Narrow view of corporate responsibility

Chapter 5

Corporations

I. Introduction (NIB-Chapter Introduction) A. Opening Case Comments (NIB-Chapter Introduction)

1. In Chapter 5, Shaw and Barry examine the nature of corporations and the relationships that either do, or ought to, exist between corporations and the societies with which

corporations interact.

a. Therefore, the main emphasis of the chapter from an ethics point of view is determining whether moral standards should apply to corporate organizations and

the concept of corporate social responsibility.

2. Chapter 5 examines the following topics: a. Corporations as moral agents and individual responsibility. b. The narrow view and the broader view of corporate responsibility. c. Corporate responsibility and the invisible-hand argument, the let-government-do-

it argument, and the business-can’t-handle-it argument.

d. Institutionalizing ethics within corporations, ethical codes, and corporate culture. B. Chapter Learning Objectives (NIB) – After completing this chapter students should be able

to:

1. Trace the stages in the evolution of the corporate form from the earliest institutions allowed by public charter, through the small private firms of the nineteenth century, to

their status as the “dominant institution of American society” today.

2. Read and absorb the 1886 Santa Clara decision to understand its implications with regard to the determination of corporate responsibility.

3. Apply moral standards to corporate organizations weighing competing positions on corporate responsibility-narrow view and broader view.

4. Examine the three arguments and counter arguments presented in the text with regard to corporate responsibility.

5. Understand how and why corporations need to create an ethical culture. C. The Legal Structure of a Corporation (NIB-Chapter Introduction)

1. Stockholders, who provide the capital, own the corporation, and enjoy liability limited to the amount of their investments.

2. Managers, who run the business operations. 3. Employees, who produce the goods and services.

II. Characteristics of a Corporation (NIB-§ 5-1) A. Terminology (NIB-§ 5-1)

1. Corporations are legal entities/agents, with legal rights and responsibilities similar but not identical to those enjoyed by individuals.

2. Business corporations are limited-liability companies—that is, their owners or stockholders are liable for corporate debts only up to the extent of their investments.

3. Other Characteristics: a. A corporation requires a public registration or acknowledgment by the law. b. The shareholder/stockholder is entitled to a dividend from the company’s profits

only when it has been “declared” by the corporation’s board of directors.

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c. A corporation can be for-profit or not for-profit/nonprofit. d. A corporation can be privately owned or owned wholly or in part by the

government.

e. A corporation can be privately held/closely held or publicly held. B. Evolution of the Corporation (NIB-§ 5-1) – The modern business corporation has evolved

over several centuries.

1. The corporate form developed during the Middle Ages. a. The first corporations were towns, universities, and ecclesiastical orders,

chartered by government and regulated by public statute.

b. By the 15th century, the courts of England had evolved the principle of limited liability.

c. During the medieval period, the law did not grant corporate status to purely profit-making associations.

2. Elizabethan Era: a. In 1600, Queen Elizabeth I granted to a group of merchants the right to be “one

body corporate” and bestowed a trading monopoly to the East Indies.

b. However, members of the earliest corporations financed voyages and absorbed the losses individually if vessels sank because they were not allowed to pool

capital.

c. Eventually, when no one individual could afford to purchase and outfit a vessel, let alone absorb the loss individually if a ship sank or was robbed by pirates,

investors were allowed to pool capital and share liability.

3. The Final Stage of Corporate Evolution: a. The first significant industrial corporation in the United States was the Boston

Manufacturing Corporation established in 1813, but only after the Civil War did

the movement toward the corporate organization of business gain steam.

b. The traditional system of incorporation up to the mid-1800s involved the petitioning of the Crown (in England) or the state government (in the U.S.) for

charter.

1) However, in the late 19th century, this was replaced by a system in which corporate status was granted essentially to any organization that filled out

the forms and payed the fees.

c. Two ideas motivated the change behind the new system: 1) The belief that a business corporation should not be directly tied to any

public policy.

2) The view that a corporation is a by-product of the people’s right of association, not a gift from the state.

