WEEK 1 READING: FORM & NATURE OF BUSINESS
Business Forms Available in Singapore
1. A sole proprietorship – A business owned by a single person, the sole proprietor
a. As the sole proprietorship does not exist by itself, separate and apart from the
sole proprietorship is considered “unincorporated”, meaning that it is not a
separate legal entity, or a legal personality separate from the sole proprietor
b. As the sole proprietor’s responsibility for the liabilities and business of the sole
proprietorship is unlimited, the regulations governing sole proprietorship are
relatively lesser than the regulations governing other types of business entities,
where the owners’ liabilities may be limited
2. A partnership – A business firm owned by 2 or more partners
a. It is an unincorporated association as it is not a separate legal entity separate
from the partners
b. In a general partnership, every partner in the partnership is liable jointly with
the other partners for all the debts and obligations of the partnership incurred
while he is a partner. Every partner’s liability is potentially unlimited. In
Singapore, a general partnership can have a maximum of 20 partners, except
for some professions
c. In a limited partnership, a limited partner is not liable for the debts or
obligations of the limited partnership beyond the amount of his agreed
contribution. The general partner’s liability is unlimited. In Singapore, there is
no limit to the number of partners in a limited partnership
d. The regulations governing partnerships are relatively less than the regulations
governing other types of business entities where the owners’ liabilities are
limited. However, the regulations governing partnerships are relatively more
than those governing sole proprietorships, as there are more owners involved
e. When the limited partnership is publicly traded and listed on a national
securities exchange, it is known as a master limited partnership
3. A limited liability partnership (LLP) – Formed by 2 or more partners, like a partnership
a. An LLP is a separate legal entity or personality, whereas a partnership is not
b. A partner of an LLP is only liable for his own wrongful act or omissions and is
not liable for the obligations of the LLP or for the wrongful acts or omissions of
the other partners of the LLP
4. A company
a. A company is in law a legal entity with a legal existence. A company can exist
longer and is not limited to the lifespan of a natural person. The existence of a
company also makes it easier for contracts to be entered into
b. A limited liability company means that the liability of the owners of the
company is limited. The limited liability of the owners is a main reason why
businessmen prefer to conduct business in the form of limited liability
companies. The law limits their liability to encourage them to invest in the
business. There are exceptions to the limited liability of the members,
including cases of fraud or where the company is a sham or façade
c. An unlimited liability company is one where the owners of the company have
unlimited liability and are fully responsible for the debts of the company. The
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law may require certain businesses to be conducted in the form of unlimited
liability companies
d. For both limited and unlimited companies, the company’s liability is unlimited.
If the company is not able to pay its debt, it can be wound up and dissolved.
Most limited liability companies issue shares
e. Companies limited by guarantee do not issue shares. If the company is wound
up, a member pays the amount which he has agreed to contribute on winding
up
f. A private company must satisfy 2 requirements. It must limit its members to
not more than 50 and there must be restriction on the right of members to
transfer their shares
g. A public company can have more than 50 members, or it can have no
restriction on the right of its members to transfer their shares or both
h. Listed companies are public companies and not private companies because a
listed company normally has more than 50 members and the right of the
shareholders to sell their shares is not restricted
5. Co-operative or Co-operative societies – A group of persons who join together to pool
resources to promote their interests
a. Basic structure of a co-operative society:
b. In Singapore, a co-operative society is a body corporate and has separate legal
personality, like a company. An individual member can hold not more than 20%
of the share capital of a co-operative society and has only 1 vote regardless of
the number of shares he owns. A company is prohibited from becoming a
member of a co-operative society, which lessens the profit motive of cooperatives
c.
6. Social enterprises – A business which aims to strike a balance between the making of
profits and the achievement of social purposes
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a. In Singapore, social enterprises take the form of companies, co-operatives or
societies. Singapore does not have any specialised business form for social
enterprises, unlike other countries
7. Unit trust – An arrangement where a trustee(s) holds property for the real owner
called the beneficiary
a. Unit trust structure:
b. To protect himself, the actual owner or beneficiary can ask the trustee to sign
a document (such as a trust deed) stating that the trustee is holding the
property on trust for the beneficiary
c. In the case of a unit trust, the investors collectively invest in the unit trust and
are issued units in the unit trust. The investment of a unit trust is handled by a
manager, which must be independent of the trustee
8. REITs (Real Estate Investment Trust)
a. It takes the form of a unit trust but invests predominantly in real estate
9. Business trusts
a. It is like a unit trust where the investment is held on trust for the investors, but
it does not have separate trustee and manager
b. Business trust structure:
10. Chit fund – A group of persons each contribute an equal amount into a pool
a. The pool is lent to the person who is willing to pay the highest interest. When
the borrower repays the loan plus interest, the money is divided amongst
those who contributed towards the pool
Foreign Hybrid Business Forms
1. A community interest company (CIC) – Originated from the UK
a. It must meet a “community interest benefit test”
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2.
3.
4.
5.
b. The assets of a CIC are locked up for charitable purposes. If the CIC is dissolved,
the remaining assets, after payment of liabilities, must be transferred to
another CIC or charity
c. There are limits on how much dividends are payable to the members, which is
presently fixed at 35% of distributable profits
A low-profit limited liability company (L3C)
a. Non-profit: It must have a primarily charitable purpose with profit making as a
secondary purpose
b. Profit: Investors are entitled to distributions and appreciation in their
investment
A benefit corporation
a. They are required to publicly report on their overall social and environmental
performance against a third-party standard annually
B Corporation
a. B Corporations are corporations certified by B Labs, a non-profit organisation,
to meet certain standards of social and environmental performance
A flexible purpose corporation (FPC)
a. An FPC must specify at least 1 “special purpose” in its constitutive document.
It is primarily intended for use by for-profit companies seeking traditional
capital market investment. It is expressly allowed to promote the interest of
the community or the employees rather than the members
Foreign Businesses in Singapore
A foreign business that engages in business in the host country has a number of options:
1. It can duly register itself in the host country as a branch or it can set up a subsidiary
company in the host country
2. When a company establishes a branch in the host country, the branch exists as a part
of the company and not as a separate entity
3. A subsidiary, on the other hand, is an entity separate from the foreign company
4. An entity with branches may find it easier to relocate moneys, assets and personnel
among its branches as all the branches are part of the same entity. However, each
branch’s prospects may be dependent on the other branches of the entity
5. A foreign company can also engage in business through a local agent or distributor.
In Singapore, if a foreign company does not engage in business in Singapore but
merely wants an outpost for market research, feasibility studies and liaison work, it
can set up a Singapore Representative Office
Entities not Primarily for Profit
1. Societies – A group of people coming together for a common purpose
a. In Singapore, societies are associations of 10 or more persons and are not
bodies corporate. A judgment against a society cannot be enforced against its
officer or members
2. Trade unions – Associations of workmen or employers
a. Its principal object is to promote the interests of the workmen or employers
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3. Management corporations – A body corporate formed when a development is
subdivided into separate units
a. Each unit can be owned by a separate owner
4. Companies limited by guarantee
a. Not entities for profit
5. Non-profit organisations, charities and institutions of public character
a. A non-profit organisation does not have profit as its main objective, even if
profit is actually made, whereas a for-profit organisation is expected to do so
b. In Singapore, non-profit organisations that are exclusively charitable can be
registered in Singapore as charities. This gives them tax exempt status and the
status of a charity to help them raise funds from the public
c. In Singapore, some charities are further registered as Institutions of Public
Character (IPC). Donations to IPCs enjoy tax deductions
d. The separation between charities and businesses helps the charities to operate
as charities thereby gaining them tax exempt status while the businesses
continue to operate on a commercial basis subject to tax
6. Non-governmental organisations (NGOs)
a. Organisations that are not part of the government or are independent of the
government
b. Include societies and charities
7. Mutual benefit organisations
a. Organisations in which their members pool funds to provide relief in times of
need
The Corporate Structure
1. The board of directors
a. Currently, a Singapore company need only have 1 director as long as he
satisfies the requirements, such as residency
b. The head of the board of directors is commonly called the Chairman of the
Board
2. The responsibility of the directors – To manage the business of the company
a. The directors of a company are fiduciaries of the company, which are persons
entrusted with property or power for the benefit of another person, called the
principal or beneficiary
b. The duty to act with due skill, care and diligence means that the directors
must not be careless, reckless, or absent-minded
c. The duty to act in the best interest of the company means that the director
cannot act in the director’s own interest or the interest of other person other
than the company
d. The duty to disclose and act transparently is to ensure that the director is
indeed acting properly and discharging his duties to the company
e. The directors are accorded protection under the business judgment rule.
Under the rule, the court defers to the business judgment of directors and
corporate executives as long as certain requirements are fulfilled. The
directors may be free from liability from a bad decision taken honestly and in
good faith
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3. Types of directors
a. Executive director – Director and executive
i. Usually considered to be not an independent director because the
executive director is involved in the management of the company
ii. Small companies usually have only executive directors
b. Non-executive director – Director but not executive
c. Independent director – Director who can exercise independent business
judgment
i. Sometimes, to be independent, the director must also be independent
of the major shareholders of the company as well as the executives
d. Non-independent director – Director who cannot exercise independent
business judgment
4. Nominee directors and real directors
a. Nominee director acts according to the instructions of the real director
5. The board committees
a. Some companies, such as listed and larger companies, have board committees
to assist the board of directors. Smaller companies usually do not have board
committees
b. In Singapore, a listed company is required to have an audit committee. The
functions of an audit committee include the review of the audit plan, internal
accounting controls, internal audit procedures and the financial statements
6. The management
a. Comprises the executives who manage the business of the company
7. The secretary
a. In charge of preparing the documents for the company and for calling and
recording the meetings of directors and members
8. The auditor
a. In charge of auditing the financial statements of the company and reporting
on the financial statements to the members of the company
b. In Singapore, some companies are exempted from appointing auditors and
audit requirements, in particular, small private limited companies
9. The members, shareholders, or stockholders – Owners of the company
a. The members usually control the appointment and removal of directors in
Singapore
b. There can be more than 1 type or class of members, most commonly, the
ordinary shareholders
c. Sometimes the real owners, called controllers, control the company from
behind the members
d. Dividends can be distributed to members by way of cash or in specie (property)
10. Variations in company structure
a. Companies range in size from a small standalone company to a multinational
b. A global company can operate as 1 company with branches in various
countries or it can operate through subsidiaries in the countries concerned
11. Foreign differences
a. Two-tier boards
i. Comprises a supervisory board and a management board
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ii. The supervisory board oversees and appoints the members of the
management board and must approve major business decisions
b. Communist party committees
The Life Cycle of a Company
1. Incorporation
a. A company is incorporated when the legal requirements have been satisfied
2. Operations
a. A company can obtain funds from various sources:
i. Members of the company – From time to time, the company can raise
additional funds from the existing members or from new members,
such as private equity funds or other investors
ii. Lenders – Such as banks, financial institution and individuals
iii. Suppliers of goods on credit terms
iv. Retained earnings
v. Government subsidies
b. Not all companies are in operation. Sometimes, companies remain dormant
after incorporation or become dormant after ceasing their business operations.
The company may remain dormant until the company operates again or is
dissolved
3. Receivership
a. The objective of the receivership is the realization of the properties and assets
for the benefit of the creditor
4. Scheme of arrangement
a. In a scheme of arrangement, the members and creditors agree to restructure
the debts of the company
5. Judicial management of the company
a. Judicial management is where the court allows the company a period of time
to restructure or rehabilitate itself. During this time, the creditors are not
allowed to take any legal action against the company
6. Dissolution of the company
a. Reasons for dissolution:
i. It is no longer viable and is making losses
ii. It has outlived its purpose
iii. It has become redundant after it merged with another company or
after its assets have been taken over
iv. The members want to break it up and divide up the assets
v. The members cannot get along with each other
b. When the winding up process is completed, the company is dissolved and no
longer exists as a legal person
Problems with the Company
1. Legal personality
a. Sometimes when many managers are involved, it becomes difficult to identify
the culprit involved. With the multiplication of companies, it becomes easier
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to evade regulations. Sometimes managers and directors seek to evade
responsibility on the ground that the person liable is the company and not
them
2. Limited liability
a. The rationale for limited liability is the encouragement of risk-taking by the
members of the company
3. Liability of directors and managers
a. Members, directors, and managements try to escape from liability by taking
advantage of a company’s legal personality and limited liability. In response,
the law imposes liability on the members, directors and management where
appropriate
b. Many areas of immunity still apply, such as the application of the business
judgment rule, to deflect liability from the members, directors or management
4. Conflict of interest and problem with the corporate structure
a. Factors contributing to the growth in the power of management:
i. Increase in the size of the corporation
ii. Skill and business acumen required to manage the company
iii. The dispersed and fragmented nature of shareholdings of companies
iv. The short-term outlook and interest of shareholders
v. The shareholders’ emphasis on investment rather than ownership
vi. The right of management to withhold certain information from the
shareholders
vii. Managers who also serve as directors thereby wielding substantial
influence over the board of directors
b. The increase in management power relative to the shareholders and directors
has given rise to problems, such as agency problems, lack of control over
management and conflict of interest. This has led to excessive compensations
for managers, excessive retirement plans (golden parachute), insider trading
and difficulty in removing incompetent management
c. Measures proposed or implemented to address these problems:
i. Improving the composition of the board of directors
ii. Establishing board committees
iii. Enhancing the shareholders’ role
1. Even if the resolution pushed for by shareholders is not passed,
the debates and discussions will publicise their causes. Where
appropriate, shareholders can sue the company or its directors
iv. Whistleblowing mechanism
v. Tightening the laws and issuance of codes
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WEEK 1 LESSON
Directors have the overall responsibility. Their role is higher than that of the executives, and
they make decisions for the company
Executives manage the business, but they may or may not be directors. They execute the
decisions made by the directors
Company structure:
1. All directors being executive directors, but not all executives being directors → Mostly
seen in SMEs
2. Some are just directors, and some are just executives, but there are some executive
directors → Mostly seen in listed companies and MNCs
3. Only directors and executives, but no overlapping roles → Mostly seen in not-forprofit companies and charities, where usage of money is restricted. This is to have
more control, since there is a separation between directors and executives
4. All executives are executive directors, but not all directors are executives → Mostly
seen in small companies, and this is not very common. This is to give the investors
some control of the company
5. All are executive directors → Mostly seen in new start-ups, where nobody is hired yet,
so the founders are both directors and executives
Rationale for having a:
1. Director who is not an executive – Makes important decisions only and not actually
carry out the work. Only controls the business
2. Director who is independent from the executives – Controls the management
3. Director who is independent from the executives and the majority shareholders –
Ensures the director will not make decisions that favour the interests of the majority
shareholders, at the expense of the minority shareholders
4. Director who is independent from the executives and the major shareholders –
Protects the minor shareholders
5. Director who is independent from the executives and the shareholders – Conflict
resolution and protects the company’s interests. Protects the government’s interests
and other employees
Majority shareholders are those who own more than 50% of the shares. Major shareholders
are those who have a lot of shares, but not necessarily more than 50% of the shares, and it
depends on how it is defined by the company
Executive directors cannot be independent
A chairman may be executive chairman, and a CEO can work as a director as well, so they are
not necessarily independent
Rights and protection:
1. Business judgment rule – As long as you made the decision for the business in the best
interests of the business, you will not be punishable by law, even if the business fails
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2. Separate personality – Your company is considered as a different entity from you, so
you are not liable for the full extent of the company’s losses, even if the company
declares bankrupt
Duties and liabilities in law:
1. Piercing the corporate veil – Looking at the real person who should be held
accountable for the business
2. Fiduciary duty – Placed in the position of trust to act in the best interests of the
company. Fiduciary comes from the word trust and confide
Agency is needed because the company has no body, so it needs the managers to perform
tasks for the company
Conflict of interest can occur when decisions in the best interests of your company and its
directions conflict decisions in your own interests or the interests of those whose influence
you are under
A legal person is someone who is considered a person from the legal point of view, and is
accorded rights of a person
Company as a legal person:
Attributes
Legal Person
Space
The company can
operate in multiple
places at the same time
Time
The company can
outlive any individual
Mental
The company is a
mental construct, it
needs rights accorded
to a person (to own
property, to open a
bank account), as well
as duties and liabilities
of a person
Usefulness
The company
doesn’t have a
physical body, so it
can be expanded to
many different
locations at any
point in time
Not limited by a
natural lifespan of a
human, which is
relatively short and
uncertain
Can represent a
large group of
people, in order to
facilitate business.
The company can
enter into a contract
with anybody
Problems
The problem is regarding
regulation. Companies can
defraud people and then
leave. There is a limitation
in the punishments that
can be meted out to the
business
Difficulty in managing the
people, and hard to
pinpoint the culprit when
something goes wrong. The
company is the contractual
party, so if there is a
breach of contract, the
individuals are not liable
Ways legal personality can be used:
• A company can create another company at a tax haven and transfer the ownership of
the brand to that company, and the profit is used to pay the new company for the
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•
•
rights of using its brand name, which reduces profits so that tax is reduced yet you can
retain the cash yourself
In order to protect your assets from your liabilities, you can create different
companies, 1 for your assets and 1 for your liabilities
In order to maximise protection for your assets, have multiple companies, so that even
if 1 fails, the rest will be protected and not affected by the failure of that 1 company
Limited liability companies exist to encourage risk-taking and investments, but this can be
abused by the shareholders. The limited liability company is fully liable to the creditors, but
its shareholders are not liable to the creditors, since they have limited liability
Corporate structure (hierarchy in the corporation) is useful because everyone has their own
roles that they’re supposed to perform, but there may be oversight and transparency issues,
since the non-executives will not know what the executives are doing. Abuse of the corporate
structure can only be prevented by having good managers, and punishing the culprits using
law
People of the same character tend to work together, because they can work well in a team
and there will be fewer conflicts. So, in a company, most employees think alike and work in a
certain manner
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WEEK 1 CASE 1: AGENCY – F&N and Lee Hsien Yang
Summary:
F&N CEO Lee Hsien Yang is going to be paid $1 million as director’s fees and $0.25 million as
the chairman. The 2 roles of consultant and CEO has been collapsed into one so as not to have
problems of possible conflict of interest, accountability and transparency
Was there a conflict of interest when Lee Hsien Yang acted as both the non-executive
Chairman and consultant at the same time?
• There was a conflict of interest when Lee Hsien Yang acted as both the non-executive
Chairman and consultant at the same time, because the board will need to ensure
objective evaluation of the consultant’s services and that would be hard to do so if the
consultant was also the Chairman at the same time
• There may also not be much of a conflict of interest since Lee Hsien Yang has many
achievements under his belt to prove his skills, since he has worked in SingTel before
and has led SingTel to greater heights previously
• F&N and the shareholders approved his remuneration of $1.25 million a year, and
since the shareholders are the owners of the company, the public cannot complain
about it
• The difficulty is in showing that there is an actual conflict of interest
• Arguments for conflict of interest:
o He may give advice as a consultant that personally benefits him although he
should be acting in the best interests of the company
o He may still have influence over some directors even if he’s not in the meetings
• Arguments against conflict of interest:
o When his advice is being discussed, he can be asked to sit out of the meetings
WEEK 1 CASE 2: LEGAL PERSONALITY – OPENNET
Summary:
OpenNet failed to challenge 3 decisions of the Infocomm Development Authority (IDA) in
relation to the ownership and control of the infrastructure to be used to run its fibre-optic
network. CityNet Infrastructure Management had been granted a licence by the IDA to
operate infrastructure facilities. The licence requires CityNet to ensure that it does not come
under the effective control of any other telecommunication licensee. CityNet’s customers
include operators like OpenNet and SingTel, but it may also serve other licensees in the future
CityNet and NetLink Trust are not completely independent of SingTel because SingTel sold its
underlying assets and infrastructure to CityNet, which was to manage the assets placed in
NetLink Trust. Although CityNet’s board is staffed with independent directors, SingTel can still
appoint up to 30% of the board
CityNet holds assets for SingTel and the trustee-manager CityNet and real owner SingTel have
a relationship of business trust
WEEK 1 CASE 3: LIMITED LIABILITY – ANAERGIA
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Summary:
Anaergia Pte Ltd, formerly affiliated with Anaergia, the MNC, has not paid more than $1.2
million to sub-contractors for a project to use food waste to generate more electricity. It then
sold off the project to Anaergia Singapore Pte Ltd, which isn’t responsible for the debt it owes
to the sub-contractors. Anaergia Pte Ltd has been renamed APL Bioengg Pte Ltd and has
changed directors twice since being sold. There is no minimum paid-up capital requirement
set by the EDB and PUB for research projects, so as to avoid disadvantaging small firms with
promising new technologies. PUB can assess its payment process and consider
reimbursement of the technology provider only after payment receipts for work done by subcontractors or equipment bought are verified
Anaergia, the MNC, was formerly affiliated with Anaergia Pte Ltd and Anaergia Pte Ltd did not
pay its sub-contractors $1.2 million and the project was sold off to Anaergia Singapore Pte
Ltd, which isn’t responsible for the debt of Anaergia Pte Ltd. Such action was not morally
responsible of Anaergia and has tarnished its reputation
In this case, the contract has been terminated, so PUB is no longer liable to pay Anaergia Pte
Ltd, so the sub-contractors will not be paid. So the balance money will have to be paid by the
new owner. Anaergia is not liable to the sub-contractors because of the concept of limited
liability, which is a problem for the creditors
WEEK 1 CASE 4: LEGAL PERSONALITY – DEUTSCHE BANK
Summary:
When banks commit misconducts, they are only charged with fines which are paid using the
shareholders’ money, but the executives and individuals from the banks who are actually
involved in the misconduct are not singled out for punishment due to deferred prosecution
agreements (DPAs) and regulatory settlements that has followed the financial crisis. This
allows banks to withhold significant details about their past misconduct, such as the identities
of those responsible or the magnitude of their violations, making it impossible for outsiders
to know whether the penalty is appropriate
Deferred prosecution agreements (DPAs) and regulatory settlements that has followed the
financial crisis allow the banks to admit wrongdoing, but critically without disclosing
significant details about their past misconduct, such as the identities of those responsible or
the magnitude of their violations. This means no individuals, such as executives, will have to
take responsibility and punishment for their misconduct, and the bank can just pay a penalty
fine using the shareholders’ money to get off the hook
WEEK 1 CASE 5: CORPORATE STRUCTURE – ENRON CORPORATION
Summary:
Enron resorted to various dubious practices to inflate its revenues and profits and hide its
debts and liabilities. 3 factors:
•
Enron needed cash but it was reluctant to issue equity for fear that the issuance of
equity would depress its stock price
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•
•
Enron needed to maintain an investment grade credit rating and its financial ratios
Enron needed to cover up its business failures and losses
Despite the schemes, Enron’s problems became more and more dire. After a series of
disclosures and restatements, Enron filed for bankruptcy on 2 Dec 2001. Enron’s bankruptcy
led to a loss of US$60 billion worth of investors’ stock value and left 5,600 employees jobless
Reasons why nobody stopped the mismanagement of Enron:
• Need to maintain high earnings, stock price and investment grade credit rating
• Enron’s compensation system provided a tempting incentive to distort its financial
results
• Enron’s management were more concerned with justifying a desired result
• Enron officers were able to pressure third parties to accommodate Enron’s financial
statement objectives, by using Enron’s economic power
• There were many incomplete disclosure by these officers to the Enron Board and the
public
• Enron’s auditors, Anderson, failed to provide checks and balances against Enron’s
officers’ wrongdoing, because Anderson didn’t provide the requisite information to
the Audit Committee, preventing the Audit Committee from performing its function
properly
• Enron’s in-house attorneys failed to provide checks and balances against Enron’s
officers’ wrongdoing
• Enron’s CEO and COO, Kenneth Lay and Jeffrey Skilling, failed to provide checks and
balances, and they did little to help the Outside Directors serve effectively as a check
on the wrongful conduct
• The Enron Board failed to provide checks and balances. The Enron Board was
unusually large, leading to a tendency for individual directors not to feel personal
responsibility
• The oversight by the Finance Committee and the Audit Committee was poor and they
did not serve as an effective check, such as not seeing or asking for a complete list of
Enron’s obligations and the committees not properly reviewing the matters presented
before them
Reasons why the Enron corporate structure failed to stop the dishonest executives:
•
•
The executives were the ones who carried out business in such a way that breached
the rules. The directors may be in the wrong also if they knew about what the
executives were doing wrong and did not stop them, but this is unlikely. In the end,
the shareholders are the ones paying the fines for the company. The government
cannot be sure who is actually the one responsible, so it is easier to fine the entire
company
The executive directors are the ones actually responsible for the Enron case, but
nobody else stopped them. The independent directors didn’t stop the executive
directors. Independent directors didn’t go to office, so they won’t know what the
executive directors are doing. But if the independent directors go to office to control
the executives, they won’t be independent anymore. This is where the conflict lies.
