Business 303 Sheppard

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Business 303 Sheppard

• Business Society Ethics, Week 6
• Corporate Social Responsibility (CSR)
• In Practice

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BUSINESS ETHICS WEEK 6 MAIN QUESTIONS

1. Why has tort liability expanded?
2. What are the basic features of the corp.?
3. Whats the Received Legal Model?
4. Whats the Managerial Domination Model?
5. What are ways to increase the corp.'s
   responsiveness to stockholders.
6. What are the individual failures
   that lead to corporate problems?

At a minimum shouldnt we be responsible to
the customer or at least to the shareholder?
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1. Who is Responsible? (1/3)

• Firm, consumer, or government? 373
• Who assumes the risk and liability 355
• Lockean Proviso
• Is there an even playing field?

• Legal Responsibility

• Tort Liability 356
• Unintended injuries 357
• Pricey way to handle a market info. failure?
• A peculiarly American institution?
• A lack of desire to regulate arbitration?
• The move from contractual consent
  to coercion to pay a liability tax.

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1. Who is Responsible? (2/3)

• Legal Responsibility Tort Liability 361

Drugs pharmaceutical devices were among the
last products to be swept up in the design defect
litigation. Until well into the 1970s, most
courts accepted that potent drugs often have
unavoidable side effects Courts began to find
design defects in a list ending with morning
sickness drugs, intrauterine devices.

• Implied warranties 360
• No-fault system 365

http//archives.cbc.ca/IDD-1-75-88/science_technol
ogy/thalidomide/
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1. Who is Responsible? (3/3)

• Responsibility of the Consumer?
• Calculation of risk and benefit 362
• Imposed versus voluntary risk 362
• The need for personal responsibility

• Responsibility of the firm?

• Strict (not absolute) product liability 367?
• Reduce the risks of the product 369
• Avoid deception and fraud 370
• Access to information 371
• Compensatory justice 372

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2. Background on the Corporation (1/2)

• Previous Issues
  Limits / controls to corp. behavior
  include
• Lockean proviso
• NIMBY
• Explicit and implicit laws
• Kantian ethics for
  directors 591

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2. Background on the Corporation (2/2)

• The necessary legal fiction
• Legal lets pretend England / church 1100 AD
• Incorporate to promote the public good
• The incorporated city England 1500 AD
• Dutch English trading ventures
• Capital pooling Holland / U.K. 1600 AD
• Public works to promote public good
• Govt. Corp.s / canals U.K. / Hol. / U.S. 1700 AD
  
• Incorporation to business ventures
• Private corp. for mfg. U.K., Hol. U.S. 1800 AD
• Incorporation to holding companies
• Co. owns other co. N.J. ? Del. ? Intl. 1900 AD

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3. What is the Corporation? (1/2)

• Characteristics of Corporations
• Legal entity
• Artificial being, invisible, intangible,
• existing only in the contemplation of law
• Creature of the state
• Owes its existence to the government
• Allows for free transfer of ownership
• Limited liability
• Perpetual existence
• Moral Agent?
• CID, Corp. Culture, Imprison-able?

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3. What is the Corporation? (2/2)

• Powers of the Corporation
• Expressed powers in a corp. charter
• Implied powers (free speech)
• Limits legalities the changing face
  of the law
• Responsibilities Corporate Liability
• Civil Liability Corp. has deep pockets
• Criminal Liability The courts would like to
  arrest someone!

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4. Stockholders (1/3)

• Who are they?
• Individual Investors
• Institutional Investors
• Why are they so important?
• As residual claimants, if shareholders needs are
  met then in theory all other stakeholder needs
  are met. Jay Barney
• Fact is, if shareholders needs are not met, few
  other stakeholder needs are likely to be met.
• They may also have a desire for the corporation
  to behave ethically

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4. Stockholders (2/3)

• Shareholders vote on
• Mergers / Consolidations
• Important shareholders
  investment decisions
• Disposing of most corp. assets
• Dissolving the corp. / re-incorporation
• Charter and Bylaw Changes
• Proposals by Stockholders to force corp. to act
• Elections of Directors
• Who should act on corp.s shareholders behalf

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4. Stockholders (3/3)

• Shareholders Legal Rights
• Shareholder Suits
• Individual Suits
• Derivative Suits On the corporations behalf
• Corporate Disclosure
• The Annual Report
• Want More and itll cost!
• Selling the Shares

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5. The Received Legal Model (1/3)

• How the Corporation is run by law

Annuit Coeptis
S h a r e h o l d e r s
B o a r d o f D i r e c t o r s
M a n a g e r s a n d O f f I c e r s
W o r k e
r s
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5. The Received Legal Model (2/3)

• Implications

• Governmental Power to Charter Regulate
• Fiduciary Duty of Directors to
  the company the Stockholders
• Obedience
• Fiduciary Duty of Loyalty
• Liability under some conditions
• Insolvency CDN wages
• Whenever theres a buyout
• Pollution
• Due Diligence
• Oversight which would be used by a
  responsible director in a similar position

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5. The Received Legal Model (2/3)

• The Board of Directors
• Number Type
• Inside Directors in-house directors
• Outside Directors out-house directors
• Election
• Majority takes all the board (this is the slate
  of candidates vote yes or no) OR
• Cumulative Voting
  one vote for
  each share times the number of directors being
  elected such that shareholders with a large
  minority can elect a director
• Staggered Term Boards
  e.g. only elect 2 members
  / year for a 3 year term on a 6 member board for
  continuity

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6. Managerial Domination Model (1/5)

• How the Corporation is really run?

