Philosophy 323

1
Philosophy 323

• Corporate Social Responsibility and Models of
  Corporate Governanceg

2
Corporate Social Responsibility Some Background

• A common assumption corporations dont have any
  responsibilities.
• Officers of corporations do, but they are
  narrowly defined according to perceived interests
  of the owners.
• What becomes clear ultimately is that the view
  does not deny that the agents of corporations
  have moral obligations, just that they are very
  specific (primarily fiduciary).

3
Corporations Dont Have Responsibilities?

• Corporations are legal fictions.
• Dont have the capacities necessary for
  responsibilities.
• Knowledge and will.
• What about the fact that corporations are
  frequently held criminally and civilly liable?
• Also, corporations are increasingly granted the
  rights of individual citizens (First National
  Bank of Boston v. Bellotti).

4
If There is Responsibility it Must be That of the
Officers

• Only people with the appropriate capacities.
• But to whom are they responsible? The owners.
• What is the nature of that responsibility?
• To satisfy the will of the owners.

5
Utilitarian Defense of Classical Model

• The market guarantees maximization of good
  (usually characterized as satisfaction).
• Managers have a responsibility to conform closely
  with market expectations (maximize satisfaction).
• Evidence is expressed preferences of consumers
  and owners.

6
Criticisms of the Utilitarian DefensePart I

• There are a range of instances in which the
  pursuit of profits does not maximize
  satisfaction.
• Market Failures
• Externalities (Pollution, resource depletion).
• Public Goods (Air, water, fisheries)-no pricing
  mechanism.
• Prisoners Dilemma (cooperation more optimal than
  competition).
• Complexity of markets and the contexts in which
  they function make it unlikely that a
  single-minded focus on profit will guarantee good
  outcomes.

7
Criticisms of the Utilitarian DefensePart II

• Of course, there may be mechanisms that could be
  developed to meet the sort of objections just
  noted.
• Property values an economic measure of air
  quality preferences.
• However, there are more difficult conceptual
  problems.
• First-Generation Problem markets are reactive,
  not proactive.
• Satisfaction does not equal happiness. Its not
  always good to get what you want.

8
Private Property Defense of Classical Model

• Corporations are the property of their owners.
• Officers of corporations are responsible to the
  desires of the owners.
• The primary desire of the owners of the
  corporation is profit maximization.

9
Criticisms of the Private Property Defense

• Right to property is not absolute.
• Constrained by rights of others zoning eminent
  domain.
• Corporate Property Rights are different from
  personal property.
• Stockholder of a corporation have limited
  liability for actions of their corporations.
• They have no direct rights of access/control.

10
Stakeholder Theory

• The current focus of much of the thinking about
  corporate social responsibility is Stakeholder
  Theory.
• Adherents of the theory argue that all
  stakeholders in a corporation have a fundamental
  right to respect, and thus that corporate
  officers have a responsibility to treat them as
  ends rather than as means to ends.

11
Who is a Stakeholder?

• Narrow Definition
• Any individual or group vital to the survival and
  success of the corporation.
• Wide Definition
• Any individual or group whose interests can
  effect or are affected by the corporation.
• Examples?

12
Defense of Stakeholder Theory

• Most defenses of Stakeholder Theory begin with
  the recognition that Stakeholders are
  conceptually related to stockholders.
• Justification then focuses on the reach and
  number of relevant normative concerns.
• Differences between stockholders and employees?

13
Criticisms of Stakeholder Theory

• A common criticism of Stakeholder theory emerges
  from the classical model.
• Stakeholder theory inadequately addresses
  stockholder rights and property rights.
• Another criticism focuses on practical issues.
• Who are the stakeholders? How do they count? How
  should managers take them into account in their
  decisions?

14
"Social Responsibility of Business"

• Milton Friedman was a Nobel Prize winning
  economist. He won for his work in the fields of
  consumption analysis, monetary theory and for his
  demonstration of the complexity of stabilization
  policy.
• He was more famous, though, for his social policy
  work, of which the piece we read is perhaps the
  most infamous example.

15
CSR?

• Friedman pulls no punches in this essay. His
  opening salvo insists that all talk of CSR is
  incomprehensible and declares that the business
  people who suggest that business has obligations
  beyond profit are advocating "socialism.
• A less impassioned gaze reveals that Friedman is
  offering a version of a private property critique
  of CSR.

16
Where is the Responsibility?

• According to Friedman, if we are to make sense of
  the discussion of claims concerning the
  responsibility of business, we need to determine
  the nature of the responsibility.
• Friedman first asserts that the corporation
  itself is a legal fiction, and if there is
  responsibility it must be that of the executive
  officers.
• To whom are they responsible? Why the owners, of
  course. What is the nature of that
  responsibility? To satisfy the will of the owners.

17
What do owners want?

• One may ask "Why does this preclude an analysis
  of business that includes social responsibility?"
  Friedman pins his answer to a conception of such
  responsibility as necessarily antagonistic to the
  will of the owners (52).
• On the basis of this antagonism, Friedman equates
  a decision motivated by social responsibility
  with taxation. This in turn explains why Friedman
  thinks that CSR is equivalent to socialism (53).