The independent directors only rely on the information given to them by the
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•
executives, so if the executives are conducting wrongdoings, they won’t be informed
of it
The board of committees will also similarly not be able to put a stop to the
misconducts of the executives. The shareholders rely on the financial statements
given to them by the auditors, but the financial statements are inflated and prepared
by the executives, so they won’t know what’s actually going on in the company, so the
shareholders cannot put a stop to the misconducts of the executives. The employees
are too low-level, they do not have any influence over what the executives are doing.
They can whistle-blow but it doesn’t help if they report to the executives, since the
executives are the ones conducting wrongdoings
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WEEK 2 READING 1: MANAGING FOR STAKEHOLDERS – TRADE-OFFS OR VALUE CREATION
The central insight of stakeholder theory is the jointness of stakeholder interests. Managing
for stakeholders asks us to see stakeholders as “bound together by the jointness of their
interests”. The executive’s or entrepreneur’s job is to manage and shape these relationships.
The idea that 1 particular group always gets priority is deeply flawed. The very nature of
capitalism itself is putting together a deal, or a contract, or a set of relationships among
stakeholders so that all can win continuously over a long period of time. The very heart of
capitalism and its entrepreneurial spirit is in figuring out how to meet the demands of
customers, suppliers, employees, communities, and financiers, so that all win
3 interconnected ideas of stakeholder theory:
1. No stakeholder stands alone in the process of value creation. The stakes of each
stakeholder group are multi-faceted, and inherently connected to each other
a. When there is dissonance, the time is ripe to try and find a reframing of the
basic business proposition so that more stakeholders win continuously over
time. Rather than give in to trade-offs, executives should first try to reframe
the questions
b. Serving all your stakeholders is the best way to produce long-term results and
create a growing, prosperous company. There is no conflict between serving
all your stakeholders and providing excellent returns for shareholders. In the
long-term, it is impossible to have one without the other. However, serving all
these stakeholder groups requires discipline, vision, and committed leadership
2. The primary responsibility of the executive is to create as much value as possible for
stakeholders, without resorting to trade-offs. If trade-offs have to be made, because
of a failure of imagination, time pressure, or other reasons, then the obvious next step
is to try and figure out how to improve the trade-offs for all sides
a. The key idea that holds this value creation mindset together is the idea that
businesses can have a purpose. Capitalism works because we can pursue our
purpose with others
3. Executives and academics, especially, must understand that business is fully situated
in the realm of humanity. Businesses are not mere placeholders for social roles. As
such, matters of ethics are routine when one takes a “managing for stakeholders”
approach
a. Businesses work in part because of our urge to create things with others and
for others. The assumption of narrow self-interest is extremely limiting and can
be self-reinforcing – people can begin to act in a narrow self-interested way if
they believe that is what is expected of them. There can be non-monetary
reasons for why people go to work each day
16
WEEK 2 READING 2: THE DEFECTS OF STAKEHOLDER THEORY
Reversal of meaning and function
- Originally, stakeholders were identified as those without whom an organisation could not
survive, those in whom the organisation had a stake. Now, in contrast, stakeholders are more
commonly identified as those who have a stake in an organisation. This represents a radical
shift, from those who affect the organisation, to those who are affected by it, increasing
dramatically the number of groups identified as stakeholders
Stakeholder theory is incompatible with business
- Although originally proposed as a way of improving strategic planning in business, and more
recently as a way of making business conduct more ethical, stakeholder theory in fact wholly
precludes the activity of business as it has traditionally been understood. This is because the
definitive stakeholder aim – balancing benefits for all stakeholders – precludes all objectives
which favour particular groups
Balancing stakeholder benefits is an unworkable objective
- The number of people whose benefits need to be taken into account is infinite
- Stakeholder theory does not explain what should count as a benefit for the purposes of
balancing benefits
- Stakeholder theory provides no guidance as to how the balance of the relevant benefits is
to be struck, even if they could somehow be identified. Stakeholder theory gives no clue as
to how to rank or reconcile the normally conflicting interests of stakeholders
- The way that conflicts are resolved is by using the substantive goal of the organisation as a
decision criterion. That purpose enables managers to identify which groups need to be
considered, and which of their perceived benefits are relevant and legitimate; it indicates how
benefits are to be ranked, and how conflicts are to be resolved. The only way that stakeholder
theory can be made workable, is to employ the very substantive objectives that it explicitly
rejects
Stakeholder theory is incompatible with corporate governance
- The key concept in corporate governance is accountability: the accountability of directors to
shareholders, and the accountability of corporate employees and other corporate agents to
the corporation via the directors. Stakeholder theory is inimical to them both
- Multiple accountability can only function if everyone involved accepts a clear common
purpose. But that is what stakeholder theory conspicuously rejects
- Stakeholder theory provides no effective standard against which corporate agents can be
judged. Managers responsible for interpreting as well as implementing it are effectively left
free to pursue their own arbitrary ends
- Despite the pious hopes which are so often attached to stakeholder theory, it is unlikely to
improve either corporate performance or corporate governance
The stakeholder theory of accountability is unjustified
- That an organisation must take many factors into account, does not give them any right to
hold it to account. Nor does the fact that various groups are affected by an organisation give
them any right to control it
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The performance argument
- Practical success of stakeholder-oriented strategies does not and cannot justify
accountability to stakeholders
Treating stakeholders as ends
- Treating stakeholders as ends is thought to be a less effective way to achieving substantive
objectives
- It is sometimes claimed that treating stakeholders as means to others’ ends is morally wrong.
Far from supporting stakeholder theory, the requirement to treat persons as ends effectively
precludes it
The parallel with government
- Another unsuccessful argument for accountability to all stakeholders comes from confusing
corporate governance with government
- The argument overlooks the special nature of government: government is different from all
other organisations because of its monopoly on the legitimate use of physical violence. Since
organisations have no coercive power, there is no need to hold them accountable for its use
- Non-governmental organisations are too different from governments for the comparison to
be valid. Organisations are properly accountable only to some of their stakeholders: for
corporations, to the shareholders and those with whom the corporation has entered into
specific contractual agreements
The social contract argument
- Though organisations depend on the willing cooperation of the members of society, that
does not give society at large any right to hold them to account. Organisations must indeed
take various groups into account. But they are answerable to those groups only in so far as
the law or specific contractual arrangements have made them so
- Even organisations which require formal authorisation have no general obligation to society
to which they can be held accountable by all stakeholders
- The undeniable fact that some groups may have power over an organisation – even the
power to destroy that organisation – does not, and cannot, give those groups legitimate
authority over the organisation, or the right to hold it to account. Claims to justify
accountability require demonstrations of entitlement, not displays of raw power
Stakeholder theory undermines private property, agency and wealth
- Stakeholder theory undermines 2 of the most fundamental features that characterise
modern society: private property and the duties that agents owe to principals
- Stakeholder theory undermines private property, because it denies owners the right to
determine how their property will be used. The owners of assets are prevented from devoting
their property unequivocally to the ends of their choice. The fact that shareholders are
sometimes unwilling or unable actively to protect their interests does not entitle other
stakeholders to commandeer corporate property
- Stakeholder theory makes the critical relationship between agents and principals
unworkable, by denying that agents have any particular duty to their principals. According to
stakeholder theory, organisational agents are equally accountable to all stakeholders – and
thus to no one
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- Stakeholder theory is so popular because its implications are seldom recognised. It also
seems to offer a free lunch; it attracts those who would like to enjoy the benefits of business
without the discipline of business. But they are mistaken because the wealth that they want
from business will not be available if the essential business objective of maximising long-term
owner value is forsaken, and investors are not allowed to reap the benefits of their
investments
The appropriate use of the stakeholder concept
1. As a convenient reminder
a. Stakeholders need to be considered both to improve organisations’ chances of
achieving their objectives, and to ensure that their conduct is ethical
b. Although a business’s responsibilities to stakeholders are limited to those
created by law and specific agreements, business cannot afford to ignore any
stakeholder concern that might affect its ability to generate long-term owner
value
c. To be ethical, a business must treat all its stakeholders ethically. It means
treating all stakeholders with ‘distributive justice’ and ‘ordinary decency’
2. As the key to ‘social responsibility’
a. Although only owners have the right to change the business’s objectives,
everyone can influence business conduct
b. To the extent that the term ‘stakeholder’ helps remind people of their
individual responsibilities to act conscientiously, it serves a second valuable
function
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WEEK 2 LESSON
Stakeholder Theory:
• To prosper over time, every company must not only deliver financial performance, but
also show how it makes a positive contribution to society. Companies must benefit all
of their stakeholders, including shareholders, employees, customers, and the
communities in which they operate
• Without a sense of purpose, no company, either public or private, can achieve its full
potential. It will ultimately lose the license to operate from key stakeholders
• Serving all your stakeholders is the best way to produce long-term results and create
a growing, prosperous company
• Building and leading a great company has always been about managing for
stakeholders. This much is perhaps uncontroversial, and has in fact become a
mainstream idea about business all over the world
• Managing for stakeholders is about creating as much value as possible for
stakeholders, without resorting to trade-offs
• Business can be understood as a set of relationships among groups which have a stake
in the activities that make up the business. Business is about how customers, suppliers,
employees, financiers (stockholders, bondholders, banks, etc.), communities and
managers interact and create value. Customers, suppliers, employees, financiers,
communities, and managers are all key parts of today’s business organisation
• Stakeholders that are difficult to please, critics, employees who push back, even
conflicts of values, all can be sources of value creation, when approached with the “no
trade-off” mindset of managing for stakeholders
• The primary responsibility of the executive is to create as much value as possible for
stakeholders
• Where stakeholder interests conflict, the executive must find a way to rethink the
problems, so that these interests can go together, so that even more value can be
created for each
• In this mindset of managing for stakeholders, executives play a special role
• All of these organisations have to generate profits, or else they cannot pursue their
purposes. We cannot emphasise this idea too much. Capitalism works because we can
pursue our purpose with others
• The point is that if an entrepreneur or an executive can find a purpose that speaks to
the hearts and minds of key stakeholders, it is more likely that there will be sustained
success
Yardsticks to determine the fairness of Walmart’s associate’s pay:
Responsibilities undertaken by the
employees, as compared to those of the
retail workers in other companies
Retail average
< Retail average, excluding the discounts
and profit sharing, so it may not be fair
Minimum wage
> Minimum wage, so it should be fair
Poverty line
< Poverty line for sole breadwinner
families, so it may not be fair
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Differences between the market and stakeholder theory:
Criteria
Stakeholder Theory
Today’s Capitalism
Value
Walmart should give the
Pay the employees enough to retain
employees more benefits
them. Use demand and supply to see the
and create more value for
market pricing for the employees’ wage
them
There is no defined value.
Whether or not my products bring you
Everything depends on what value is on your part. I value profits, and it
you consider valuable.
is defined objectively
Everything is subjective
Value
Price
Subjectivity There is subjectivity of value.
Profit-making. Consumers decide for
of Value
Different criteria to consider
themselves whether a good or service is
for different people
good for them
Stakeholders
Must determine whether
No differentiation between stakeholders
someone is your stakeholder, and non-stakeholders. Consider whether
and if they are, then you
people are going to provide benefits for
must create value for them
the company or not
Creation of
Persons who harm the
Sue / Eliminate. Solve the problems.
Value
business → Treat them as a Ignore. Treat the feedback as constructive
source of value creation
criticism in order to improve
Persons the business harms
Ignore. Some harm is unavoidable, such
→ Cannot harm anyone.
as environmental damage and pollution
Compensate or create value
for them
Trade-offs
Avoid trade-offs
Give profits to shareholders. The
company will not consider whether there
are any trade-offs. Take trade-offs as a
given
Executives
Focus on creating value for
Executives are under the control of the
all stakeholders without
directors and shareholders. They are
trade-offs
answerable to the shareholders who are
the owners of the company
Corporations Ultimately, the success of the
Most of the profits will be given to the
company is for the benefits
shareholders, since they are the owners
of all stakeholders
of the company
Profit
Profitable long-term, but
Profitable, but profit dividends are only
profits should be shared and
shared among the shareholders
used to create value for all
stakeholders
Value is subjective, depending on the scarcity of the good, and what each individual values
Stake means to claim your ownership of something. You stand to lose something if something
goes wrong
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According to Stakeholder Theory, it is hard for a business to not harm anyone and create value
at the same time, depending on the definition of harm. Even space occupied by a business
organisation represents an opportunity cost, which may constitute harm
There are many things to consider, and it is hard to achieve no trade-offs in reality
The advantages of Capitalism include passive income and having more time to pursue your
own interests. However, the consequences of Capitalism include inequality, and social gap
between the rich and the poor
The alternative to the shareholders’ corporation is workers’ cooperatives
Comparison between Corporations and Workers’ Cooperatives:
Attribute
Capitalist
Workers’
Implications
Corporations
Cooperatives
The Members (The Owners)
Types of
Shareholders, not
Workers in the
Members
workers
cooperatives
Number of
Larger
Smaller
Members
Financing
More
Less
Less investments for workers’
from
cooperatives since the workers
Members
are not as rich as other investors
Profit
Goes to
Goes to workers
Conflict of interest since workers
shareholders
work but shareholders get the
profits
Loss
Only
Workers will suffer
shareholders, not
the loss
workers, will
suffer the loss
Rights of
1 share, 1 vote
1 member, 1 vote
The more shares you have, the
Members
more you can overrule the
minority shareholders → Greater
fairness and equality in workers’
cooperatives
Differences Depends on how
No difference
Fairer in a workers’ cooperative
between
many shares you
Members
have
Speed of
Faster
Slower
Decision-making in a workers’
Decisioncooperative involves a lot more
making
people, so it will be slower
Managers
Manager’s A lot higher than
Only a bit higher
Employees have more say in how
Pay
the workers’ pay
than the workers’
much the pay is
(~ 300 times)
pay (~ 6 – 12 times)
Member Workers
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Member
Workers’
Income
Lower
Nonmember
Workers’
Pay
Same
Higher
Employees in cooperatives
should get paid more since they
invested in the corporation
Non-Member Workers
Same
Non-member workers’ rights
cannot be protected in a
workers’ cooperative
Size
Large
Nature of Entity
Small
Types of
Business
Any
Restricted
Failing parts of a workers’
cooperative will be shut down,
so they cannot grow too big
Regarding the size of workers’ cooperatives, if 1 branch incurs losses, the workers at the
profit-making branches will vote to close the loss-making branch down, so the size cannot
expand too much. But the workers at the loss-making branch will vote not to close their
branch down. The workers working for the loss-making branch will have to be transferred or
retrenched. No matter whether the workers are transferred or retrenched, the problem is
that the workers’ cooperative will only be left with 1 branch in the end
Reasons why there are so many entities that are not cooperatives in the Mondragon Group:
• Consideration: Collective ownership. Spread of profit dividends among more people.
Amount of the cooperation will be lower
• Must ensure that a worker is fit and suitable to be a member before allowing workers
to join as a member
• The problems faced in the treatment of the non-member workers are inequality and
that people will try to maximise their own profits in the pursuit of self-interest
• A big difference between the workers’ cooperatives and private organisations is the
difference in sharing
Summary of Stakeholder Theory (The responsibility of business is to create value for all
stakeholders):
• Responsibility → Profitable
o The company becomes profitable if you adopt the stakeholder theory, but you
might deprive the shareholders, because the profits made under the
stakeholder theory is supposed to benefit everyone, and not just the
shareholders
• Business → Executives
o The executives are stakeholders as well as employees who should be
furthering the company’s interests. There is possibility of abuse by the
executives, since they can justify paying themselves more because this is the
fair and right way to distribute the value (counter-argument)
• Create → Harm
o To others – Rethink the problem so you can create value for everyone instead
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•
•
•
o By others – Even sources of conflict can be sources of value-creation for the
company. Treat the feedback as an opportunity for you to improve the
company
o However, the issue is whether it is possible to always do this, since there will
always be opportunity costs that come with every choice. It is impossible to
change harm into benefits all the time, since it is hard to please everyone
Value
o Subjectivity of value. It may not be so clear to decide whether there is value
created
All → Trade-offs
o Trade-offs should not exist because you should try to create value for everyone,
but it is actually impossible to not have any trade-offs at all in reality
Stakeholders
o The issue is how the companies should define and identify the stakeholders
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WEEK 2 CASE 1: WALMART
Summary:
Discusses the pros and cons of Walmart paying its employees more. Pros include more
comfortable lives for its employees, and reducing poverty. Cons include lower taxes for the
country, higher unemployment figures, not actually solving any inherent problems in the US,
higher consumer goods prices for everyone
There are many things to consider to decide whether Walmart should pay its employees more
but ultimately I don’t think Walmart should pay its employees more, as the pros of doing so
are significantly less than the cons. The rise in wages will not be significant enough for a large
increase in the standard of living of Walmart employees, but those who lose their jobs due to
increased wages will suffer greatly. The increase in prices of consumer goods will affect the
whole nation and will just make the income inequality a lot worse, as the purchasing power
of all consumers will go down if the prices go up
WEEK 2 CASE 2: MONDRAGON
Summary:
Discusses the management system of Mondragon Corporation and the principles behind why
they use certain management strategies, and also discusses the pros and cons of their broadbased employee ownership principle. Also discusses the balances they aim to strike in order
to remain true to their original principle
Edward Freeman would likely support the Mondragon Corporation and how it operates, as
the Mondragon Corporation focuses largely on all employees having a say in the running of
the business and it caters to everyone, and not just focused on pleasing the shareholders
The non-cooperative members are mostly located outside of Basque Country. It is more
difficult to deny membership rights to those working together with you, but it is easier to
deny membership to those in other countries, when you don’t have to see / work with them
every day. The company expanded to other countries in order to exploit the lower costs in
that country, so if they make that company into a workers’ cooperative, they’ll have to pay
more for the worker members, which will not help to lower costs for them
Pros of Mondragon Corporation: Profit-pooling, Everyone sharing responsibility, Employees
are well taken care of (retirement funds, receiving interest dividends, health insurance),
Cooperatives can depend on one another in times of need, Reinvestment in the firm for future
growth and development, Focus on education and sustainability, Smaller income gap,
Flattening of hierarchy due to self-management, More involved employees participating in
management
Cons of Mondragon Corporation: Business opportunities at the divisional level may be lost, if
there are disagreements between individual cooperatives
25
WEEK 3 READING: THE STRUCTURE AND NATURE OF THE GOVERNMENT
Branches of the Singapore Government – The President
1. The President – Head of State of Singapore
a. Function is to safeguard the reserves of Singapore and the integrity of the
Public Services of Singapore
b. Although the President has restricted powers, the President plays important
roles due to his status as the head of state. The President represents Singapore
internationally and acts as Singapore’s diplomat in promoting Singapore’s
interests
2. The Council of Presidential Advisers
a. The President is assisted by the Council of Presidential Advisers. The function
of the Council is to advise and make recommendations to the President on any
matter referred to the Council by the President under the Constitution
Branches of the Singapore Government – The Executive
1. The Executive
a. Executive authority of Singapore is vested in the President and exercisable
subject to the provisions of the Constitution by him or by the Cabinet or any
Minister authorised by the Cabinet
b. Executive authority refers to the authority to execute and enforce the law
2. The Cabinet
a. The executive authority is usually exercised by the Cabinet. The Cabinet has
the general direction and control of the Government and is collectively
responsible to Parliament
b. The Cabinet consists of the Prime Minister and Cabinet Ministers
3. The Prime Minister (PM)
a. The PM is appointed by the President and must be a Member of Parliament
(MP) who in his judgment is likely to command the confidence of the majority
of the MPs
b. The President can exercise some influence on the appointment and
resignation of the PM when the support for the PM is weak
c. The PM cannot hold any office of profit and cannot actively engage in any
commercial enterprise
d. The word “Minister” in the designation “Prime Minister” conveys the notion
that the PM is not the head of state. The word “Prime” conveys the notion that
he has a higher office than a Minister
4. The Ministers
a. The Cabinet Ministers are appointed by the President from among the MPs, in
accordance with the advice of the PM. Cabinet members cannot be actively
engaged in any commercial enterprise
b. Other than the Cabinet Ministers, non-Cabinet Ministers are also appointed
5. Collective action and dividing up the responsibilities
a. The Cabinet acts collectively. Once the Cabinet decides on an issue, it becomes
Government policy and the Ministers adopt it
26
6.
7.
8.
9.
b. The PM decides on his own portfolio and the portfolio of the Ministers. The
PM decides whether to retain in his charge any department or subject or to
charge a Minister with the responsibility. The PM can also revoke or vary the
responsibility. The PM heads the Prime Minister Office while the Ministers
head their respective ministries
c. Advantages of a hierarchy:
i. There is clear assignment of roles and area of responsibility
ii. Each personnel follows the instructions of the superior
d. Disadvantages of a hierarchy:
i. Rigidity
ii. It may not respond well to areas outside its scope of responsibility
e. Division of responsibility allows for proper scope, focus, specialisation, and
clear lines of responsibility
f. Dividing up the responsibilities places too much responsibility on the shoulders
of a ministry, which can lead to ineffectiveness. Placing multiple portfolios on
a ministry may result in neglect of part of the portfolios
g. A ministry can turn into a silo that insulates itself from working efficiently with
the other ministries, or the division of responsibilities can unwittingly turn into
a barrier against coordination among the ministries. Duplication,
inconsistencies and conflicts can also arise among ministries. A matter can fall
into the cracks between the ministries, with no ministry assuming
responsibility
h. Sometimes Ministers have different views and approaches on similar matters,
leading to different policies and practices in different ministries. There is no
single policy applicable to the whole country. Instead, different policies and
practices apply to different areas under different ministries
i. There is inherently a tension between the whole and the parts. How the
tension is addressed is a necessary function of Government. To resolve some
of these issues, the Government has set up inter-ministerial task forces and
agencies
Advantages of Ministers being Members of Parliament (MPs)
a. A Minister can be more attuned to public interest as he must be accountable
to the electorate who decides whether to re-elect him in the next election
Disadvantages of Ministers being Members of Parliament (MPs)
a. Sometimes, there is no MP with the requisite experience or expertise to run a
particular ministry
b. Difficulty in removing a popular or powerful politician when he has not
discharged his Ministerial role well
Parliamentary Secretaries
a. Ministers are assisted by Parliamentary Secretaries in the discharge of their
duties and functions. A Parliamentary Secretary cannot be actively engaged in
any commercial enterprise
Attorney-General and Deputy Attorney General
a. The Attorney-General’s duties are to advise the Government on legal matters,
to perform duties of a legal character referred or assigned to him by the
President or the Cabinet, and to discharge the functions conferred on him by
law
27
b. The Attorney-General has power, exercisable at his discretion, to institute,
conduct or discontinue any proceedings for any offence
c. The President can, on the advice of the PM, appoint 1 or more Deputy
Attorneys-General. A Deputy Attorney-General performs duties of the
Attorney-General assigned to him by the Attorney-General. He is subject to the
general direction and control of the Attorney-General and is responsible to the
Attorney-General for his performance
Branches of the Singapore Government – The Legislature
1. The Legislature
a. The Legislature consists of the President and Parliament
b. The legislative power of Singapore is vested in the Legislature
c. Legislative power means the power to make, amend and repeal laws. In
addition, Parliament serves as the place where issues are raised and debated.
