Ethics in the Ethics in the corporationcorporation

What is a corporation?What is a corporation?

There are two main views:There are two main views:1.1. Corporations are legal creations, fictional persons Corporations are legal creations, fictional persons

with no emotions, intelligence, or will. Their legal with no emotions, intelligence, or will. Their legal personality is narrow, directed to one end only: personality is narrow, directed to one end only: generating wealth for their owners. (Tönnies; Chief generating wealth for their owners. (Tönnies; Chief Justice Marshall)Justice Marshall)

2.2. Corporations are very much like people or Corporations are very much like people or communities and may be treated as such. Likewise, communities and may be treated as such. Likewise, the people who run them carry the responsibility of the people who run them carry the responsibility of the corporate direction and must be accountable for the corporate direction and must be accountable for its “state of mind”. (Lord Denning)its “state of mind”. (Lord Denning)

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

18191819““A corporation is an artificial being, invisible, A corporation is an artificial being, invisible,

intangible, and existing only in the intangible, and existing only in the contemplation of the law. Being the mere contemplation of the law. Being the mere creature of law, it possesses only those creature of law, it possesses only those properties … as are best calculated to properties … as are best calculated to effect the object for which it was created.”effect the object for which it was created.”

(quoted by De George, 122)(quoted by De George, 122)

Denning L.J in H.L. Bolton (Engineering) Co. Denning L.J in H.L. Bolton (Engineering) Co. Ltd. v T.J. Graham & Sons Ltd [1951] 1 Q.B. 159 Ltd. v T.J. Graham & Sons Ltd [1951] 1 Q.B. 159

at 172.at 172.

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

The joint stock companyThe joint stock company

Allowed many contributors to pool their capital, Allowed many contributors to pool their capital, usually with monopoly rights usually with monopoly rights the Russia Company (1553)the Russia Company (1553) the East India Company (1600)the East India Company (1600) the Hudson Bay Company (1670)the Hudson Bay Company (1670)

Owners have liability to the extent of the fully paid Owners have liability to the extent of the fully paid up value of their shares. The price they pay is up value of their shares. The price they pay is not having much say in the running or not having much say in the running or management of the company.management of the company.

Limited liabilityLimited liability

The Joint Stock Company Act 1856; The Joint Stock Company Act 1856; Company Act 1862; House of Lords, Company Act 1862; House of Lords, SalomonSalomon v. v. Salomon & CoSalomon & Co (1897) (1897) established the separate legal personality established the separate legal personality of the joint stock corporation.of the joint stock corporation.

The liabilities of the company are not those The liabilities of the company are not those of the owners, the shareholders.of the owners, the shareholders.

Exceptions do occurExceptions do occur

Where the courts believe that a corporation is Where the courts believe that a corporation is being used as a front to evade contracts or being used as a front to evade contracts or statute law, they may lift the corporate veil.statute law, they may lift the corporate veil.

In In Gilford Motor Co LtdGilford Motor Co Ltd v. v. HorneHorne (1933), the court (1933), the court found that Horne had formed a company to evade found that Horne had formed a company to evade contractual obligations to a former employer and contractual obligations to a former employer and stopped that company from trading.stopped that company from trading.

How can ethics apply to a How can ethics apply to a corporation?corporation?

When the owners do not bear When the owners do not bear responsibility or liability for its acts?responsibility or liability for its acts?

When responsibility is delegated to When responsibility is delegated to directors who are protected by a corporate directors who are protected by a corporate veil?veil?

When a corporation is a legal instrument When a corporation is a legal instrument for achieving a limited range of objectives, for achieving a limited range of objectives, principally profit?principally profit?

Can a corporation have a Can a corporation have a conscience?conscience?

““Did you ever expect a corporation to have Did you ever expect a corporation to have a conscience when it has no soul to be a conscience when it has no soul to be damned, and no body to be kicked?” damned, and no body to be kicked?” First First Baron Thurlow, Chancellor of England, c1600.Baron Thurlow, Chancellor of England, c1600.

A corporation can commit crimes and it A corporation can commit crimes and it can be punished. But can it be unethical? can be punished. But can it be unethical?

