever-changing environments. If he is correct, and the chronic failure of management academics to disconfirm any theory suggests that he is (Davis & Marquis, 2005), then global parsimonious theory has only limited usefulness for understanding business activity at the macro or societal level, since firms not only operate within a changing environment, but, aggregated, are themselves a major cause of constant environmental change. Simply put, a hypothesis that might hold true in one time, place, or industry, does not necessarily hold elsewhere without closer examination of the differences in background conditions, nor is there any particular reason to think it would.

This does not mean that grappling with issues of economic distribution, or any other business-related investigation, requires abandoning any and all scientific methodology. According to Dubin (1976), “[i]n the social sciences particularly, there is a strange incapacity to recognize that a theory must have a boundary” (p. 28), but this is hardly a problem in the natural sciences, where different fields have developed somewhat distinct approaches in trying to bound theory as to make them practicable (Harding, 1986). If one peruses the journals of the various sciences that rely relatively little on laboratory experimentation (e.g., geology, astronomy, paleontology, sub-disciplines of field biology), it is clear that what social scientists call middle-range theories are what many of these natural scientists simply call “theories” (Boudon, 1991).

If scholars wish to build theories explaining contemporary trends in social and economic outcomes for differently situated groups, taking a more substantive and less formal approach to theory building makes sense. Any number of environmental factors might shift the instrumental value for a firm of, for example, providing relatively generous compensation for non-executive employees. These would include the unemployment rate, the practicality of outsourcing, barriers to entry such as capital expenditures, the relative importance of price and service competition, the cost of automation, the rate of product innovation, and the legal power of employees to limit managerial discretion through such actions as lawsuits or strikes. All of these factors vary over time and, furthermore, the causal arrow is hardly one-way. The aggregated choices that businesses make, ranging from political lobbying to the widespread adoption of certain technologies, feed back into the environment and induce further change. Moreover, many theoretical arguments within the management literature and, more specifically, business and society are presumed to possess more global application than they actually do, and the generalities that result from such global ambitions are rarely either insightful or confirmable.

Two examples can illustrate how a more substantive and ideographic approach to theory building might explain a great deal more about the treatment of employees than efforts at generating parsimonious universal principles. Costco has received favorable publicity for the relatively high levels at which it compensates employees relative to Wal-Mart, thus encouraging the conclusion that Costco is the more ethical or stakeholder-oriented company. However, this would be somewhat simplistic as they are hardly a scientifically matched pair. Costco is less labor-intensive, offers far fewer items for sale, and caters to a more affluent clientele that is willing to pay more for better customer service (McCardle, 2013). This does not necessarily mean that Wal-Mart’s compensation practices are fair, let alone generous. What it does mean is that any comparison of the two chains must be careful about directly comparing their profitability or productivity without first factoring in important differences between them.

On a more macro level, Levine and Tyson (1990) suggested that the practice of Japanese companies of avoiding layoffs (at least at that time) could not readily be adopted by American companies. Japanese companies have had a history of not only trying harder to avoid layoffs, but they also tended to give (at least at the time of publication) smaller raises to their permanent employees during profitable years than American firms, a policy approach that fit Japanese culture and the nation’s need to rebuild after military defeat. Once one understands these historic differences, it becomes impossible to simply assume that Japanese firms are inherently more equitable, or that American companies should necessarily imitate their no-layoff policies.

The presence and impact of environmental factors not only shift with geography or industry but over time as well. IBM and Bank of America, considered among the most employee-supportive firms during those decades when they maintained near monopolies in their particular niches, have not only imposed layoffs in recent years but also have actually required some of their laid-off employees to train their foreign replacements in return for severance packages (Lazarus, 2006; Lohr, 2009). Changes in the identity of managerial personnel may explain some of this shift although that explanation only begs the question as to why a newer generation of executives would embrace a different set of values. A deeper explanation may arise from considering changes in IBM’s or Bank of America’s environments, such as entering new product markets or the intensification of competition in older ones, or the way recent developments in technology and international relations have made outsourcing easier and thus more tempting.