Any MP may introduce any Bill, propose any motion for debate in Parliament
or may present any petition to Parliament
2. The Parliament
a. The Parliament consists of:
i. Elected MPs
ii. Non-constituency MPs
iii. Nominated MPs
b. There are 2 types of constituencies that return elected MPs: the single
constituencies and the group representation constituencies (GRC). A single
constituency elects a single elected MP. A GRC elects a group of not less than
3 but not more than 6 elected MPs
c. MPs usually belong to political parties
d. An MP is not prohibited from being actively engaged in commercial
enterprises, but he cannot hold any whole-time office in the public service
e. Parliament elects the Speaker of Parliament. Whenever the office of Speaker
is vacant otherwise than by reason of the dissolution of Parliament, Parliament
cannot transact any business other than the election for a person to fill that
office
f. A feature unique to Singapore is the Government Parliamentary Committees
(GPCs). GPCs are limited to MPs from the governing party. They monitor
closely the policies of particular ministries. The creation of the GPCs allows for
greater participation by the backbenchers. They provide a wider range of views
in Parliament and help Cabinet Ministers refine policies. They also serve as
sounding boards and provide valuable feedback and suggestions to the
relevant ministries on issues of public interest
g. Parliament may, from time to time, make, amend, and revoke Standing Orders
for the regulation and orderly conduct of its proceedings and the dispatch of
business
3. The Presidential Council for Minority Rights
a. Considers and reports on matters affecting persons of any racial or religious
community in Singapore referred to it by Parliament or the Government
4. Law-making by the Legislature
28
a. The law-making process begins with a Bill. Parliament sometimes debates on
the Bills. Where required, the Ministers defend the Bill and answer queries
raised by the MPs. After the 1st and 2nd reading, the Bill may proceed to the 3rd
reading, with or without amendments, where it is passed by Parliament
b. Two-thirds of the total number of votes cast by the electorate in a national
referendum is required to amend the provisions in the Constitution on the
sovereignty of Singapore. Two-thirds of the total number of elected MPs is
required to amend the other provisions of the Constitution
c. If the Presidential Council for Minority Rights (PCMR) reports favourably, the
Bill proceeds. If PCMR reports adversely, a two-thirds majority in Parliament is
needed to override it. The Bill, then, proceeds for the President’s assent and is
formally enacted as law called an Act of Parliament
Branches of the Singapore Government – The Judiciary
1. The Judiciary – Body of judges
a. The judicial power of Singapore is vested in the Supreme Court and other
subordinate courts
2. The Supreme Court
a. Consists of the Court of Appeal and the High Court
3. The Subordinate Courts
a. There are a few courts subordinate to the Supreme Court:
i. Family Justice Courts
1. The Family Division of the High Court
2. The Family Courts
3. The Youth Courts
ii. State Courts
1. The District Courts
2. The Magistrate Courts
3. The Coroners’ Court
4. The Small Claim Tribunal
5. Employment Claims Tribunals
iii. Other adjudicatory bodies
1. The Copyright Tribunals
2. The Strata Title Boards
3. The Industrial Arbitration Court
4. The Syariah Court
b. Subordinate Courts judges do not enjoy as much security of tenure as the
Judges of the Supreme Court
4. Judge-made laws
a. Many areas of law are judge-made. Most of contract law and tort law are
judge-made laws. These laws are made by the judges and not Parliament or
other bodies. They are found in the judgments and grounds of decision of
judges rather than Acts of Parliament or subsidiary legislations
Branches of the Singapore Government – The Public Service
29
1. The public service
a. Public Service carries out the dictates of the elected politicians, and serves as
an extension of the elected politicians in implementing and furthering the
policies and wishes of the elected politicians
b. The Public Service is seen to be independent of the elected politicians. There
is a conception of what the Public Service should and should not do and the
correct way in which the Public Service should relate to the elected politicians
c. The Public Service exercises influence over the elected politicians. This can
happen when the elected politician has inadequate expertise in the matter
d. The normal roles of the public servants are formulating, administering, and
implementing policies
e. The term civil service is normally reserved for those working in the Ministries.
The term public service is a wider term encompassing the civil service and
other governmental services such as those working in statutory boards, the
police force, the armed forces and the legal service. The highest-ranking civil
servant is the Head of the Civil Service
2. Ministries and Permanent Secretaries
a. Parliamentary Secretaries are politicians in that they must also be MPs,
whereas Permanent Secretaries are civil servants
b. A Permanent Secretary exercises supervision over the department or
departments to which he is allocated subject to the general direction and
control of the Minister
Branches of the Singapore Government – Statutory Boards
1. Statutory Boards
a. Statutory boards are legal bodies created by Parliament through Acts of
Parliament
b. Statutory boards are created to perform their functions and duties specified
in the Acts
c. To perform its functions, a statutory board is given legal powers under the Act.
The powers can include powers to make regulations and enforce them
d. A statutory board is provided with the relevant personnel
e. A statutory board can remunerate and deal with its employees differently from
civil servants
f. A statutory board can have advisory boards or panels to give it advice
g. A statutory board is also given the necessary money and resources to perform
its functions
h. Statutory Boards perform 3 broad function:
i. Regulatory
ii. Operational and the provision of goods and services
iii. Advisory
i. Some statutory boards perform 1 main function while others perform more
than 1 function
j. When a statutory board performs both the regulatory and operational
functions, the functions can be compromised. It is also recommended that the
30
designing of the maintenance regime should be separated from the auditing
of the regime
k. Given its powers and responsibilities, a statutory board usually comes under
the direction of a Minister, who can give directions to the statutory board and
has a say over the appointment of the main personnel of the statutory board
and its budget
l. A statutory board may be subject to appeal processes under which the
decisions of the statutory board can be challenged. Ultimately, all decisions of
statutory boards can be challenged in the courts on relevant grounds
m. The roles of ministries and statutory boards overlap
2. Circumstances where Ministries are more suitable than Statutory Boards
a. Higher level policy formulation and governance
b. Confidential and sensitive matters
c. Non-involvement of private persons
d. Less transactions in goods and services
3. Circumstances where Statutory Boards are more suitable than Ministries
a. When flexibility in pay is required
b. When the focus is on a particular area or matter
c. When it is advantageous to incorporate non-public servants into the board
d. Provision of goods and services
e. When some distance from the government is desirable (e.g. religious matters)
Branches of the Singapore Government – Companies
1. Government companies
a. Government companies are companies owned, either wholly or substantially,
by the Government. They are referred to as State-Owned Enterprises (SOEs)
or Government-linked Companies (GLCs)
b. These government companies, in turn, can own and control other companies,
listed and unlisted
c. Some GLCs are profitable businesses and compete in the market place just like
any other privately-owned companies. Some GLCs are not profitable and need
to be subsidised by the Government
d. GLCs, whether profitable or not, perform public functions
2. Circumstances where government companies are more suitable than statutory boards:
a. When operations should be conducted on commercial or profitable basis
b. When managers and workers need to be remunerated on commercial basis
c. When goods and services are provided on competitive basis
d. When independence from the government is desired
e. When operations are conducted overseas
3. Statutory boards are more suitable than government companies in opposite
circumstances as those mentioned above
4. Companies exercising public functions
a. Some privately-owned companies exercise public functions as well. Because of
their hybrid nature, there may be times when it is not clear whether a
particular function they are performing is a public function or not
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Branches of the Singapore Government – Other Government Bodies
1. Town Councils
a. Function is to control, manage, maintain, and improve the common property
of the residential and commercial property in a HDB housing estate within the
Town
b. A Town Council’s powers include the powers to make by-laws for regulation of
housing estates, levy conservancy and services charges, and borrow and invest
its funds
2. Community Development Councils and other organisations under the People’s
Association
a. In all, Singapore is divided into 5 Districts, with 1 Community Development
Council (CDC) for each District. The functions of the CDC are to foster
community bonding, strengthen social cohesion amongst Singaporeans,
administer new community and infrastructural projects and administer
Government assistance schemes for deserving residents of the District
3. Other government agencies, bodies and offices
a. Singapore Armed Forces
b. Singapore Police Force
c. Auditor General
d. Public Service Commission
e. Legal Service Commission
f. Other bodies and organs of state
Branches of the Singapore Government – Subsidiary Legislations
1. Subsidiary Legislations
a. The laws made by those empowered to do so by the Legislature are called
subsidiary legislations
b. A subsidiary legislation must comply substantially or procedurally with the
parent Act. If not, the subsidiary legislation is ultra vires (i.e. beyond the
powers of) the parent Act
2. Self-regulation
a. Some areas are subject to self-regulation. The rules are drawn up by the
industry or profession under the ultimate oversight of the government
Characteristics of the Singapore Government
1. Sovereign Republic
a. Singapore is a sovereign republic. As a sovereign state, Singapore has supreme
authority over its territory. As a republic, it has no royalty, unlike countries
such as Japan, Great Britain, Malaysia, and Thailand. The government has
power to acquire, hold, and dispose of property and to make contracts. The
government can also sue and be sued
2. Constitutional Government
a. The Singapore Government is a constitutional government. The Constitution
lays down the powers and limits of Government
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3. The secular nature of the government
a. The Singapore Constitution does not provide for a state religion. The
government can be considered formally secular, in that no religion is preferred.
However, the government has responsibilities pertaining to religion and race
and needs to take religion into account when governing
b. The government must exercise its functions in such manner as to recognise the
special position of the Malays, and must protect, safeguard, support, foster,
and promote their interests and the Malay language
4. Separation of powers
a. Separation of powers means that the powers of Government are not exercised
by 1 person or 1 body alone but by separate bodies (the branches of
Government)
b. If there is separation of powers, there can be more checks and balances among
the branches of government. In Singapore, separation of powers is effected by
vesting executive authority (or power) in the Executive, legislative power in the
Legislature and judicial power in the Judiciary
c. Where the separation of powers is pure, the different branches of Government
are completely segregated. In Singapore, the separation is not considered
“pure”. The Singapore President is not only the Head of State. He also has
executive authority and legislative power vested in him
d. MPs in Singapore occupy positions in both the Executive and the Legislative
branches of Government. The advantage is that the executive branch is given
a freer hand in governing but there is less checks and balances on the executive
branches of government
e. Under the separation of powers, the judiciary is meant to be independent from
the executive and legislative branches of government
5. Democratic form of government
a. A democracy can have frequent changes in government. The government may
be hampered in its long-term planning and may not be able to carry out
consistent policies over a longer time frame
b. The first line of authority vests in the President who is elected or deemed
elected by the people. The elected President exercises power as a
representative of the people
c. The second line of authority vests in the Parliament whose Members are
elected or deemed elected by the people
6. Drawbacks of democracy
a. In a democracy, the electorate elects the leaders, but their choice of policies is
indirect
b. Elections only take place in intervals of a few years
c. Some issues are too technical or minor to be subject to political debate
d. In an election, a plethora of issues are debated on. Voters are not able to cast
votes on any single policy
e. Some issues espoused by the elected leaders need not necessarily have
majority support
f. A sizable minority can at times frustrate the will of a majority. This is when the
majority is slim, or a minority wields substantial power
33
g. Some issues should be decided not according to the dictates of the majority
but by objective criteria not subject to pressure from the public. It is for this
reason that legal issues are decided by judges who are not elected
h. The majority can oppress the minority
7. Other means of policy making
a. The government may adopt policies based on agreements reached with the
relevant parties or interest groups directly. In the business domain, the
government may seek consensus or compromise with the relevant business
groups. This is in contrast to decision making by democratic means where
policies are decided through the ballot box
b. The government may adopt policies based on corporatism, which is an
arrangement where the Government and relevant interest groups work
together through negotiations, accommodations, or compromise to arrive at
a decision or policy
c. The government may adopt policies based on pluralism. In pluralism, policies
are reached after contentious political debates or activism involving various
competing groups
d. Government policy may be decided by the political leaders themselves with
little involvement of the electorate or other interest groups. In formally
democratic but autocratic countries, policy may be decided by a dominant
leader or a dominant group of leaders. As a result, the policy may not accord
with the wishes of the majority
e. Issues may be decided by specialist bodies that are insulated from the
electorate
Other Governments
1. Parliamentary system of government
a. In parliamentary systems, the leader of the executive branch of government
is also the leader of the legislative branch of government
b. In some parliamentary systems, the legislature is bicameral, which means that
it is divided into 2 separate assemblies, chambers, or houses
c. A parliamentary system can have another leader in addition to the PM. The
head of state in a parliamentary system usually has relatively limited powers
and can take different forms
2. Presidential system of government
a. A presidential system usually has a President who functions as the head of the
executive branch of government. He is usually not concurrently a member of
the legislative branch of government. In the US, the separation of powers is
“pure”. There may be more checks and balances on the President, but the
President may find it difficult to persuade Congress to pass laws that the
President wishes to enact
b. Advantages of the Presidential system:
i. The President can appoint any person he considers suitable to serve as
Ministers, subject to the approval of the Senate. They need not be
elected politicians
34
3.
4.
5.
6.
7.
8.
9.
ii. The President normally serves for a fixed term of office. Except for
certain limited circumstances, such as impeachment, he does not lose
office mid-term in the way a PM of a parliamentary system can if the
PM loses the confidence of a majority of the MPs
Undemocratic forms of government – Do not have leaders who are elected by the
electorate
a. Communist governments – Power vests in the Communist Party and the
leaders of the Communist Party. Their source of power is the party
b. Monarchies – Most monarchs are ceremonial heads of states. They reign but
do not rule. Power passes to their descendants or relations
c. Military dictatorships – Their source of power is military
d. Religious states – Their source of power is religion
Federal states
a. A federal state is a union of partially self-governing states under a federal
(central) government. In a federal state, some powers are exercised by the
federal government, with the remainder by the states
Unitary states
a. In a unitary state, the state does not have any self-governing states in it. Any
self-governing or autonomous area does not impact central authority too
much. Unitary states can be large or small. If a unitary state is large, the state
can be divided into provinces or regions, which are not self-governing states
Confederation
a. Lying somewhere in between the federal state and unitary state is the
confederation, a union of sovereign states formed for a common purpose
The European Union (EU) – Project to unify the European states
a. Main EU political institutions:
i. The European Commission
ii. The EU legislature – The President of the European Parliament is
analogous to a parliament speaker
iii. The European Council – Acts as the collective presidency of the EU. It
has no formal powers but is influential because its members are heads
of state or government of the EU states. The President of the European
Council is analogous to the President
iv. The Court of Justice of the EU
b. There is free flow of people and capital within the EU, but regulations are not
fully uniform and the adoption of the Euro as a single currency has been partial
The Judiciary of other countries
a. Most modern states have judiciaries which are separate from the executive
and legislative branches of government. Level of independence of the judiciary
from the influence of the executive and legislative branches of government
varies from country to country
Lower levels of government
a. All states need to delegate some functions to the lower levels of Government,
such as the public service, statutory boards and local bodies, similar to or
analogous to those discussed above
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WEEK 3 LESSON
Roles of the President:
• Head of state – Represents Singapore internationally
• Safeguard the national reserves
• Champions charitable causes
• Ceremonial role (E.g. Inspection of Guard of Honour)
• Figure head
• Exercise veto power
Governing and ruling are not the role of the President
The President reigns but does not rule, and is the head of state, whereas the PM rules but
does not reign, and is the head of government, governing the nation and making decisions on
how the country is run
One becomes the PM through appointment by the President, and the President will appoint
an MP whom he believes has the majority support of the MPs
Types of MPs in Singapore:
• Elected MP
• Non-constituency MP
• Nominated MP
MPs need to be voted into Parliament. Elected MPs represent the electorate
Roles of Parliament:
• Critical / Inquisitorial – Discuss and debate bills before they are passed
• Make laws
• Financial scrutiny – Exercise financial control → Have to approve spending
Governing and enforcement of laws are not the role of Parliament. This is to ensure the
separation of power, and because Parliament may have parties who may disagree with one
another
The electorate votes for Parliament, who makes laws for the Executives, Cabinet, Ministries
& Statutory Boards. In return, the Executives, Cabinet, Ministries & Statutory Boards govern
on behalf of Parliament, who represents the electorate
For law made by the Parliament, a document before it becomes law is called a Bill, and a
document after it becomes law is called an Act (means they are law that is passed by
Parliament)
The Executives execute the law and the actual governing of the country. The PM is the head
of the Executives. The Cabinet is the body that makes up the Executives. The Cabinet means
the small room where consultations happened in the past. The Cabinet (PM + Cabinet
Ministers) governs the country collectively
Types of Ministers:
• Cabinet Ministers
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• Non-cabinet Ministers
Ministers serve the needs and wants of the electorate. Only MPs can be Ministers. Ministers
are elected by the electorate, so they have to care for the people. If not, they’ll not be reelected as Ministers
Singapore has 1 PM Office, and 15 Ministries. Even if the government changes, the
Permanent Secretary doesn’t. The role of Public Servants is to do the actual work of serving
the people
The Attorney General is the government’s lawyers, and he advises the government on legal
matters
The typical organisational structure of a Statutory Board is Chairman / Chief Executives /
Assistant CEOs / Members. A Statutory Board can incorporate non-public servants. It is an
independent body
A Minister usually has supervisory control over a Statutory Board
A Ministry has a broader range of functions and responsibilities and is controlled by the
government. A Statutory Board is more focused, and more independent from the government,
but has more transactions to be handled
A Subsidiary Legislation (law made by specific Statutory Boards) will include:
1. Name of the Subsidiary Legislation
2. Name of Parent Legislation
3. Who made the Subsidiary Legislation
4. Under what power the Subsidiary Legislation is made
The role of Government-linked Companies (GLCs) is to remunerate workers on a competitive
basis. Statutory Boards serve the needs of the people, and is localised, whereas GLCs are more
commercial and competitive, and they make profits and operate internationally
Some governmental functions are performed by private for-profit bodies because:
• Expertise
• Involvement of private citizens in performing governmental functions, in order to
lighten the government’s workload
• E.g.: SGX, CASE
The role of the Courts is to hear cases and settle disputes. The effect of the Courts’ judgments
forms case law / common law
Source of Law
Legislation
Judges
Parliament
Name of the Law
Statute
Case Law
Act
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Separation of powers:
• Judicial branch → Judging based on laws
• Legislature branch → Making laws
• Executive branch → Executing laws / Law enforcement
In the Parliamentary System, there are 2 heads – President and PM. The Ministries are not
answerable to the President. The Judiciary, Legislature / Parliament, and Executive branches
may overlap a bit. The Executive branch rules the electorate
In the Presidential System, there is only 1 head – President, who is both the head of state
and parliament. The ministers need not be voted in by the electorate, so they only answer to
the President, but they may have more expertise in their own fields. The Judiciary, Legislature,
and Executive branches are separate. The Legislative branch (Congress) rules the electorate
Differences between the Parliamentary System and the Presidential System:
Parliamentary System
Presidential System
President is the head of state. PM is
President is both the head of state and the head
the head of government
of government
Ministers must be MPs. They are
Ministers need not be MPs. They are not elected,
elected, and are answerable to the
so they can be chosen from a wider pool of
people
people. They only answer to the president
Has a PM to act as the head of
Normally does not have a PM
government
China’s political system in order of increasing power:
• People
• Party
• People’s Congress / Party Congress
• Party’s Central Committee
• Politburo
• Politburo Standing Committee
• Paramount Leader
In China, the courts are not independent. They come under the President, Standing
Committee, and National People’s Congress. There is no election of President, so it is not
democratic. The State Council, Military, Court, and Procuratorate all come under the control
of the National People’s Congress, which the Standing Committee is a part of
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WEEK 3 CASE 2: PRESIDENTIAL SYSTEM – THE US GOVERNMENT
Summary:
•
•
•
•
The American President is elected by the Electoral College system. In general election,
he must win 270 out of 538 electoral college votes
Term of 4 years, renewable once. The President earns $400,000 a year
The President is the Head of state. Partisan, elected on own platform of politics,
usually with support of a party, e.g. Republican or Democratic. Negotiates treaties.
Directs foreign policy. Can sign executive orders without Congress approval. Power of
veto - President must sign any bill passed by Congress before it becomes law.
President must report to Congress - usually done by giving State of Union address
The President is the Commander-in-Chief of armed forces, responsible for strategy.
