4 THE CORPORATION AND EXTERNAL STAKEHOLDERS … 4... · THE CORPORATION AND EXTERNAL STAKEHOLDERS Corporate Governance: From the Boardroom to the Marketplace 4.1 Managing Corporate

4THECORPORATIONANDEXTERNAL

STAKEHOLDERSCorporateGovernance:FromtheBoardroomtothe

Marketplace

4.1ManagingCorporateSocialResponsibilityintheMarketplaceEthicalInsight4.1Point/CounterPoint

4.2ManagingCorporateResponsibilitywithExternalStakeholdersEthicalInsight4.2

4.3ManagingandBalancingCorporateGovernance,Compliance,andRegulationEthicalInsight4.3

4.4TheRoleofLawandRegulatoryAgenciesandCorporateCompliance

4.5ManagingExternalIssuesandCrises:LessonsfromthePast(BacktotheFuture?)

ChapterSummary

Questions

Exercises

Real-TimeEthicalDilemma

Cases9.ConsciousCapitalism:WhatIsIt?WhyDoWeNeedIt?DoesItWork?10.GoldmanSachs:HedgingaBetandDefraudingInvestors11.GoogleBooks

Notes

OPENINGCASE

Whenyouread“TheTJXCompanies,Inc.V.A.L.U.E.CorporateSocialResponsibilityReport2013”andseeCarolMeyrowitz’sletter,youwouldneverbelievethecrisisthatrockedthecompanyin2008everhappened.Thiscaseillustratesonedifferencebetweencompaniesthatlearn,change,andgrow,andthosethatdonot.

TJXseemstopracticeitsVALUEproposition,“VendorSocialCompliance,AttentiontoWeiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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Governance,LeveragingDifferences,UnitedWithOurCommunitiesandEnvironmentalInitiatives.”Forbesreportedin2013thattheTJXCompanies(NYSE:TJX)hastakenoverthe#95spotfromCapitalOneFinancialCorp(NYSE:COF).Althoughthecompany,aswithseveralotherretailers,couldimproveitscustomersatisfactionindexscore,ithasrecoveredfromthe2008crisisrecountedhere.1

OnJanuary17,2008,TJXCompanies,Inc.,aleadingretailerinthefieldofclothingandhomefashionsthatoperatesstoresdomesticallyandinternationally,announcedthattheorganizationhadexperiencedanunauthorizedintrusionofitscomputersystems.2Customerinformation,includingcreditcard,debitcard,anddriver’slicensenumbers,hadbeencompromised.ThisintrusionhadbeendiscoveredinDecemberof2006,anditwasthoughtthatdataandinformationasfarbackas2003hadbeenaccessedand/orstolen.Atthetime,approximately45.6millioncreditcardnumbershadbeenstolen.InOctoberof2007,thenumberroseto94millionaccounts.3Thisisoneofthelargestcreditcardtheftsorunauthorizedintrusionsinrecenthistory.

BecauseofthelaxsecuritysystemsatTJX,thehackershadanopendoorwaytothecompany’sentirecomputersystem.In2005,hackersusedalaptopoutsideofoneofTJX’sstoresinMinnesotaandeasilycrackedthecodetoenterintotheWi-Finetwork.Oncein,thehackerswereabletoaccesscustomerdatabasesatthecorporateheadquartersinFramingham,Massachusetts.Thehackersgainedaccesstomillionsofcreditcardanddebitcardnumbers,informationonrefundtransactions,andcustomeraddressesandphonenumbers.Thehackersreportedlyusedthestoleninformationtopurchaseover$8millioninmerchandise.4

TJXusedanoutdatedWEP(wiredequivalentprivacy)tosecureitsnetworks.In2001,hackerswereabletobreakthecodeofWEP,whichmadeTJXhighlyvulnerabletoanintrusion.(SimilardatabreacheshaveoccurredwithinthepastfewyearsatthefirmsChoicePointandCardSystemsSolutions.)InAugustof2007,aUkrainianman,MaksymYastremskiy,wasarrestedinTurkeyasapotentialsuspectintheTJXcase.Accordingtopoliceofficials,Yastremskiyis“oneoftheworld’simportantandwell-knowncomputerpirates.”5Heledtwoothermeninthescheme.6

EventhoughtheintrusionwasdiscoveredinDecemberof2006,thecompanydidnotpublicizeituntilamonthlater.Consumersfeltthattheyshouldhavebeennotifiedofthebreachonceitwasdiscovered.However,TJXcompliedwithlawenforcementandkepttheinformationconfidentialuntilitwastolditcouldnotifythepublic.RetailcompaniessuchasTJXthatusecreditcardprocessingarerequiredtocomplywiththePaymentCardIndustryDataSecurityStandard(PCIDSS).ThePCIDSSisasetofrequirementswiththepurposeofmaximizingthesecurityofcreditanddebitcardtransactions.Amajorityoffirmshavenotcompliedwiththisstandard,aswasthecasewithTJX.

