Business Ethics and Corporate Governance: The Nature of Corporation and Corporate Responsibility Debate

1. Business Ethics and Corporate Governance:The Nature of Corporation and Corporate Responsibility Debate TOPICS FOR TODAY 1.The Nature of Corporation. 2. The Classical Theory of CSR. 3. Challenges to the Classical Theory of CSR. 4. The Stakeholder Theory of CSR. 5. Challenges to the Stakeholder Theory of CSR. .

2. The Nature of Corporation (1) Two questions strike me: (1) Is corporation a moral agent that has responsibilities? (2) If it is, what kind of responsibilities it has? The first question is related to the nature of corporation or the corporate moral agency , whereas the second question is about the corporate responsibility debate. Lets start with the philosophical debate on the nature of corporation: there are five positions to consider, as proposed by (A) John Ladd (B) John R. Danley & Michael Keeley (C) Kenneth Goodpaster & John Matthews (D) Peter French (E) Tom Donaldson . .

3. The Nature of Corporation (2) Please summarize those five positions … Ladd: “corporation is a formal organization; its structure directs those inside to pursue a single goal”. No moral standard is applicable to it and its members. Danley: “corporation is like a machine; only individuals inside are moral agents”. Keeley:”there is no corporate intentions, but only individual intentions”. . . D A B C D Donaldson: its status depends on (1) having reasons; (2) having control over policies and rules. French: “the corporation’s internal decision- making structure (CID) makes corporation just like an intentional being or a moral person”. Goodpaster: “rationality and respect in corporate decision makings lead corporation to a moral agent; it works thru moral projection of the owner”.

4. The Nature of Corporation (3) Individual: viewed as an “atomistic” entity Corporation: viewed in a mechanistic sense as a means of coordinating individual actions. Corporate policies & actions: sum of (reducible to) individual inputs & actions. Preventing harmful unethical corporate behaviors: external pressures thru laws and regulations. Goodpaster French Ladd Danley & Keeley Individual: viewed as a member of community. Corporation: viewed as a compact entity that is more than the sum of the individuals within. Corporate policies & actions: more than sum of (irreducible to) individual inputs & actions. Preventing harmful unethical corporate behaviors: internal moral pressure from within (culture). . A B C D

5. The Nature of Corporation (4) Is that all what you want to say? No, that is not all. I should say also that each of those arguments is not free from some defects. Nevertheless, it is much more reasonable to insist corporate moral agency and responsibility than to reject it, because any corporate action stems from human endeavors that are simply inescapable from moral evaluation. By nature, however, the moral agency and responsibility of a corporation is different from personal moral agency and responsibility. It is of a special kind. In order to see how special the moral agency and responsibility of corporation is, we need to investigate the characteristics and purposes of corporation. .

6. The Nature of Corporation (5) The characteristics of corporation: Corporation is a private institution, chartered and protected under the state’s laws with some rights similar to persons. Corporation is an organization of self-interested people working for the achievement of a common purpose. Corporation is limited with regard to the accountability of the owners for the amount of money invested in it. Corporation in its modern form is more and more separated or independent from its founders and owners. The purposes of corporation: Corporation is operated to produce goods and services or to create economic values that are ultimately beneficial for the well-being of society. Corporation is in its origin legally established by the owners for the purpose of increasing their values, including making a profit (economic value). What are the characteristics and purposes of corporation ? .

7. The Classical Theory of CSR (1) The classical theory of CSR has its roots in Neoclassical (free market) economic theory; thus it is very influential in the past century. It has strong connection to free enterprise system, free market and capitalism. It is defended earnestly by Milton Friedman, and clearly suggesting that the only social responsibility of business-management is to maximize profits for the benefit of the stockholders so long as the business stays within the rules of the game (expressed in laws and ethical custom), i.e. engages in open and free competition, without deception or fraud. Serving or using the stockholders’ money for any other purpose would undermine the very foundation of free market economy (society) and betrays the stockholders’ trust (refer to fiduciary duty to them)  ethically wrong! . .

8. The Classical Theory of CSR (2) Friedman’s theory is defended by referring to: (1) UTILITARIANISM It relies on the mantra of “free market economy”  pareto optimality (efficient allocation of resources) where every participant maximizes his/her utility (satisfaction) that results in the greatest overall good through the working of “invisible hand” (in neoclasical interpretation)  “market solution!” (2) INDIVIDUAL RIGHTS-BASED ETHICS The manager has direct responsibility to the stockholders who give them trust to manage their property. Using their property against their interests is violating their property rights. These property rights override any other rights and the rights of other individuals. How did Friedman defend his theory from ethical point of view? . .

9. Challenges to the Classical Theory of CSR (1) I don’t think so… Lets challenge him from the same grounds: (1) UTILITARIANISM (a) Free market is not an adequate means to the ends of maximum social efficiency because of possible market failures (externalities, public goods, and imperfect information). Imposing laws /regulation to remedy market failures can be inappropriate (too late) or ineffective (business is too powerful). (b) The ends brought about by free market may not be legitimate ethical goals, such as pornography, drugs, cigarettes, prostitution, human trafficking, etc. demanded by consumers. Thus, economic consequences of free market economy is just rather an amoralstate than providing moral justification for the classical theory of CSR. It is not easy to challenge the classical theory of CSR… . .

