Business Ethics? Corporations are clearly legal agents. They can enter into contracts, own property, and sue and be sued.? For your main post, analyze and explain if they are also mo

CHAPTER 5 Corporations

Glossary

1. corporation: A limited liability company. A company with one or more shareholders who share ownership while enjoying limited liability.

2. externalities: Unintended positive and negative effects done to third parties from business transactions, such as pollution.

3. fiduciary duties: The duty of management to make profit for shareholders. 4. limited liability: Investors (shareholders) are not responsible for the actual price of

damages done by the corporations they own stock in. Instead, they are liable for the amount they invest in the company.

5. shareholder: The investors (stockholders) who share ownership of a corporation by buying stock.

Chapter Summary Points:

1. The modern business corporation has evolved over several centuries and incorporation is no longer the special privilege it once was.

2. Corporations are legal entities, with legal rights and responsibilities similar but not identical to those enjoyed by individuals. 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. The question of corporate moral agency is whether corporations are the kind of entity that can have moral responsibilities. If corporations can make rational and moral decisions, then they can be held morally blameworthy or praiseworthy for their actions. Philosophers disagree about whether the corporate internal decision (CID) structure makes it reasonable to assign moral responsibility to corporations.

4. This problem is compounded by the difficulty of assigning moral responsibility to individuals inside corporations.

5. Despite these controversies, the courts and the general public find the notion of corporate responsibility useful and intelligible—either in a literal sense or as shorthand for the obligations of individuals in the corporation.

6. The debate over corporate responsibility is whether it should be construed narrowly to cover only profit maximization or more broadly to include acting morally, refraining from socially undesirable behavior, and contributing actively and directly to the public good.

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7. Proponents of the narrow view, such as Milton Friedman, contend 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.

8. Defenders of the broader view maintain that corporations have additional responsibilities because of their great social and economic power. Business is governed by an implicit social contract that requires it to operate in ways that benefit society. In particular, corporations must take responsibility for the unintended side effects of their business transactions (externalities) and weigh the full social costs of their activities.

9. Advocates of the narrow view stress that management has a duty to the owners (stockholders) of a corporation, which takes priority over any other responsibilities and obligates it to focus on profit maximization alone. Critics challenge this argument because (a) they fear the damage that can be done from a narrow focus on profit maximization, (b) they see nothing absurd in requiring corporations to have a broader view of social responsibility, and (c) they don't think the management-stockholder relationship should forbid people from taking moral considerations seriously other than profit-maximization.

10. Three arguments in favor of the narrow view are the invisible-hand argument, the let-government-do-it argument, and the business-can’t-handle-it argument. Finding flaws in each of these arguments, critics claim there is no solid basis for restricting corporate responsibility to profit making.

11. Those proposing broader corporate responsibilities see the creation of an ethical atmosphere within the corporation as an important first step. Essential to this atmosphere are acknowledging the critical importance of ethics, encouraging morally responsible conduct by all employees, recognizing the pluralistic nature of our social system, and openness to public discussion and review.

12. According to Christopher Stone, corporations and the people who make them up must have high moral standards and monitor their own behavior because there are limits to what the law can do to ensure that business behavior is socially and morally acceptable. One, the laws tend to only be passed after the damage is done. Two, formulating the laws and regulations are often too difficult. Three, enforcing the laws and regulations is often too difficult.

13. All settled economic life requires trust and confidence. The adoption of realistic and workable codes of ethics in the business world can actually enhance business efficiency. This is particularly true when there is an imbalance of knowledge between the buyer and the seller.

© 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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14. To improve the organizational climate so individuals can reasonably be expected to act ethically, corporations should adopt an ethical code, set up a high-ranking ethics committee, and include ethics training in their employee-development programs. Attention to corporate culture is also crucial to the successful institutionalization of ethics inside an organization.

Additional Resources for Exploring Chapter Content

Further Reading

 “Before and After Bellotti: The Political Contributions Cases” http://www.liebertonline.com/doi/abs/10.1089/elj.2006.5.293  Robert E. Mutch. Election Law Journal: Rules, Politics and Policy. September 1,

2006, 5(3): 293-324. doi:10.1089/elj.2006.5.293.

Internet Resources

 Johnson & Johnson Credo http://www.jnj.com/connect/about-jnj/jnj-credo/

 News article, “Google, Microsoft, and Yahoo Unveil Human Rights Guidelines” http://www.informationweek.com/news/internet/policy/showArticle.jhtml?articleID=211601095

© 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter Five: Corporations

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

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?

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

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 acknowledgment 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.

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.

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.

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 paid the fees.

The Limited Liability Company

 Two ideas motivated the change behind the new system:

(1) The belief that a 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

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.

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.

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.

Corporate Moral Agency

 Can corporations make moral decisions? Many argue that only the individuals within the structure can act morally or immorally, and can be consequently held morally responsible for their actions.

 Others disagree as to whether the structure as a whole can be liable for criminal offenses and punishable by the law.

 Not every form of punishment can be applied to corporations.

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.

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.

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

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.

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

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.

Rival Views of Corporate Responsibility

 Proponents of the narrow view argue that management’s fiduciary responsibility to maximize shareholder wealth outweighs any other obligations.

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

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.

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

Debating Corporate Responsibility

 The let-government-do-it argument: The corporation has a natural and insatiable appetite for profit and 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.

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.

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?

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

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.

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

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

“Maurice Hank Greenberg was the CEO of American International Group (AIG), a long-prosperous and respected insurance company, when it suddenly collapsed. AIG was said to have fostered a corporate culture that accepted excessive risk. But is corporate culture alone capable of bringing down a company like AIG?”

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.