Unfortunately, business and society academics, who have actually attempted to theorize corporate human resource policies, have tended to rely on parsimonious formal theory, with its implicit dependence on ceteris paribus (Bosse, Phillips, & Harrison, 2009). This presumption limits the practical value of a management theory, and not only because neither businesses themselves nor the environments in which they operate typically meet this condition. Business and society scholars have compounded the problem by reifying the construct of “stakeholders,” which is so frequently relied upon as a building block for business and society theory. In doing so, the field implicitly homogenizes the treatment of diverse groups by management, paying insufficient attention to the reality that organizations are likely to treat different groups very differently, much as the people who comprise them do. As a result, too much “stakeholder” theory relies on the unfounded presumption that a particular firm takes a consistent moral or instrumental stance toward all stakeholder groups (Jones et al., 2007).

Logic and circumstances would suggest the opposite, especially given the variance in the cost of satisfying various stakeholder groups, their contribution to profitability, and the differences in their relative power to retaliate (Coff, 1999). If, for example, Exxon and Boeing have proven to be relatively generous employers over the years, it is plausible that this generosity can be explained by such factors as capital intensity, barriers to entry, union power, government subsidization, or dependency on employees with highly specific skills. Boeing’s recent decision to discontinue defined benefit pensions even suggests that one or more external pressures (e.g., union opposition) may no longer even be operative. Being generous employers, however, does not in any way create a presumption that Exxon will deal equally magnanimously with environmentalists, or that Boeing would respect governmental and taxpayer stakeholders by refraining from lobbying for lucrative defense projects of questionable military value (Bumiller, 2011). Wolfe and Putler (2002) went further and questioned whether stakeholder groups that are defined by a shared function (e.g., employees, investors, customers) are even sufficiently homogeneous within their own group to enable a management team sincerely committed to stakeholder values to assume a shared set of intra-group interests. Smith (1990), for example, found that middle managers of a major bank held a diverse set of strategies in dealing with pressures from upper management, variations made explicable by the profitability or culture of their respective departments and the external demand for these managers’ particular skill sets.

To be fair, the same criticism of excess reliance on overly broad and parsimonious theories could be leveled at most of the theorizing generated or applied by all management fields. A glance through back issues of the Academy of Management Review would confirm countless examples of “physics envy” at work (Lo & Muller, 2010) in which truisms based on common sense and simplified logic are dressed up as universal principles, unbound by cultural, chronological, or geographic contingency. It was, perhaps, a need to counter one or another essentialist theory of what a corporation “is” or how it “should” act that might have encouraged business and society scholars to try to “fight fire with fire” when confronting those theories that they regard as either morally repugnant, empirically dubious, or excessively narrow (Freeman, Harrison, Wicks, Parmar, & De Colle, 2010). Understanding intellectual error, however, is not the same as excusing it, and disagreeing with one essentialist theory does not require embracing another. As Bratton (1992) pointed out, a corporation is not a single stable “thing,” whose essence must be uncovered, but rather a time and place varying construct, its definition depending on the historical era, or the focus of the analysis, or the particular perspective or interests of the theorist:

They [corporations] are welfarist instruments. They also are nexuses of interpersonal relationships with ethical implications. They advance each participant’s self-interest, but they also demand individual sacrifices to collective goals. They are nexuses of contract relationships. At the same time, they are self-referential systems—separate entities with identifiable, albeit reified, contents. They include relational contracts and discrete contracts. They result from free contract and yet entail empowerment and dependence. They amount to hierarchical power structures in some respects, and artifacts of arm’s length contracting in others. (p. 212)

Davis and Marquis (2005), prominent organization theorists, suggested that the search for timeless grand theory within their own discipline has failed, in part because the “times” have changed. Efforts to develop an all-encompassing theory of organization, quixotic or not, had at least an understandable rationale during the decades in which business was dominated by large, stable, and similarly organized firms (Edwards, 1975). Given, however, the contemporary fluidity and diversity of those social arrangements that we call “business organizations,” trying to formulate a single grand theory that could successfully explain, let alone predict, the behavior of all these organizational types now makes as much sense, according to Davis and Marquis, as a theory of hitchhiking or a theory of diesel trucks.

