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Corporate Governance, Disclosure,
and Executive Compensation
&
Marketing, Truth, and Advertising
Corporate Governance
• Corporate scandals at the start of the century were
principally scandals about corruption at the top.
 In many cases, management was not responsible to their
boards, & boards were not accountable to shareholders.
 The reaction of the government was not only to condemn
the abuses but to attempt to legislate remedies.
 In the U.S. the Sarbanes-Oxley Act (SOx) served as a
start to addressing issues of corporate governance.
 Since Canadian securities are regulated provincially, national
adjustments to the U.S. law are more difficult (more on this later).
 TSX / NYSE cross listed companies would be impacted.
http://www.luc.edu/law/activities/publications/lljdocs/vol39_no3/ben_ishai.pdf
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In Canada 1/2
• In 2003 the Canadian Securities Administrators (CSA),
& the Ontario Securities Commission (OSC), drafted a
series of instruments to cover most SOx provisions.
• CSA rules, Multilateral Instruments or MIs, were
adopted by all jurisdictions in Canada.
– Most provisions are now in force & investors will receive
more consistent disclosure on a more timely basis, & they
can be more confident in the quality of the info. they get.
• In 2004, the OSC published proposals that describe
best corp. governance practices & require issuers to
make disclosures relating to these best practices.
– These include measures related to the composition of a
board, its mandate & its committees; director education &
assessment; and codes of business conduct and ethics.
In Canada 2/2
• 1st set of rules proposed by CDN regulators requires
CEO/CFO certification of annual & quarterly reports.
– Canadian companies will also have to adopt disclosure
controls and procedures with regard to financial reporting.
• 2nd set of rules proposes new standards and an
expanded role for the audit committee.
– Major Canadian public companies will be required to have
fully independent and financially literate audit committees.
– Certain exemptions are provided for venture issuers,
controlled companies and U.S.-listed issuers.
• 3rd set of rules relates to internal controls.
– Companies will be required to perform detailed tests of all
internal accounting processes, and their external auditors
will have to examine and give an opinion on those tests.
Top Management
• Frequently members of top management have
acted as if their corp. ethics codes applied to those
in the lower echelons in the firm, but not to them.
– U.S. Law requires that a company disclose whether it
has a code of ethics for its senior financial officials.
– If it does, the company must disclose the contents of the
code, and any change in the code that it may make. If it
does not have a code, it must explain why it does not.
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Managerial Domination Model of
Corp. Governance(1/5)
• How the Corporation is really run?
Num Me
Vexo
Management
Government
Shareholders
Board of
Directors
Workers
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Managerial Domination Model (2/5)
• Management Influences on Government
– Competition for chartering

More a U.S. & international problem
– Political influence:

To keep a healthy econ., gov. caters to 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
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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Managerial Domination Model (4/5)
• Management Influences on Shareholders
– Information

Shareholder’s 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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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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Corporate Board
• Corporate boards vary considerably from
company to company.
• One job of the board is to oversee the management of the corporation by its executives.
• Under new U.S. rules, independent members of
the board are required to hold regularly
scheduled meetings without management.
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Corporate Disclosure
• Info. that a corp. is morally obliged to disclose
coincides with much that is legally required.
• The moral basis for disclosure of corp. info. rests
primarily on two moral principles:
– Each person has the right to access the info. he or she
needs to enter into a transaction fairly, and
– Each person has the right to know those actions of others
that will have a serious & adverse impact.
• A transaction is fair if those who are a party to it have
access to the appropriate info. & freely enter into it.
Parties Entitled to Disclosure
• A corp. has a moral obligation to disclose appropriate
info. to those with whom it enters into transactions &
those whom its actions affect seriously & adversely.
• In broad terms, those affected are:
– Shareholders and potential shareholders (have the right to
financial info., board member info. significant policies),
– The board of directors (has access to critical info.),
– The workers (have a right to know the conditions of work,
including their rights, benefits, and obligations),
– Government (has the right to enforce regulations),
– Suppliers & agents (need info. to make fair contracts),
– The consumer of products (need info. on potential hazards),
– The general public, and communities.