Congress must approve going to war but the President can decide when to launch
nuclear missiles
WEEK 3 CASE 3: THE CHINESE GOVERNMENT
Summary:
39
•
•
•
•
•
•
•
•
China’s most senior decision-making body is the standing committee of the
politburo, heading a pyramid of power which tops every village and workplace
Communist Party: The Community Party oversees and influences many aspects of
people’s lives. It is an elite group made up largely of government officials, army
officers, model workers and business people. The party has a pyramid structure
resting on millions of local-level party organisations across the country and reaching
all the way up to the highest decision-making bodies in Beijing. The central
committee’s main job is to elect a new politburo and its smaller standing committee,
where real decision-making powers lie
Politburo: Every significant decision is first discussed and approved by a handful of
men who sit on the party’s political bureau, the nexus of all power in China. Real power
lies within 9-member standing committee, which works as a kind of inner cabinet and
groups together the country’s most influential leaders. The emphasis is always on
reaching a consensus, but if no consensus is reached, the majority holds sway. Once a
decision has been made, all members are bound by it
Discipline Commission: Party members suspected of corruption, bad management or
breaking with the party line are liable to be hauled before discipline inspection
commissions, set up to deal with internal party discipline and to monitor abuses. More
often, powerful party members are usually able to protect themselves, their families
and proteges from any enquiries or public criticism. Nevertheless, the discipline
inspection commissions do have privileged access to information about people. Their
control over networks of informers and personal files makes them particularly feared
Party Elders: Part of the reason the elders wield such influences is because of the
patron-protege nature of Chinese politics. It is not simply about power for power’s
sake. In China, retiring leaders know that the verdict on their achievements can easily
be reversed. They also have to look out for their children, whose wealth and success
becomes vulnerable to attack if their own influence fades. As compensation, elders
get a privileged and pampered retirement, and have access to restricted documents
and information
National People’s Congress (NPC): The most powerful organ of state is meant to be
the NPC, China’s parliament, but in truth, it is little more than a rubber stamp for party
decisions. About 70% of its delegates, and almost all its senior figures, are also party
members. Their loyalty is to the party first, the NPC second. The party drafts most new
legislation and passes it to the NPC for speedy approval. But the NPC has shown some
signs of growing independence over the past decade, and has also been given greater
leeway drafting laws in areas like human rights
Courts & Prosecutors: Laws are seen as a way to manage the economy and people’s
lives, rarely to protect them from the state or enshrine individual rights. Even once
laws have been passed, there is no guarantee they will always be respected. Often,
provincial governments and state-owned enterprises view court decisions as
something to be negotiated, not obeyed. And for the party and state, the ‘rule of law’
is not allowed to undermine its own interests
Military Affairs Commission: China’s People’s Liberation Army (PLA) has always
defended the party as much as national borders. Party leaders know they are lost
without the army’s support. Senior military leaders realise they need the leadership’s
backing if far-reaching plans to modernise the armed forces are to be paid for. The
commission also controls the paramilitary People’s Armed Police, who have the
40
•
•
•
politically sensitive role of guarding key government buildings. In theory, the
commission’s chairman is elected by the National People’s Congress. But in practice,
the job automatically goes to the party’s most powerful figure, who effectively
becomes commander-in-chief
Armed Forces: The military’s position as defender of the party means it will never be
de-linked from politics. Officers and men still have to declare their loyalty to party
principles, study its teachings and read leaders’ important pronouncements. In
keeping with its more professional role, the PLA has lost influence over non-military
affairs
State Council: The State Council is the cabinet which oversees China’s vast
government machine. It sits at the top of a complex bureaucracy of commissions and
ministries and is responsible for making sure party policy gets implemented from the
national to the local level. The State Council’s most important roles are to draft and
manage the national economic plan and the state budget, giving it decision-making
powers over almost every aspect of people’s lives. It is also responsible for law and
order
Provinces & Townships: China is governed as 22 provinces, 5 “autonomous” regions,
4 municipalities, and 2 special administrative regions. The people in charge of these
bodies are all appointed by the party’s organisation department, and although many
are powerful individuals, their ability to deviate from the party line is limited because
they know their next career move would be at stake. Power and decisions flow down
from the top level to an intermediate level of counties and cities, and finally to the
local-level townships. At each level, the party and government structures sit side by
side, with the party’s representative always the more powerful. Thus a province’s
party general-secretary takes precedence over its governor. Local governments have
been given limited leeway to adopt local regulations in keeping with their situation
WEEK 3 CASE 4: THE EU
Summary:
41
•
•
•
•
•
The President of European Council is elected by European Council leaders. Liable to
select candidate by consensus. If vote held, each country has different number of
votes. Winner must gain 258 out of 345 votes from at least 18 of the 27 countries
Term of 2.5 years, renewable once. Salary reported to be 350,000 euros ($521,374) a
year
As shown above, the left represents the EU system and the right represents the US
system
The EU president chairs European Council. Duty to “facilitate cohesion and consensus”,
without national bias. Represents EU abroad on issues concerning its common foreign
and security policy. No powers of veto. Must report to European Parliament after each
European Council meeting
No influence on military. EU Military staff receives “tastings” from EU Military
Committee (which represents defence chiefs of all member states)
42
WEEK 4 READING 1: THE ROLES OF GOVERNMENTS
Why We Need a Government
Situations where coercion may be required:
• Co-ordination
• Dealing with harm, dissenters, criminals, and enemies
• Tax and transfer
• Preventing or avoiding free riders
• Forcefully acquire land and property for the public good
• Regulate and restrain rights to communal property
Roles of the Government
Various roles of the government:
• Maintaining a well-functioning state apparatus to govern properly
• Maintaining public order and safety, defence against external and internal threats,
and developing and maintaining foreign relations
• Raising revenue and spending for goods and services
• Providing for a good environment and infrastructure
• Providing for the people’s welfare in education, housing, amenities, healthcare, social
protection, recreation, sports, culture and religion
Extent of the Roles of the Government
1. Religious sphere
a. Some advocate the separation of state and religion while others the mixing of
the 2
2. Family and social sphere
a. Some advocate intervention in the personal affairs of families and
communities while others the opposite
3. Individual sphere
a. Some advocate that the government should prohibit certain private activities,
while others champion more liberal policies
4. Economic sphere
a. Some advocate more governmental intervention in the economy while others
the opposite
The Government as Provider
The abandonment of the socialist model by former socialist states, such as Russia, Eastern
Europe and China in the 1990s, appear to have settled the issue in favour of the capitalist
model. Presently, Cuba and North Korea are the 2 remaining socialist states which restrict
private businesses but even they have steadily increased the roles played by private
businesses. Currently, no state attempts to curtail private businesses altogether, unlike the
former socialist states
43
The Boundary between Public and Private
•
•
Different economic roles
o In some countries, like the US, business operates many sectors relative to the
government. These countries have relatively less state ownership of business
and adopt a more liberal economy emphasising free market and laissez-faire
policies
o On the other hand, some countries, such as China and France, have relatively
higher state ownership and greater government involvement in the provision
of goods and services. This is referred to as State Capitalism. They believe that
the state should have command of the economy (its commanding heights),
such as strategic sectors, natural monopolies, and sectors with limited
competition
o Strategic sectors include:
▪ Defence industries
▪ Transport, such as airlines, automobile, trains
▪ Infrastructure and utilities, such as ports, airports, water supply,
electricity
▪ Production and manufacturing, such as steel, metals, and shipbuilding
▪ Energy, such as oil, gas, electricity, coal
▪ Communications, such as telecommunications, post, and the media
▪ Certain goods, such as food and dairy products
▪ Finance and trade, such as banks, insurance, export agencies
Arguments for the government
o Control and accountability
▪ Control should reside with the elected leaders and not business. The
government is more accountable to the public whereas business cares
more for its own interests
▪ E.g.: Provision of peace, security, defence, governance, law and order,
and the administration of justice
o Control of strategic sectors
▪ The government should operate a sector when business failure will be
too costly for society. Such failure consequently will affect the
reputation of the government
o Control and knowhow
▪ The government should operate a sector if the government risks losing
its operational knowhow and capacity. Business granted today’s
contract may accumulate greater market power for tomorrow’s
contract
▪ The government may become dependent on private expertise and be
put in a disadvantaged position
o Community and societal interests
▪ The government should control the sector when public interest
requires it, such as:
• Natural monopolies and sectors with little competition, such as
the power grid and other networks – The government is more
concerned with delivering satisfactory service whereas
44
•
business will be tempted to increase price or reduce the quality
of service to boost its profits
• Sectors where price should not be determined by the market –
The government can reduce price for the goods and services to
help the needy and the poor. Business will charge market price,
which the poor may not be able to afford
• Sectors at risk of relocating overseas – Government control
ensures that the operations stay to provide jobs for the people.
Business on the other hand will relocate to a cheaper place
• Sectors that are operated with a longer-term view – The
government operates with a longer-term view whereas
business may adopt a shorter-term mentality. This makes for
more inferior planning for business
o Capital, cash, and catalyst
▪ The government should step in when business is not able to undertake
it. This can be due to the:
• High capital investments required
• High risks involved
• Long gestation period required
• Uncertainty over profitability
▪ The government can also act as a catalyst for the sector
▪ Business cannot fulfil the role as it does not have the capital to
undertake it or is not interested in it because it is not profitable or too
risky
o Cost
▪ The government should control a sector if the government can operate
it more cheaply. This in turn will result in cheaper goods and services
▪ The government may be able to finance the project more cheaply.
Unless the government has bad credit ratings, it can usually borrow at
a cheaper rate than business given its lower credit risk
o Cost and efficiency
▪ The government should operate a sector if the sector is integrated or
connected with other government sectors. The government can
operate all connected sectors as a whole more efficiently. If business
operates the sector, it will be difficult for the government to coordinate
the other sectors with business sector
▪ If the government operates the sector, it can change its operations as
and when required. If business operates a sector under regulatory
oversight, such oversight may be inferior to direct government
ownership and operation
o Cash and profit
▪ The government should provide the goods and services when the profit
should go into the pockets of the government rather than business. The
profits made should be kept by the state for the benefit of the people.
Similar arguments have been advanced in respect of public utilities and
natural monopolies
Examples of sectors operated by the Singapore government
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•
o The operations of Changi Airport by the Changi Airport Group (Singapore) Pte
Ltd
o The operations of Singapore’s ports by PSA International Pte Ltd
o The national broadcaster, MediaCorp. Its role is to help bring the whole nation
together. It includes the production of programmes that celebrate Singapore’s
culture and heritage, reflect Singapore’s society and values and educate,
inform and entertain its audiences
Arguments for business
o Competition
▪ Businesses compete among themselves, driving up efficiency,
innovation, and quality. It is less easy for business to stifle competition.
Government wants to avoid the discipline of the marketplace and can
stifle competition through regulation and policy making
▪ Business entities can take more small bets in the marketplace. The
unsuccessful bets are discontinued, leaving the successful ones to
continue. This leads to more trial and errors, which ultimately result in
more successful innovations. The government takes big bets and lack
the variety offered by business
o Consumer choice
▪ A business can offer a product with specifications different from those
of the competitors. If the government operates a sector, the choices
available are usually limited. They may also adopt a take it or leave it
attitude
▪ Further, competition means that goods and services that are not in
demand will ultimately be removed from the marketplace while goods
and services that are in demand will be made more readily available
o Country
▪ Business can operate overseas while the government may not be able
to do so. The government may not be able to invest in a foreign country
but a business may
o Capital
▪ Business can start a venture more easily than the government. It may
be easier for an entrepreneur to risk private capital than for the
government to risk public funds
▪ Business can also discontinue unprofitable or unsuccessful operations
faster. The government is not as flexible
▪ A government may not have the resources to invest in all the
infrastructures it needs. Business involvement means the use of private
capital to pay for infrastructural expenditures
o Cost and efficiency
▪ Business has the expertise to be efficient. Business is less bureaucratic
and tends to operate as cheaply as possible. At the same time,
competition acts as a control over the amount of profits that a business
can make
▪ Business expertise may also be due to its proprietary knowhow. The
government may not have the relevant expertise. Business expertise
may also be due to its international scope and greater scale
46
Business is not burdened with public objectives that may cause it to be
inefficient. Government-owned entities may be saddled with public
considerations causing them to be inefficient
o Cost and profit
▪ Business is incentivised by profit to work hard, be innovative, and to
take risks. The government is bureaucratic and does not have a risktaking culture. Government servants usually have a fixed pay scale and
are not incentivised by any government profit
Singapore’s monopolistic or near-monopolistic sectors operated by business:
o SGX, the sole stock exchange in Singapore
o BG Group, the exclusive gas aggregator in Singapore
Shifting boundaries
o How large the role of business should be relative to the state is still
controversial. The boundary between state and business is always shifting
o Data seem to suggest that success of business ownership is mixed. For some,
it does not matter whether the government or business is the owner. What is
needed are strong long-term investment, strong management, and sensible
regulation
▪
•
•
A Third Way: Involving Both the Government and Business
Instead of leaving a sector to the government or business solely, the sector can be operated
by both the government and business at the same time. They can do so:
• Competitively
o Both government and business provide the same goods and services in
competition with one another. The competition can vary in intensity
depending on the sector
o Private businesses can be disadvantaged when competing with state-owned
enterprises (SOEs). SOEs can have greater access to capital and other
governmental help and preferential treatment
• Cooperatively
o The government and business enter into an arrangement to provide goods and
services together, through:
▪ Joint venture – The government and business both own the business
entity and lend their respective contributions to the venture.
Drawbacks include the possible conflict of interests and the difficulty in
restructuring a co-owned company when their interests differ over
time
▪ Contractual – The contractual arrangement can be a simple supply of
goods and services to the government. The government in turn
supplies them to the public. More elaborate contractual arrangements
include the contracting model of the public bus sector. The assets will
be owned by the government while SMRT will operate the lines.
Revenue will be shared between the government and SMRT
▪ Public private partnership (PPP) – Business builds, owns, finances, or
operates a project. The goods and services can be supplied to the
government or the public directly, while payment can be made by the
47
▪
government or the users directly. PPPs have been used for the
provision of utilities, infrastructure and buildings, such as roads, rails,
prisons, hospitals, and public utilities. PPPs attempt to harness the
regulatory strengths of the public sector and the efficiency of the
private sector
Assigning of roles – Can take the form of the parceling of roles. A
particular sector can be divided up into various parts with the
respective parts assigned to the government and business, respectively
Whether the cooperative arrangement is successful or fails depends on the parties involved,
the arrangements between them and the circumstances and environment. When the
cooperative arrangement is successful, goods and services are provided at reasonable prices
efficiently under the effective governmental supervision or regulation. On the other hand,
when the cooperative arrangement fails, goods and services are provided at unreasonable
prices inefficiently, while the government fails in its supervision or regulation
Variations Possible
There are many ways to structure a sector. Even markets for common commodities can be
structured differently. The government can always take over the provision of the goods and
services and monopolise the trade
How Should the Government Provide?
If the government should provide the goods and services, it can do so through government
bodies such as the ministries, statutory boards, government-owned companies or other
public bodies such as schools and hospitals. Government can provide goods and services
without a fee or for a fee. Some fees are fixed, and sometimes the fee is determined by the
market
How does the Government Relinquish or Take on its Role?
If the government should relinquish its involvement in a sector, it can do so by privatising it.
Conversely, if the government should assume the role, it can nationalise the sector. Stages of
privatisation and nationalisation:
48
What Businesses should be Allowed to Operate?
If the government decides that a sector should be operated by business, the government
needs to consider the number, nature, and type of businesses that should operate it, which
in turn will affect its market structure. Market structures:
• Few or many
o Sometimes the government allows only a monopoly to operate in the sector.
This may be desirable when there are scale and network advantages to be
gained. Limiting the number of operators can be done by way of licensing.
Examples include financial institutions, professionals, and taxi operators
• Big or small
o Some countries allow a few big businesses to dominate certain sectors while
some countries actively curtail the power of big business groups
o The advantage of big businesses is the personnel and resources they have to
compete and innovate, especially in capital heavy ventures. The disadvantage
of big businesses is the adverse effects of their dominance over smaller rivals
o The advantage of smaller businesses is the speed with which they can change
but they may lack the personnel and resources required
• Stand alone, conglomerate, or networks
o Things to consider include whether a business should be allowed to operate
different types of businesses under the same ownership, and whether
different types of businesses should be allowed to form networks or operate
in groups
o Sometimes it is necessary for clusters to operate together. The Singapore
government actively promotes the formation of industrial clusters for these
reasons, such as the petrochemical, bioscience and aeronautical clusters
o Conglomerates and networks enjoy the advantages of big businesses, and
established businesses of a conglomerate can support its newer businesses.
Stronger companies in a network can support its weaker members. Such
advantages may allow conglomerates and networks to take a longer strategic
outlook. The arguments for separation include focusing on core competency,
limiting the risk of contagion, minimising non-arm’s length transactions and
increasing transparency. However, naturally when a conglomerate is big and
powerful, it attracts criticism from its competitors
• Types of business entities
o Certain legal entities are given tax advantages in Singapore, such as S-REITS
and Master Limited Partnerships
• Foreign or local
o The government may ban foreign businesses from sectors deemed sensitive
and strategic. Singapore is relatively welcoming to foreign businesses
o Things to consider include whether foreign businesses should be allowed to
operate in the sector, and whether some locals should be preferred over
others
How should the Government Relate to Business?
•
The environment of business: soft and hard infrastructure
49
•
•
•
o Business needs a good environment in which to operate efficiently.
Governments friendly to business seek to create an environment that is
conducive to business. This requires both good hard infrastructure and soft
infrastructure, which includes:
▪ Peace and security from internal and external threats and proper
control for the entry and exit of goods, services, capital, and labour
▪ Good physical infrastructure, amenities and support services, and
industries
▪ Good financial, economic, fiscal, and legal frameworks
▪ Good healthcare, educational facilities, human capital, and expertise
▪ Suitable social, cultural, and ideological backdrop
o Singapore, one of the freest economies in the world, has virtually no import
tariff, exchange restrictions, price ceiling, minimum wage, and rent control. On
the other hand, bureaucracy, red-tape, corruption, and uncertainty have the
opposite effect
o To create an environment conducive to business, governments have to
legitimise capitalism in the face of its inherent inequality and economic
harshness. Governments also seek to stabilise the market in times of market
failure
More direct support for business
o Government can provide more direct support to business in various ways:
▪ The government can serve as a customer to purchase goods and
services from business
▪ The government can serve as a protector of business by endorsing a
business monopoly or by restricting competition in favour of certain
businesses
▪ The government can serve as an enabler by providing information,
knowhow, research, personnel, contacts and networks
▪ The government can serve as a partner by entering into public-private
partnership with business
▪ The government can serve as a diplomat to assist businesses’
expansion abroad. The government acts as a powerful negotiator to
open foreign markets to local businesses and lobbies and protects
them when operating there
o Some governments actively support certain businessmen resulting in an
uneven level playing field
Industrial policies
o Some governments actively implement industrial policies and work closely
with business to build up the country’s industries. Industrial policy may enable
industries that would not have taken off otherwise. This is important in
strategic industries
o An industrial policy, however, can back the wrong industry leading to
inefficiencies and harm to other viable industries. It may create vested
interests, making it difficult to change course when it has proven
counterproductive. Industrial policy can also be inefficient if there are no
appropriate ways to measure its returns
Hostility to business
50
o Governments hostile to business attempt to control business through various
means, such as fixing the price of goods and services, increasing taxes and
levies, favouring state entities over private business and burdening business
with heavy regulations
Government and the Non-Profit Sector
Not all roles should be assigned to business even when profits can be made. Non-profit
entities may be more appropriate when business should not profit from the provision. An
example is the religious sector. Not all functions should be undertaken by the government.
Sometimes it is better if a non-profit entity assumes the role. Areas where non-profit entities
may be more appropriate:
• Delivering programs for the government
o Government programs may be more efficiently and cheaply administered by
non-profit entities. Even when the program is government-funded, the
program may still be cheaper due to individuals volunteering their time or
donations. E.g.: Welfare homes, Community hospitals
• Lightening the load of the government
o Citizens and non-profit organisations step in and donate their time and money
out of the goodness of their hearts or due to their convictions and beliefs. E.g.:
Charities
• More effective programs
o A non-profit entity may have expertise that the government lacks and may
form deeper ties with the constituents than the government. The constituents
may also be more responsive to a non-profit entity than the government
o Non-profit entities may have procedural flexibility and have less red tape. Nonprofit entities being more numerous can also try more varied approaches than
the government. Government usually operates on a national scale. Non-profit
entities can operate on a smaller scale. E.g.: ACRES
• No sense of entitlement
o Non-profit entities can provide goods and services on a voluntary and
discretionary basis. Government help may lead to a sense of entitlement
• Fact-sensitive
o Government programmes usually apply wholesale according to the objective
terms of the programs. It does not give much discretion to the public servants
to deviate from the programs
• The excluded
o Government programs may be designed to favour certain constituencies and
to disadvantage others. Non-profit entities can help those excluded from the
government program. E.g.: Unwed mothers who cannot form a family nucleus
• Independence from the government
o Non-profit entities should be allowed to pursue their interests without
government involvement. Private individuals can be more motivated and
enthusiastic over a certain issue or cause. They can serve as counterparties to
the government by providing independent views and feedback. They can also
lobby the government for policies. E.g.: Lobbying by various groups to change
HDB rules that work against flat ownerships by unwed mothers
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•
•
Neutrality
o The government may take a neutral stand over matters such as religion. The
respective religions are then served by their respective religious organisations.
The non-profit entity may also have more moral and religious authority with
its constituents than the government
Moderation and middle ground
o The government may also take a more moderate stand. The partisan groups
can then contend for their more partisan views. E.g.: Issues regarding the
environment, or foreign workers
The Singapore government has called for greater collaboration between the government,
business, and the non-profit sector
Regulation
•
•
•
Regulation of business
o A government has to decide whether to adopt a laissez-faire approach, or a
more regulated environment. The issue is not whether regulation is required
or not but whether proper regulation has been put in place. Proper regulation
should achieve its intended aim and benefit without imposing too much cost
and burden (cost-benefit approach)
o In the financial sector, Singapore has been shifting towards a risk-based
approach. MAS imposes healthy prudential standards and evaluates the
relative risk posed by each financial institution. A financial institution that
potentially has the largest impact on the financial system is subjected to the
greatest supervisory intensity
o Another approach is the regulatory sandbox approach. It seeks to enable the
relevant businesses to experiment with innovative financial products and
services with appropriate safeguards within a well-defined space and duration
Market failure
o Business regulation is important because business can abuse or harm other
parties or can be abused or harmed by others. Situations where regulation is
called for include:
▪ Where a business is dominant because of its monopoly power or its size
and reach. Where a natural monopoly or market power occurs, the
government needs to regulate the entity providing the goods and
services to stop it from abusing its market power
▪ When a business is too big to fail and can cause systemic risk to the
economy
▪ When a business has information which the other parties do not
▪ When a business creates negative externalities, such as pollution
▪ Where a rational action done individually can lead to an irrational result
done collectively, known as the “tragedy of the commons”. E.g.: Global
pollution, Deforestation
Other areas for regulation
o Social and workers regulation
o Internet regulation
52
•
o Environmentalism as a justification for regulating business
o Inequality
▪ The capitalistic system favours those with capital and relevant skills.
With capital and skills, they can accumulate more capital and skills.
Those who are not so gifted, such as the poor, sick, incapable, or
disadvantaged, can lose out in the system
▪ Poverty can lead to crime and an unsafe society. The key is to provide
the poor with means to survive in difficult times without jeopardising
the incentive to work and be responsible
Effects of regulation
o Through regulation, the government can create a market for players to
operate in. The government can create standards and platforms. Regulations
can also create a level playing field which fosters competition. They provide
assurances about the safety and effectiveness of goods and services
o Regulations can curtail competition. Regulation can also favour some to the
detriment of the rest. Regulations can create barriers of entry to new comers
or new types of operations. Regulations can allow business to capture extra
profits, a form of rent-seeking
o Business sometimes appeals to the government to curtail its competitors.
Sometimes, regulation and policies can favour most to the detriment of a few.
In this respect, the government should look not only at the effect on the
country as a whole but on individuals as well
o The irony of market regulation is that prices of important goods and services
are never truly freely determined by the market. The irony is that truly
important goods and services can be cheaper than discretionary goods and
services
How to Govern and its Limitations
•
Main ways to govern
o Information and persuasion
▪ When a new law is enacted, the government needs to publicise it so
that the public becomes aware of it. The government also needs to
educate and persuade the public to ensure compliance with the law.
Some persuasion and campaigns involve more fundamental ideologies,
such as capitalism, liberalism, democracy, and free trade
▪ To this end, government can undertake public and private means of
persuasion. For public persuasion, the government can use both
traditional means as well as more sophisticated ways. In private
persuasion, the government seeks to persuade individuals or smaller
groups more directly
▪ It will be easier if key people of influence agree with and support the
government’s programs. To this end, governments support key people
of influence in strategic positions to help support or carry out their
objectives when required
o Regulation, command, and control
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▪
•
While persuasion and advocacy are important, they can be limited in
effect. Some may not be persuaded or agree with the idea. Hence, the
government needs to put in place laws and regulations and enforce
them accordingly
o Money
▪ A government governs through the expenditure of money, such as in
the form of outright payments of welfare to the poor, or subsidies to
those who need them, or the purchase of goods and services that the
country needs
o Provision of goods and services
▪ The provision of money can be an outright giving or spending of cash.