Anumberofstakeholderswereinvolvedinthisbreak-in:consumers,whowereputatgreatrisk;banks;TJX(itsshareholders,management,employees,andotherinternalpartieswhodidbusinesswithandwereinvestedinthefirm);thecreditcardcompanies;thelawenforcementandjusticesystems;thepublic;otherretailfirms;andthemedia,tonameafew.Chiefexecutiveofficer(CEO)CarolMeyrowitztookanactiveroleininformingthepublicinstatementsonthecompany’swebsitesandthroughthemediaaboutthecompany’s

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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responsibilityandobligationstoitsstakeholdersduringandaftertheinvestigation.TJXalsocontactedvariousagenciestohelpwiththeinvestigation.Awebsiteandhotlinewereestablishedtoanswercustomerquestionsandconcerns.

TheintrusioncostTJXapproximately$118millioninafter-taxcashchargesand$21millioninfuturecharges.AlthoughTJXincurredsubstantiallegal,reimbursement,andimprovementcosts,thecompany’spretaxsaleswerenotnegativelyaffected.Salesduringthesecondquarteroffiscalyear2008increasedcomparedtosecondquartersalesfromfiscalyear2007.7

Attheendof2007,TJXreachedasettlementagreementwithsixbanksandbankers’associationsinresponsetoaclassactionlawsuitagainstthecompany.8Inthespringof2008,TJXsettledinseparateagreementswithVisa($40.9millionwith80%acceptance)andMasterCardInternational(amaximumof$24millionwith90%minimumacceptance).TherewasalmostfullacceptanceofthealternativerecoveryoffersbyeligibleMasterCardaccounts.9Notethatthoseissuerswhoaccepttheagreementsandterms“releaseandindemnifyTJXanditsacquiringbanksontheirclaims,theclaimsoftheiraffiliatedissuers,andthoseoftheirsponsoredissuersasMasterCardissuersrelatedtotheintrusion.ThatincludesclaimsinputativeclassactionsinfederalandMassachusettsstatecourts.”10

Affectedcustomerswerereimbursedforcostssuchasreplacingtheirdriver’slicensesandotherformsofidentificationandwereofferedvouchersatTJXstoresandfreemonitoringoftheircreditcardsforthreeyears.Customerdiscontentwasreportedlyexpressedaftertheintrusion;however,customerloyaltyreturned,11aswasevidencedinsalesnumbers.

4.1ManagingCorporateSocialResponsibilityintheMarketplaceCorporatesocialresponsibility(CSR)involvesanorganization’sdutyandobligationtorespondtoitsstakeholders’andthestockholders’economic,legal,ethical,andphilanthropicconcernsandissues.12Thisdefinitionencompassesboththesocialconcernsofstakeholdersandtheeconomicandcorporateinterestsofcorporationsandtheirstockholders.Generally,societycannotfunctionwithouttheeconomic,social,andphilanthropicbenefitsthatcorporationsprovide.Leadersincorporationswhouseastakeholderapproachcommittoservingbroadergoals,inadditiontoeconomicandfinancialinterests,ofthosewhomtheyserve,includingthepublic.

ManagingCSRinthemarketplacewithmultiplestakeholderinterestsisnoteasy.AsdiscussedinChapter2,ethicsatthepersonalandprofessionallevelsrequiresreasonedandprincipledthinking,aswellascreativityandcourage.Whenethicsandsocialresponsibilityescalatetothecorporatelevel,wherecompaniesmustmakedecisionsthataffectgovernments,competitors,communities,stockholders,suppliers,distributors,thepublic,andcustomers(whoarealsoconsumers),moralissuesincreaseincomplexity,asthischapter’sopeningcaseillustrates.Fororganizationalleadersandprofessionals,themorallocusofauthorityinvolvesnotonlyindividualconsciencebutalsocorporategovernanceandlaws,collectivevalues,and