III. Corporate Moral Agency (§ 5-2) A. Overview (NIB-§ 5-2)

1. In the eyes of the law, corporations are legal persons/legal agents. a. This means they enjoy rights and protections like any ordinary individual. b. These include the right to free speech, right to due process, right against

unreasonable searches and seizures, jury trials, and freedom from double

jeopardy.

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2. First National Bank of Boston v. Bellotti: In 1978, the U.S. Supreme Court defined corporate free-speech rights for the first time.

a. In this case, the bank wanted to spend corporate funds to oppose a Massachusetts referendum enacting a graduated personal income tax.

b. Prior to this decision, the Massachusetts Supreme Judicial Court had ruled that business corporations were prohibited by law from spending corporate funds to

publicize political views that did not materially affect their property, business, or

assets.

c. The U.S. Supreme Court struck down the Massachusetts court decision allowing corporations to use corporate funds to publicize political views.

d. Citizens United v. Federal Election Commission: In 2010, the U.S. Supreme Court struck down a provision of the McCain–Feingold Act that prohibited all

corporations, both for-profit and not-for-profit, and unions from broadcasting

“electioneering communications.” (NIB)

1) An “electioneering communication” was defined in McCain–Feingold as a broadcast, cable, or satellite communication that mentioned a candidate

within 60 days of a general election or thirty days of a primary.

2) Justice Anthony Kennedy wrote in the 57-page majority opinion, “No sufficient governmental interest justifies limits on the political speech of

nonprofit or for-profit corporations.”

3. These decisions granting corporations similar rights to those of individuals raises the question: “What kind of person is a corporation?

a. A corporation is an artificial person; its existence is prescribed by law. b. However, it has rights similar to individual. c. Therefore, this raises the question of its status as a moral agent: If a corporation

has the status of a moral agent like individuals, they can be held morally

responsible for their actions.

B. Can Corporations Make Moral Decisions? (§ 5-2a) 1. The process of moral corporate decision making is filtered through the framework of

corporate internal decision (CID) structures.

a. Corporate internal decision (CID) structures amount to establish procedures for accomplishing specific goals.

b. This framework lays out lines of authority and stipulates under what conditions personal actions become official corporate actions.

c. Some philosophers have compared the corporation to a machine or have argued that because of its structure it is bound to pursue its profit goals single-mindedly.

d. Manuel Velasquez argues that an act is intentional only if the entity that formed the intention brings about the act through its bodily movements. But it is only the

people who make up the corporation who carry out the acts attributed to it.

Therefore, only corporate members, not the corporation itself, can be held

morally responsible.

e. As a result, these philosophers argue that it is a mistake to see a corporation as being morally responsible or to expect it to display such moral characteristics as

honesty, considerateness, and sympathy.

f. Therefore, only the individuals within the structure can act morally or immorally,

and can be consequently held morally responsible for their actions.

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2. Other philosophers have argued in support of corporate moral agency—that is, holding the corporation as an entity morally responsible just like individuals.

a. This CID structure, like an individual person, collects data about the impact of its actions.

b. It monitors work conditions, employee efficiency and productivity, and environmental impacts.

c. Professors Kenneth Goodpaster and John Matthews argue that as a result, there is no reason a corporation cannot show the same kind of rationality and respect

for persons that individual human beings can.

d. Likewise, Thomas Donaldson argues that a corporation can be a moral agent if moral reasons enter into its decision-making and if it is decision-making process

controls not only the company’s actions but also its structure of policies and rules.

e. Peter French arrives at the same conclusion a slightly different way. 1) According to French, the CID structure in effect absorbs the intentions and

actions of individual persons into a “corporate decision.”

2) Therefore, this is enough to make corporate acts “intentional” and thus make corporations “morally responsible.”

3. One area that this debate over corporate moral agency becomes important is the question of corporate punishment.

a. Regardless of their status as moral agents, many laws fine corporations as an entity for wrongdoing, monitor and regulate their activities, and require the

people who run them to do one thing or another.

b. Thus, numerous laws treat corporations as moral agents; however, the punishment of corporations cannot be the same as that of individuals.