One can see these limitations of present approaches to theory building in Jones (1995), who, in one of the first and still highly influential attempt to develop a global and parsimonious theory of stakeholder management, applied game theory to explain how satisfying stakeholders would logically lead to better average outcomes for businesses, ceteris paribus. Several of the hypotheses he either formally developed or simply suggested relate to the treatment of employees, and he consistently predicted that firms on the “pro-employee” side of such practices as executive pay, monitoring of employees, internal labor markets, union decertification, downsizing, and pension funding would tend to perform better. Jones’s effort to create a global theory was both thoughtful and internally logical, yet it also failed to predict outcomes over the two decades since it was published, an era in which the stinginess of American employers relative to historical practices correlates with one of the most profitable and investor-friendly periods in American history (Mishel et al., 2012; Mizruchi, 2013; Piketty & Saez, 2003).

Others have attempted to refine and extend Jones’s theory by considering a number of contingent factors. Unfortunately, these efforts have done little more than add moderating variables to his excessively generalized and parsimonious approach, and thus failed to significantly increase either its explanatory or predictive power. This is not to say that no scholar has ever made any insightful point in following this practice, but even genuine understanding is all too often eclipsed by the effort to generate what is wrongly believed to be the only way to theorize in a scientific manner. Harrison, Bosse, and Phillips (2010) insightfully reminded readers that stakeholder management is not costless, and so firms can actually damage themselves by overinvesting “in particular stakeholder relationships or invest unwisely” (p. 61). Yet these very same authors, in another article, offer little more than truisms disguised as testable hypotheses, such as “[f]irms perceived as distributionally fair (unfair) by their stakeholders create more (less) rent” (Bosse et al., 2009, p. 452).

Shropshire and Hillman (2007) generated one of the most thorough efforts to refine formal stakeholder theory by adding a number of intervening variables and should be credited for acknowledging that the strength of some variables may change over time. Unfortunately, they derive their variables (e.g., industry practices, firm size, firm success, risk, managerial discretion, and turnover, etc.) from logical deduction, not puzzles generated by anomalies in the empirical record, almost guaranteeing that whatever their statistical tests reveal, we will learn nothing particularly surprising, and thus nothing particularly illuminating, about how businesses behave toward various stakeholder groups. One can contrast their approach to Fligstein’s (1990) investigation of why the most likely background of American top corporate management appears to have varied in a systematic way over time, at one time being heavily recruited from engineering, while marketing dominated another era, and so on. To solve the puzzle, he studied the historical record as to what were the major challenges facing businesses during different eras. He then applied resource dependency theory to this historical data to explain why a particular functional background might be regarded as more or less crucial at different times for ascending to corporate leadership. As a result, Fligstein’s explanation of the data explains something about changes in the likely background of top management that we did not necessarily know before and has the added virtue of demonstrating a way to predict how organizations may change again.

What is ultimately needed for understanding why even successful firms have not shared their success with their employees to the extent that they had in the past is a theory that is not merely more contingent upon current environmental circumstances but also one that can help understand, and even predict to some degree, how that environment itself changes. The reality that Jones’s hypotheses with regard to the treatment of employees failed to hold despite being logically generated from his starting assumptions is exactly the kind of paradox that should encourage scholars to search for or create more useful theory. It is precisely those phenomena that seem to violate received theory, or even just basic common sense, that can prove to be especially fruitful for either modifying old or creating new theory. This is especially true when the gap between expectations and reality seem to have grown over time, thus implying that some new or overlooked factor may have become increasingly important since the original formulation (Poole & Van de Ven, 1989). The next section offers example of how a social science theory, well-grounded in the empirical record, can aid in analyzing the issue of income distribution.

Exemplifying a Useful Theory

Scholars outside of business schools have developed a number of theories highly relevant for understanding how economic relationships change over time, which certainly includes the distribution of business income. In examining these theories, scholars need to keep an open mind as the utility of a theory should be judged on its ability to explain phenomenon, reconcile paradox, and possibly predict outcomes, not on the degree of its fidelity to conventional wisdom. A single “right” social science theory is rare, but rather there exists a set of insightful explanations, and a scholar should select from among these on the basis of their utility in understanding a trend or puzzle, with no concern with political implications. Scholars should be careful to avoid Getz’s (1997) mistake in the pages of this very journal, in which she excluded both Weberian power elite theory and structural Marxism from her otherwise comprehensive survey of theories of corporate political activity, a mistake in which the reviewers and editors share complicity. As a result, the article failed to include two perspectives, both of which include both theorizing and empirical work, that are particularly focused on explaining the relationship between corporate political action and the distribution of income.