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consequencesthataffectmillionsofpeoplelocally,regionally,andglobally.Patagonia,forexample,isacompanythatconductsitsoutdoorapparelbusinesswitha360-degreefocusofresponsibility.Thecompanytakesresponsibilityfortheactionsofallmembersofitssupplychainandforimpactsontheenvironment.Thisattitudeisintegratedintothecultureofthecompany,itsorganizationalstructure(withanewDirectorofSocial/EnvironmentalResponsibilitypositioncreatedin2010),anditsrelationshipwithsuppliers.Ithasdevelopeda“contractorrelationshipassessment,”ascorecardsystemthatisusedtoratetheperformanceofeachfactory.Patagonia,alongwithmanyothercompanies,nowrecognizesabroaderscopeofaccountabilityandtheinterestsofmultiplestakeholders.13

Intheopeningcase,theTJXexecutiveshadtodealnotonlywiththeirowncustomers,butwithbanks(inaclassactionsuit),creditcardcompanies,themedia,competitors,andanetworkofsuppliersanddistributors—aswellastheirownreputation.Whatmayhaveseemedlikearoutinetechnicalsecurityproblemturnedintothelargest-knowncreditcardtheft/unauthorizedintrusioninhistory.HadtheCEOnotsteppedinandbecomearesponsiblespokespersonanddecisionmakerforthecompany,customersmaynothaverespondedinkind.

ThebasisofCSRinthemarketplacebeginswithaquestion:WhatisthephilosophicalandethicalcontextinwhichCSRandethicaldecisionsaremade?Forexample,noteveryoneisconvincedthatbusinessesshouldbeasconcernedaboutethicsandsocialresponsibilityastheyareaboutprofits.Manybelievethatethicsandsocialresponsibilityareimportant,butnotasimportantasacorporation’sperformance.Thisclassicaldebate—andseemingdichotomy—betweenperformance,profitability,and“doingtherightthing”continuestosurfacenotonlywithregardtoCSR,butalsoinpoliticalpartiesanddebatesoverpersonalandprofessionalethics.TherootsofCSRextendtothetopicofwhata“freemarket”isandhowcorporationsshouldoperateinfreemarkets.Statedanotherway,doesthemarketsufficientlydisciplineandweedoutinefficient“badapples”andwrongdoers,therebysavingcorporationsthecostsofhavingtosupport“soft”ethicsprograms?

EthicalInsight4.1

EthicalIssuesintheTJXCase

Afterreadingtheopeningcase,answerandbepreparedtodiscussinclassthesequestions:

1.Ifyouhadbeenassignedtoinvestigate,report,andofferrecommendationsfromthiscase,howwouldyourespondtothisquestion:Whowastoblameforthesecuritybreachandwhy?

2.Whichfactor,inyourjudgment,wasthemostimportantcontributortoTJX’ssecuritybreach:thelackofacomprehensivesecuritypolicyandlegalproceduresORissueswiththecompany’scorporateleadershipandculture?Explain.

3.WhatwillworkbestforTJXinthiscase:disciplinefromthelegalandjudicialsystemORrequiredchangesinthecompany’sleadershipandcultureregardingsecurity?Explain.


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ThetypeofinformationsecuritybreachexperiencedbyTJXhasbecomealmostcommonplaceforlargeorganizations,particularlywithbusinesstrendstowardelectronicdatacollectionandstorageandtheincreasingcomplexityoftechnology.Corporationsnowhaveanethicalresponsibilityforpreventive,detective,andcorrectiveactionsregardingtheprotectionofstakeholderinformation.Thefollowingisalistofthetopten“massivesecuritybreaches”ofrecentyears:14

1.TJX(February2007).“Thieveshadstoleninformationonpossiblytensofmillionsofcreditanddebitcards.Thecompanyfirstthoughtitssystemshadbeencompromisedforabouteightmonths,butitturnedoutthevulnerabilitymighthavelastedforalmostayearlongerthanthat.TheincidentwoundupcostingTJXmillionsofdollarspaidtotheFederalTradeCommission(FTC),creditcardcompanies,banks,andcustomers.Elevenhackerswereeventuallyarrestedforthebreak-in.Securitybreacheshaveonlyincreasedinscopeandfrequencyinrecentyears,asmorebusinessesstoretheirdataindigitalfilesandthievesbecomeincreasinglysophisticatedinhowtheygainaccesstothosefiles.”

2.CardSystemsSolutions(June2005).“MasterCardannouncedthatupto40millioncreditcardholderswereatriskofhavingtheirdatastolen—and200,000definitelyhad.CardSystemsSolutionshadimproperlystoredthecarddata,unencrypted,inordertodoresearchonthetransactions.”

3.HeartlandPaymentSystems(2009).“Thecompanyrevealedthattensofmillionsoftransactionsmighthavebeencompromised.Thecompany’scomputerswereinfectedwithmalware.”