10. Challenges to the Classical Theory of CSR (2) (2) INDIVIDUAL RIGHTS-BASED ETHICS The appeal to the overriding rights of private owners is not convincing because: (a) The property rights are not absolute as they are constrained by the rights of others. (b) Corporate property rights are different from private property rights; holder of the former is in fact an investor (rather than an owner of private property), for he is free to sell his property and is granted limited legal liability for the act of his corporate property. Thus, the obligation of manager to the stockholders has no special (overriding) status as compared to the manager’s obligation to customers, suppliers, employees, and the local community. . Rain again… What man wants, really? I miss you! .

11. The Stakeholder Theory of CSR (1) Why is the stakeholder theory of the modern corporation considered so special that you think it is important for us to discuss here? The stakeholder theory of the modern corporation is an attempt to make a paradigm shift with regard to the way we treat a modern corporation, i.e. a shift from treating the corporation as an input-output “black-box” with a single purpose to treating it as a part of social network with multiple purposes. It radically challenges the special position (privilege) of the stockholders in the corporation. . .

12. The Stakeholder Theory of CSR (2) What is the development of the modern corporation that makes the stakeholder theory relevant? Arguments showing the development of the modern corporation: The Legal Argument The legal system has undergone many changes that constrain the pursuit of stockholder interests. Following the refined legal system means that the claims of the affected parties (e.g. consumers, employees, local communities) have to be taken into consideration in every corporate decision-making. (2) The Economic Argument Externalities, moral hazards and monopoly power, which emerge from the failure of the internal “invisible hand” of the market, have led the government and other parties to exercise more external control on the managerial operation of the corporation. From this latest developments, the article develops two foundations: Principle of Corporate Rights (PCR) &Principle of Corporate Effects (PCE). .

13. The Stakeholder Theory of CSR (3) Principle of Corporate Rights (PCR): The corporation and managers may not violate the legitimate rights of others to determine their own future. Principle of Corporate Effects (PCE): The corporation and managers are responsible for the effects of their actions on others. . Property right of the owner doesn’t yield right to treat others as means to an end The corporation as a “legal person” can be the cause of and can be held accountable for the consequences of its actions. Kantianism: Each person has the right to be treated not as a means to some end but as an end in itself. Consequentialism: Each person is responsible for the consequences of his/her actions.

14. The Stakeholder Theory of CSR (4) How do those two principles provide foundation for the concept of stakeholder? . Narrowly defined stakeholders: those groups who are vital to the survival and success of the corporation. Widely-defined stakeholders: those who can affect or are affected by the corporation. . The stakeholders of the corporation: Those groups and individuals whose rights are violated/respected by who benefit from or are harmed by Corporate actions Principle of Corporate Rights (PCR): The corporation and managers may not violate the legitimate rights of others to determine their own future. Principle of Corporate Effects (PCE): The corporation and managers are responsible for the effects of their actions on others.

15. The Stakeholder Theory of CSR (5) Thus, each of those stakeholders has a right to make claims or a right to demand certain actions by management. Correct! But remember that the relationships between the corporation and its stakeholders are reciprocical, meaning that the actions demanded must be expected to happen from both sides. A Stakeholder Model of the Corporation (narrowly defined) . Management Local community Owners The corporation Suppliers Customers Employees

16. The Stakeholder Theory of CSR (6) Right. Two principles are to follow: Based on the purpose of the firm, principles of stakeholder management must follow, right? Participation: No stakeholder may be used as a means to the ends of another without full rights of participation in that decision. . Principle of Corporate Legitimacy: The corporation should be managed for the benefit of its stakeholders. The right of these groups must be ensured, and, further, the groups must participate, in some sense, in decisions that substantially affect their welfare. The Stakeholder Fiduciary Principle: Management bears a fiduciary relationship to stakeholders and to the corporation. As the agent of the stakeholders, management must act in their interests, and in the interests of the corporation to ensure the survival of the firm, safeguarding the long-term stakes of each group. The very purpose of the firm is to serve as a vehicle for coordinating stakeholder interests.

17. The Stakeholder Theory of CSR (7) I am curious how the theory is to be implemented? Two (2) recommendations are to be considered: (1) The Stakeholder Board of Directors Board of Directors is to be formed to comprise of representatives of five stakeholder groups (employees, customers, suppliers, stockholders, and the local community) and a representative of the corporation (called a “metaphysical director” ). (2) Redefining the Law of Corporation This is to accommodate the principle of corporate legitimacy that partially has been developed under product liability, labor law, contract law, etc. .

