Ethics in the corporation

1
Ethics in the corporation
2
What is a corporation?

• There are two main views
• Corporations are legal creations, fictional
  persons with no emotions, intelligence, or will.
  Their legal personality is narrow, directed to
  one end only generating wealth for their owners.
  (Tönnies Chief Justice Marshall)
• Corporations are very much like people or
  communities and may be treated as such. Likewise,
  the people who run them carry the responsibility
  of the corporate direction and must be
  accountable for its state of mind. (Lord
  Denning)

3
Chief Justice Marshall, Dartmouth College v.
Woodward, 1819

• A corporation is an artificial being, invisible,
  intangible, and existing only in the
  contemplation of the law. Being the mere creature
  of law, it possesses only those properties as
  are best calculated to effect the object for
  which it was created.
• (quoted by De George, 122)

4
Denning L.J in H.L. Bolton (Engineering) Co. Ltd.
v T.J. Graham Sons Ltd 1951 1 Q.B. 159 at 172.

• A company may in many ways be likened to a human
  body. It has a brain and nerve centre which
  controls what it does. It also has hands which
  hold the tools and act in accordance with
  directions from the centre. Some of the people in
  the company are mere servants and agents who are
  nothing more than hands to do the work and cannot
  be said to represent the mind or will. Others are
  directors and managers who represent the
  directing mind and will of the company, and
  control what it does. The state of mind of these
  managers is the state of mind of the company and
  is treated by the law as such.

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The joint stock company

• Allowed many contributors to pool their capital,
  usually with monopoly rights
• the Russia Company (1553)
• the East India Company (1600)
• the Hudson Bay Company (1670)
• Owners have liability to the extent of the fully
  paid up value of their shares. The price they pay
  is not having much say in the running or
  management of the company.

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Limited liability

• The Joint Stock Company Act 1856 Company Act
  1862 House of Lords, Salomon v. Salomon Co
  (1897) established the separate legal personality
  of the joint stock corporation.
• The liabilities of the company are not those of
  the owners, the shareholders.

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Exceptions do occur

• Where the courts believe that a corporation is
  being used as a front to evade contracts or
  statute law, they may lift the corporate veil.
• In Gilford Motor Co Ltd v. Horne (1933), the
  court found that Horne had formed a company to
  evade contractual obligations to a former
  employer and stopped that company from trading.

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How can ethics apply to a corporation?

• When the owners do not bear responsibility or
  liability for its acts?
• When responsibility is delegated to directors who
  are protected by a corporate veil?
• When a corporation is a legal instrument for
  achieving a limited range of objectives,
  principally profit?

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Can a corporation have a conscience?

• Did you ever expect a corporation to have a
  conscience when it has no soul to be damned, and
  no body to be kicked? First Baron Thurlow,
  Chancellor of England, c1600.
• A corporation can commit crimes and it can be
  punished. But can it be unethical?

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Ethical standards for corporations

• Let us grant that corporations are legal persons.
  Are they only legal entities?
• If corporations should observe legal standards,
  why should not they observe ethical ones?
• Corporations act, so why should not they act
  according to ethical standards?

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Two replies

• Philosophers argue about whether an organisation
  can act.
• Pragmatically, the law and people do regard
  corporations as actors, and the latter make moral
  judgments about corporate conduct.
• Making moral judgments about corporations is
  intelligible and often persuasive.

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Corporate morality limited

• Corporations have a different moral status from
  natural persons.
• Their moral obligations are fewer.
• They can still be held accountable and liable.
• Those within them can be held accountable and
  responsible.

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The ethics of role

• Role adds specific responsibilities
• Father/mother citizen occupation
• Role requires more of a person.
• Following directions is a valid reason for acting
  as long as those directions are ethical.

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What about role could exempt from ordinary moral
requirements?

• Is it a particular place in the hierarchy of the
  organisation
• Just following the orders of superiors?
• Others would do the same thing in my place?
• This is acceptable in this organisation?
• Somebody had to use their authority to save the
  company?
• My actions were necessary in my position?

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Accountability the key

• Can the person with responsibility account
  satisfactorily for their actions?
• Even if there is an unsatisfactory aspect to
  these actions, were they done maliciously?
• Were the actions proportionate to the objective?
• Were other less harmful alternatives considered?

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The danger of double standards

• In corporations there are often two versions of
  reality the one for external consumption (and
  accountability) and what actually happens.
• If the latter is too far from the former, people
  get the message that requirements for good
  practice are only for show and that they can cut
  corners.

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Societal Norms
Organisational Counternorms

• Be open honest
• Conscientiously adhere to rules
• Be cost effective
• Take responsibility
• Be a team player

• Be secretive deceitful
• Do whatever it takes to do the job
• Use it or lose it
• Pass the buck
• Take credit for your own actions ( take credit
  for the actions of others, if you can)

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Accountability Responsibility

• historical track
• tick the box
• reveals liability

• proactive
• take
• responsibility
• for
• discretion
• ethical
• empowerment

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Stakeholder theory and the manager

• How are stakeholders to be ranked?
• The traditional view is to place owners - the
  shareholders - first and last.
• A modern view demands that shareholders share
  their claims upon directors and managers with all
  those affected by the corporations operations.

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Corporate personality helps rank priorities

• The aims and purposes of the corporation (eg.
  articles of association) define its range of
  activities.
• Corporations - unlike natural persons - are not
  ends in themselves they are not moral persons.
• Directors and managers are employees of the
  corporation, not of its shareholders.
• Directors have fiduciary duties to shareholders,
  but this does not exhaust their obligations.