The provision of goods and services is provision in kind. Through
spending and purchases, governments acquire required goods and
services, such as defence and infrastructure, and establish programs
for the benefit of the people
Limitations of governments
o Governments are inherently limited in resources, personnel, expertise, power,
territorial reach, public support, control, etc. Governments that fare well have
more resources and make better use of them. Governments that fare poorly
lack them or fail to make good use of them. Government limitations,
unfortunately, can lead to government failure
54
WEEK 4 READING 2: THE THEORY OF GOVERNMENT FAILURE
The theory of government failure examines the theoretical consequences for efficiency and
equity of 3 kinds of government activity: provision, subsidy, and regulation. Economists
disagree as to whether the size of market failure to achieve efficiency was sufficient to
warrant government intervention, and the risks for efficiency which that would create.
Defining equity has 2 issues:
1. Distribution of the commodity concerned, whether it is distributed equally, or
whether everyone can obtain at least a minimum standard of consumption of the
commodity
2. Overall ability to purchase commodities: the distribution of income and wealth, or of
command over economic resources
4 reasons why government institutions with self-interested agents may fail in a fashion that
parallels market failure:
1. Disjunction between costs and revenues
a. Where the revenues that sustain an activity are unrelated to the costs of
producing it, more resources may be used than necessary to produce a given
output, or more of the non-market activity may be provided than is warranted
by the original market-failure reason for undertaking it in the first place
b. However, difficulties with this way of formulating the problem:
i. Not all forms of government intervention involve a complete
disjunction between revenues and costs
ii. Even if there is a disjunction between revenues and costs, this does not
necessarily mean that there will be inefficiency
c. The question is not really one of the disjunctions between revenues and costs
as such, but the impact of any disjunction that may exist on the incentives of
the relevant agents
2. Internalities and organisational goals
a. Internalities are defined as “the goals that apply within non-market
organisations to guide, regulate, and evaluate agency performance and the
performance of agency personnel”. Because public agencies lack the direct
performance indicators available to market organisations, particularly that of
profit, public agencies have to develop their own standards or goals. However,
whatever form they take are unlikely to coincide with the public interest,
particularly that part of it concerned with efficiency
b. The form that government intervention takes will affect the behaviour of the
agents involved and hence the consequences for efficiency
3. Derived externalities
a. Government intervention to correct market failure may generate
unanticipated side effects. Government operations are often large and are
therefore ‘blunt instruments whose consequences are both far-reaching and
difficult to forecast’. Most derived externalities are long-term in nature and,
because they are under political control, government organisations are under
short-term pressure, hence they will tend to overlook potential externalities
b. There seems no a priori reason for supposing that government organisations
are likely to create more ‘derived externalities’ than private ones; and, if that
55
is the case, these kinds of externalities are as much a source of market as of
government failure
4. Distributional inequity
An Alternative Formulation:
• The government can provide a commodity itself through owning and operating the
relevant agencies and employing the relevant personnel
• It can tax the commodity, thus raising its price above the level that would have been
attained in a competitive market
• It can also subsidise the commodity, thus lowering its price below the market level.
Sometimes the price may be reduced to zero, with the commodity being provided free
• Alternatively, the government can regulate the production and distribution of the
commodity, prescribing the structure of the market or the quantity, quality, or price
of the commodity concerned
• In many cases of government intervention, all 3 of these methods are used
Efficiency:
1. Government provision
a. The reason why government provision may be inefficient is that government
providers are usually (although not always) monopolies, hence their market is
not contestable. The absence of competition, either actual or threatened, and
of the danger of take-over, reduces the incentive to keep costs to a minimum.
Hence, in these circumstances, there will be X-inefficiency
b. Most studies regarding government provision do not examine the question as
to whether the output is worth providing in the first place – whether it is of
use or value
c. In some cases, government enterprises may be more X-inefficient than their
market counterparts; but it may be that, despite this, they are more
allocatively efficient
d. It is rare to find examples of government provision on its own, unaccompanied
by any other form of intervention, notably subsidy, which creates efficiency
problems of its own
2. Government subsidy
a. If a commodity is provided at any price below cost, there will be excess
demand for that commodity. The government can either meet all the demand,
thus creating a situation where more of the good or service is provided and
consumed than is socially efficient, or if it knows the amount that is socially
efficient, it can simply provide this amount and use non-price rationing devices
to decide who gets what
b. However, although in terms of X-efficiency, the right amount is being produced,
the level of production will not be allocatively efficient
c. The problem with delegating the relevant decisions to professionals or
bureaucrats is that, in making those decisions, the latter may pursue their own
interests, and these may not coincide with those of either consumers or the
government
d. In a market system, movements in prices convey information to producers
about changes in what consumers want. Consequently, the government will
56
find it very difficult to assess the overall efficient level of production of a
commodity, since in the absence of a price mechanism, it has few, and not very
reliable, ways of assessing the social benefit from that production and relating
it to its social cost. The government can either use simple majority voting
procedures, or delegate decisions to bureaucrats and professionals
e. Reasons for why majority voting procedures might give a better indication of
the ‘true’ social benefit of the production of a good or service than relying on
market signals:
i. The mechanism of voting allows everyone who is affected by the
consumption and production of a good or service to have a say in its
level of provision
ii. Majority voting can give everyone an equal say, in the sense that
everyone has only 1 vote; this overcomes the disadvantage of market
demand that it gives a greater weight to those who are better off
f. Problems with majority voting as a means of ascertaining voter preferences:
i. Under certain conditions, it can be shown that majority voting gives
greater weight to the preferences of certain individuals or groups than
others, such as the median voter
ii. Sequential majority voting can lead to ‘irrational’ outcomes, such as
cycling or inconsistent decisions
iii. It is impossible to gauge the depth of someone’s preferences – how
much he wants the good or service concerned
iv. Elections or referendums are expensive to arrange and organise,
particularly if voters are to have enough information to be able to make
the necessary decisions
v. When people vote, they are rarely properly informed about either the
benefits or the costs of the various proposals with which they are
confronted. It is unlikely that the amount they vote for will coincide
with the efficient level
vi. Additional source of inefficiency that arises from government subsidy:
Disincentives for work and savings created by the taxation necessary to
finance the subsidy. Almost all forms of taxation create allocative
inefficiencies of 1 form or another in the economy
3. Government regulation
a. The government can regulate:
i. Quantity
ii. Quality
iii. Prices
iv. Market structure through controlling the numbers of firms allowed to
operate in the market
b. Problems with such regulation:
i. Very difficult to obtain the relevant information since the government
would need to obtain information from the organisations concerned
on costs, information that the latter would have little incentive to
supply
ii. Problem of ‘regulator capture’ → Eventual level of regulation (whether
of quantity, quality, price, or structure) might therefore correspond
57
more to the interests of producers than to those of the society as a
whole (as represented by the efficient level)
c. These problems can result in quality and structure regulation being used to
protect those being regulated from competition and thereby create both Xand allocative inefficiency
d. Too heavy regulation of any kind may stifle incentives for invention and
innovation; it might also discourage potential suppliers from entering the
market and encourage those already in it to leave. Regulation can thus create
both dynamic and allocative inefficiency
Equity:
• Government subsidy may achieve equity if the latter is defined in terms of minimum
standards of consumption, for subsidizing a commodity will make it easier for poor
people to consume it and thereby help ensure that everyone has a minimum quantity
• If the subsidy is means-tested – that is, if it is confined only to people on low incomes
– then it may promote greater equality of consumption, for it will encourage poor
people’s consumption relative to rich people’s. However, those in receipt of a meanstested service may lose their entitlement if they increase their income and hence may
be discouraged from trying to do so by working harder
• Many directly subsidised services are used by the better-off at least as much as, and
often more than, by the poor. The fact that subsidies to services such as healthcare
and education are inegalitarian in their distributional consequences does not
necessarily mean that they are more inegalitarian than if there were no subsidy
• A non-price rationing system that almost inevitably accompany government subsidy
are unlikely to be efficient, and there is no guarantee that they will promote equity
either
• Government regulation designed to promote quality or market structure may also
have undesirable redistributional consequences. The same market failures that
provided the motivation for the government intervention in the first place militate
against impartiality and perfect information
Conclusion:
• A study of government failure does not imply that governments always fail, still less
that markets always succeed. Whether a particular form of government intervention
creates more inefficiency or more inequity than if that intervention had not taken
place is ultimately an empirical question and one that is by no means always
supported by the evidence. Governments sometimes succeed, a fact that should not
be lost to view in the current glare of the market’s bright lights
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WEEK 4 LESSON
In a market system, goods are apportioned by buying power, and produced by business
owners. The government leader regulates the market and collects taxes. He provides security
and protects the public and private property. Buying and selling involve contracts. The
government is there to provide currency and enforce contracts. Those who can’t afford the
goods will have to go without the goods. The advantages include incentives for hard work,
and efficiency. The disadvantages include the fact that the poor are not taken care of and
provided for
In a welfare state, the government leader collects taxes, and passes them on to the
bureaucrat who is in charge of redistributing the taxes to the poor citizens who can’t afford
goods and services on their own. This is to protect the wellbeing of the citizens to ensure the
society is fairer, because the government leader is voted in by the people. Goods are
produced by business owners, who are taxed by the government. The advantages include a
more equal society, everyone is protected, and the poor are not left behind. The
disadvantages include less incentives for the poor to get out of their situation, the middle
class may be affected because they don’t get welfare, but they also cannot afford most of the
goods, and higher taxes for the working population
In a State Capitalism (Singapore), which is somewhere between communism and market
system, goods are produced by business owners, whose businesses are co-owned by the
government. Everyone who can afford it and everyone who qualifies for welfare will get the
goods and services needed. The advantages include taxes that are not that high, the poor still
being taken care of, efficiency, and incentives for hard work. The disadvantages include there
still being inequality and hierarchy in society
In Communism / Socialism, goods are apportioned through fair distribution by the
government, and produced by workers working on public properties and businesses.
Everyone shares all resources equally and gets the same amount of goods because everything
is considered public property. The government leader will fairly distribute the resources to
every citizen, if he is not corrupt. The process of distribution may or may not be fair. The
advantages include no inequality nor hierarchy, and a guaranteed access to goods. The
disadvantages include no incentives to work hard or be creative, and the problem of free
loaders. The citizens also have no incentives to improve on the infrastructure because they
do not own anything. Everything is public property
Government systems in order of increasing government ownership:
• Market system
• Welfare state
• State Capitalism
• Communism / Socialism
Sources of money for the poor:
• Body and mind
o Body and mind: Work by selling time and effort to an employer
o Body: Athletes, Manual labourers
59
•
•
•
o Mind: Teachers, Chess players
Legal rights
o Vote
o Legal rights
o Welfare states
Emotional / Moral
o Family
o Funds
Spiritual / Religious groups
o Soup kitchens
o Charities
o Welfare drives
Characteristics of government and its functions and failures:
Characteristics
Function
Failure / Problems
Agency
Take care of the
Serve their own interests instead
public interest
Misuse of tax money
Hiding information to not get blamed
Hierarchy /
Use expertise in
Lack of collaboration between departments
Assigned role
the best areas
Red tape / Bureaucracy
and reporting
Unclear responsibilities
structure /
Reporting structure Top-down structure prevents efficient functioning
Incentive
due to the need to seek approval from the top
systems
Division of labour
The higher-ups must be proactive and
hardworking, and must have an ear on the ground
to know about what’s going on
Output and
Ensure societal
Counter-productive policies
performance
improvements
Internalities (long-term benefits / costs to an
(worst case is
individual that they do not consider when making
not putting in
decisions)
any effort at
Ensure societal
The government may not know what’s best, and
all)
wellbeing
may implement wrong or unsuitable policies
Failure to achieve results → Assess the
government based on efforts, instead of results
Public and
Tell the public
Lack of checking and enforcement
private
what they should
May be ignored by the public
persuasion
and shouldn’t do
Power &
Provide goods and
Lack of regulation
regulations
services to the
Over regulation
(can go wrong
public
in 2 extremes) Set regulations to No regulation regarding new areas, and loopholes
protect societal
May implement economically inefficient or
functioning
unfeasible policies
Government
Implement socially Easy to justify the programmes by coming up with
programmes /
beneficial
reasons, Difficult to assess whether a programme
Government
programmes
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spending /
Provision of
goods and
services by the
government
(Ministry,
Statutory
Boards, GLCs,
Judiciary)
Collect taxes to
fund socially
beneficial
programmes
Provide goods and
services to the
public cheaply
through subsidies
is worthy as the benefits may be intangible,
Imperfect information
Mismatch between the spender and the payer
Wrongful externalities, Benefitting the wrong
people, Difficult to design programmes that only
help the intended people
The government cannot eliminate persuasion entirely and just use laws. There are restrictions
in enforcing regulations. Regulations use more resources. The more fundamental the issue,
the more important the power of persuasion
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WEEK 4 CASE 1: AGENCY – PSI DATA
Summary:
The public accused that the authorities were withholding or even manipulating the PSI
readings, but the government decided against instantly publishing real-time or raw data of
the PSI during the height of the haze crisis, because the risk of confusion or worse, publishing
unverified or inaccurate information was too high. The government assured the public that
they’ll keep Singaporeans updated about any changes for the better or for worse
The real-time or raw data of the PSI (hourly PSI readings) during the height of the haze crisis
was not published, because the government believed that the risk of confusion or worse,
publishing unverified or inaccurate information was too high. Only the 3-hourly PSI readings
are published, since they will be more averaged, which makes the situation look not that bad
so that people won’t panic. The government doesn’t want to be blamed for the situation, so
all governments will try to hide at least some data
WEEK 4 CASE 2: HIERARCHY / ASSIGNED ROLE AND REPORTING STRUCTURE / INCENTIVE
SYSTEMS – RATS
Summary:
There was a large colony of rats spotted residing near Bukit Batok MRT station, causing
concern and public outrage among netizens. This was also not the first complaint of rats in
the area. The Chairman of Jurong Town Council brought up the matter to the HDB, which
manages the piece of land. They are also going to work with the NEA to take enforcement
action against indiscriminate feeding
The different government agencies have different areas that they are in charge of and when
it is unclear whose responsibility it is to deal with the rat colony, it will get pushed around,
and it also takes time for different government bodies to work together since they are likely
bureaucratic. This is due to there being too many people in the hierarchy, and the top-down
structure of the government agencies, instead of bottom-up structure
WEEK 4 CASE 3: OUTPUT AND PERFORMANCE / PUBLIC AND PRIVATE PERSUASION –
DENGUE
Summary:
The number of reported dengue cases rose 33% in just a week, and the NEA’s Gravitrap
surveillance system has also shown that the population of adult Aedes aegypti mosquitoes
has doubled in July 2014 since May 2014. The NEA, all town councils and other government
agencies from the Inter-Agency Dengue Task Force will continue to check public areas and
housing estates for potential breeding grounds, with a focus on riskier areas like construction
sites. It said it will pay particular attention to high-risk sites such as those with a poor track
record, and those located within clusters showing active transmission
It is not fair to use the dengue infection numbers to evaluate the performance of the relevant
government bodies, because the NEA, all town councils and other government agencies from
the Inter-Agency Dengue Task Force has been checking and will continue to check public areas
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and housing estates for potential breeding grounds, with a focus on riskier areas like
construction sites. The NEA has also issued 476 Notices to Attend Court and 49 Stop Work
Orders, and 13 contractors have been prosecuted in court for repeat offences, as of early July
2014, so it can be seen that the relevant government bodies have indeed been doing their
job properly and it will be unfair to judge their performance based on the dengue infection
numbers alone. It is up to the general public to work together to prevent mosquitoes breeding,
and there are limitations in what the government can do. Problems may come from the public
rather than the government, and the government can only advise but cannot force people to
change their habits
The lessons that can be learnt from this case are that we can consider using efforts as a proxy
instead of results to assess performance, and that efforts may not be very productive or
efficient
WEEK 4 CASE 4: POWER / REGULATIONS – SIBOR REGULATION
Summary:
A review concluded by the MAS in June 2013 found hundreds of attempts by 133 traders at
20 banks to manipulate benchmark interest rates. There was no conclusive evidence to
indicate that any attempts were successful, but the MAS has ordered the banks involved to
set aside additional statutory reserves of up to $1.2 billion for a year at 0 interest while they
put in place measures to address deficiencies in their operations. The MAS was unable to
impose specific fines as they do not regulate rate-setting activities today, neither do any
jurisdictions. Regulators did not find evidence that the top management were aware of their
traders’ misconduct. Senior management took the MAS review seriously and cooperated fully.
The MAS plans to close the gaps and tighten oversight on key financial benchmarks. A new
regulatory framework has been released for public consultation and may be implemented
later in 2013
There was insufficient regulation against manipulation of benchmark interest rates, since the
MAS did not realise that the benchmark interest rates can be manipulated. The MAS was
unable to impose specific fines as they do not regulate rate-setting activities today, neither
do any jurisdictions. 5 cases of attempted rate manipulation were referred to the Commercial
Affairs Department but no further action was taken as there was insufficient evidence to
prosecute under existing criminal laws. The current regulatory frameworks do not provide for
specific criminal or civil sanctions for the manipulation of such benchmarks
The lesson that can be learnt from this case is that areas that are too new will not have enough
regulations governing them
WEEK 4 CASE 5: OUTPUT AND PERFORMANCE / POWER / REGULATIONS – SET-TOP BOX
Summary:
The Government’s plans for a single set-top box for content from various service providers
has stalled because none of the proposals from the 3 bidders - SingTel, M1, and StarHub were found to be “likely to achieve desired outcomes”. Sources said that the telcos’
competing commercial interests could have been the main stumbling block. The
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considerations when the request-for-proposal was launched in September 2010, were interoperability and cross-charging. The existing pay-TV operators are already using different
systems to provide content, which means the “technical challenges of having a common
standard for IPTV was always going to be a challenge
The single set-top box is the integral component of the Government’s Next Generation
Interactive Multimedia, Applications and Services (Nims) project that was launched in 2009.
It was to ride on the super-fast Internet lanes of the Next Generation Nationwide Broadband
Network, which was to have wired up 95% of the country by the end of June 2012. Originally
slated to be launched by the end of 2012, Nims was to have opened the market to new service
providers which hitherto would have had to choose to offer their content through a set-top
box from SingTel or StarHub. Another objective was that the set-top box should be such that
it could be widely adopted. From the onset, it was very difficult to get everyone to go along
with one standard because there are so many vested parties along the value chain, and having
a common approach might mean that one party feels that he might lose out. Each party may
have different incentives, goals and interests that are divergent
The government proposed the single set-top box although it was not a good idea, because it
thought it would be beneficial to the public. However, the 2 systems were too different for
StarHub and SingTel, and it is not necessarily cheaper to combine them. The lesson that can
be learnt from this case is that the government may not always know what is best for the
country and it is possible for the government to implement wrong or unsuitable policies as
well
WEEK 4 CASE 6: GOVERNMENT PROGRAMMES / GOVERNMENT SPENDING / PROVISIONS
OF GOODS AND SERVICES BY THE GOVERNMENT – 2010 SUMMER YOUTH OLYMPICS
Summary:
The estimate of the budget for YOG was wrong largely due to the Community Development,
Youth and Sports Ministry’s lack of experience in organising a sports extravaganza on such an
Olympian scale. The benefits included the huge gains for the economy, the laying of a strong
foundation for Singapore’s sporting culture, especially in spectatorship, community
involvement and volunteer engagement, and a permanent legacy that helps ensure Singapore
stays on the radar of future investors. The initial YOG budget was $104 million but was revised
in July 2010 to $387 million. The gains from the YOG included: $7 million expected from
merchandise and ticket sales; an additional $57 million in tourism receipts; $60 million worth
of sponsored products and services; and $7.6 million in cash sponsorship
The cost of hosting the YOG may be worth it. The benefits included the huge gains for the
economy, the laying of a strong foundation for Singapore’s sporting culture, especially in
spectatorship, community involvement and volunteer engagement, and a permanent legacy
that helps ensure Singapore stays on the radar of future investors. However, this is hard to
judge since the benefits are non-monetary in nature, so they can’t really be compared
objectively against the costs
The Community Development, Youth and Sports Ministry lacked experience in organising a
sports extravaganza on such an Olympian scale. The minister had underestimated the
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requirements and consequential cost of several major functional areas which were necessary
to host these Games, such as not foreseeing the need for costly world-class timing and
information systems. The 26 International Federations representing each sport approved the
final specifications and standards for the YOG very late, after Singapore won the bid to host
the Games in 2008
The lesson that can be learnt from this case is that because it is difficult to compare tangible
costs with intangible benefits, it becomes easier to justify government programmes because
you can always point to an intangible benefit. Although the government has to be accountable
to taxpayers by not frivolously spending the budget, there is a disconnect between payer and
spender. The taxpayers are paying for the programmes, but the government is the one
actually spending that money, and the contractors and YOG athletes are the ones receiving
that money
WEEK 4 CASE 7: GOVERNMENT PROGRAMMES / GOVERNMENT SPENDING / PROVISIONS
OF GOODS AND SERVICES BY THE GOVERNMENT – EXECUTIVE CONDOMINIUM SCHEME
Summary:
CityLife at Tampines is offering a Penthouse Suite with a sprawling size of over 4000 square
feet, which is estimated to be above $2M, which is well above the typical $1M price for
executive condominiums (ECs). People are concerned and suggested raising the income
ceiling for this kind of ECs. ECs are cheaper than private condominiums, but of the same
quality. However, others think that EC developers do not design big penthouses based on
profit motive, the EC could be bought using the money earned by HDB dwellers after they
have sold their HDB, EC penthouses may be purchased by multi-generational families and
upgraders as well and not just young couples, and all EC projects and pricing are to be
approved by authorities before they go on sale, so whether it is too big, or right for the
government to be subsidising these purchases should be best addressed by authorities
instead
The unintended externality of the EC scheme was the lack of housing space experienced by
other people who cannot afford to purchase such large ECs, when developers build such large
ECs for the rich people to purchase. ECs are subsidised by taxes, but it doesn’t make sense for
those who can afford $2M condominiums to be receiving such subsidies. It ends up helping
the rich instead of helping the sandwiched class, as it was intended to
There is a difference in the quality of security and amenities provided by HDBs and private
condominiums. The government doesn’t provide HDB flats of private condominium quality
because the government wants to provide HDB flats cheaply to the masses to meet the
demands of the public, and increasing quality will increase costs, meaning the poor cannot
afford it
The lesson that can be learnt from this case is the problem of wrongful externalities
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WEEK 5 READING: INFLUENCING THE GOVERNMENT
Basic Building Blocks of Influence
1. Relationship
a. The closer and stronger the relationship, the greater is the influence. Although
relationship alone does not guarantee success, it increases the chance of doing
so. Relationships formed when young are usually viewed with more trust than
relationships formed when one has already become successful
b. Social, sporting and religious events are good opportunities to form
relationships. Clubs and societies are good venues for forming relationships.