Ethical standards for Ethical standards for corporationscorporations

Let us grant that corporations are legal Let us grant that corporations are legal persons. Are they persons. Are they onlyonly legal entities? legal entities?

If corporations should observe legal If corporations should observe legal standards, why should not they observe standards, why should not they observe ethical ones?ethical ones?

Corporations Corporations actact, so why should not they , so why should not they act according to ethical standards?act according to ethical standards?

Two repliesTwo replies

Philosophers argue about whether an Philosophers argue about whether an organisation organisation cancan act. act.

Pragmatically, the law and people do regard Pragmatically, the law and people do regard corporations as actors, and the latter make corporations as actors, and the latter make moral judgments about corporate conduct.moral judgments about corporate conduct.

Making moral judgments about corporations Making moral judgments about corporations is is intelligibleintelligible and often persuasive. and often persuasive.

Corporate morality limitedCorporate morality limited

Corporations have a different moral status Corporations have a different moral status from natural persons.from natural persons.

Their moral obligations are fewer.Their moral obligations are fewer. They can still be held accountable and They can still be held accountable and

liable.liable. Those within them can be held Those within them can be held

accountable and responsible.accountable and responsible.

The ethics of roleThe ethics of role

Role adds specific responsibilities:Role adds specific responsibilities:• Father/mother; citizen; occupationFather/mother; citizen; occupation

Role requires Role requires moremore of a person. of a person. Following directions is a valid reason for Following directions is a valid reason for

acting as long as those directions are acting as long as those directions are ethical.ethical.

What about role could exempt from What about role could exempt from ordinary moral requirements?ordinary moral requirements?

Is it a particular place in the hierarchy of the Is it a particular place in the hierarchy of the organisation:organisation:

• Just following the orders of superiors?Just following the orders of superiors?• Others would do the same thing in my place?Others would do the same thing in my place?• This is acceptable in this organisation?This is acceptable in this organisation?• Somebody had to use their authority to save the Somebody had to use their authority to save the

company?company?• My actions were necessary in my position?My actions were necessary in my position?

Accountability the keyAccountability the key

Can the person with responsibility account Can the person with responsibility account satisfactorily for their actions?satisfactorily for their actions?

Even if there is an unsatisfactory aspect to these Even if there is an unsatisfactory aspect to these actions, were they done maliciously?actions, were they done maliciously?

Were the actions proportionate to the objective?Were the actions proportionate to the objective? Were other less harmful alternatives Were other less harmful alternatives

considered?considered?

The danger of double The danger of double standardsstandards

In corporations there are often two In corporations there are often two versions of reality: the one for external versions of reality: the one for external consumption (and accountability) and what consumption (and accountability) and what actually happens.actually happens.

If the latter is too far from the former, If the latter is too far from the former, people get the message that requirements people get the message that requirements for good practice are only for show and for good practice are only for show and that they can cut corners.that they can cut corners.

Societal NormsSocietal Norms Organisational CounternormsOrganisational 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)

historical track

tick the box

reveals liability

proactive

“take responsibility for”

discretion

ethical empowerment

Accountability Responsibility

Stakeholder theory and the Stakeholder theory and the managermanager

How are stakeholders to be ranked?How are stakeholders to be ranked? The traditional view is to place owners - The traditional view is to place owners -

the shareholders - first and last.the shareholders - first and last. A modern view demands that A modern view demands that

shareholders share their claims upon shareholders share their claims upon directors and managers with all those directors and managers with all those affected by the corporation’s operations. affected by the corporation’s operations.

Corporate personality helps Corporate personality helps rank prioritiesrank priorities

The aims and purposes of the corporation (eg. The aims and purposes of the corporation (eg. articles of association) define its range of articles of association) define its range of activities. activities.

Corporations - unlike natural persons - are not Corporations - unlike natural persons - are not ends in themselves: they are not moral persons.ends in themselves: they are not moral persons.

Directors and managers are employees of the Directors and managers are employees of the corporation, not of its shareholders.corporation, not of its shareholders.

Directors have fiduciary duties to shareholders, Directors have fiduciary duties to shareholders, but this does not exhaust their obligations.but this does not exhaust their obligations.