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Form of Disclosure
• Appropriate channels for reporting info. concerning
the moral dimensions of some corp. actions have
yet to be decided upon, much less standardized.
• Corporations have typically been reluctant to
disclose information about their activities.
• If left to themselves, some of them would consider
all their internal operations trade secrets.
• Shareholders’ meetings are only one forum for
raising and discussing these questions.
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Insider Trading
• Insider info. is info. that someone within a firm has
but that is not available to those outside the firm.
– This includes not only trade secrets, but strategy & plans.
• The moral problems connected with insider info.
• Concerns the use individuals may make of such
info. while they are still members of a firm.
• Two aspects of the question raise special problems.
– Someone in the firm may use info. for their private gain at
the expense of the firm. This is called conflict of interest.
– OR use of insider info. by someone within a firm to
secure personal advantage over those not in the firm.
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Executive Compensation 1/3
• One of the responsibilities of a corporate board is
the appointment and evaluation of the corporation’s
CEO, & the determination of his/her compensation.
• We should ask what institutions are appropriate to
keep income differentials from skewing society in
undesirable ways, robbing those less well off of their
dignity and personal or social esteem.
Executive Compensation 2/3
• The term “golden parachute” refers to a practice of
guaranteeing chief officers of a company are given
a certain set of benefits in the case of voluntary or
involuntary severance. The justifications are:
1. It makes it easier to hire a new CEO in a climate of
corporate takeovers, where one may lose one’s job
through no fault of his or her own.
2. It increases the cost to the predator company.
3. It gives chief executives an incentive to work toward the
interests of the shareholders in case of a takeover threat.
Executive Compensation 3/3
• Critics of the “golden parachute” object that this
is an inappropriate use of a company’s money.
1. Many doubt that well-paying CEO positions would go
begging without golden parachutes.
2. Given the scale of large takeovers, the cost of golden
parachutes is unlikely to prevent a takeover.
3. Importantly, CEOs are already very well compensated, &
they are paid precisely to manage the company as best
they can for the benefit of, among others, the shareholders, even at some possible detriment to themselves.
Case Analysis
CASE
ANALYSIS
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Marketing, Truth, and Advertising
• Once a manufacturer produces a certain product,
its aim is to sell it.
• Marketing is the process by which it does so?
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Competition
• Competition tends to produce efficiency in the market
and benefits the general consumer by resulting in a
variety of goods at the best prices.
– But the competitive market works to the advantage of the
buyer only when the competitive process is fair.
• Competition can be undermined by:
– The creation of monopolies.
– A small group of producers collude for their common good.
• For example, they may agree on the prices to charge, a practice
known as price fixing.
• Such collusion is generally illegal because it undermines the
competitive system to the detriment of the buyer.
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Pricing
• Generally, the competitive system should preclude
the possibility of overpricing.
– Where this means charging much more than the producer
knows the product is worth, yielding an excessive profit.
– There are some who claim that overpricing is a misnomer
because there is no specific limit of justifiable profit. But
this claim assumes that prices are always competitive.
• Excessive rates can arise in money lending.
– For those unable to borrow in the conventional,
competitive way, sharks charge usurious rates.
465%
• A deceptive practice is claiming a price higher than
that at which it was ever sold, & claiming a discount
(to sell at a discount implies one from its real price).
Price Gouging
• Price gouging refers to the
practice of a seller putting a
much higher price on the item
for sale than is considered fair
or reasonable.
• Price gouging usually refers to
pricing, not of luxuries or optional
items, but of practical necessities
– fuel, food, water, and shelter –
in times of emergency.
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Bidding 1/2
• Not all bidding is secret, but much of it is.
• Secrecy tends to produce fairer bids and lower prices
for the purchaser. This happens in two ways.
– If the process were open, a firm that could make a profit
at a price considerably less than the competition would
make a bid only just enough less to win the contract.
– If the competition were open, a firm might start out at a
bid low enough to scare off, even though the bid is not
the lowest he would offer if forced to make a secret bid.
• In addition to fraud, using materials inferior to those
specified in the bid, and perpetrating other obvious
violations of justice, honesty, and fairness, bidding
has led to other questionable practices.