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Conflict of interest a case of understanding
good judgment

• Corporate ethics is not about the corporation
  having a conscience not about it feeling good
  not about it being generous.
• Corporate ethics is about just conduct and
  avoiding unjust actions. It is about giving
  various stakeholders their due.
• Perhaps the biggest obstacle to this is conflict
  of interest.

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Conflict of Interest

• Conflict of interest ? being adversely
  affected by a conflict

A persons having a conflict of interest is not
the same thing as a persons being affected by a
conflict of interest.
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Its a matter of where you draw the line.
Rather, some things are black, some things are
white, and some things are grey.
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Good judgment

• Begins with the facts - as they are available.
• Is principled - expresses ethical principles.
• Is detached but not apathetic.
• Is committed but not fanatical.
• Respects the interests of others and can look at
  the issues from the viewpoint of others.

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In 2003, Johnson Johnson

• Gave 99 million in cash to welfare organisations
  in the US and abroad.
• Gave 285.5 million in non-cash contributions.
• Gave a total of 3.7 of pretax profit to
  charitable causes - see the list in the report in
  the readings.

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Milton Friedman argues

• Only people can have responsibilities.
  Corporations can have responsibilities but not
  business in general. Why not?
• Executives are employees of the owners of the
  business and should act as they desire, namely
  to make as much money as possible. Is this true?
  Are not executives employees of the corporation?

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Friedman adds

• As the agent of others, he may not use their
  money for his purposes. Social responsibility
  implies that the manager will act contrary to the
  interests of shareholders. This robs them, may
  raise prices for customers, and may lower wages
  for workers.
• Individuals should spend their own money on
  socially worthy causes.
• If managers do this, they are in effect imposing
  taxes.

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Alan Greenspan agrees

• By law, shareholders own our corporations and,
  ideally, corporate managers should be working on
  behalf of shareholders to allocate business
  resources to their optimum use.

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A stronger view

• Business managers who use business funds for
  non-business purposes are guilty not just of the
  legal crime of theft, but of the offence of
  teleopathy in diverting funds from strictly
  business objectives to other purposes, they are
  pursuing the wrong ends. when business pursues
  love - or social responsibility - rather than
  money. Elaine Sternberg.

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This is not the common view

• Friedmans view might be theoretically correct
  but there is a practical problem most people
  view corporations as more than wealth generators.
• The 1999 Millennium Poll on Corporate Social
  Responsibility of 25,000 consumers
• Two in three citizens want companies to go
  beyond their historical role of making a profit,
  paying taxes, employing people and obeying laws
  they want companies to contribute to broader
  societal goals as well. (PricewaterhouseCoopers)

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Andrew Carnegie

• the duty of a man of wealth (is) First, to set
  an example of modest, unostentatious living to
  provide moderately for the legitimate wants of
  those dependent upon him and after doing so, to
  consider all surplus revenues which come to him
  simply as trust funds, which he is called upon to
  administer to produce the most beneficial
  results for the community

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Philanthropy

• Why cant we encourage our major companies to
  put major dollars into healthcare? The Government
  can only do so much. Im not critical of the
  Government. Im critical of the corporations.
  (Rosenfeld, W/end Aus. 2001)
• Professor Rosenfeld criticised drug companies for
  not investing in research on diseases prevalent
  in the Third World.

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Corporate giving

• Corporations were criticised for not giving
  generously to victims of the tsunami.
• They have been criticised for being difficult
  with insurance payouts, ungenerous with
  termination packages, for fighting legal actions
  vigorously.
• There is a general expectation in the West that
  they will give to charities.

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Shareholders Association view

• The Australian Shareholders Association has taken
  a tough line on charity. It believes companies
  should only give when there is an economic
  benefit to shareholders. Chief executive, Stuart
  Wilson, said
• "In relation to the tsunami appeal I think it is
  quite appropriate for companies with suppliers,
  customers or operations in Asia to help the
  victims."

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The problem with philanthropy

• Directors and managers can confuse their
  generosity with the corporations the
  corporations money does not belong to them
• Can raise expectations about the role of
  corporations and increase the costs of doing
  business. Businesses must remain competitive in
  order to serve any social purposes.

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The central issues in corporate giving are

• That directors can account for it
• That it is transparent
• That it is related to business purposes even if
  it is not central to those purposes
• That it does not harm the competitiveness of the
  business
• That is does not violate commutative or
  distributive justice

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Social costs and social responsibilities

• The operations of business incur social costs.
  Often those costs are paid socially as negative
  externalities rather than included in the price
  of products.
• This contravenes principles of fairness and
  distributive justice.

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Justice requires that

• Businesses compete on an equal footing
• Social resources not be regarded as free
• That use of social resources should reflect their
  cost and especially their cost to third parties
• That business engage in socially responsible
  conduct as a cost of doing business

39
Triple bottom line reporting (Term coined by
John Elkington in1997)

• To the financial statements attesting to the
  financial health of a corporation, 3BL adds
  environmental and social performance.
• Is a measure of general sustainability of a
  corporations operations. In order to have a long
  term future
• It must be profitable
• It must minimise environmental impacts
• It must meet social expectations

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The Merck case

• 1979, a Merck scientist has a hunch that one of
  their products could cure river blindness.
• Cost of development is gt 100 million.
• Risk of undermining veterinary product.
• Drug market was crowded and margins were
  shrinking.
• No distribution networks where drug most needed.
• No clear market for product.
• U.S. Govt. and WHO would not fund it.
• Should Merck develop the drug?