A more positive case of how abandoning political prejudices can lead to appreciation of useful theory can be found in the revival of the work of Hyman Minsky, whose previously obscure theories regarding speculative bubbles have gained a great deal of attention since 2008. According to Cassidy (2008), many of Minsky’s colleagues used to regard his financial-instability hypothesis “as radical, if not crackpot,” as he was not only guilty of arguing that markets were not always rational but further suggested that at certain points financial markets might actually prove destructive to society without government intervention. Furthermore, Minsky not only failed to model his theory mathematically in the conventional manner, his membership within the post-Keynesian school, known for its mildly left-leaning orientation, insured that he would not be widely read within economics, let alone the field of finance, although, ironically, he had served for years as a director of a bank. Now, however, there are conferences devoted to his work, and a new term, “Minsky moment,” has entered the economic and finance lexicons to characterize a sudden collapse of asset prices. As a result, the work of this once obscure and suspiciously liberal academic has generated a better understanding of the seemingly inexplicable behavior of financial institutions over the last several years.

While Minsky provides a powerful case for the value of canvasing without prejudice a gamut of relevant theories to better understand a phenomenon, Giovanni Arrighi (1994) offered a theory capable of more specifically connecting the repeated financial scandals of the last generation with the growth of income disparity and growing job insecurity during this same time period. Much as the post-war cohort of business and society scholars drew on their academic and real-world experiences with depression, government, labor, business, and non-profits (Marens, 2010), Arrighi’s unusually diverse background that included both business and academics, and both economics and sociology within academics, provided him a uniquely rich perspective on the operation of the global economic system (Harvey, 2009). The richness of his personal experience led to a theory notable for its erudite mix of Smith, Ricardo, Gramsci, Marx, and the Annales School historian, Ferdinand Braudel.

Arrighi’s (1994) model of the dynamics of global capitalism is both cyclical and evolutionary. He defines global capitalism quite specifically in time and space as that network of international production, trade, and related financing that originally grew out of the conquest of the Western Hemisphere. (Whether networks of trade that predate Columbus should also be regarded as “capitalism” is not relevant to the utility of his theory in this context.) According to Arrighi, what has characterized this particular system is that it has been dominated by one or another of a succession of hegemonic societies, which are more or less identifiable with a nation state, and each in turn extracting a disproportionate benefit of this system. Each successive hegemon—Genoa, Netherlands, England, and finally the United Sates—dominated this global capitalist network for over a century before ultimately becoming the victim of its own success for two reasons. First, the comparative advantages that allowed the hegemon to dominate this global network is eventually imitated elsewhere at lower cost and then superseded by another polity with its own set of comparative advantages, advantages ironically amplified by investments and technological transfers on the part of the reigning hegemon. Second, rising costs of production within the hegemonic core combined with its vast accumulation of wealth makes zero-sum financial activity increasingly attractive compared with enduring the risks and expenses of engaging in more concrete commercial or manufacturing activity. Ultimately, this increasing attractiveness of finance feeds on itself for about a generation, leading to ever more sophisticated and risky financial engineering that ultimately leads to crises that spread throughout the entire system.

The cycle repeats itself after a transition period of relative chaos and unrest that results when the old hegemon is no longer capable of enforcing order within the system of global capitalism. Eventually, a new hegemon emerges, building upon what the previous one achieved but with its own comparative advantages that allow it to emerge more powerful and organized than its predecessor. In this way, Genoa and a few other Italian city-states, operating under Hapsburg protection, financed the rise of the Netherlands. A very wealthy Netherlands, after seizing control of this global trading system, then financed much of the English agricultural revolution. This agricultural revolution eventually made the industrial revolution possible, upon which was built the global dominance of Britain. Finally, Britain invested heavily in its North American colonies even after their independence, most notably with regard to the railroads, a breakthrough technology and organizational form that was actually invented in England.

A few points need to be clarified for understanding the implications of this model. First, it exemplifies what might fairly be regarded as the upper limits of “middle-range” theory; although it is vast in both chronology and geographic scope, it is not global in that it remains bound by time and place. Second, Arrighi emphasizes that the exercise of hegemony is far subtler than mere coercion. While military power is involved in establishing and maintaining global dominance, the military prowess of each hegemon tends to be purchased through its economic success, almost the reverse of traditional (non-capitalist) empires. As Kennedy (1987) pointed out, any advantages of military superiority are eventually outweighed by its cost, especially as economic dominance begins to erode. For Arrighi, the exercise of capitalist hegemony is both a political and social process, and following Gramsci, it is based at least as much on cooperation as coercion. Segments of the populations of other societies would understandably respect and choose to emulate aspects of a hegemon, not only its successful commercial practices but also the ideological orientation and aesthetics of a powerful society.

