Justice and Economic Systems

1. Justice and Economic Systems & Corporations, Morality, and Corporate Social Responsibility

2. Justice and Economic SystemsMoral Evaluation of Economic Systems • Economicsystemscanbeevaluatedin2ways • Structural analysis. • Involves evaluating the morality of the basic economic relation on which it is built, • and analyzing the actions that follow as a result of that relation. • End-state approach. • Involves looking at what the system as a whole does to the people affected by it.

3. Economic Models and Games • Though economics might be considered a game, economic systems when actually implemented are not games (We’re not bluffing here). • Frequently, economics is studied as if it had nothing to do with people, as if it was simply the study of abstract concepts (supply, demand, money, price, profits). • Ultimately, economic systems are the ways in which people are related. • Their relations are mediated by money, commodities, prices and wages, and supply and demand. • Economicsystemsaren’t,ultimately,morally neutral. • They should be examined from a moral point of view.

4. Capitalist Model • There are three defining features of the model of classical capitalism: • an available accumulation of industrial capital, • private ownership of the means of production, and • a free-market system. • The model of classical capitalism includes industrialization and capital. • It does not question where capital comes from or how it was developed. • Because the model is not an historical account but an analytic tool, the presence of capital is given.

5. Capitalist Model (Accumulation of Industrial Capital) • Capitalism derives its name from the notion that it is a system based on accumulated industrial capital. • In a barter economy there is no accumulation of capital. Goods are exchanged for goods of equal value; there is no residue.

6. Capitalist Model (Private Ownership) • The distinguishing characteristic of capitalism is sometimes said to be private ownership of the means of production. • But this does not mean that everyone owns the means of production. • The majority of people in our model of capitalism do not individually own means of production they use; they’re employed by others & work for wages. • Wages are the dominant source of income for the vast majority in our capitalist model.

7. Capitalist Model (Free-Market System) • A free market is one that is not controlled either by government or by any small group of individuals. • In a free market, government does not: • set the price of goods • set wages or • control production. • Competition is also vital to a free-market system. • To try to achieve greater returns on investment, perhaps by taking more risk, resources must be free to move within the system to whichever portion of it someone believes will bring the greatest return.

8. Capitalism and Government • First, the model of Laissez-Faire capitalism. • This model, fails to take into adequate account the good of society as a whole, opposed simply to the good of those who enter into economic transactions. • A second model depicts government as the protector of capitalists at the expense of the other members of society [Fascism]. • The third version of the model is one of governmental protectionism [Infant Industry].

9. Capitalism and Government • A fourth model assigns to government a variety of different tasks vis-à-vis business, all of which are responsive to the general interests of the citizens [Basic U.S. Model]. • In the fifth version of the model, government and business cooperate for the sake of both business and the society as a whole [Industrial Policy]. • The sixth version of the model comes closest to socialism [Democratic Socialism].

10. Socialist Model • There is no classical model of socialism as a purely economic system. Historically, a number of very diverse societies have been called, socialistic. • To the extent that socialism involves government ownership, it is very difficult, if not impossible, to separate socialism as an economic system from socialism as a political system. • Socialism should not be identified with or confused with communism. • Communism, as an economic system, has never been achieved, though some countries, like the USSR, claimed to have been developing such an economy.

11. Socialist Model • A partial model of socialism which is restricted to socialism as an economic system could be characterized by three features: • an industrial base, • social ownership of the means of production, and • centralized planning. • Crown Corporations as Socialism? • Pay your socialist auto insurance premium?!

12. Economic Systems and Justice • We can’t be moral & espouse an inherently immoral economic system. But, there’s no moral imperative mandating we choose one over another. • Distributive justice: justice in allocation of benefits & burdens, is often thought to be the most important moral component of any economic system. • In the capitalist system, justice demands equality of opportunity; it does not demand equality of results. • Justice in a socialist system consists not only in equality of opportunity, but allows for proportionality of differential rewards. It may guarantee all receive rewards, but limits the amount of rewards one gets.

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14. Private vs. Public Ownership • To some extent, the rules for privately owned companies are different from the rules for those that are publicly owned. • Publicly traded companies are obliged to reveal a good deal of info. about their financial status, so investors can make informed decisions about buying & selling their stock. • More is legally required of publicly traded companies in order to protect the interest of the shareholders (more on this next class).

15. Small & Medium-Sized Businesses • Though giant corp.s tend to dominate business & are the focus of most discussions about business & business ethics, small & medium-sized businesses are the most numerous in all societies & are often the most innovative. • Small and medium-sized businesses are frequently treated differently under the law. • The emphasis in most discussions of business ethics is on corporations, & especially on large corporations.

16. 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

17. What is the Corporation? (2/2) • Powers of the Corporation • Expressed powersin a corp. charter • Implied powers(free speech) • Limits legalities & the changing face of the law • Responsibilities: Corporate Liability • Civil LiabilityCorp. has deep pockets • Criminal LiabilityThe courts would like to arrest someone!