Businessmen join expensive and exclusive clubs to network with the rich and
powerful. A businessman can live near an officeholder for opportunities to
meet up. A person without access to an officeholder can do so through an
intermediary who does. Business can build relationships with government
officials through official means
c. Doing favours is important in relationship-building. If you do a favour for
somebody, he may or may not remember. If you do a favour for an institution,
you’d better collect on your quid pro quo immediately because whoever is
running the place today might not be around tomorrow
d. Customs, social graces and etiquette play a part in relationships. One must
conduct oneself appropriately when relating to a government officeholder. It
is prudent to cultivate relationships with not only the present government
officials but also the opposition leaders and potential leaders. Politics is
uncertain, and today’s opposition may become tomorrow’s leaders
e. Relationships can backfire, however, for both the government and the
businessmen. Support from top government officeholders may give the
executives a false sense of security, but such support is not absolute. Such
relationship may not be able to save them when public scrutiny is intense
2. Information, expertise and know-how
a. The use of information to influence the government is called lobbying,
commonly referred to as giving feedback in Singapore. Information, feedback
and lobbying persuade the government to take a certain course of action
b. Ignorance of a minister
i. His ignorance of the subject he is in charge of greatly exceeds his
knowledge of it
c. Measuring performance
i. Performance in a government ministry cannot usually be assessed by
such tangible measures as profits. The subject is difficult and
complicated
d. Role of a minister
i. He must be sensitive to public opinion and be able to carry the public
with him. He is responsible for what happens in his ministry and has to
answer to the PM and his cabinet colleagues, through them to
Parliament and through Parliament to the electorate
e. Generalist v Specialist
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i. A Minister is a generalist, not a specialist. Not only is a generalist better,
but a specialist could be dangerous. A Minister can acquire knowledge
partly by reading the professional literature, or rather that part of value
to him, and partly by engaging expert consultants; but mainly he
depends on his professional and administrative staff
f. Implications
i. To be effective, a Minister must have a strong organisation staffed with
competent professionals and administrators. If his organisation is weak,
he must strengthen it
ii. Since a Minister cannot know everything, he cannot do everything, and
he must delegate responsibility
iii. Identifying the crucial problems and seeing to it that they are solved
are the main jobs of the Minister
g. Problem-solving
i. The problems in any ministry are numerous and the minister must set
out his priorities and decide how much he can tackle. This depends not
only on his estimate of his own ability but also on the capability of the
ministry staff. A Minister depends on his staff, professional and
administrative, at every stage of the decision-making process both for
information and advice. The final solution is a collective effort
h. Implementation
i. Solutions reached are only paper solutions until they are implemented
3. Money
a. The utility of money is naturally appreciated by government officeholders and
society. Business donations, while arguably charitable in motive, do not harm
the interest of the giver. Since a foreign business is prohibited from making
political donations, they can make non-political donations to establish
goodwill, cultivate relationships and gain access to officeholders. Government
officeholders and family members may have pet projects close to their hearts
b. Another way for business to cultivate goodwill is to give business to spouses
and relations of political officeholders. It is not legally wrong in itself, unless it
has influenced the officeholders in inappropriate ways
c. Non-profit organisations also use money to influence the government. While
some donations and gifts are clearly legal and proper, and some are outright
illegal, others may not be so clear cut. Distinguishing between legal gifts and
illegal bribery can be tricky at times, so the rules should be consulted where
appropriate. In some countries, bribery and payments are unavoidable when
government leaders demand payments and kickbacks
4. Assets and resources
a. Resources such as gas, minerals, metals, energy and other commodities are
necessary for any country. Influence is even stronger when government fears
that the business will relocate to other countries. Businesses that provide the
resources can have strategic influence over the government
5. Support, approval and votes
a. Anyone who can contribute, directly or indirectly, to gain support, approval
and votes can exert influence on the government. Politicians desire positive
coverage by the media and are susceptible to their influence
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6. Group strength
a. Business and non-business interests can increase their influence by working
together and building coalitions to influence the government as a group. By
working as a group, they can gain more clout and effectiveness than lone
organisations acting on their own
b. The trade associations can also come together to form peak associations. Peak
associations are associations that represent a larger set of business interests.
Peak associations can also have individual businesses as members
c. Benefits conferred by peak organisations to businesses:
i. Access to government ministers and officials through their activities
ii. Opportunities to present businesses’ views and concerns, especially
when consulted by the government on issues related to business
iii. Provision of information, statistics, databases, research and
consultation
iv. Active monitoring of relevant issues and involvement in their formation
and development
v. Opportunities to meet with other businesses and stakeholders
d. Trade associations sometimes compete with each other to influence the
government. A policy may work for the interest of some businesses but not for
others. A policy may favour capital-intensive businesses but not labourintensive ones. Trade associations representing the different interests may
compete to influence the government to opposing effect
e. Non-business interests also form trade unions, societies and coalitions to
influence the government. By combining individuals into bigger groups, they
share resources and create a bigger voice to influence the government. Some
trade unions and societies are powerful groups with a strong influence on the
government
7. Fairness, justice, morality, law, religion and beliefs
a. The public act on what is right and wrong and judge the government
accordingly. Businesses engage in CSR to increase their influence. Respected
businessmen can exert greater influence than less honourable ones
b. Leaders have lost power because of corruption
c. The laws of some countries are shaped by religion. Religious government
officeholders try to live and act according to their beliefs
8. Threats
a. A person can threaten to withdraw whatever he is currently providing to the
government to influence the government, such as threats to withdraw
investments, vote against a politician, protest against the government, or
engage in civil or mass disobedience
9. Time
a. Sometimes patience is required when one seeks to influence the government.
The government may need time to consider the matter and the circumstances
may not be right for the government to act
b. Sometimes businesses wait for a change in government policy. When the
change in government policy is announced, businesses seize the moment and
jump into action. Companies need to be aware of changes in the relevant
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operating environments and make timely preparations to take advantage of
any change
c. Issue life cycle:
d. The issue arises due to some development in society. It is identified, gains
attention and is discussed or debated. The debate or contest may be public or
private in nature and may occur over a shorter or longer period of time. At the
contest stage, groups and coalitions may form and take sides over the issue.
Interested parties justify their positions and endeavour to convince the
government or society on their point of view. An issue may mature fairly
quickly, or it may take time to mature or not at all. If it does mature, the issue
reaches the decision stage when the government decides on the policy. The
policy may be accompanied by appropriate laws or changes to the law. The
policy or law is then implemented and enforced. The cycle may repeat itself
when a change of policy is sought
e. An interested party should take action at the appropriate stage. It may be too
late when an issue has been decided and implemented. Efforts to overturn an
implemented policy will be much harder than the efforts to win the debate at
the contest stage
Where and How Influence is Carried Out
1. Influencing the executive branch of the government, ministries and statutory boards
a. Sometimes an interested party seeks to influence the most powerful
government leaders. Influence can take place in official meetings between
businessmen and the officeholders. Influence can also take place in
international gatherings
b. Not all lobbying can be conducted on such personal and direct terms. For some,
lobbying will be indirect, such as through letter writing and petition writing.
The government has set up official avenues for business and society to lobby
or give feedback to the government.
c. Other more customised feedback occurs when government ministries,
agencies and statutory boards seek feedback and consultations, via the
internet and other means, on their proposals and initiatives before
implementing them
2. Clientelism
a. Direct business influence on the government is especially important in
clientelism. Clientelism is a situation where the business relies on the
government for support. In return, business provides benefits to the
government. The business becomes a client of the government and receives
concessions and help from the government. In return, the business, as a client,
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3.
4.
5.
6.
7.
“pays” the government for the service and concessions, in the form of
investments, assets, jobs and other contributions
b. Clientelism can be abused by government officeholders and businesses. In
corrupt countries, businesses are expected to confer personal benefits on the
government officeholders in return for support and projects
c. Clientelism is usually a one-to-one relationship. A business, however, may
need to compete with other businesses before it is selected as the favoured
business for the project or undertaking
d. No business leader could afford to alienate a chief minister. You have to work
along with the government, whoever the chief minister is, from whichever
party he is
Tenders
a. Tenders are more formalised ways of persuading the government to accept
the business as the party to work with or to source the goods and services from
Regulatory capture
a. Business influence on the regulators may result in a clubby relationship
between business and the regulator, leading to “regulatory capture”. In
regulatory capture, the regulators are “captured” by the regulated and fail to
regulate business properly
Incorporating government or former government officeholders or their relations in
the business or society
a. Business and non-business groups can gain influence by incorporating political
officeholders or former political officeholders in their organisations. A former
government officeholder who has entered the business world can capitalise
on his relationships with his former government colleagues
b. Business can incorporate a government officeholder while the officeholder is
still in office. Business can incorporate a government officeholder after leaving
office. It can be a win-win for both government and business as business
provide employment to retiring government officeholders
c. Some businesses incorporate MPs in their organisations, since they are
permitted to engage in business while in office. The same extends to the family
members and relations of officeholders. It is not uncommon in Singapore and
other countries to have spouses and close relations of government
officeholders appointed directors or executive of companies. Whether it is
legal or not depends on the law of the specific place
d. Non-business entities may also do likewise. Political leaders are seen to engage
in good deeds and the charitable organisations gain a higher profile and
endorsement
Exporting executives and personnel to the government
a. Some business executives or directors quit their jobs to join the government.
The business whose former executives join the government can have influence
through these executives. Some business executives also serve as MPs.
However, some of these appointments can be controversial. Some activists
and representatives of interest groups serve as nominated MPs in Singapore
Formal bodies
a. Formal bodies are a good avenue for an interested party to influence and
interact with the government. The formal bodies may be represented by
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government officeholders, business representatives and non-business
interests. Some of these bodies have limited functions and are discontinued
after they have served their purposes, while others function for a longer term
b. An interested party may also serve as a Board member of a statutory board. A
trustworthy advisor can also influence government officeholders by acting as
their advisors. A businessman’s involvement in a government body can be
challenged
8. Corporatism (“corpus” means body in Latin → corporatism means acting together as
1 body)
a. Corporatism is an arrangement where the government and the relevant
interest groups work together through negotiations, accommodations or
compromise to arrive at a decision or policy
b. Corporatism works on the basis that the different sections of a group, society
or state work together as a collective body for the good of the whole. Applied
to the state, the relevant interest groups work together harmoniously rather
than in a contentious and fractious manner to decide on policies
c. Singapore adopts the corporatist model when dealing with some worker issues,
called Tripartism. Issues and policies relating to employment, wages and
labour are areas in which aspects of corporatism are practised
9. Influencing the MPs and through them
a. Interested parties can lobby the government in Parliament through an MP. An
MP can table a Parliamentary Query. Individuals or corporations may also
present a petition to parliament with the help of an MP. The petition is
presented by an MP, who affixes his name at the beginning of the petition. An
MP, however, cannot present a petition of which he is one of the signatories.
Behind-the-scenes lobbying may be more likely to succeed than public
lobbying
b. Some bills are considered by Parliament Select Committees. Representations
can be made to them
10. Electoral support, campaign financing and political donations
a. Interested parties hope to have their preferred candidates elected into office.
Interested parties hope to build relationship with or gain access to these
officeholders when they are elected into office
b. Campaign financing and political donations are legitimate forms of influence
and are governed by the Political Donations Act. Every political party,
candidate, election agent and organisation whose objects or activities relate
wholly or mainly to politics in Singapore and which has been declared by the
minister to be a political association can only accept donations from
permissible donors. This effectively bars foreigners and foreign businesses
from making political donations in Singapore. It also forbids unincorporated
associations such as sole proprietors, partnerships and trade unions from
making political donations
c. Business normally has more money to contribute and can tilt the balance of
influence in favour of business, resulting in laws and policies that favour
business over society. This can be counterbalanced by non-business interests
with their votes
11. Grassroots and constituency campaigns
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a. Grassroots and constituency campaigns are campaigns undertaken at the
grassroots or constituency levels which may include public rallies. Businesses
can be affected by grassroots and constituency campaigns
12. Public advocacy
a. An interested party can influence society and the government through public
advocacy. Public advocacy educates the public and persuades it to adopt a
certain point of view. Public advocacy influences the government indirectly
through society’s acceptance, influence or pressure
b. Public advocacy can be conducted through the internet and traditional media.
The effectiveness of public advocacy can be enhanced if the proposal is
endorsed by independent experts. Businesses and interest groups can fund
think tanks and advocacy groups to advocate their policies
13. Public pressure
a. If public advocacy is insufficient, public pressure may be resorted to. Public
pressure can utilise townhall meetings, public rallies, protests, grassroot
activism and coalition building
b. Interest groups sometimes give a false sense of public pressure by increasing
the volume of feedback or lobbying. This is referred to as astroturfing. The
feedback does not come from real grassroots but from artificial astroturf. By
multiplying twitter accounts, websites and social media and by manipulating
search rankings, the message can fill the echo chamber, drowning out
alternative voices
14. Pluralism
a. Pluralism is a setting where multiple interests groups compete against one
another to influence the government in its decision making. Unlike
corporatism, where interest groups deliberate and decide on policies
consensually, in pluralism, interest groups actively compete with one another
for influence. Interest groups interested in the issue can compete in pluralism.
Government policies do not affect 1 company or societal group alone
b. Each company or societal group has its own stakeholders and people in its
value chain. Value chain refers to all those involved in the process that
contribute to the process. Similarly, a societal group has its own value chain.
Any issue affecting a company or societal group will directly and indirectly
affect a larger group of people and organisations. A company or societal group
can call upon those in its value chain to support its cause
c. Size of membership is an important component of a group’s political credibility.
Expertise and information are valuable to policy makers, and they will tend to
be more responsive to groups with such resources
d. Access to the media and the capacity to influence public preferences will
depend, in part on financial resources. Access to government may result from
the government’s preference for meeting with certain groups rather than
others (insider vs outsider status) and the institutional structures in place
e. The contest between interest groups can be intense. However, contests in
pluralism are not always intense nor do they always attract wide participation.
Some contests only involve the participation of a few interested parties
15. Civil disobedience
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a. Society can influence the government through civil disobedience. Civil
disobedience is the active refusal to obey laws, demands, and commands of a
government or an occupying international power
16. Referendum
a. Sometimes governments conduct referendums to decide on important
matters. Referendums go beyond influencing the government. It seeks to
make decisions for the government and the country. The interests of
government leaders can differ from the populace
17. Judicial review
a. Interested parties have the option of taking action in the law courts to
challenge decisions made by the government. The process is called “judicial
review” and is usually taken as a last resort. Judicial review is an application to
overturn the decisions or acts of the government
b. Non-business interests and individuals can also apply for judicial review of
government decisions. Sometimes, individuals ask MPs to write to the court to
help in their cases
c. However, the PAP has reminded PAP MPs not to do anything that may give rise
to any misperception that they can influence or interfere in the judicial process
18. International lobbying
a. A government can influence another government for the benefit of its business
and non-business interests. Singapore, a small country which relies on
international trade, is sensitive to international lobbying and pressures from
foreign governments
b. Business can work through its home country’s government leaders, officials
and ambassadors to influence the host government. The influence can also be
mutual. 2 countries can grant concessions to each other
c. Business can also leverage on international bodies to influence governments
d. Non-business interests can seek the help of its government to influence a
foreign government as well. Environmental groups enlist the help of their
government to pressure foreign governments to ban illegal logging of
rainforests
Why Influence the Government
1. Choice of government officeholders
a. Business hopes that business-friendly government leaders come to power,
while non-business the reverse
2. Government support
a. Business seeks a more pro-business environment and hard and soft
infrastructure needed to operate efficiently. Business seeks grants, subsidies,
loans and reduction in taxes from the government
b. Non-business interests do likewise for their interests
3. Greater roles
a. Business seeks more favourable market structures and a bigger role in the
provision of goods and services. Business favours the privatisation of
government roles and seeks government tenders, PPPs and other government
projects
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b. Non-business interests seek greater roles for the government and their
interests
4. Competition
a. New businesses seek to enter into markets monopolised by the incumbents.
Players in newer businesses seek license to operate as an alternative to older
businesses
b. Businesses seek to restrict their competitors and ask the government to take
action against them. Non-business interests may side with certain businesses
over others
5. Policies and regulations
a. Business seeks policies and regulations that favour business over labour and
the environment
b. Non-business interests seek the opposite
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WEEK 5 CASE 1: GOVERNMENT AS CLIENT – TRADITION FINANCIAL SERVICES IN LIBYA
Summary:
Tradition Financial Services of Switzerland is being investigated by wide-ranging US and British
corruption probes for bribing Moammar Gadhafi, to win business in Libya, an effort that
included hiring relatives of senior Libyan officials. Tradition for years handled investments for
the Libyan funds, earning millions of dollars in commissions
Tradition Financial Services get business from the Libyan government by bribery. It included:
•
•
•
•
Hiring relatives of senior Libyan officials
Organising luxury vacations in Marrakesh in 2009 and 2010 by renting a large villa and
inviting Mr Zewam, other officials of Arab Banking Corp, and the Libyan Investment
Authority and bank traders
Entertaining Mr Zewam and his colleagues in London, such as inviting Mr Zewam to a
private Fashion Week lingerie-modelling party in February 2010
Paying for much of Mr Zewam’s travel to Marrakesh, as well as his airfare and hotel
stays in London and Dubai
WEEK 5 CASE 2: CLIENTELISM – SUMITOMO CHEMICAL AND THE PCS PROJECT
Summary:
In 1980, Singapore wanted to move away from electronics and precision engineering
companies, to move into chemicals, since electronics is labour-intensive, and Singapore
cannot get labour quickly enough to meet industry demands, and the Singapore electronics
industry is saturated. Mr Hasegawa, together with Mr Hon Sui Sen, proposed a petrochemical
investment plan for Singapore and Mr Hasegawa obtained Japanese government funding for
the project. It became successful despite many setbacks and difficulties, such as
disagreements between the parties, and the threat of a similar project being carried out in
Iran. In February 1984, Philips Petroleum Singapore Chemicals, Polyolefin Company
(Singapore) and Denka Singapore plants started up
How Mr Norishige Hawegawa lobbied the Singapore and Japanese Governments to support
the Petrochemical Corporation of Singapore (PCS) Project:
• Mr Hawegawa obtained Japanese government support by going through several levels
in the administration. Mr I.F. Tang and Mr Hawegawa would argue that the project
was in Japan’s own interests for a more secure supply of chemicals to Japanese
industry, and that the project would ultimately benefit the entire ASEAN community.
The project was granted the Japanese government’s official blessing with strong
support from the Ministry of International Trade and Industry and the Japanese
Ministry of Foreign Affairs
• The Singapore government was already interested in moving into the chemical
industry, so PM Lee was happy to consider this a “national” project, since it would be
significant for Singapore’s development
Clientelism (Should be mutually beneficial – Involves government and businesses)
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•
•
•
Organisation to benefit the government by making investments and providing jobs,
etc
Government to benefit the organisation by awarding licenses for it to operate in the
country
The nature of the policy is that the government will pay in terms of contracts, and the
businesses will pay in terms of jobs and services
Influencing the Singapore government: Mr Hasegawa → Mr Hon Sui Sen (friendship through
church) → Mr Lee Kuan Yew (Logical reasoning → Benefits to Singapore) → Singapore
government (Benefits to Singapore)
Influencing the Japanese government: Mr Hasegawa went through several levels in the
administration to argue that the project was in Japan’s own interests for a more secure supply
of chemicals to Japanese industry, and that the project would ultimately benefit the entire
ASEAN community
WEEK 5 CASE 3: CORPORATISM – ECONOMIC STRATEGIES COMMITTEE SUB-COMMITTEE
SIX AND FOREIGN WORKERS POLICIES
Summary:
The foreign worker levy increase is set to take effect, which affects businesses in industries
hiring many foreign workers. There is also going to be a long-term cap of one-third of the
population being foreign workers. However, there is no scaling back of quotas for foreign
workers, and the ultimate decision was to walk the middle line and be more flexible,
depending on the economic prospects of Singapore. The ESC was effective and came up with
a proposal 3 months ahead of the deadline
Balancing of interests of the various parties, and deciding on the appropriate policy:
• Government: Ensure the public is happy, Ensure the businesses have enough workers,
Ensure the economy's growth and potential growth
• Employers: Wants productivity growth through cheap labour
• Employees: Wants jobs and does not want to compete with foreign workers for jobs
• Public: Does not want Singapore to be majority foreigners, Does not want foreigners
taking up too much space, opportunities, resources in Singapore
• Appropriate policy: The foreign workforce will be maintained at its current level of
one-third for the indefinite future
Corporatism involves everyone working together – government and various interest groups.