Furthermore, while there is a cyclical element to his model of hegemonic waves, there is also an evolutionary one. In each case, a new hegemon added features that had not existed previously. Genoa, the first post-Columbus capitalist hegemon, was a city-state dependent upon Hapsburg Kings for protection and foreign producers for the actual production of the commodities it traded. Genoa was superseded by the Netherlands, also a trading nation but with more formally organized business institutions and a larger and stronger polity capable of handling its own protection after decades of fighting these same Hapsburgs. The even larger and more centralized United Kingdom internalized far more of production and sales within its own borders, and as the factory system rose, British merchants could abandon the putting-out system in favor of internalizing production costs within their own firms. Finally, the United States internalized transaction costs both nationally and within firms as the largely British-financed railroad system not only created a then uniquely large and well-policed domestic market, but it also pioneered the organizational methods, financial practices, and engineering technology necessary for the emergence of the large vertically integrated “Chandlerian” firms, which, free of many of the governmental and social constraints larger firms faced elsewhere (Vogel, 1996), would dominate the global economy during the course of the 20th century.

Arrighi’s theory of long waves of capitalist hegemony provides a powerful example of a substantive theory that, on one hand makes sense of an enormous quantity of historical and sociological empirical research and, on the other, remains bounded by both time and space. One can readily apply its interpretation of events to explain the trends in the distribution of income. First, as international competition began heating up in the 1970s, an almost relentless effort by American management began to improve the profitability of firms, most notably by holding down labor costs through outsourcing, layoffs, pushing-back on unionization, reducing the real value of the minimum wage, and so forth. They were, in effect, applying what corporate raiders had taught them about improving a company’s bottom line by squeezing employees or outsourcing to firms with lower labor costs (Useem, 1996). These trends were boosted by both technological change—containerization, the Internet, inexpensive long-distance telephone service, standardized practices—that made outsourcing increasingly practical, and reduced reliance on domestic wage-driven demand due to the growth in both global trade and personal credit, thus reducing the need to share gains in productivity or profitability with the bulk of employees.

Second, the future of investing in commerce and manufacturing became comparatively less attractive than tapping accumulated financial wealth, much of it stored in the pension funds and retirement accounts of American workers. Those positioned to do so within the American system, typically top management and elite financial workers, turned their attention to skimming off this accumulated wealth through stock options, financial management fees, and sometimes outright swindles, and even major non-financial firms put a great deal of effort into generating returns on financial investments (Lazonick, 2014; Lin & Tomaskovic-Devey, 2013; Schultz, 2011; Tiabbi, 2013). Financial interests even sought the partial privatization of the social security trust fund, created in the first place to allow workers to avoid reliance on financial markets, with the effort only failing because of the 2008 financial crisis (Laursen, 2012).

Third, government and the public policy industry that informs it were largely refashioned along largely non-partisan lines with regard to economic policy to facilitate this transfer of wealth through deregulation, tax reductions and credits, and the weakening of union and other employee protections (Burris, 2008; Clawson et al., 1998). At the same time, American governments at all levels increased profitability and lowered business risk through military and security spending (Cypher, 2007; Melman, 1987), various state and local “economic development programs” (Leroy, 2005), privatization (Gold et al., 2011; Herivel & Wright, 2008; Hira & Hira, 2005; Ravitch, 2013), and the panoply of support programs offered to large financial institutions over the last 5 years (Huszar, 2013).