C. Vanishing Individual Responsibility (§ 5-2b) 1. Acting within the confines of a given CID framework makes it difficult to assign

individual responsibility for corporate outcomes.

2. The structure of modern corporations contributes a great deal to the diffusion of responsibility, which means that no particular person(s) can be held morally

responsible.

3. There are two ways to combat this tendency of vanishing individual responsibility: a. One response to the tendency of vanishing individual responsibility is to attribute

moral agency to the corporation itself.

b. Another response is to refuse to let individuals duck their personal responsibility. 4. Today, many companies and many of the people inside them accept without hesitation

the idea that corporations are moral agents with generally immoral, not just legal,

responsibilities.

IV. Rival Views of Corporate Responsibility (§ 5-3) A. Overview (NIB-§ 5-3)

1. The debate over corporate responsibility involves several elements: a. Whether it should be construed narrowly to cover only profit maximization. b. Whether it should be considered more broadly to include acting morally,

refraining from socially undesirable behavior, and contributing actively and

directly to the public good.

2. See Tennessee Iron & Steel versus Xerox Corporation examples.

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B. The Narrow View: Profit Maximization (§ 5-3a) 1. In his book Capitalism and Freedom, economist Milton Friedman (1912–2006)

argues that diverting corporations from the pursuit of profit makes the economic system

less efficient.

a. Therefore, Friedman argues that business’s only social responsibility is to make money within the rules of the game.

b. Also, private enterprise should not be forced to undertake public responsibilities that properly belong to government.

2. Harvard professor Theodore Levitt echoed this point stating that business has only two responsibilities:

a. First, to seek material gain. b. Second, to do so within the elementary rules of morality (face-to-face conduct)

such as honesty, good faith, etc.

C. The Broader View: Corporate Social Responsibility (§ 5-3b) 1. The rival position to that of Friedman and Levitt is simply that business has obligations

in addition to pursuing profits.

a. In other words, a corporation has obligations not only to its stockholders, but to all other constituencies that affect, or are affected by, its behavior.

b. This includes all parties that have a stake in what the corporation does or does not do—employees, customers, and the public at large.

c. It is sometimes called the social entity model or the stakeholder model. 2. Proponents Arguments

a. Melvin Anshen maintains that historically there is always a kind of “social contract” between business and society. Although only an implicit agreement, it

represents a tacit understanding within society about proper goals and

responsibilities of business.

1) For example, business activity causes deleterious side effects, or what economists call externalities: the unintended negative (or in some cases

positive) consequences that an economic transaction between two parties

can have on some third-party.

2) Anshen maintains that externalities should no longer be overlooked. In the jargon of economists, externalities must be “internalized”—that is, the

factory should be made to absorb the cost, either by disposing of its waste in

an environmentally safe (and presumably more expensive) way or by

paying for the damage the waste does downstream.

b. Keith Davis stresses that modern business is intimately integrated with the rest of society. As a moral agent it therefore has certain moral obligations to society just

as an individual has moral obligations to society.

1) For example, he advocates going beyond requiring business to internalize its externalities.

2) He maintains that in addition to considering potential profitability, a business must weigh the long-range social costs of its activities as well.

Only if the overall benefit to society is positive should business act.

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D. Stockholders and the Corporation (§ 5-3c) 1. As we have seen, proponents of the narrow view argue that management’s

responsibility to maximize shareholder wealth outweighs any other obligations.

a. Legally, stockholders own the company. They entrust management with their funds, and in return management undertakes to make as much money for them as

it can.

b. Therefore, managers of a corporation have a fiduciary responsibility to look after the interests of shareholders, a duty that is clearly violated by corporate

executives who take advantage of their position to enrich themselves at company

expense.

2. Proponents of the broader view argue that management has fiduciary responsibilities to other constituencies as well (to employees, bondholders, and consumers).

a. The duty to make money for shareholders is real, but it does not trump all of the company’s other responsibilities.

b. Indeed, it is debatable whether most shareholders believe that it does. Many of them may want the company they “own” to act in a morally responsible manner.

