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Chapter Five:
Corporations
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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.
Moral Issues in Business
Chapter 1
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?
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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
acknowledgement 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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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
payed the fees.
Moral Issues in Business
Chapter 1
The Limited Liability Company
 Two ideas motivated the change behind the new
system:
(1)The belief that a business 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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
Corporate Moral Agency
 Can corporations make moral decisions? Only the
individuals within the structure can act morally or
immorally, and can be consequently held morally
responsible for their actions.
 So philosophers disagree as to whether the
structure as a whole can be liable for criminal
offenses and punishable by the law.
 It seems that not every form of punishment can be
applied to corporations.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
Rival Views of Corporate
Responsibility
 Proponents of the narrow view argue that
management’s responsibility to maximize
shareholder wealth outweighs any other
obligations.
 Proponents of the broader view argue that
management has fiduciary responsibilities to other
constituencies as well (to employees, bondholders,
and consumers).
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
Debating Corporate Responsibility
 The let-government-do-it argument: The
corporation has a natural and insatiable appetite
for profit – 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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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?
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1
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 employeedevelopment programs.
Moral Issues in Business
Chapter 1
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.
Moral Issues in Business
Chapter 1