Not surprisingly, the elites of other societies conditioned to emulate both the organizational practices and ideology of a hegemon, follow American-led practices. On one hand, such practices benefit much of the business and political elites elsewhere (Robinson, 2004). On the other, even where practices such as squeezing wages and allowing unregulated financial innovation appear to threaten social peace and stability, the lure of hegemonic ideology is, following Gramsci, seductive to some degree even for many who do not materially benefit. An apparent exception to this trend is China in that it is currently practicing the kind of deficit spending and wage growth promotion increasingly abandoned in most of the rest of the industrialized world where budget reductions, outsourcing, and reducing employee protections are generally in vogue. On closer examination, however, China also fits Arrighi’s model as American firms fuel its potential development into its hegemonic successor, not only by stimulating the growth of its manufacturing sector but also by teaching firms in China (and elsewhere) much of what these American firms developed with regard to such higher value business activity as software design, architecture, banking, pharmaceuticals, editing, and manufacturing research (Bradsher, 2007; Hira & Hira, 2005), activities postulated at one time to be the bright future for millions of American workers in a global economy (Reich, 1992).

There is a counter-argument that much foreign investments remain within formally “American” companies and therefore its threat to American leadership is exaggerated, but such investments hardly benefit American society as a whole. If a firm moves abroad production or services that are reimported into the United States, it provides no great advantage for either American employment or tax collection and, to the extent that doing so benefits investors, that benefit is highly concentrated among a very small slice of the American citizenry (Wolff, 2011). As for the future, with American firms increasingly investing in research and development overseas (Bradsher, 2007), it is difficult to see how American firms will necessarily retain their comparative advantage indefinitely any more than British textile factory owners did after inadvertently teaching Lowell and Appleton of New England how to manufacture cotton. And much as the United States added its own comparative advantage in large organizations to its own technological transfer, China’s facility with networking may result in its own advantage as it is applied to what it has learned from contemporary American businesses (Arrighi, 2009).

Arrighi’s theory is not presented here to exemplify a comprehensive theory of everything. What it does offer is an example of an insightful theory that can explain a great deal as to why an economic system that historically produced prodigious amounts of material wealth and distributed it in a relatively egalitarian way currently appears to do much less of both. Moreover, while this theory is structural and even a bit deterministic, it need not be regarded as fatalistic. An end of American economic hegemony need not prove to be a long-term disaster for American society, any more than it proved to be for previous hegemons. Indeed, the loss of the global responsibilities that a global hegemon incurs may theoretically create more social space for alternative forms of economic organization that could possibly prove more egalitarian and sustainable than present-day relationships. That possibility should certainly provide some grist for the mill for an ongoing dialogue centered on managerial policies and economic outcomes.

Conclusion: Glancing Back to Start Afresh

In order for the field of business and society to grapple with such a complex and crucial topic as the relationship between managerial theory and social and economic outcomes, it is necessary to consider what approaches employed in the past are either flawed or simply inappropriate for dealing with the particular issues raised by this special forum. Whatever the virtues of earlier efforts, many fall into the trap of treating the post-war decades in the United States as the universal “normal” background on which to build timeless global theory regarding the relationship between businesses and the larger society. The temptation to do so is understandable, not only because this period is so familiar to many business and society scholars but also because it appears to offer an attractive model of what “normal times” can and ought to look like. Mizruchi (2013) has claimed that for roughly three or perhaps four decades after World War II, the practice of enlightened self-interest was much more prevalent among the American corporate leadership than it has been either earlier or over the last generation, and during that time it was at least arguable that many major firms operated within the constraints of an implicit social contract, especially with regard to the treatment of employees. He points to more generous human resources practices in terms of compensation and job security, which sometimes included a grudging acceptance of unionization, or at least a “high road” strategy of matching what unions were promising. On the level of public policy, some sizeable fraction of corporate leaders even endorsed a degree of Keynesian demand management and employment stimulation (R. Collins, 1982). During this period, it was possible to argue that a significant portion of American corporate leadership was practicing a degree of what we would now call, following Jones (1995), instrumental stakeholder management.

Furthermore, this instrumentality operated at both the firm and societal levels. Companies needed the cooperation of their predominantly domestic employees to get “the work out the door” properly, and the aggregated paychecks of American workers (then lacking credit cards) had to be sufficiently large to provide a critical mass of consumers of the goods and services generated by these same businesses. This does not mean that the U.S. economy was driven by relationships that were free of conflict or always welcomed by the parties involved. Rather it suggests that such relationships persisted despite a certain degree of distrust or even hostility precisely because the outcomes tended to be positive for those who participated.