Conflict of interest: a case of Conflict of interest: a case of understanding good judgmentunderstanding good judgment

Corporate ethics is not about the corporation Corporate ethics is not about the corporation having a conscience; not about it “feeling good”; having a conscience; not about it “feeling good”; not about it being generous.not about it being generous.

Corporate ethics is about just conduct and Corporate ethics is about just conduct and avoiding unjust actions. It is about giving various avoiding unjust actions. It is about giving various stakeholders their due.stakeholders their due.

Perhaps the biggest obstacle to this is conflict of Perhaps the biggest obstacle to this is conflict of interest.interest.

Conflict of InterestConflict of Interest

Conflict of interest being adversely affected by a conflict

A person’s having a conflict of interest is not the same thing as a person’s being affected by a conflict of interest.

“It’s a matter of where you draw the line.”

Rather, some things are black,

some things are white, and

some things are grey.

Good judgmentGood judgment

Begins with the facts - as they are Begins with the facts - as they are available.available.

Is principled - expresses ethical principles.Is principled - expresses ethical principles. Is detached but not apathetic.Is detached but not apathetic. Is committed but not fanatical.Is committed but not fanatical. Respects the interests of others and can Respects the interests of others and can

look at the issues from the viewpoint of look at the issues from the viewpoint of others.others.

In 2003, Johnson & JohnsonIn 2003, Johnson & Johnson

Gave $99 million in cash to welfare Gave $99 million in cash to welfare organisations in the US and abroad.organisations in the US and abroad.

Gave $285.5 million in non-cash Gave $285.5 million in non-cash contributions.contributions.

Gave a total of 3.7% of pretax profit to Gave a total of 3.7% of pretax profit to charitable causes - see the list in the charitable causes - see the list in the report in the readings.report in the readings.

Milton Friedman arguesMilton Friedman argues

““Only people can have responsibilities.” Only people can have responsibilities.” Corporations can have responsibilities but Corporations can have responsibilities but not business in general. Why not?not business in general. Why not?

Executives are employees of “the owners Executives are employees of “the owners of the business” and should act as they of the business” and should act as they desire, namely to make as much money desire, namely to make as much money as possible. Is this true? Are not as possible. Is this true? Are not executives employees of the executives employees of the corporationcorporation??

Friedman addsFriedman adds

As the agent of others, he may not use their As the agent of others, he may not use their money for his purposes. Social responsibility money for his purposes. Social responsibility implies that the manager will act contrary to the implies that the manager will act contrary to the interests of shareholders. This robs them, may interests of shareholders. This robs them, may raise prices for customers, and may lower raise prices for customers, and may lower wages for workers.wages for workers.

Individuals should spend their own money on Individuals should spend their own money on socially worthy causes.socially worthy causes.

If managers do this, they are “in effect imposing If managers do this, they are “in effect imposing taxes”.taxes”.

Alan Greenspan agrees:Alan Greenspan agrees:

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

A stronger viewA stronger view

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

This is not the common viewThis is not the common view

Friedman’s view might be Friedman’s view might be theoreticallytheoretically correct but correct but there is a practical problem: most people view there is a practical problem: most people view corporations as more than wealth generators.corporations as more than wealth generators.

The The 1999 Millennium Poll on Corporate Social 1999 Millennium Poll on Corporate Social ResponsibilityResponsibility of 25,000 consumers: of 25,000 consumers:

““Two in three citizens want companies to go Two in three citizens want companies to go beyond their historical role of making a profit, beyond their historical role of making a profit, paying taxes, employing people and obeying paying taxes, employing people and obeying laws; they want companies to contribute to laws; they want companies to contribute to broader societal goals as well.” broader societal goals as well.” (PricewaterhouseCoopers)(PricewaterhouseCoopers)

Andrew CarnegieAndrew Carnegie

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

Philanthropy Philanthropy

““Why can’t we encourage our major Why can’t we encourage our major companies to put major dollars into companies to put major dollars into healthcare? The Government can only do healthcare? The Government can only do so much. I’m not critical of the so much. I’m not critical of the Government. I’m critical of the Government. I’m critical of the corporations.” corporations.” (Rosenfeld, W/end Aus. 2001)(Rosenfeld, W/end Aus. 2001)

Professor Rosenfeld criticised drug Professor Rosenfeld criticised drug companies for not investing in research on companies for not investing in research on diseases prevalent in the Third World.diseases prevalent in the Third World.