3. Who controls the corporation? a. Few economists or theorists believe that stockholders of medium-to-large

corporations are really in charge of the companies whose shares they hold or that

they select the managers who run them.

b. Today, as most business observers acknowledge, management handpicks the board of directors, thus controlling the body that is supposed to police it.

c. This fact is contrary to the narrow view.

V. Debating Corporate Responsibility (§ 5-4) A. The Invisible-Hand Argument (§ 5-4a)

1. Corporations should not be held accountable for non-economic matters—this distorts business’s mission and undermines the free-enterprise system.

2. Criticisms: a. First, the invisible-hand argument does not apply to modern conditions in the free

market—corporations are extremely powerful and bear little resemblance to

Smith’s self-sufficient farmers and craft persons. Thus, the invisible-hand

argument seems economically unrealistic.

b. Second, corporations today find it in their interest to acknowledge values other than profit. Corporations find themselves in a social and political environment in

which they are pressured by public opinion, politicians, the media, and various

activist groups to act as responsible corporate citizens, as socially conscious

enterprises that acknowledge other values besides profit and that seek to make a

positive contribution to society.

B. The Let-Government-Do-It Argument (§ 5-4b) 1. Business’s role is purely economic, and corporations should not be considered moral

agents; however, what is possible for corporations is not necessarily useful or desirable

for society.

a. John Kenneth Galbraith (1908 – 2006) rejected the assumption that Smith’s

invisible hand will solve all social and economic problems or that market forces

will moralize corporate activities.

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b. Galbraith and others warn that left to their own self-serving devices, modern corporations will enrich themselves while impoverishing society.

c. Therefore, proponents of this argument believe that the strong hand of government, through a system of laws and incentives, can and should bring

corporations to heel.

2. Criticisms: a. First, the let-government-do-it argument is a blueprint for big, intrusive

government.

b. Second, it is doubtful that government can control any but the most egregious corporate immorality. Government cannot anticipate all corporate moral

challenges.

c. Third, government manifests many of the same structural characteristics that test moral behavior inside the corporation.

d. Fourth, given the awesome clout of corporate lobbyists, one wonders whether, as moral police, the government officials will do anything more than impose the

values and interests of the most generous financiers.

C. The Business-Cannot-Handle It Argument (§ 5-4c) 1. According to this argument, corporations are the wrong group to be entrusted with

broad responsibility for promoting the well-being of society for the following two

reasons

a. Second, in addressing non-economic matters, corporations inevitably impose their own materialistic values on the rest of society.

2. Corporations Lack the Expertise: a. Those who develop this first point contend that corporate executives lack the

moral and social expertise to make other-than-economic decisions.

b. Criticism: The social role of corporations does not confine its or its employees’ responsibilities to profit making—often only business has the know-how, talent,

experience, and organizational resources to tackle problems.

3. Corporations Will Impose Their Values on Society: a. Those who developed this second point contend that broadening corporate

responsibility will “materialize” society rather than “moralize” corporate activity.

b. Criticisms: 1) First, this argument seems to assume that corporations do not already

exercise enormous discretionary power over society. Keith Davis points out

that business already has immense social power.

2) Second, Paul Camenisch makes the point that business already promotes consumerism and materialistic values. It does not hesitate to use its

resources to express its views and influence the political system on issues

that affect its economic interests.

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VI. Institutionalizing Ethics Within Corporations (§ 5-5) A. Overview (NIB-§ 5-5)

1. The criticisms of these three arguments in support of the narrow view of corporate responsibility have led many people inside and outside business to adopt the broader

view—that the obligations of the modern business corporation extend beyond simply

making money for itself.

a. Society grants corporations the right to exist and gives them legal status as separate entities.

b. It does this not to indulge the profit appetites of owners and managers but, as Camenisch says, as a way of securing the necessary “goods and services to

sustain and enhance human existence.”

c. In return for its sufferance of corporations, society has the right to expect corporations not to cause harm, to take into account the external effects of their

activities, and whenever possible to act for the betterment of society.