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Bidding 2/2
• One difficulty many governments encounter is that
there are only a few construction firms capable of
handling a given locale’s large construction needs.
• In the defense industry ethical issues include cost
overruns & locking government into a single supplier.
• Several pitfalls are also common in the purchase of
goods by a government or large firm.
– There is always the possibility of leaking information to a
potential supplier – an unfair practice.
– There is also the possibility of writing specifications in so
detailed & narrow a way that only one supplier can fill the
order, thereby undermining the purpose of bidding.
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Consumer Marketing
• The opportunities for fraud, deception, & unethical
practices are endless, but most such practices are
clearly immoral and so raise no ethical problems.
• A few of the issues of current concern, including
truth in lending, unit pricing, & labeling & dating.
– All of these have become items of consumer concern &
the focus of attention by the consumers’ movement.
Questionable Products
• It’s often assumed what’s legal to mfg., is legal to sell.
• There are some questionable products in this regard.
– E.g., small, cheap handguns: Saturday night specials.
Advertising
• There are five areas in which the moral dimension of
advertising is of central importance:
– The immorality of untruthful, misleading, or deceptive ads;
– The immorality of manipulation and coercion through
advertising, including the question of audience;
– The morality of paternalism with respect to advertising;
– The immorality of preventing some kinds of advertising; &
– The allocation and distribution of moral responsibility with
respect to advertising.
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Truth and Advertising ½ (X/3)
• A major function of advertising is to sell goods.
– Advertising may educate or mold public opinion.
• The terms true & false are properly predicates of
sentences. Only a proposition can be true or false.
– A statement is true if the stated relation between subject
& predicate corresponds to the actual relation in the world
between what are referred to by the subject & predicate.
• Lying consists, not simply in stating a falsehood.
– Lying consists in making a statement, which one believes
is false, to another person, whom one has reason to think
will believe the statement to be true.
– Whether a statement is true or false depends on the world;
whether a statement is a lie depends on speaker’s intent.
Truth and Advertising 2/2
• Some ads contain express propositions that are
appropriately evaluated in terms of truth and falsity.
• Without making any false statements, an ad might
be misleading or deceptive.
– A misleading ad is one where the ad doesn't misrepresent
or make false claims but makes claims in such a way that
many ordinary people reading it quickly & without great
attention & thought, will make a false inference.
• A statement made about a product may be true, may
not mislead or deceive, but be morally objectionable.
• It is immoral to advertise and sell a dangerous
product without indicating its dangers.
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Manipulation and Coercion
• Persuasion in itself is not immoral.
• In Kantian terms, both coercion and manipulation
treat another person only as a means to one’s own
end and deny respect for his or her freedom.
• Coercion involves force or the threat of force,
either physical or psychological.
• Manipulation does not use force;
– It involves playing upon one’s will
by trickery or by devious, unfair, or
insidious means.
– Coercion & manipulation in
advertising are thus immoral.
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Prevention of Advertising
• The prevention of advertising, in some cases,
comes up against free speech rights.
• Until recently, many professionals were restricted
from advertising by their professional associations.
– Ads were considered poor taste, vulgar & unprofessional.
• Arguments in favor of changing the rules were:
– Essentially, the good gained by the lawyers & doctors &
their respective professions was less than the evil
suffered by their potential & actual clients & patients.
– Other arguments rest on the right of the practitioner to
make known his or her services and to compete, in price
and in kinds of services provided, for potential clients.
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Allocation of Advertising Moral Responsibility
• Prime responsibility for advertising rests on the one
who initiates and directs the advertising.
• Ad agencies handle promotion of a many goods.
– They have a responsibility not to lie, or misrepresent.
– They have an duty to investigate suspicions of falsehoods.
• Once an advertisement or ad program has been
produced it can be presented in a variety of forms.
– All TV stations, magazines, & newspapers have the moral
responsibility for what they publish.
• Members of the public perform a public service by
making concerns about an ad’s accuracy known.
• Government has a role in regulating & monitoring
advertising. Their role is to protect the public interest.
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