18. Challenges to the Stakeholder Theory of CSR (1) According to the stakeholder theory, the way of integrating ethical values into management decision making (ethics in management) is by paying careful attention not only to stockholders but to stakeholders generally. That is too simple to capture the issue at hand. Referring to the decision making process, one has to follow six (6) steps before arriving at resolution, namely (PASCAL): 1. Perception 2. Analysis 3. Synthesis 4. Choice 5. Action 6. Learning Paying attention to all stakeholders is only part of analysis (stakeholder analysis). It doesn’t go beyond the first two steps. . .

19. Challenges to the Stakeholder Theory of CSR (2) So? What matters further is synthesis (stakeholder synthesis), i.e. a pattern or channel by which to move from stakeholder identification to a practical response or resolution. There are two competing positions of stakeholder synthesis: STRATEGIC STAKEHOLDER SYNTHESIS Stakeholders outside the stockholder group are viewed instrumentally as factors (just like “weather”) potentially affecting the overarching goal of optimizing stockholder interests (profit maximization). CRITICISM: it is non-moral (though not immoral) and insufficient consideration, because the motive is for the sake of stockholder’s interest (or anyone’s interest other than theirs). (2) MULTI-FIDUCIARY STAKEHOLDER ANALYSIS All stakeholders (including the stockholder group) are viewed impartially as having fiduciary relationships with the managers. CRITICISM: It is simply incompatible with widely-held moral convictions about the special fiduciary obligations owed by management to stockholders. .

20. Challenges to the Stakeholder Theory of CSR (3) Ah so… Either way we get problems; we are facing dilemma, right? I am confused why it is always difficult to do good rather than bad, to take right way rather than wrong way. That is why we, as rational beings, have to use our rational faculty (our brain) to solve our problems. The problem we discuss here is not only dilemma but also paradox. Goodpaster called it “stakeholder paradox”: “It seems essential, yet in some ways illegitimate, to orient corporate decisions by ethical values that go beyond strategic stakeholder consideration to multi-fiduciary ones”. Ethics seems both to forbid and to demand a strategic, profit-maximizing mind-set. Management’s fiduciary duty to the stockholders implies partiality which is morally short; but impartiality can unfortunately be interpreted as illegitimate and a betrayal of trust. . .

21. Challenges to the Stakeholder Theory of CSR (4) But Goodpaster is able to offer a way out. He argues that taking business ethics seriously need not mean that management bears additional fiduciary relationships to non-stockholders as the multi-fiduciary stakeholder synthesis suggests. It may mean that there are morally significant non-fiduciary obligations to the non-stockholders surrounding the similar significant fiduciary obligations to the stockholders. Management obligations to stockholders have to be of a piece with the obligations that the stockholders themselves would be expected to honor in their own right. It follows the “Nemo Dat Principle” (“no body gives what he doesn’t have”): “Investors cannot expect of managers (principals cannot expect of their agents) behavior that would be inconsistent with the reasonable ethical expectations of the community”. The way out lies in understanding that the conscience of the corporation is a logical and moral extension of the consciences of its principals. The conscientious corporation can maintain its private economic mission, but in the context of moral obligations owed by any member of society to others affected by that member’s actions. .

22. Challenges to the Stakeholder Theory of CSR (5) Goodpaster’s argument of the stakeholder paradox attacks the very core of Prof. Freeman’s initial idea of stakeholder theory. But Prof. Freeman insists that no paradox should hold if the multi-fiduciary view is correctly interpreted and justified. For Prof. Freeman, Goodpaster’s paradox is a result of confronting business-without-ethics (strategic stakeholder synthesis) with ethics-without-business (multi-fiduciary stakeholder synthesis). Thus, the paradox emerges from an implicit principle (prevalent in most business ethics thinking) called “the separation thesis”: The discourse of business and the discourse of ethics can be separated so that sentences like “x is a business decision” have no moral content, and “x is a moral decision” have no business content. As long as “moral” and “business” is separated, there will be room for people to connect them and do criticism on either side. The multi-fiduciary stakeholder interpretation rejects the separation thesis at institutional level, so that the stakeholder paradox is beside the point. .

23. TOPICS FOR NEXT WEEK: Corporate Citizenship Please do read: (1) Freeman, Robert E. “The Politics of Stakeholder Theory: Some Future Directions.” Business Ethics Quarterly 4:4 (1994): 409-421 (2) Carroll, A.B. & Buchholtz, A.K. “Corporate Citizenship: Social Responsibility, Responsiveness, and Performance.” Chapter 2 in Business & Society: Ethics and Stakeholder Management, 29-55. Mason: South Western – Thomson, 2003. (3) Weber, Leonard J. “Citizenship and Democracy: The Ethics of Corporate Lobbying.” Business Ethics Quarterly 6:2 (1996): 253-9. (4) Case : Bader, Sharon. “A Corporate Class.” (Ch.1). “Conclusion: The Triumph of Corporate Rights.” (Ch.11). In Suiting Themselves: How Corporations Drive the Global Agenda. 1-8, 219-24. London: Earthscan, 2006. .