Corporate givingCorporate giving

Corporations were criticised for not giving Corporations were criticised for not giving generously to victims of the tsunami. generously to victims of the tsunami.

They have been criticised for being difficult They have been criticised for being difficult with insurance payouts, ungenerous with with insurance payouts, ungenerous with termination packages, for fighting legal termination packages, for fighting legal actions vigorously.actions vigorously.

There is a general expectation in the West There is a general expectation in the West that they will give to charities.that they will give to charities.

Shareholders’ Association Shareholders’ Association viewview

The Australian Shareholders Association has taken a tough The Australian Shareholders Association has taken a tough line on charity. It believes companies should only give line on charity. It believes companies should only give when there is an economic benefit to shareholders. Chief when there is an economic benefit to shareholders. Chief executive, Stuart Wilson, said:executive, Stuart Wilson, said:

"In relation to the tsunami appeal I think it is quite "In relation to the tsunami appeal I think it is quite appropriate for companies with suppliers, customers or appropriate for companies with suppliers, customers or operations in Asia to help the victims."operations in Asia to help the victims."

The problem with The problem with philanthropyphilanthropy

Directors and managers can confuse their Directors and managers can confuse their generosity with the corporation’s: the generosity with the corporation’s: the corporation’s money does not belong to corporation’s money does not belong to themthem

Can raise expectations about the role of Can raise expectations about the role of corporations and increase the costs of corporations and increase the costs of doing business. Businesses must remain doing business. Businesses must remain competitive in order to serve any social competitive in order to serve any social purposes.purposes.

The central issues in The central issues in corporate giving arecorporate giving are

That directors can account for itThat directors can account for it That it is transparent That it is transparent That it is related to business purposes That it is related to business purposes

even if it is not central to those purposeseven if it is not central to those purposes That it does not harm the competitiveness That it does not harm the competitiveness

of the businessof the business That is does not violate commutative or That is does not violate commutative or

distributive justicedistributive justice

Social costs and social Social costs and social responsibilitiesresponsibilities

The operations of business incur social The operations of business incur social costs. Often those costs are paid socially costs. Often those costs are paid socially as negative externalities rather than as negative externalities rather than included in the price of products.included in the price of products.

This contravenes principles of fairness and This contravenes principles of fairness and distributive justice.distributive justice.

Justice requires thatJustice requires that

Businesses compete on an equal footingBusinesses compete on an equal footing Social resources not be regarded as freeSocial resources not be regarded as free That use of social resources should reflect That use of social resources should reflect

their cost and especially their cost to third their cost and especially their cost to third partiesparties

That business engage in socially That business engage in socially responsible conduct as a cost of doing responsible conduct as a cost of doing business business

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

To the financial statements attesting to the financial To the financial statements attesting to the financial health of a corporation, 3BL adds environmental and health of a corporation, 3BL adds environmental and social performance.social performance.

Is a measure of general sustainability of a corporation’s Is a measure of general sustainability of a corporation’s operations. In order to have a long term future:operations. In order to have a long term future:

• It must be profitableIt must be profitable

• It must minimise environmental impactsIt must minimise environmental impacts

• It must meet social expectationsIt must meet social expectations

The Merck caseThe Merck case

1979, a Merck scientist has a hunch that one of 1979, a Merck scientist has a hunch that one of their products could cure river blindness.their products could cure river blindness.

Cost of development is > $100 million.Cost of development is > $100 million. Risk of undermining veterinary product.Risk of undermining veterinary product. Drug market was crowded and margins were Drug market was crowded and margins were

shrinking.shrinking. No distribution networks where drug most needed.No distribution networks where drug most needed. No clear market for product.No clear market for product. U.S. Govt. and WHO would not fund it.U.S. Govt. and WHO would not fund it.Should Merck develop the drug?Should Merck develop the drug?