18
A very thin sort of responsibility.

• What becomes clear ultimately is that Friedman is
  not denying that business has some moral
  obligations, just that it has particular the ones
  typically articulated under the banner of CSR.
• He does however insist (without arguing for it)
  that corporate officers have a responsibility to
  play fair and play by the rules (existing laws
  and regulations).

19
Managing For Stakeholders

• Freeman sets out to question the conventional
  wisdom that the primary or only responsibility
  held by corporate managers is to the
  stockholders.
• His aim is not to deny this particular
  responsibility, only to widen it to include all
  "stakeholders" in corporate practices.
• Freeman insists that all stakeholders are due a
  fundamental respect by corporate officers, that
  is, they have a right to be treated as an end in
  themselves, and not merely as a means to some
  specific corporate end.

20
The Changing World

• He supports this claim by referring to changing
  legal standards, which have increasingly
  recognized the claims and interests of customers,
  labor, and communities against those of
  corporations.
• He also argues that recognizing stakeholder
  rights also makes economic sense, especially in
  light of problems like the "tragedy of the
  commons" which have increased government
  oversight of corporations, lessening their
  ability to make their own economic decisions.

21
Freemans Stakeholder Theory

• Freeman then goes on to articulate the specifics
  of the stakeholder theory, focusing on the narrow
  definition of the stakeholder (those groups vital
  to the survival of the corporation), though he
  holds out the possibility of a theory that would
  encompass a broader notion of stakeholder (any
  group/individual who can affect or be affected by
  a corporation).
• Essentially, the stakeholder theory he offers is
  just an expansion of the traditional shareholder
  theory. Of course, the range of individuals
  involved in the theory is much broader (see
  diagram on p. 61).
• Where the stakeholder theory significantly
  diverges from shareholder theory is in the reach
  and number of relevant normative concerns.

22
Two Key Assumptions

• The Integration Thesis Most business decisions
  have some ethical content, or implicit ethical
  view. Most have ethical decisions, business
  content, or an implicit view about business.
• The Responsibility Principle Most people, most
  of the time, want to, actually do, and should
  accept responsibility for the defects of their
  actions on others.

23
Practical Implications

• Stakeholder interests should be regarded as
  joint.
• Stakeholder interests may be prioritized by
  different companies in different ways.
• Businesses must have a clearly defined purpose.

24
Theoretical Foundations

• The argument from consequences Results in
  economic, social, and environmental benefits.
• The argument from rights Helps to ensure that
  property rights and human rights are protected.
• The argument from character Helps ensure that
  virtues, such as efficiency, fairness, respect,
  and integrity are enacted by managers.
• The Pragmatists argument Because we want
  humane social institutions, businesses should be
  regarded as a social practice governed by the
  norms common to all social practices.

25
Has Stakeholder Theory Won?

• Boatright appeals to transaction cost economics
  to defend the stockholder model of the
  corporation and to criticize the stakeholder
  model.
• Advocates of stakeholder management get one point
  right the modern for-profit corporation should
  serve the interests of all stakeholder groups.
• Where stakeholder theory goes wrong is in
  thinking that managing for the interests of all
  shareholders is not in the interest of all
  shareholders.
• Managers ought not be tasked with managing for
  the interests of all since the market will ensure
  that the interests of all are taken into account.

26
Two Forms of Stakeholder Management

• Instrumental Stakeholder Theory holds that it is
  in the interest of shareholders for managers to
  attend to all stakeholder groups in their
  operations. This view is compatible with the
  prevailing stockholder (shareholder) theory of
  the firm.
• Normative Stakeholder Theory holds that (1)
  stakeholders have a right to participate in
  decisions that affect them (2) that managers
  have fiduciary duties to serve all stakeholders
  and (3) the objective of the firm ought to be the
  promotion of all interests and not shareholders
  alone.

27
An Economic Approach to the Purpose of the Firm

• The stockholder model of corporate governance is,
  or should be, grounded in the transaction cost
  theory of the firm as articulated by Coase
  (1937).
• On this theory, the purpose of the firm is to
  enable individuals with economic assets to
  realize the full benefits of joint production.
  Every stakeholder group benefits from such
  production.

28
Governance

• Governance may be understood as the contractual
  agreement and legal rules that secure the
  interests of each input group.
• Shareholders govern corporations because control
  is the most suitable protection for the capital
  they contribute to the firm.
• Having shareholders in control is also in the
  best interest of other stakeholder groups
  because
• All benefit from maximizing profits
• Shareholders assume most of the risk

29
Advantages of Shareholder Theory

• Protecting stakeholder interests is best
  accomplished by the shareholder model of
  management since
• Legal protection is to be preferred to managerial
  good will.
• Corporate decision-making is more efficient when
  management has a single goal and this benefits
  all stakeholders.

30
What about Fariness?

• Fairness is partly secured by managers
  recognizing their basic ethical obligations to
  all parties, in addition to their legal
  obligations. Three further points
• Contractual agreements and legal rules help
  secure fairness.
• Governments, and not managers, are best
  positioned to ensure a fair distribution of
  wealth.
• Governments, and not corporate governance
  structures are best suited to ensure a fair
  distribution of wealth.