Num Me V e x o
Management
Govern-m e n t
Share-holders
Board of Directors
Workers
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6. Managerial Domination Model (2/5)

• Management Influences on Government
• Competition for chartering
• More a U.S. international problem
• Political influence Lindblom
• Why government must cater to big business
• Capital Mobility
• Ability to pick places for the 'right'
  regulations
• Pick government you want to be regulated by
• Pick several for a range of regulations

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6. Managerial Domination Model (3/5)

• Picking several governments at once
• 11/13/02 A 15m hole opens in the oil tanker
  Prestige,
• Nearby France, Spain Portugal block
  entry.
• 11/19/02 The tanker breaks in half and sinks,
  
• Oil spoils 600km of Spanish French
  coast,
• Est. Damage of about 3 billion.
• Who was responsible?
• Tanker was Japanese built, Liberian owned,
• Bahamian registered, Greek operated,
• Swiss-based Corp. chartered as a sub. of a
  Russian industrial company and
• Classified seaworthy by U.S. shipping auth.s.
• Where do you begin, or end?

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6. Managerial Domination Model (4/5)

• Management Influences on Shareholders
• Information
• Shareholders Lists
• Money
• Proxy Process
• Greenmail
• Disbursed Shareholders
• with little real power
• Berle Means
• Different Classes of Stock
• with Different Voting Rights

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6. Managerial Domination Model (5/5)

• Management Influences on the Board

• The Proxy Process
• Staggered Boards
• Treating Outside Directors
  Like Mushrooms
• Outhouse directors
• Liability Insurance
• Non-Cumulative Voting

• Management Influences on the Workers
• Lack of Access to the Board

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7. The Corp. Governance Critique (1/3)

• So what about the Mgr. Dom. Model?
• Firms behave in inefficiently
• Owners that should rid themselves
  of poor management don't
• (Capital) Market forces that should
  have great influence
  dont
• Uncontrolled managers wield great influence
• The largest corporations and the assent of
  people to the top
• Conflict with democracy? (Lindblom again)

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7. The Corp. Governance Critique (2/3)

• New Issue Summary
• Management autocracy 583-4
• The board as rubber-stamp 585
• Or source of policies 592
• Consent of the governed 588
• Growth of firms
• Berle Means again
• Owner-management decline 595 too
• Rise in social expectations

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Agency Theory
7. The Corp. Governance Critique (3/3)
An agency relationship exists when
Managerial Decision-Making Specialist (Agent)
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8. Increase Corp. Responsiveness (1/9)

• Reforming the Board
• Professional, Full Time Directors
• Ethics Public Affairs Committees
• Separate Post of Board Chair Pres.
• Poor idea when fast action is needed
• Increasing Director's Liability
• Barbarians at the gates
• Concentrated Ownership

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Percent Adoption of TSE Corp. Governance
Guidelines by Companies listed on the T.S.E.
8. Increase Corp. Responsiveness (2/9)
( Only those guidelines where a majority of
firms have adopted the guideline are shown.)
From R.M Corbin, 1999, Report on Corporate
Governance, 1999, Five Years to the Dey, Toronto
Stock Exchange,3
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Executive Compensation
8. Increase Corp. Responsiveness (3/9)
They do increase the likelihood that managers
will do the things for which they are rewarded

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8. Increase Corp. Responsiveness (4/9)

• Corporate Raiders Takeover Artists
• Help get Rid of Bad Management
• Downside Effects
  Management destroying value via
• Management concentrating on short run
  profits to avoid a raid
• Greenmail
• Golden Parachutes
• Poison Pills
• White knights, etc.

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8. Increase Corp. Responsiveness (5/9)

• Sensible Defences against Corporate Raiders
  Takeover Artists
• Restrictions to min. effects of
  Raiders vs. Managers on stockholders
• All anti-takeover devices to be
  approved/renewed periodically
• Board approval for purchase of more than X
  of a company
• If board doesn't approve, buyer must offer
  to buy whole corp.

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8. Increase Corp. Responsiveness (6/9)

• Big Sums in Union Retirement Funds
• These stockholders are forced to take an active
  interest in the corporation
• LBOs to address Principle/Agent Prob.
• A Buyout gives former investors cash that can put
  it to productive use
• Managers make efficient resource use due to need
  to meet interest payments
• Management incentives are greater they
  own a bigger slice of the company

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Ownership Concentration
8. Increase Corp. Responsiveness (7/9)
- In Canada such shareholders account for 65 to
. 70 of publicly traded stocks (59 in the U.S.)
(although financial institutions are legally
forbidden from directly holding board seats)
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Dealing with failed firms 596-605
8. Increase Corp. Responsiveness (8/9)
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Radical Corporate Governance Strong
Participation Rights 606-13
8. Increase Corp. Responsiveness (9/9)

• Dignity
• Fairness
• Self-respect
• Health
• Democracy
• Autonomy
• Utility

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9. On International Corp. Governance

• Big firms often have a major s-holder (a bank)
• Larger German firms have a 2-tiered system
• Banks (especially a firms main bank) are
• highly influential with a firms
  managers
• Employees, union members shareholders
• appoint a group to select the board
• Japanese Banks (especially a firms main
• bank) are influential with a firms managers

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10. Autocracy Symptoms / Side-effects (1/2)

• Workaholism
• Not just a work ethic
• Relations to others
• Business schools?
• Physical psychological harm
• Ethics

• Groupthink
• Grandiosity
• Management will solve it
• Scapegoating
• Ethics Loyalty

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10. Autocracy Symptoms / Side-effects (2/2)

• Escalation
• Love of conflict
• Self-destructiveness
• Denial
• Ethics

• Diffusion of responsibility
• Result of autocracy
• Indifference
• Tragedy of commons
• Ethics
• Case of WorldCom 615-619

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