18. Stockholders • Shareholders vote on: • Mergers / Consolidations • Important shareholder’s 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

19. Government The Received Legal Model 1/2 • How the Corporation is run by law AnnuitCoeptis 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

20. The Received Legal Model 2/2 • 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 there’s a buyout • Pollution • Due Diligence • Oversight which would be used by a responsible director in a similar position

21. Shareholder vs. Stakeholder 1/3 • Corporations have a special status under law in that they have limited liability. • This means that the owners of stock in the company are only liable for the amount they have invested in the company’s stock. Their personal assets are not at stake. • The classical concept of the corp. presents the it as existing primarily to serve the shareholders. • According to this view, the interests of the shareholders are paramount and come first over all other interests. • Under Canadian law, the corporation may have its own interests, which means that directors must broadly consider all stakeholders (BCE).

22. Shareholder vs. Stakeholder 2/3 • Shareholders, although legally the owners, are very often simply speculators with no real interest in the long-range future of the company. • Though stockholders are technically the owners & have rights, including the right to have the corp. run well, there are other constituents who have a much stronger interest & involvement in the firm, & a much stronger stake in it and in its continuance & success.

23. Shareholder vs. Stakeholder 3/3 • All those to whom the corp. has any obligations are collectively referred to as stakeholders in the corp. • A stakeholder analysis of an issue consists of weighing & balancing all of the competing demands on a firm by each of those who have a claim on it, to arrive at the firm’s obligation in any particular case. • The stakeholder approach has the strength of forcing us to consider carefully all the obligations involved, for instance, in a plant closing, • Instead of just looking at the closing from the point of view of profits, & so from the point of view of the shareholders.

24. The BCE Decision 1/4 • “There is no principle that 1 set of interests, for example the interests of shareholders, should prevail over another set of interests. • Everything depends on the particular situation faced by the directors & whether, having regard to that situation, they exercised business judgment in a responsible way.” • “The duty to act in the best interests of the corporation comprehends a duty to treat individual stakeholders affected by corporate actions equitably and fairly.” • Corp. decisions may now need a more rigorous analytical approach, but, if a proper decision-making process is followed & documented, corp. decision-makers may take comfort that their decisions are less likely to be second-guessed by courts.

25. The BCE Decision 2/4 • Everything depends on the particular situation faced & whether, having regard to that situation, directors “exercised business judgment in a responsible way.” • Thus, corp. decision-makers may have greater latitude to make decisions provided appropriate process is followed. • What is the Business Judgment Rule? • Courts will grant deference to a business decision so long as it lies within a range of reasonable alternatives. • The rule reflects a reality that directors & officers are often better suited than judges (exercising perfect hindsight) to determine what is in the best interests of the corporation. • The business judgment rule applies to decisions on stakeholders’ interests as much as other decisions.

26. The BCE Decision 3/4 • Decision-makers need to turn their minds to a range of affected stakeholders & consider their reasonable expectations in making significant corp. decisions. • Corporate decision-makers need only consider the “reasonable expectations” of stakeholders. • The profit motive is not to be abandoned. • “The corp. & shareholders are entitled to max. profit & share value… but not by treating individual stakeholders unfairly. Fair treatment… is most fundamentally what stakeholders are entitled to ‘reasonably expect’.” • Where a director’s decision is reasonable in light of all circumstances the director knew or ought to have known, courts will not interfere with that decision. • A court’s inquiry will generally focus on whether directors applied an appropriate degree of prudence and diligence.

27. The BCE Decision 4/4 • Stakeholders cited by the Supreme Court included: • Employees, Creditors, Consumers, Governments, The Environment. • Directors must consider what are the “reasonable expectations” of the stakeholders identified. • Commercial / past practice • The relationship between the parties • Steps the claimant could have taken to protect itself • Representations and agreements • Fair resolution of conflicting interests between stakeholders • Public statements and disclosures (including ethics policies and codes of conduct). • Properlydocumentproceedings(with appropriate evidence). • Solicit outside advice where necessary. • Consider the public disclosure of possible decisions.

28. Corporate Moral Responsibility 1/5 • A corp. has the same ethical obligations to its share-holders, employees, customers, suppliers, and the community & the same responsibilities with respect to the environment whether it is conceived on the shareholder or the stakeholder model. • General obligations of corp.s stem from the nature of the firm, society & implicit agreement among them. • The first is the obligation to “Do no harm.” • The second general obligation is the moral obligation not to undermine the freedom and the values of the system. • The third general obligation is to be fair in the transactions in which it engages. • The fourth general obligation is to live up to the contracts into which one enters freely.