The nature of policy is a compromise, where the involved parties meet somewhere in
between
WEEK 5 CASE 4: PLURALISM / TENDERS – INTEGRATED RESORTS IN SINGAPORE
Summary:
Singapore had to decide on whether to build a casino as part of integrated resorts, following
a slowing economy in 2001-2003. Many conservative and religious groups objected to the
idea, but ultimately, the government decided to go ahead with the plan and allowed for the
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operation of 2 casinos in Singapore, due to the economic benefits that such developments
can provide
Pluralism (Many interests to be balanced with diverse interest groups trying to influence
decisions and outcomes):
• The religious groups and conservative groups wrote to the Straits Times and to the
government and MPs directly, voicing their opinions, and they also went for policy
discussion sessions, and signed petitions
• The government arrived at its decision after considering all opinions and after having
many debates within the cabinet and among the MPs. They took into consideration
all the opinions from the public as well, and the economic benefits that the
developments can bring for Singapore. This is because the developments would likely
go to other countries in the region if Singapore rejected the projects, and then
Singapore will have a hard time catching up to the developments in those countries
• The issues are usually controversial, and a policy will not settle the differences
Reasons for building the casinos:
1. Economic benefits
2. Slowing Singapore economy
3. Increased tourism activity
4. Can put in measures to protect Singaporeans from being too negatively affected
5. Unfair to prevent people from gambling legally
6. Other avenues of legal gambling exist as well, better to collect taxes from casinos
Reasons against building the casinos:
1. Against religious beliefs
2. Considered immoral
3. Negative social consequences
4. Negatively affect families
Tendors (Based on who provides the most benefits, with the most important benefit usually
being profits):
• Criteria for the tenders:
o Tourism appeal and contribution
o Architectural concept and design
o Development investment
o Strength of the consortium and partners
• The Singapore government awarded the tenders to Las Vegas Sands due to it having
committed the highest development investment of S$3.85 billion. With the land price
and associated capital cost, its total investment would exceed S$5 billion, making it
one of the most expensive casinos in the world. Sands was assessed to have the best
overall proposal to meet Singapore’s economic and tourism objectives
• The Singapore government awarded the tenders to Genting due to it having submitted
the most compelling proposal overall that best meets Singapore’s economic and
tourism objectives. In particular, the proposal reflects Singapore’s vision for the
Sentosa IR as a large-scale, family resort with its host of world-class family leisure
attractions and other strong offerings. The attractions are believed to position Sentosa
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as a premier island resort for families and draw significant numbers of both new and
repeat visitors to Singapore
WEEK 5 CASE 5: WHY INFLUENCE THE GOVERNMENT – MICROSOFT IN CHINA
Summary:
Microsoft has found a way to work in China by working together with the government and
making sure their interests are aligned with those of the government. They tolerated piracy,
and opened up many businesses in China, providing many IT services to the Chinese
government, ensuring that their interests are aligned with those of the Chinese government,
and assured them that the Microsoft software isn’t spying on China, and allowing the Chinese
government to add in its own software to the Microsoft software. It has led to the growth of
Microsoft in China, and a growing number of Chinese computers are downloading Microsoft
legally now
Microsoft wants a dominant market share in China, and wants most computers in China to
use Microsoft software, legally or otherwise. Microsoft believes that by working on its
strategy of influencing and working together with the Chinese government, it will result in
mutually beneficial outcomes for both Microsoft and the Chinese government
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WEEK 6 READING 1: STRATEGY & SOCIETY – THE LINK BETWEEN COMPETITIVE
ADVANTAGE & CORPORATE SOCIAL RESPONSIBILITY
CSR has emerged as an inescapable priority for business leaders in every country. Many
companies have already done much to improve the social and environmental consequences
of their activities, yet these efforts have not been nearly as productive as they could be,
because:
1. They pit business against society, when clearly the 2 are interdependent
2. They pressure companies to think of CSR in generic ways instead of in the way most
appropriate to each firm’s strategy
The prevailing approaches to CSR are so disconnected from business as to obscure many of
the greatest opportunities for companies to benefit society
Activist organisations of all kinds, both on the right and left, have grown much more
aggressive and effective in bringing public pressure to bear on corporations. Activists may
target the most visible or successful companies merely to draw attention to an issue, even if
those corporations actually have had little impact on the problem at hand
4 prevailing justifications for CSR:
1. Moral obligation
a. Companies have a duty to be good citizens and to “do the right thing”
2. Sustainability
a. Emphasises environmental and community stewardship
3. License to operate
a. Every company needs tacit or explicit permission from governments,
communities, and numerous other stakeholders to do business
4. Reputation
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a. CSR initiatives will improve a company’s image, strengthen its brand, enliven
morale, and even raise the value of its stock
Practical limitations of each approach above:
1. Moral obligation
a. The nature of moral obligations is to be absolute mandates, but most
corporate social choices involve balancing competing values, interests, and
costs
b. The moral calculus needed to weigh 1 social benefit against another, or against
its financial cost, has yet to be developed
2. Sustainability
a. Companies should operate in ways that secure long-term economic
performance by avoiding short-term behaviour that is socially detrimental or
environmentally wasteful. The principle works best for issues that coincide
with a company’s economic or regulatory interests
b. In other areas, the notion of sustainability can become so vague as to be
meaningless. Assertions of what is more sustainable offer little basis for
balancing long-term objectives against the short-term costs they incur. The
sustainability school raises questions about trade-offs without offering a
framework to answer them
c. Managers without a strategic understanding of CSR are prone to postpone
these costs, which can lead to far greater costs when the company is later
judged to have violated its social obligation
3. License to operate
a. This is far more pragmatic, since it offers a concrete way for a business to
identify social issues that matter to its stakeholders and make decisions about
them. This approach fosters constructive dialogue with regulators, the local
citizenry, and activists
b. By seeking to satisfy stakeholders, however, companies cede primary control
of their CSR agendas to outsiders. Stakeholders’ views are obviously important,
but these groups can never fully understand a corporation’s capabilities,
competitive positioning, or the trade-offs it must make
c. A firm that views CSR as a way to placate pressure groups often finds that its
approach devolves into a series of short-term defensive reactions – a neverending public relations palliative with minimal value to society and no strategic
benefit for the business
4. Reputation
a. Concerns about reputation focus on satisfying external audiences. This
rationale risks confusing public relations with social and business results
All 4 schools of thought share the same weakness: They focus on the tension between
business and society rather than on their interdependence. Internally, CSR practices and
initiatives are often isolated from operating units – and even separated from corporate
philanthropy. Externally, the company’s social impact becomes diffused among numerous
unrelated efforts, each responding to a different stakeholder group or corporate pressure
point. The consequence of this fragmentation is a tremendous lost opportunity
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Successful corporations need a healthy society. Education, healthcare, and equal opportunity
are essential to a productive workforce. Any business that pursues its ends at the expense of
the society in which it operates will find its success to be illusory and ultimately temporary.
At the same time, a healthy society needs successful companies. If governments, NGOs, and
other participants in civil society weaken the ability of business to operate productively, they
may win battles but will lose the war, as corporate and regional competitiveness fade, wages
stagnate, jobs disappear, and the wealth that pays taxes and supports non-profit
contributions evaporates
To put these broad principles into practice, a company must integrate a social perspective
into the core frameworks it already uses to understand competition and guide its business
strategy:
1. Identifying the points of intersection
a. Inside-out linkages (Company impinging upon society through its operations in
the normal course of business)
i. No longer can companies be content to monitor only the obvious social
impacts of today. Without a careful process for identifying evolving
social effects of tomorrow, firms may risk their very survival
b. Outside-in linkages (External social conditions influencing corporations) –
Competitive context can be divided into 4 broad areas:
i. The quantity and quality of available business inputs – human
resources, or transportation infrastructure
ii. The rules and incentives that govern competition – such as policies that
protect intellectual property, ensure transparency, safeguard against
corruption, and encourage investment
iii. The size and sophistication of local demand, influenced by such things
as standards for product quality and safety, consumer rights, and
fairness in government purchasing
iv. The local availability of supporting industries, such as service providers
and machinery producers
2. Choosing which social issues to address
a. The essential test that should guide CSR is not whether a cause is worthy but
whether it presents an opportunity to create shared value
b. Categories of social issues affecting a company:
i. Generic social issues: Important to society but are neither significantly
affected by the company’s operations nor influence the company’s
long-term competitiveness
ii. Value chain social impacts: Significantly affected by the company’s
activities in the ordinary course of business
iii. Social dimensions of competitive context: Factors in the external
environment that significantly affect the underlying drivers of
competitiveness in those places where the company operates
c. Even issues that apply widely in the economy can have greater significance for
some industries than for others. Within an industry, a given social issue may
cut differently for different companies, owing to differences in competitive
positioning. Where a social issue is salient for many companies across multiple
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industries, it can often be addressed most effectively through cooperative
models
3. Creating a corporate social agenda – Types of CSR:
a.
b. Responsive CSR
i. Acts as a good corporate citizen, attuned to the evolving social
concerns of stakeholders, and mitigates existing or anticipated adverse
effects from business activities
ii. The best corporate citizenship initiatives specify clear, measurable
goals and track results over time
iii. For most value chain impacts, there is no need to reinvent the wheel.
The company should identify best practices for dealing with each one,
with an eye toward how those practices are changing
c. Strategic CSR
i. Strategy is about choosing a unique position – doing things differently
from competitors in a way that lowers costs or better serves a
particular set of customer needs
ii. Moves beyond good corporate citizenship and mitigating harmful value
chain impacts to mount a small number of initiatives whose social and
business benefits are large and distinctive. Involves both inside-out and
outside-in dimensions working in tandem. It is here that the
opportunities for shared value truly lie
iii. Many opportunities to pioneer innovations to benefit both society and
a company’s own competitiveness can arise in the product offering and
the value chain
iv. Unlocks shared value by investing in social aspects of context that
strengthen company competitiveness. The success of the company and
the success of the community become mutually reinforcing
4. Integrating inside-out and outside-in practices
a. Activities in the value chain can be performed in ways that reinforce
improvements in the social dimensions of context. Investments in competitive
context have the potential to reduce constraints on a company’s value chain
activities
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b. When value chain practices and investments in competitive context are fully
integrated, CSR becomes hard to distinguish from the day-to-day business of
the company
5. Creating a social dimension to the value proposition – A set of needs a company can
meet for its chosen customers that others cannot
a. The most strategic CSR occurs when a company adds a social dimension to its
value proposition, making social impact integral to the overall strategy
b. Not every company can build its entire value proposition around social issues,
but adding a social dimension to the value proposition offers a new frontier in
competitive positioning
c. Government regulation, exposure to criticism and liability, and consumers’
attention to social issues are all persistently increasing. As a result, the number
of industries and companies whose competitive advantage can involve social
value propositions is constantly growing
Organising for CSR:
Companies must shift from a fragmented, defensive posture to an integrated, affirmative
approach. The focus must move away from an emphasis on image to an emphasis on
substance. The current preoccupation with measuring stakeholder satisfaction has it
backwards. What needs to be measured is social impact. These transformations require more
than a broadening of job definition; they require overcoming a number of long-standing
prejudices. Strategy is always about making choices, and it is about choosing which social
issues to focus on. Creating value should be viewed like R&D, as a long-term investment in a
company’s future competitiveness
The moral purpose of business:
The most important thing a corporation can do for society, and for any community, is
contribute to a prosperous economy. This cannot excuse businesses that seek short-term
profits deceptively or shirk the social and environmental consequences of their actions. NGOs,
governments, and companies must stop thinking in terms of “corporate social responsibility”
and start thinking in terms of “corporate social integration”. Perceiving social responsibility
as building shared value rather than as damage control or as a PR campaign will require
dramatically different thinking in business. Addressing social issues by creating shared value
will lead to self-sustaining solutions that do not depend on private or government subsidies.
When a well-run business applies its vast resources, expertise, and management talent to
problems that it understands and in which it has a stake, it can have a greater impact on social
good than any other institution or philanthropic organisation
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WEEK 6 READING 2: THE SOCIAL RESPONSIBILITY OF BUSINESS IS TO INCREASE ITS
PROFITS
Reasons why the social responsibility of business is to increase its profits, instead of
promoting desirable “social” ends:
1. In his capacity as a corporate executive, the manager is the agent of the individuals
who own the corporation or establish the eleemosynary institution, and his primary
responsibility is to them. As a person, he may have many other responsibilities that he
recognises or assumes voluntarily, but they are the social responsibilities of individuals,
not businesses. The stockholders or the customers or the employees could separately
spend their own money on the particular action if they wished to do so. The executive
is exercising a distinct “social responsibility”, rather than serving as an agent of the
stockholders or the customers or the employees, only if he spends the money in a
different way than they would have spent it
2. If the agent spends the money in a different way than the principal would have spent
it, he is in effect imposing taxes, and deciding how the tax proceeds shall be spent.
This process raises political questions on 2 levels: principle and consequences
a. On the level of political principle, the imposition of taxes and the expenditure
of tax proceeds are governmental functions. We have established elaborate
constitutional, parliamentary, and judicial provisions to control these functions,
to assure that taxes are imposed so far as possible in accordance with the
preferences and desires of the public. We have a system of checks and
balances to separate the legislative function of imposing taxes and enacting
expenditures from the executive function of collecting taxes and administering
expenditure programs and from the judicial function of mediating disputes and
interpreting the law
b. On the grounds of consequences, can the corporate executive in fact discharge
his alleged “social responsibilities”? Even if we suppose that he could get away
with spending the stockholders’ or customers’ or employees’ money, how is
he to know how to spend it? How much cost is he justified in imposing on his
stockholders, customers, and employees for this social purpose? What is his
appropriate share and what is the appropriate share of others?
3. Whether he wants to or not, can he get away with spending his stockholders’,
customers’, or employees’ money? Will not the stockholders fire him? His customers
and employees can desert him for other producers and employers less scrupulous in
exercising their social responsibilities. The difficulty of exercising “social responsibility”
illustrates the great virtue of private competitive enterprise by forcing people to be
responsible for their own actions and making it difficult for them to “exploit” other
people for either selfish or unselfish purposes. They can do good, but only at their own
expense
4. In practice, the doctrine of social responsibility is frequently a cloak for actions that
are justified on other grounds rather than a reason for those actions. Whether
blameworthy or not, the use of the cloak of social responsibility, and the nonsense
spoken in its name by influential and prestigious businessmen, does clearly harm the
foundations of a free society. Businessmen are capable of being extremely far-sighted
and clear-headed in matters that are internal to their businesses. They are incredibly
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short-sighted and muddle-headed in matters that are outside their businesses but
affect the possible survival of business in general
5. The short-sightedness is exemplified in speeches by businessmen on social
responsibility. This may gain them kudos in the short-term, but it helps to strengthen
the already too prevalent view that the pursuit of profits is wicked and immoral and
must be curbed and controlled by external forces. The political principle that underlies
the market mechanism is unanimity. In an ideal free market resting on private
property, there are no values, no “social” responsibilities in any sense other than the
shared values and responsibilities of individuals. The political principle that underlies
the political mechanism is conformity. Unfortunately, unanimity is not always feasible
6. However, the doctrine of “social responsibility” taken seriously would extend the
scope of the political mechanism to every human activity. It does not differ in
philosophy from the most explicitly collective doctrine. It differs only by professing to
believe that collectivist ends can be attained without collectivist means. It is a
“fundamentally subversive doctrine” in a free society, and in such a society, “there is
one and only one social responsibility of business – to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game,
which is to say, engages in open and free competition without deception or fraud”
Reasons against CSR:
1. Agency – Should not spend the shareholders’ money
2. Branches of government – CSR is the government’s responsibility
3. Competence – No competence to do CSR
4. Dismissed – The worker may be dismissed for misspending the shareholders’ money
5. Evil of profits – Prevalent view that the pursuit of profits is wicked and immoral and
must be curbed and controlled
6. Free market – Free to do what you want
7. Government control – Responsibility of executives
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WEEK 6 LESSON
CSR-related terminologies:
1. Corporate social responsibility
2. Corporate responsibility
3. Corporate citizenship (Companies are considered citizens of the country, and should
behave as such)
4. Sustainability
5. Triple bottom line (Bottom line: The final thing that matters most)
6. 3P’s – People, Planet, Profits
Greenwashing is an act of advertising as an environmentally-responsible company when it is
in fact only superficially involved
Which type of responsibility is most important is contingent on each individual
Types of
Source of
Why fulfil these
Why disagree with these
Responsibility
Responsibility
responsibilities?
responsibilities?
Economic
Need / Want
Uncertainty / Many
components / Long-run vs
Short-run / Computational
basis
Pragmatic
Need / Want
Legal
Government
Legal sanctions
Based on construction
(interpretation of law) /
Laws can change / May be
incorrect / Loopholes
Moral
Self / Society
Guilty conscience /
Moral relativism /
Social sanctions
Subjective
Religious
Religious beliefs
Divine punishments
Subjective (different
religions)
Law that is independent of morality is for administrative purposes
Examples of things not allowed by:
1. The law but allowed by morality: Uber, Black market
2. Morality and the law: Crime, Hacking
3. Morality but allowed by the law: Casino, Apartheid
Pragmatism believes that the ends justify the means, but morality believes that there are
things you cannot do even if they let you achieve what you want
Secular morality: Human rights standards, Changing with the times
Religious morality: Spiritual, More fixed and ancient, Paramount
Legal, Moral, Profitable: Typical businesses (Advocated as CSR)
Legal, Moral, Unprofitable: Curbing pollution (Advocated as CSR)
Legal, Immoral, Profitable: Casino (Sometimes defended)
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WEEK 6 CASE: FORD PINTO
Summary:
Henry Ford II and Lee Iacocca are concerned with making profits only and did not care about
the safety of the Pinto cars produced by Ford. They did everything they could to fight against
and delay the safety regulations from being passed, by employing several techniques, such as
blaming the cause of the accident on something else other than the vehicles, and giving many
reports and details, which will take the people in the regulations department many months
to test and check against
Ways to improve the Ford Pinto:
1. Make the bumper stronger
2. Put a bladder in the fuel tank to contain the fuel
3. Relocate the fuel tank to the middle of the car
4. Put a steel plate between the bumper and the fuel tank
5. Make the fuel tank stronger
6. Put a protective layer between the bolts and the fuel tank
Friedman would approve of what Ford did in the Pinto case, because Friedman believes that
the only responsibility of a business is to make profits, and whatever that produced the most
amount of profits is what’s best for the business. The employees should not be concerned
about the social impacts of their actions because they are only liable to the shareholders and
investors who are the owners of the business
Porter would not approve of what Ford did in the Pinto case, because Ford was not concerned
about its consumers, and instead harming them greatly, by releasing Pinto cars despite
knowing about their safety hazards. CSR involves making sure you value-add to society by
trying to solve a societal problem that your business has the most stakes in, but Ford is
creating more problems for society instead
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WEEK 7 READING 1: PRIVATE POLITICS AND SOCIAL PRESSURE
Introduction
•
•
•
Private politics focuses on changing the behaviour of private economic agents not
through government action but through social pressure and the threat of harm to the
business. Private politics is frequently led by NGOs and social activists, many of whom
have concluded that more progress toward their goals can be achieved by targeting
economic agents directly rather than by working through government
The success of a private politics strategy depends on support from at least a portion
of the public. The “trust gap” between NGOs and companies favours the NGOs
Private politics can be motivated by self-interest as well as by broader concerns. In
some cases, it arises because an individual becomes concerned about an issue. More
often, private politics originates from interest groups. The causes these individuals,
interest groups, and NGOs pursue are important components of the non-market
environment, and the issues on their agendas are frequently thrust onto the agendas
of firms. Understanding their concerns, organisation, and strategies is essential for
formulating effective strategies to address the issues they raise and the pressures they
generate
Private Politics and the Non-Market Environment
•
Private politics can shape the non-market environment in several ways:
o Those initiating private politics can identify issues about which management
either is unaware or has not understood as important to others
o Social activists and NGOs can affect the organisation of interests by forming
watchdog and advocacy groups and by mobilizing people to work for causes
o The social pressure these groups exert can affect the institutional
configuration of the non-market environment. This private regulation has
been growing as an alternative to government regulation
o Individuals, interest groups, and activists provide information that influences
public and private politics
The Evolution of Private Politics
•
•
•
•
The activists turned to corporate campaigns that deployed confrontational tactics to
pressure their target companies. Corporate campaigns were frequently successful
when they targeted companies with a reputation or brand equity that could be
harmed by the media attention given to the campaigns and the activists’ claims
Social activists, however, found that corporate campaigns had limits because they
could not gain leverage over many companies. Market campaigns are directed at the
components of the value chain that are most susceptible to harm from a successful
campaign
Democracy in the marketplace means that citizen consumers express in markets their
views on the performance of firms
Private politics led by activists differs from union campaigns:
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•
•
o Unlike labour unions, social activists are not linked to their target by a market
and hence have no direct market power over their target
o Labour unions engage in public politics by delivering votes, election campaign
volunteers, and campaign contributions
In the 1990s, some NGOs began to adopt a cooperative rather than a confrontational
approach in which they worked with companies to reduce threats to the environment,
protect human rights, and improve social welfare
Private politics social pressure became the preferred instrument of many activists, and
with the increased social pressure firms began to seek shelter. Some NGOs saw an
opportunity to make progress toward their agendas by working with rather than
against firms, and firms sought shields against the confrontational activists.
Cooperative engagements became more common
Confrontational Private Politics
•
•
•
•
Social issues can cut across product market lines. The lines of business of a firm
determine the scope of the social pressure the firm could face. Activists organise
corporate and market campaigns to advance the issues on their agendas, and a
frequent component of a campaign is a boycott. Boycott targets may also be chosen
because of opportunity. Activist and interest groups often use both private and public
politics strategies
Firms that were identified as environmentally abusive experienced a statistically and
economically significant decrease in their share prices, whereas the share prices of
firms identified as abusive of human rights were unaffected. Despite the varying
evidence, most firms are concerned about the possibility of a boycott not only because
of possible lost sales but also because the public attention, frequently under the
scrutiny of the media, could harm their brands as well as their reputations and public
images
The goal is to call attention to objectionable practices of the target, casting doubt on
the public face the company has created through its public relations and advertising.
The strength of activist groups varies across countries
Factors causing susceptibility to private politics:
o Products
▪ Consumer products
▪ Products with low switching costs
▪ A brand name that can be damaged
o Operating environment
▪ Activities that produce harmful externalities
▪ Operating in an interest group-rich environment
▪ Multinational / Global operations – issues can spill over to other units
and countries
▪ Operating in developing countries
o Organisation
▪ A decentralised organisation, so that external effects, including
intracompany, are not naturally considered
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•
•
In a highly decentralised company, a subsidiary in 1 country may not take into account
or even be aware that its activities can spur private politics affecting subsidiaries in
other countries
The effectiveness of private politics social pressure depends on:
o Social value achieved by causing a potential target to change its practices, as
in the mitigation of a negative externality or improvement in the working
conditions in suppliers’ factories in developing countries
o How tough the potential target is, where toughness depends on the cost of
changing its practices
o How vulnerable a potential target is, where vulnerability can depend on brand
equity or reputation that could be harmed by a campaign
o The extent to which potential targets take into account the social value of a
change in their practices when making their decisions; that is, the extent to
which they accept social responsibilities
Cooperative Private Politics
•
•
•
•
•
•
NGOs with expertise may be able to adopt a cooperative strategy. An NGO could help
a firm identify the benefits and costs from changing its environmental practices
A cooperative NGO can use its expertise to help the target discover the consequences
of a change in practices, where neither the NGO nor the target initially knows the
specific benefits that might be discovered. Certification by the NGO is one way that
external legitimacy is granted
A firm could adopt its own policy or participate in an industry programme to address
a social issue, but frequently these efforts lack legitimacy and do little to reduce social
pressure
External legitimacy could involve the certification of a change in the target firm’s
practices. External legitimacy improves the standing of the firm with the public,
reduces social pressure, and makes the target less attractive to a confrontational
activist because there is less that can be accomplished through a campaign
A cooperative engagement can allow an activist to observe the firm’s alternatives and
certify for the public that the change has been made while not revealing specific
information to the public and competitors. This can also help create markets
Cooperative and confrontational strategies can leave activist groups on opposite sides
of an issue
Synergies between Confrontational and Cooperative Private Politics
•
•
Because of the synergy between confrontational and cooperative private politics,
cooperative NGOs may participate or support the campaigns of confrontational NGOs
to strengthen the demand for cooperative engagements. The greater that demand,
the more bargaining power the cooperative NGO has to obtain greater changes from
its corporate partners in cooperative engagements
Use confrontational tactics with higher demands to push organisations towards
agreeing to cooperative tactics with more reasonable demands
Moderates and Radicals
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•
•
•
Some NGOs are operated by self-proclaimed radicals and others by moderates
Some of the negative perceptions of an NGO may actually serve to support its cause,
upholding Machiavelli’s proposition that it is better to be feared than loved, when
campaigning against corporations. The notion that NGOs often can be more effective
by imposing harms rather than offering benefits is consistent with the economics
literature
The tougher is the bad cop, the more leverage the good cop has. Some activists have
developed both cooperative and confrontational capabilities
Activist Strategies
•
•
•
•
•
The news media and the social media play a central role by providing information
about the issue, the firm’s practices, and the target. Activists often take out
advertisements in newspapers and magazines as part of their attempt to inform the
public, but they also rely on “earned” media – that is, media coverage of the campaign
itself. Information provision elicits participation by the public as well, mitigating a freerider problem
Direct pressure can be applied by calling attention to the activities of a company,
through “naming and shaming”
The trust gap can create an asymmetry between the effectiveness of NGOs and firm
strategies. Because the public tends to trust NGOs more than firms, negative
information provided by an NGO can have more impact on the development of an
issue than can information provided by the target
Pressure can be applied through centralised and decentralised activities. The internet
has helped activists coordinate their actions and mount their campaigns on a broader
and more decentralised basis. The internet has also become important in fundraising
for NGOs. Social media can be as powerful by coordinating the actions of people with
shared interests
Activist groups also use their standing before courts, legislatures, and administrative
organisations to petition, sue, and advocate action. The most common tactic is to
question the company at its annual meeting, and a more formal approach is to file a
shareholder resolution with the Securities and Exchange Commission
Advocacy Science
•
•
A frequently used strategy of activists is to conduct a policy study or scientific
investigation to call attention to an issue
Advocacy science is most effective if it can be coordinated with other actions to
prolong attention to the issue and provide a series of newsworthy events
Target Selection
•
An important component of a private politics campaign is the selection of a target.
