Corporations

1. Corporations
Chapter 5

2. Overview
 Chapter Five examines the following topics:
(1)Corporations as moral agents and individual responsibility.
(2)The narrow view and the broader view of corporate responsibility.
(3)Corporate responsibility and the invisible-hand argument, the let-
government-do-it argument, and the business-can’t-handle-it
argument.
(4)Institutionalizing ethics within corporations, ethical codes, and
corporate culture.

3. Introduction
 The chapter discusses the application of moral standards to corporate
organizations and the concept of corporate social responsibility.
 Corporations yield awesome economic clout.
 The five hundred largest U.S. corporations make up at three-quarters of
the American economy.
 The best-run systems employ highly structured and impersonal
management systems.
 What are the moral implications of such systems?

4. The Corporation
 A corporation is a three-part organization made up of:
(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.

5. The Limited Liability Company
 The concept of limited liability: Members of a corporation are
financially responsible for the debts of the organization only up to
the extent of their investments.
 Differences between corporations and other business
partnerships:
(1) A corporation requires a public registration or acknowledgement
by the law.
(2) The shareholder is entitled to a dividend from the company’s
profits only when it has been “declared” by the corporation’s
directors.

6. The Limited Liability Company
 Kinds of corporations: For-profit, nonprofit; privately owned or
owned wholly or in part by the government; privately or publicly
held.
 Evolution of the corporation: The modern business corporation has
evolved over several centuries.
The corporate form developed during the Middle Ages.
The first corporations were towns, universities, and ecclesiastical orders,
chartered by government and regulated by public statute.

7. The Limited Liability Company
 The birth of the corporation: These enterprises began in 1600,
when 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.
 The pooling of capital: Members of the earliest corporations
financed voyages and absorbed the losses individually if vessels
sank – since ships became larger and more expensive, buyers had to
pool capital and share the losses.

8. The Limited Liability Company
 The final stage of corporate evolution: The traditional system of
incorporation involved petitioning the Crown (in England) or the
state government (in the U.S.) for charter
 In the 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.

9. The Limited Liability Company
 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.

10. Corporate Moral Agency
 Corporations as legal persons: In the eyes of the law, corporations
are legal persons.
 This means they enjoy rights and protections that any ordinary
individuals do.
 These include the right to free speech, due process, against
unreasonable searches and seizures, jury trial, and freedom from
double jeopardy.

11. Corporate Moral Agency
 What kind of person is a corporation? A corporation is an artificial
person,
 Its existence within the legal system raises the question of its status
as a moral agent.

12. Corporate Moral Agency
 Can corporations make moral decisions? The process of moral
corporate decision making is filtered through the framework of the
corporate internal decision (CID) structures.
 This framework consists of individuals although it ultimately
operates like a machine.

13. Corporate Moral Agency
 Can corporations make moral decisions? Only the individuals
within the structure can act morally or immorally, and can be
consequently held morally responsible for their actions.
 So philosophers disagree as to whether the structure as a whole
can be liable for criminal offenses and punishable by the law.
 It seems that not every form of punishment can be applied to
corporations.

14. Corporate Moral Agency
 Vanishing individual responsibility: Acting within the confines of a
given CID framework makes it difficult to assign individual
responsibility for corporate outcomes.
 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.

15. Corporate Moral Agency
 Vanishing individual responsibility: One response to the tendency
of vanishing individual responsibility is to attribute moral agency to
the corporation itself.
 Another response is to refuse to let individuals duck their personal
responsibility.

16. Rival Views of Corporate Responsibility
 Rival views of corporate responsibility: The debate over corporate
responsibility involves several elements:
Whether it should be construed narrowly to cover only profit maximization.
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.

17. Rival Views of Corporate Responsibility
 The narrow view: profit maximization: In his book Capitalism and
Freedom, economist Milton Friedman (1912–2006) argues that
diverting corporations from the pursuit of profit makes our economic
system less efficient.
Business’s only social responsibility is to make money within the rules of the
game.
Private enterprise should not be forced to undertake public responsibilities that
properly belong to government.