29. Corporate Moral Responsibility 2/5 • Members of the Board of Directors (BoD). • Are responsible to the shareholders for selecting honest, effective managers, especially the CEO. • They may also be responsible for choosing executive V.P.s & other V.P.s. They’re morally responsible for the tone of the corp. & for its major policies. They can set a moral tone, or they can condone immoral practices. • Management is responsible to the board. • Mgmt.is responsible for setting a firm’s moral tone • Unless those at the top insist on ethical conduct, set an example of moral conduct, punish unethical conduct and reward ethical conduct, the corp. tend to function without considering the moral dimensions of its actions.

30. Corporate Moral Responsibility 3/5 • Management and Workers. • Mgmt. is responsible to the workers. Workers are responsible for doing the jobs they’re hired for. • From a moral point of view, one’s job can never legitimately involve breaking the law or doing what is unethical, even if one is ordered to do so. • But within the guidelines of one’s job description, employees are expected to carry out their jobs as instructed by those above them. • Corporations and the consumer. • The corp. is responsible to consumers for its products.Goods made should be reasonably safe.

31. Corporate Moral Responsibility 4/5 • Suppliers and Competitors. • Corporations are responsible to their suppliers and competitors for fair treatment. • Fairness precludes lying about competitors or their products; it precludes stealing trade secrets, sabotage, or other direct intervention in the competitor’s firm. • Fairness in dealing with one’s competitor also precludes colluding with competing firms, price fixing, manipulating markets, and in other ways acting to undermine fair competition at the public’s expense.

32. Corporate Moral Responsibility 5/5 • The corporation and the general public. • Finally, the corporation is morally responsible for its actions to the general public or to society in general. In particular, it has the moral obligation not to harm those whom its actions affect. • The first can be called its obligation not to harm the environment that it shares with its neighbors. • The second group of moral obligations to the general public concerns the general safety of those who live in an area affected by a company’s plant. • The third set of responsibilities to the public concerns the location, opening & closing of plants – especially in small communities and one-industry towns.

33. Corporate Social Responsibility 1/3 • Moral demands stem from the moral law. • The term “corporate social responsibility” became popular in the 1960s. • Moral obligations are sometimes correctly put forth as social obligations because they can and should be demanded by a moral society. • They are morally justifiable both because they implement a moral demand & because society has the right to impose particular demands on corp.s as a condition for doing business, providing demands are in the interest of the common good.

34. Corporate Social Responsibility 2/3 • The 5 primary criticisms of CSR programs are: • CSR is often confused with a corp.’s moral responsibility, but sometimes equated to it. • CSR programs are often self-serving & used by firms to deflect legitimate moral criticisms. • The socially responsible action that a company undertakes is one of its own choosing. • Where laws are absent, exactly what society expects/demands may be difficult to determine. • The extent to which corp.s are not only national entities but international in both reach and organization complicates the application of CSR.

35. Corporate Social Responsibility 3/3 Moral & Social Audits & Standards • The Triple Bottom Line position is that a corp. can & should be evaluated in terms of its financial, environmental and its social/ethical bottom line. • The Myth of Amoral Business tends to obscure the moral obligations of corp.s. & should be put to rest. • Corp.s have moral obligations, & they can be held morally accountable for fulfilling them. • If an audit were required of all large corp.s, it would help to replace the Myth of Amoral Business with a clear & open approach to corp. moral obligations.

36. Case Analysis CASE ANALYSIS

37. Corporate Codes • Although corp. codes can’t be expected to contain a detailed presentation of moral reasoning, they can make reference to general moral principles. • The injunction to employees (found in 1 corp. code) to act in a way that they would not be ashamed to have their actions exposed to the public is one step. • A code could appropriately and helpfully refer to the principles from which the code flows, to principles of justice and fairness. • Could also refer to moral principles that objectively weigh consequences to all those affected by one’s actions, respecting the rights of others & the like.

38. Advantages of Corporate Codes • The exercise of creating a corp. code is worthwhile. • Compels thought about obligations to each other & public. • A code can also be used to generate continuing discussion and possible modification of the code. • A code may help inculcate in all new employees: • the perspective of responsibility, • the need to think in moral terms about their actions, & • the need to develop virtues appropriate to their positions. • Codes can be used as documents employees can refer to when asked to do something contrary to it. • Codes may be used to assure customersthat a firm adheres to moral principles, & provides them with a touchstone against which they can measure the firm.

39. Corporate Culture and Moral Firms • Corporate culture is analogous to the culture of a society, people, or nation. • A moral firm, or a firm that acts with integrity, lives up to and fulfills its responsibilities. • A moral firm helps its employees to act responsibly by clarifying their responsibilities, and it encourages them to assume their responsibilities. • Only when all those within a firm assume appropriate moral responsibility can the full moral responsibility of a firm be met. • Ultimately, moral responsibility, and morality itself, must be self-imposed and self-accepted.