Activists sometimes target “worst offenders”. In contrast, hoping they will be
responsive, activists sometimes target companies that have positioned themselves as
socially responsible and environmentally friendly
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•
Large firms, firms with greater toxic emissions, and firms that are more advertising
intensive are more likely to be targeted. Campaigns against larger firms and firms with
higher emissions are more aggressive, and the target is more likely to concede to the
activist demands the higher the emissions. Activists also target individuals in both
their personal and professional roles. Attention typically focuses on those perceived
as influential and possibly influenceable
A Generic Strategy of Activists
•
•
The basic strategy of the activist is to frame the issue to attract the interest of the
public and the media and induce people and government officeholders to take actions
that give the issue a life of its own
Strategies for Addressing Social Pressure – Assessment
•
•
Addressing the activist environment:
o Identify the relevant interest groups and activist organisations in your market
and non-market environments
o Understand their agenda, preferences, and capabilities
o Understand the broader public support for their agenda
o Consult with them on important issues; a number of companies have
established regular forums for exchanging information and views
o Cooperate when that is beneficial
o Fight when you are right and can win, but be careful
Basic steps successful companies have taken include:
o Assessing its positioning and any possible private politics challenges to that
position. This begins by answering the question of what is demanded of the
firm by the activists, and more importantly, by the public
o Assessing vulnerability to a private politics campaign. This involves not only the
firm’s own vulnerability but also the vulnerability of those in its value chain
o Assessing the extent of public support for the activists’ agendas. This depends
on the issue as well as the public
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o (If a company is potentially vulnerable) Considering whether it is possible to
forestall a possible campaign through self-regulation, by working with
cooperative NGOs, or by making public commitments to new politics.
Interacting with a cooperative NGO can provide benefits, particularly when the
group has expertise
▪ On some issues, companies view an NGO as part of the solution. This
has become common in environmental issues in particular
o Evaluating the specific issues of concern and assessing where the issue is in its
life cycle and how rapidly it is progressing. Often the issues generated by
activists and interest groups are early in their life cycles, and thus firms have
an opportunity to affect their progress
o Identifying other potentially interested parties and assessing how likely they
are to become active on the issue. Assessing the effectiveness of alternative
strategies is often difficult when the issue is the subject of media and public
attention, and that attention may advance an issue quickly through its life cycle
o (In the case of a boycott) Assessing whether customers and the public are likely
to be aware of the issue and sympathetic to the position of the activists, and
assessing the likelihood that individuals will actually respond to that sympathy
Strategy and Negotiations
•
•
•
•
Professionals are more difficult to co-opt, but they may be more practical as well
If the interactions with an activist group reach the point of bargaining over the
resolution of the issue, a firm must assess the benefits and costs of alternative
resolutions. Many firms prefer that the playing field be level with their competitors
adopting the same policies for dealing with the issue
An important component of a strategy for addressing a private politics campaign is to
shore up the support of a firm’s employees, some of whom may be sympathetic with
the demands made by the activists. The objective is to protect employee morale by
explaining the extensive steps the company is taking to address the issue concerned
In cases where the stakes are high, and monitoring of the firm’s actions is difficult, the
parties may require more than a simple agreement
Challenging the Activists
•
•
•
•
Companies that do not have the characteristics mentioned earlier may choose to bear
the social pressure. The target of a campaign may also fight back. This may involve
filing a lawsuit against the activist organisation
Many firms, when opposing an activist campaign, choose not to attack the activist
group but instead provide information about the issues in question in the hope of
weakening public support for the campaign. A target may invest in reputation
management by providing positive information about its record and making sure that
employees are on board. Targets may also develop an alternative organisation
In some cases, a firm may change the boundaries of the organisation. E.g.: Companies
can farm out their testing to independent companies
Activists and NGOs have been criticised for being both “unelected” and unaccountable.
They do not stand for election to allow the public to express its evaluation of their
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performance. They do not have to abide by government requirements. Activists and
NGOs could be accountable to the public, government, their members, and financial
supporters
Summary
•
•
•
Activists play an important role in the non-market environment because they can:
o Alert management to issues of concern to the public
o Affect the organisation of interests
o Lead to changes in institutions
o Provide information to the public and government officials
Private politics strategies of activists are frequently integrated with public politics
strategies. These strategies are often complemented using public politics as a lever to
encourage negotiations on the issue
Most firms prefer to negotiate rather than become engaged in a protracted
confrontation that could attract the attention of the media, the public, and
government officials
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WEEK 7 READING 2: THE PATH TO CORPORATE RESPONSIBILITY
For societal learning, the trick is for companies to be able to predict and credibly respond to
society’s changing awareness of particular issues. The task is daunting, given the complexity
of the issues as well as stakeholders’ volatile and sometimes underinformed expectations
about business’ capacities and responsibilities to address societal problems. The way
companies address issues depends on the stage of issue maturity of the issue as well
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96
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There is no universal business case for being good. Civil regulation, attacks by NGOs to
damage corporate reputations, and the like rarely cause measurable, long-term damage to a
fundamentally strong business. In the short-term, which is what most investors focus on,
variations in financial performance are usually attributable to business fundamentals such as
design, cost of sales, and market forecasting. Even high-profile cases barely affect the
mainstream investment community. Coping with such challenges is simply an acceptable
overhead cost of doing business
As with any business opportunity, the chances to make money by being good must be created,
not found. Reinventing one’s business isn’t easy. And doing so in socially responsible ways
involves a major shift in managerial mindset – from a risk-based reputational view of
corporate responsibility to one focused on product and process innovations that will help
realign the business and the market according to shifting societal concerns
The often talked-up business benefits of corporate responsibility are, at best, hard-won and
frequently, in the short-term, ephemeral or non-existent. When accusations arise, it’s easy
for companies to focus on the low-hanging fruit – employee morale, for instance, or the
immediate need to defend the brand. But making business logic out of a deeper sense of
corporate responsibility requires courageous leadership – in particular, civil leadership –
insightful learning, and a grounded process for organisational innovation
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WEEK 7 LESSON
RAN chose private politics because:
1. Lobbying the government takes forever and can easily be counter-lobbied by
corporations, so they start with consumers, and get them to pressure the businesses,
and the businesses to pressure governments
2. Companies were more responsive to public opinion than certain legislatures were.
Consumers could create more democracy in the marketplace than in the government
RAN can target the companies directly responsible, and the companies supporting the
companies directly responsible. RAN targeted Citigroup because:
1. They are greenwashing → Not genuine
2. World’s largest bank → Other banks can follow suit
3. Sensitive to public opinion
4. Global operations → Can impact other countries
5. Can garner media attention and coverage since Citigroup is the world’s largest bank
6. They are supporting companies that are destroying the rainforest
What makes a company susceptible to private politics?
1. Positioning your company as a socially responsible company
2. Sensitive to public opinion
3. Greenwashing
4. Market leaders / Large companies
5. Partnering / Supporting companies that go against a social issue
6. Products
a. Consumer products
b. Products that harm the environment
7. Operating environments
a. Operating in interest group-rich environment
b. Multinational / Global operations
8. Organisation
Should Citigroup worry about RAN?
1. RAN has a full-time media specialist
2. RAN has a campaign manager for each campaign
3. RAN has a network, so it is more influential than it seems
4. RAN has a successful track record. It made Home Depot cooperate with it
Issue Life Cycle:
1. Latent stage
2. Emerging stage
3. Consolidating stage
4. Institutional stage
5. Implementation stage
How do you campaign against a company?
• Enlist the help of experts to show proof / evidence
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•
•
•
•
•
Create a story
Publicise the campaign to enlist the help of society
Media, online personalities, traditional media outlets
Name and shame
Make them lose customers → Profit loss
Options to a company under attack:
• Cooperate
• Resist, defend & counter-attack
Citigroup chose to commit to stop funding any company using old growth rainforest products,
and to restrict funding any firm destroying endangered communities
Simon Zadek’s 5 Stages:
Stage
What will
organisations do at
this stage?
Defensive
Deny practices,
outcomes, or
responsibilities
Why do they do it?
Why is it not
enough?
To defend against attacks to their
Does not
reputation that in the short-term
own up to its
could affect sales, recruitment,
own
productivity, and the brand name
responsibility
Compliance Adopt a policy-based To mitigate the erosion of economic
Just a PR
compliance approach value in the medium-term because
move, no
as a cost of doing
of ongoing reputation and litigation
real change
business
risks
Managerial
Embed the societal
To mitigate the erosion of economic Activists will
issue in their core
value in the medium-term and to
still not be
management
achieve longer-term gains by
happy with
processes
integrating responsible business
this
practices into their daily operations
approach
Strategic
Integrate the societal
To enhance economic value in the
issue into their core
long-term and to gain first-mover
business strategies
advantage by aligning strategy and
process innovations with the
societal issue
Civil
Promote broad
To enhance long-term economic
industry participation value by overcoming any first-mover
in corporate
disadvantages and to realise gains
responsibility
through collective action
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Private Politics (RAN, ExxonMobil):
Public Politics (Silent Spring):
Judicial Process (Dolphin’s Case):
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WEEK 7 CASE 1: PRIVATE POLITICS – RAINFOREST ACTION NETWORK
Summary:
In 2000, the Rainforest Action Network (RAN) launched its Global Finance Campaign with
Citigroup as the target. The goal was to convince Citigroup, and eventually all lenders, to stop
financing destructive activities in endangered ecosystems. Environmental NGOs had
historically targeted logging and mining companies directly. In the late 1990s, however, some
environmental activist organisations, such as RAN, began to focus on the commercial banks
financing extractive industries. The objective was to cut off funding for projects that led to
the destruction of rain forests in developing countries. In the mid-1990s, RAN changed its
focus from public policy to the private sector with the objective of changing the practices of
companies with environmentally destructive practices. Companies were more responsive to
public opinion than certain legislatures were, so they could create more democracy in the
marketplace than in the government. Because RAN was a small organisation with the goal of
shifting the practices of entire sectors, not just individual companies, it relied on the ripple
effect of targeting a market leader. One company stood out as the best target - Citigroup, the
world’s largest bank. Citigroup was the leading global, emerging market project finance bank
and the leading developing country project finance bank. Citigroup also had a key role in a
number of specific projects that alarmed RAN. Citigroup’s vulnerability was its sensitivity to
public opinion, so exploiting that vulnerability by publicising Citigroup’s environmental
practices became the heart of RAN’s strategy. Enlisting students was important to the success
of RAN’s campaign, and RAN found that students at many universities were eager to
participate. By the spring of 2003, Citigroup had been implicated in the Enron and Grubman
scandals, so RAN decided to step up the pressure
RAN campaigned against Citigroup by launching campaigns on college campuses and
encouraging a boycott of Citigroup credit cards and job recruitment. Many of RAN’s actions
were designed to call the public’s attention to the campaign objectives and attract media
coverage, which was essential to informing the public. When Citigroup was implicated in the
Enron and Grubman scandals, RAN stepped up the pressure by physically blocking the
Citibank branches, and making personal attacks on Sandy Weill as well
As the situation has escalated quite quickly, Citigroup should first adopt the managerial
approach to mitigate the erosion of economic value in the medium-term and to achieve
longer-term gains by integrating responsible business practices into their daily operations,
before moving on to strategic and civil approach. This will help to enhance long-term
economic value by overcoming any first-mover disadvantages and to realise gains through
collective action eventually
WEEK 7 CASE 2: PRIVATE POLITICS INVOLVING THE SHAREHOLDERS – EXXONMOBIL
Summary:
62% of shareholders of ExxonMobil voted for the reporting of how climate change affects
Exxon’s business, as investors are increasingly demanding companies disclose the likely
impact of global warming. Climate change is a material financial risk and shareholders want
to know how companies will manage the change to a low carbon economy. Climate change is
one of the greatest long-term risks ExxonMobil faces in its portfolio and has direct impact on
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its core business. It should respond swiftly and demonstrate that it takes shareholder
concerns about climate risk seriously. The reporting should assess the resilience of the
company’s full portfolio of reserves and resources through 2040 and beyond, and address the
financial risks associated with such a scenario
WEEK 7 CASE 3: PUBLIC POLITICS – SILENT SPRING
Summary:
Rachel Carson wrote a book called Silent Spring to raise awareness about the dangers of
unrestrained use of the pesticide DDT, which allowed society to first be aware of their own
attitude toward nature. Carson made a radical proposal that, at times, technological progress
is so fundamentally at odds with natural processes that it must be curtailed. For the first time,
the need to regulate industry in order to protect the environment became widely accepted,
and environmentalism was born
Events that led to the banning of the use of DDT in USA:
1. DDT was developed in 1939, and it first distinguished itself during WWII, clearing
South Pacific islands of malaria-causing insects for US troops while being used as an
effective delousing powder in Europe
2. When DDT became available for civilian use in 1945, nature writer Edwin Way Teale
warned about it upsetting the economy of nature
3. Rachel Carson wrote to Reader’s Digest to propose an article about a series of tests
on DDT being conducted not far from where she lived in Maryland. The magazine
rejected the idea
4. In 1958, Carson’s interest in writing about the dangers of DDT was rekindled when she
received a letter from a friend in Massachusetts bemoaning the large bird kills that
had occurred on Cape Cod as the result of DDT sprayings
5. The use of the pesticide had proliferated greatly since 1945, and Rachel Carson again
tried, unsuccessfully, to interest a magazine in assigning her the story of its less
desirable effects
6. Silent Spring took Rachel Carson 4 years to complete. It was first serialised in The New
Yorker in June 1962, which alarmed readers across America and brought a howl of
indignation from the chemical industry
7. Monsanto published and distributed 5000 copies of a brochure parodying Silent Spring
entitled ‘The Desolate Year’. Some of the attacks were more personal, questioning
Rachel Carson’s integrity and even her sanity
8. Many eminent scientists rose to Rachel Carson’s defence, and when President John F.
Kennedy ordered the President’s Science Advisory Committee to examine the issues
the book raised, its report thoroughly vindicated both Silent Spring and its author
9. DDT came under much closer government supervision and was eventually banned
10. The most important legacy of Silent Spring was a new public awareness that nature
was vulnerable to human intervention
11. For the first time, the need to regulate industry in order to protect the environment
became widely accepted, and environmentalism was born
WEEK 7 CASE 4: JUDICIAL PROCESS / COURT ORDER – RESORTS WORLD SENTOSA’S
DOLPHINS
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Summary:
A group made allegations, which initiated a court action to stop the export of 25 wild-caught
dolphins from the Philippines to Singapore. A Philippines court decided not to extend the 72hour temporary environment-protection order. RWS spokesman claimed that RWS is
“pleased” that the Philippines court decided to lift the order and is looking forward to
“welcoming” the dolphins. However, the Singapore animal-welfare groups are going to
continue filing a motion for reconsideration. Animal Concerns Research and Education Society
(ACRES) will launch the next phase of their campaign in Singapore to increase the pressure on
RWS to respond positively to public concerns about the plight of the dolphins. The Earth Island
Institute, one of the environmental groups that filed the civil suit, intends to file an appeal
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WEEK 9 LESSON
DBS High Notes 5 - Lessons about the law:
1. Uncertainty
a. It is interpretive → Can come to different conclusions from the same facts
b. Subjective
2. Change
a. Can change from case to case
3. Incorrect
a. Unfair to the investors
b. Investors can only try to voice out their unhappiness and complain
Considerations for the PM and the government:
1. Economic
a. Monetary costs
2. Pragmatic
a. Agency – Should represent the citizens
b. Structure and roles – His duty
c. Output and performance – Votes
d. Spending and programs – Moral hazard
3. Legal
a. Investigate and punish
4. Ethical
a. Moral hazard (people will abuse the government)
5. Religious
DBS’s options:
1. Give in and agree to the investors
2. Fight
a. Defend
b. Attack
c. Defend and attack – Attack and defence are 2 sides of the same strategy
Underlying factors:
1. Judicial process
2. Political process
3. Market process
4. Underlying foundation to all the processes
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WEEK 9 CASE: DBS HIGH NOTES 5
Summary:
DBS High Notes 5 were a type of structured notes issued and sold by DBS to investors. A note
means a document evidencing a promise to pay a certain sum of money at a specific time. A
structured note is a note having a financial structure to it. DBS launched the sale of the Notes
on 30 March 2007. Initially, the sale was by invitation only. On 2 April 2007, the sale was
extended to the public. The Notes came in 2 types: the SGD Tranche Notes and the USD
Tranche Notes. The denomination of each Tranche Note is 5000 for both Notes. The face value
was referred to as the principal amount. The Notes’ principal amounts were not protected or
guaranteed by any third party. An investor needed to pay at least 5 or more of these Notes.
Higher interest (6.5%) payable for the USD Tranche Note than for the SGD Tranche Note (5%)
reflected the currency risks. The Notes were intended to be repaid in full on the maturity date,
which was 5.5 years from the issue date. The Pricing Statement represented that DBS would
use the principal amounts raised from the investors to buy certain notes, called Reference
Notes, issued by a company called Constellation Investments Ltd. The redemption of the
Reference Notes and the Notes on maturity would not take place if any one of a number of
possible events occurred. The Credit Basket was a conceptual basket containing credits or
creditworthiness placed in it. The Credit Basket consisted of a basket of credits or
creditworthiness of 8 entities, called Reference Entities (7 banks and 1 sovereign state). At
the time the Notes were launched, the Reference Entities had high credit ratings. A Credit
Event was defined as the bankruptcy, failure to pay and restructuring of bank reference
entities, or the failure to pay, restructuring, repudiation / moratorium and obligation
acceleration of the sovereign state reference entity. Failure to pay was defined as the failure
of the reference entity to pay any amount due under the reference obligation. The Reference
Obligations were bonds issued by the reference entities. A bond is a debt instrument issued
by a company or entity for a period of more than 1 year to raise capital by borrowing. The
pricing statement pointed out that the termination of the Notes and the ensuing
consequences was on a “first-to-default basis”: “The Notes are linked to the Reference Notes
and, in turn, the credit of the Reference Entities under the Reference Notes on “first-todefault basis”. This means that the Credit Event that triggers the credit linked redemption of
the Reference Notes is the first default of any of the Reference Entities under the Reference
Notes”. The terms of the Notes specified the consequences of the occurrence of a Credit
Event. If a Credit Event occurred, both the Reference Notes and the Notes would terminate.
Upon termination of the Reference Notes and the Notes, the interest payments would cease
and the payment on maturity date of the principal amount would no longer take place.
Instead, Constellation would pay DBS an amount called the “Credit Event Redemption
Amount (CERA)”. In turn, DBS would pay the credit event redemption amount to the investors.
The pricing statement specified that the CERA was determined by the calculation agent (DBS).
Between 16 August 2007 and 18 August 2008, the investors received 5 payments of quarterly
interest. On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy, and
consequently defaulted on the Lehman Bonds, which constituted a Credit Event under the
Notes. The investors were informed that they may not get their principal amount back. The
MAS pressured DBS to handle the customers’ queries quickly and reassure them. MAS told
financial institutions which distributed the Lehman-related products to give priority to the
elderly, the unemployed, retirees and those with little English proficiency and to focus on
cases where the products were clearly inappropriate for them given their circumstances. MAS
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announced that it would review the rules for marketing investments. It added that, while it
could fine and reprimand the financial institutions, it did not have powers to force banks to
compensate retail investors who bought structured products linked to Lehman Brothers. MAS’
approach was one that ‘balanced regulation with the responsibility on the part of the
institution to ensure that consumers are given a fair deal’. MAS rules already required the
financial institutions and issuers of structured products to properly disclose the features and
risks of the products to investors. PM Lee noted that the broader issue was not just about
dealing with upset investors but sending the right signal about Singapore’s handling of the
financial industry as a whole. The government would not take a ‘paternalistic’ approach as it
further studies the issue of how people invest their money and how banks sell their financial
products. This would involve the state determining the risk level of a product and allowing a
person to buy it and giving banks the permission to sell it, which is impossible to do, and the
government should not be making decisions for individuals. The Court decided that the CERA
amounted to zero, and the investors’ case was dismissed. The Court of Appeal observed that,
“Under the law of contract, a person who signs a contract which is set out in a language he is
not familiar with or whose terms he may not understand is nonetheless bound by the terms
of that contract. Illiteracy, whether linguistic, financial or general, does not enable a
contracting party to avoid a contract whose terms he has expressly agreed to be bound by.
The principle of caveat emptor applies equally to literates and illiterates in such
circumstances”. DBS served the sanctions imposed by MAS mentioned above and resumed
its business in dealing in and providing financial advisory services for structured notes. DBS’s
share price eventually went higher, erasing the loss. DBS appeared to have successfully sailed
past its DBS High Notes 5 legacy
What the CEO of DBS Bank should have done better to protect the bank from the investors:
•
•
•
Give more evidence of how the bank has followed the regulations as stipulated by
MAS
Deal with more consumers’ complaints in a more timely manner
Show concern for the investors and hear their complaints out
What lessons does the DBS High Notes 5 case teach:
•
•
•
•
About the corporation and its relationship with its stakeholders?
o Corporations should practise ethical means of obtaining customers and should
not misrepresent any facts in the pursuit of profits
About the roles of government?
o The government should put in more stringent rules and regulations regarding
the expected behaviour by institutions so as to protect the interests of the
society
About government failure?
o The government can fail to anticipate potential loopholes in regulations and
provide sufficient help to the public when in need
About the relationship between business and the government and ways to influence
the government?
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•
•
o Businesses should be responsible to the government, and should follow the
regulations stipulated by the government. Businesses should only influence
the government in ethical ways
About pressures from investor groups?
o Pressures from investor groups were helpful in letting their concerns be taken
seriously by the relevant authorities and were successful in allowing them to
claim for damages in some cases
About the roles of business and CSR?
o Businesses should incorporate CSR as a method by which the corporation is
run, and not just for the purpose of putting up a front
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SUMMARY OF CONCEPTS AND CASES
Week / Topic
Week 1 / Use
and Abuse of
the Corporation
Week 2 /
Shareholders vs
Stakeholders
Week 3 /
Structure of
Governments
Week 4 /
Functions and
Failures of
Government
Concept
Legal Personality
Limited Liability
Agency
Corporate Structure
Stakeholder Theory
Workers’ Cooperatives
Parliamentary System
Presidential System
Other Systems
Agency
Hierarchy, Assigned role and reporting
structure, Incentive systems
Output and Performance
Public and Private Persuasion
Power & Regulations
Week 5 /
Influencing the
Government
Week 6 /
Corporate Social
Responsibility
Week 7 /
Societal
Demands and
Activist Groups
Week 9 /
Managing Public
Affairs
Government Programmes
Government Spending
Provision of goods and services by the
Government (Ministry, Statutory
Boards, GLCs, Judiciary)
Clientelism
Tender
Pluralism
Corporatism
Sources and Nature of Responsibilities
Private Politics
Public Politics
Judicial Process
Sources of Nature of Responsibilities
Lessons about the Law (Judicial Process)
Political Battle (Political Process –
Government’s considerations)
Market Battle (Market Process – Private
Politics)
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Case(s)
OpenNet
Deutsche Bank
Anaergia
F&N and Lee Hsien Yang
Enron Corporation
Walmart
Mondragon
Singapore
United States
European Union
China
PSI
Rats
Set-top box
Dengue
Dengue
SIBOR
Set-top box
YOG
City Life @ Tampines
Sumitomo
Integrated Resorts
Sub-Committee 6
Ford Pinto
RAN
ExxonMobil
Silent Spring
Dolphins at RWS
DBS High Notes 5