2. Given that corporations should institutionalize ethical conduct, how can this be done? At least for actions seem called for:

a. Corporations should acknowledge the importance, even necessity, of conducting business morally.

b. Corporations should make a real effort to encourage their members to take moral responsibilities seriously.

c. Corporations should end their defensiveness in the face of criticism, and invite public discussion and review.

d. Corporations must recognize the pluralistic nature of the social system of which they are a part.

B. Limits to What the Law Can Do (§ 5-5a) 1. Defenders of the broader view of corporate responsibility believe that more than

laissez-faire is necessary to ensure that business behavior is socially and morally

acceptable.

2. Law professor Christopher Stone argues that there are limits on what the law can be expected to achieve. Three of his points are particularly important:

a. First, many laws are passed only after there is general awareness of the problem. b. Second, it is difficult to design effective regulations and appropriate laws. c. Third, enforcing the law is often cumbersome.

3. Conclusion: Stone’s argument is not intended to show that regulation of business is hopeless. Rather, what he wants to stress is that the law cannot do it alone.

a. Therefore, corporations and the people within them must do more than simply respond to the requirements of the law, they need to hold high moral standards

and they themselves need to monitor their own behavior.

C. Ethical Codes and Economic Efficiency (§ 5-5b) 1. There is no necessary trade-off between profitability and ethical corporate behavior.

Indeed, a large body of research shows the contrary to be true: The most morally

responsible companies are consistently among the most profitable companies.

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2. Nobel Prize-winning economist Kenneth Arrow argues that there are two types of situations in which the simple rule of maximizing profits is socially inefficient: the case

in which costs are not paid for, as in pollution, and a case in which the seller has

considerably more knowledge about his product than the buyer.

a. The first type of situation relates to the demand that corporations “internalize their externalities.”

b. In the second situation, in which the buyer lacks the expertise and knowledge of the seller, an effective moral code, either requiring full disclosure or setting

minimal standards of performance (e.g., the braking ability of a new automobile),

enhances rather than diminishes economic efficiency.

3. Conclusion: The adoption of realistic and workable codes of ethics in the business world can contribute immensely to business efficiency.

D. Corporate Moral Codes (§ 5-5c) 1. If those inside the corporation are to behave morally, they need clearly stated and

communicated ethical standards that are equitable and enforced.

a. These ethical standards are the entity’s moral code. b. Therefore, a corporate moral code is simply the ethical standards adopted by the

corporation.

2. To institutionalize ethics within corporations, Professor Milton Snoeyenbos suggests that top management:

a. Articulate the firm’s values and goals. b. Adopt a moral code applicable to all members of the company. c. Set up a high-ranking ethics committee to oversee, develop, and enforce the code. d. Incorporate ethics training into all employee-development programs.

3. Characteristics of a Good Corporate Ethics Program: a. It must be user friendly. b. It should provide a support system with a variety of entry points, one that

employees feel confident about using.

c. Part of all employee-training programs should be devoted to ethics including, at a minimum, study of the code, review of the company’s procedures for handling

ethical problems, and discussion of employer and employee responsibilities and

expectations.

d. It must allow for anonymity. E. Corporate Culture (§ 5-5d)

1. Although intangible in comparison with things like sales revenue and profit margin, corporate culture is often the key to a firm’s success.

a. Corporate culture can be defined as the set of explicit and implicit values, beliefs, and behaviors that shape the experiences of the members of a corporation.

b. According to one study, 30% of the difference in performance between companies can be attributed to differences in culture, but only 5% to differences

in strategy.

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2. Organizational theorists stress monitoring and managing corporate culture (and understanding each corporation’s distinctive culture) to prevent dysfunctional behavior

and processes.

a. A corporation’s culture is what determines how people behave when they are not being watched.

b. Management must pay attention to the values and behavior reinforced by its corporate culture.

3. Management must follow-up. a. Internal or external corporate responsibility audits can help close the gap between

stated values, goals, and mission, on the one hand, and reality on the other.

b. Another aspect of follow-up strict enforcement.

VII. Study Corner (§ 5-6)