Actually, the roots, if not the entire flowering of results, of these broadly win-win relationships can be traced back to the pre-war era. Much of the development of “modern” professional corporate management during the early decades of the 20th century was the result of the failure of successful entrepreneurs to understand that “their” firms could not necessarily operate according to the founder’s own personal views on what was fair and right without regard to what either their employees or the public might have thought. George Pullman was famously castigated by many fellow business leaders for unnecessarily provoking one of the bloodiest strikes in American history with his tightfisted and dictatorial ways, whereas J. P. Morgan was savvy enough to rely on the pragmatic Charles Schwab rather than the rigidly autocratic Henry Frick to run U.S. Steel (Brody, 1980; Lindsey, 1964). Professional managers of many major corporations understood to a greater or lesser extent that the more enlightened human resource practices potentially paid for themselves, and once the Depression hit, a number business leaders understood the need to maintain the purchasing power of consumers, including, for some, supporting government transfers to those who could not work. By the time World War II arrived, some firms were even willing to settle with the labor unions they had once disdained, at least among those companies with either sufficient market power to pass on costs, or that were themselves beneficiaries of profit-ensuring government contracts, such as “big steel” firms, which did not rely on uncertain consumer markets to the same degree as “little steel.”

But perhaps all good things do come to an end, and scholars with an interest in studying or promoting economic fairness must consider the possibility that conditions have not persisted that would encourage enlightened self-interest with regard to the widespread sharing of business success with employees and other stakeholders. From this perspective, Jones (1995) has not so much been discredited but rather superseded by events, much the way that Newtonian physics explained those measurements that scientific instruments could make in his time but not in ours. One does not need to subscribe to all the facets of Arrighi’s theory to accept that the economic and social arrangements no longer exist from which the field of business and society originally emerged. The large and stable corporations at its heart, which relied on armies of domestic consumer-workers, have largely become relics of the past.

However, there is no reason to assume that newer and potentially fairer and more productive social arrangements cannot be built upon the ruins of the old. To participate in the process, however, management scholars will require not merely the production of a few new parsimonious global theories unanchored by empirical findings but also participation in a preparatory project for theorists and researchers alike, one that not only involves familiarizing oneself with a veritable library of relevant work conducted outside of business schools, but also a rethinking of what form of theorizing is most helpful in understanding these particular phenomena. The construction of an economy that is at once fair, productive, and sustainable is certainly a daunting one. If this is our collective hope, then there is much work ahead of us.

What I am advocating is, to an extent, a partial revival of a lost tradition among those business school academics who have written on the ethics of business. When American business schools began to teach and discuss the ethics of business, it was understandable that they would bring in professionally trained ethicists and not rely solely on figures such as Benjamin Selekman (1959), who, while a seminal figure in the field of industrial relations, was effectively an amateur as an ethicist in that he did not employ either the methods or constructs developed over centuries within what is perhaps the oldest of academic fields.

But along with this gain, something valuable has been lost. Selekman, while perhaps not as nuanced in his analysis of the morality of business as many contemporary ethicists, possessed a background from his previous work that would prove quite useful if applied to issues of economic fairness. He had been both a journalist and a labor arbitrator before becoming a Harvard professor, and had actually co-written a study decades earlier on efforts to ameliorate labor–management conflict, including Rockefeller’s response to the tragedy at Ludlow massacre (Selekman & Van Kleek, 1924). Others in that post–world war cohort of pioneers in the fields of business ethics and business and society had comparably rich backgrounds relevant to issues of economic fairness. Bowen (1953), whose seminal volume was written at the behest of the predecessor to the National Council of Church, was a macro-economist and New Dealer, who had worked as a staffer for Congress. Chamberlain (1973) had had a successful career as an industrial relations scholar before he began to apply what he had learned studying negotiations to broader social concerns related to business activity. Douglas McGregor (1960) was influenced by Joseph Scanlon, creator of a participatory profit-sharing plan that still bears his name. For these and other survivors of economic depression and war, the complex web of relationships between business, labor, and government that affect the economic outcomes was something they had personally studied and may even have had a role in guiding.

This is not to suggest that the field need return to the ad hoc scholarship of the post-war generation that was shaped by depression, war, and a then new labor–management entente. Perhaps, though, a balance can be achieved. Given the seriousness of the issue, coming to grips with it may ultimately require a mix of contemporary realism with canonic ideals, and pragmatism with formal scholarship, difficult as balancing these may prove in practice.