18. Rival Views of Corporate Responsibility
 Broader view – corporate social responsibility:
 Says that a corporation has obligations not only to its stockholders, but
to all other constituencies that affect, or are affected by, its behavior.
 This includes all parties that have a stake in what the corporation does or
doesn’t do – employees, customers, and the public at large.
 It is sometimes called the social entity model or the stakeholder model.

19. Rival Views of Corporate Responsibility
 Broader view – corporate social responsibility: The relationship
between business and society is seen as an implicit social contract
that requires business to operate in socially beneficial ways.
 Corporations must take responsibility for the unintended side
effects of their business transactions (externalities) and weigh the
full social costs of their activities.

20. Rival Views of Corporate Responsibility
 Proponents of the narrow view argue that management’s
responsibility to maximize shareholder wealth outweighs any other
obligations.
 Proponents of the broader view argue that management has
fiduciary responsibilities to other constituencies as well (to
employees, bondholders, and consumers).

21. Rival Views of Corporate Responsibility
 Who controls the corporation? Few economists or theorists believe
that stockholders are really in charge of the companies whose
shares they hold or that they select the managers who run them.
 Today, as most business observers acknowledge, management
handpicks the board of directors, thus controlling the body that is
supposed to police it.

22. Debating Corporate Responsibility
 The invisible-hand argument: Corporations should not be held
accountable for non-economic matters – this distorts business’s
mission and undermine the free-enterprise system.
 Objection: Does not apply to modern conditions in the free market
– corporations are extremely powerful but are pressured by public
opinion to present themselves as responsible citizens.

23. Debating Corporate Responsibility
 The let-government-do-it argument: The corporation has a natural
and insatiable appetite for profit – should be controlled through a
government imposed system of laws and incentives.
 Objection: Government can’t anticipate all moral corporate moral
challenges – but manifests many of the same structural
characteristics that test moral behavior inside the corporation.

24. Debating Corporate Responsibility
 The business-can’t-handle-it argument:
Corporations lack the expertise: Corporate executives lack the moral and social
expertise to make other-than-economic decisions.
Corporations will impose their values on us: Broadening corporate
responsibility will “materialize’’ society rather than “moralize’’ corporate
activity.

25. Debating Corporate Responsibility
 The business-can’t-handle-it argument:
 Objection to first argument: 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.
 Objection to second argument: Corporations already promote
consumerism and materialism – but from a broader view of
responsibility, are they likely to have a more materialistic effect on
society?

26. Institutionalizing Ethics Within Corporations
 To make ethics a priority, corporations should:
(1) Acknowledge the importance, even necessity, of conducting business
morally.
(2) Make a real effort to encourage their members to take moral
responsibilities seriously.
(3) End their defensiveness in the face of criticism, and invite public discussion
and review.
(4) Recognize the pluralistic nature of the social system of which they are a
part.

27. Institutionalizing Ethics Within Corporations
 Limits to what the law can do: Defenders of the broader view of
corporate responsibility argue that the law is a fully adequate vehicle
for the control of business practices.
 But the law is limited in what it can achieve:
(1) Many laws are passed only after there is general awareness of the
problem.
(2) It is difficult to design effective regulations and appropriate laws.
(3) Enforcing the law is often cumbersome.

28. Institutionalizing Ethics Within Corporations
 Ethical codes and economic efficiency: Exclusive concern with
profit maximization is socially inefficient in two situations:
(1) When costs are not paid for.
(2) When the buyer lacks the expertise and knowledge of the seller.
 Efficient economic life requires public trust and confidence.
 The adoption of realistic and workable codes of ethics in the
business world can contribute immensely to business efficiency.

29. Institutionalizing Ethics Within Corporations
 Corporate moral codes: Several steps companies should take to
institutionalize ethics:
(1) Articulate the firm’s values and goals.
(2) Adopt a moral code applicable to all members of the company.
(3) Set up a high-ranking ethics committee to oversee, develop, and
enforce the code.
(4) Incorporate ethics training into all employee-development programs.

30. Institutionalizing Ethics Within Corporations
 Corporate culture: The set of explicit and implicit values, beliefs,
and behaviors that shape the experiences of the members of a
corporation.
 Organizational theorists stress monitoring and managing corporate
culture (and understanding each corporation’s distinctive culture)
to prevent dysfunctional behavior and processes.
 Management must pay attention to the values and behavior
reinforced by its corporate culture.