4.BankofNewYorkMellon(February2008).Thiswasaninstanceof“aphysicalsecuritybreachratherthananelectronicone,theBankofNewYorkMellonsimplylostatape.Thecompanysent10unencryptedbackuptapestoastoragefacility.Whenthestoragefirm’struckarrivedatthefacility,however,onlyninetapeswerestillonboard.Themissingtapecontainedsocialsecuritynumbersandbankaccountinformationon4.5millioncustomers.”

5.HannafordBrothers(March2008).“Hackershadgainedaccesstomorethan4.2millioncreditcardtransactions.Bythetimewordgotout,morethan1,800ofthecreditcardnumbershadalreadybeenusedatcompanystores.Thebreachresultedintwoclassactionlawsuitsonbehalfofcustomers.”

6.HMRevenueandCustoms(November2007).“Twocomputerdiscsholdingpersonalinformationon25millionBritishcitizenshadbeenlostinthemail.ThediscshadbeensentbycourierviatheHMRC’sinternalmailsystem.”

7.U.S.DepartmentofVeteransAffairs(2009).Theagencysentatroubledharddriveoutforrepairwithoutfirsterasingtheunencrypteddatacontainedonthedisc—personalinformationforabout76millionveterans.

8.Certegy(2007).AnemployeeofthissubsidiaryofFidelityNationalInformationService“hadbeenstealingcustomerrecordsandsellingthemtoadatabroker.Therecordsincludedcreditcard,bankaccount,andotherpersonalinformation,andCertegyestimatedthebreachaffected8.5millioncustomers.Certegywoundupoutnearly$1Mindonationsandcourtcosts.”


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9.OklahomaDepartmentofHumanServices(April2009).Someoneremovedalaptopcontainingunencryptedclientrecordsfromtheoffice.“Theyleftthelaptopintheircar,someonebrokeintothecar,andthenames,socialsecuritynumber,andothersensitiveinformationonaboutamillionOklahomanswentmissing.”

10.HealthNet(May2009).“TheConnecticuthealthcareproviderreportedthatanunencryptedportablestoragedevicewasmissing,containingsevenyears’worthoffinancialandmedicalinformationon1.5millioncustomers.TheConnecticutattorneygeneralpromptlyfiledsuit.HealthNetsettledfor$250,000.”

Free-MarketTheoryandCorporateSocialResponsibilityFree-markettheoryholdsthattheprimaryaimofbusinessistomakeaprofit.Asfarasbusinessobligationstowardconsumers,thisviewassumesanequalbalanceofpower,knowledge,andsophisticationofchoiceinthebuyingandsellingofproductsandservices.Ifbusinessesdeliverwhatcustomerswant,customersbuy.Customershavethefreedomandwisdomtoselectwhattheywantandtorejectwhattheydonotwant.Faultyorundesirableproductsshouldnotsell.Ifbusinessesdonotselltheirproductsorservices,itistheirownfault.Themarketplaceisanarenaofarbitration.Consumersandcorporationsareprotectedandregulated—accordingtothisview—byAdamSmith’s(oneofthemodernfoundersofcapitalism)notionofthe“invisiblehand.”WhatwouldhavehappenedtoTJXcustomerswithoutregulation?

SeveralscholarsarguethatAdamSmith’s“invisiblehand”viewisnotcompletelyorientedtowardstockholders.Forexample,EugeneSzwajkowskiarguesthat“Smith’sviewpointismostaccuratelypositionedsquarelybetweenthosewhocontendfirmsshouldactoutofself-interestandthosewhobelievecorporationsshouldbedo-gooders.Thismiddlegroundisactuallythestakeholderperspective.Thatis,stakeholdersareinessencethemarketinallitsforms.Theydeterminewhatisafairprice,whatisasuccessfulproduct,whatisanunacceptablestrategy,whatisintolerablediscrimination.Themechanismsforthesedeterminationsincludepurchasetransactions,suppliercontracts,governmentregulation,andpublicpressure.”15Szwajkowskicontinues,“Ourownempiricalresearchhasclearlyshownthatemployeerelationsandproductqualityandsafetyarethemostsignificantandreliablepredictorsofcorporatereputation.”16

Economistandfree-marketadvocateMiltonFriedmanisnotedforaphilosophicalviewsummarizedinthefollowingquote:“Thebasicmissionofbusiness[is]thustoproducegoodsandservicesataprofit,andindoingthis,business[is]makingitsmaximumcontributiontosocietyand,infact,beingsociallyresponsible.”17Friedmanmorerecentlystatedthatevenwiththerecentcorporatescandals,themarketisamoreeffectivewayofcontrollinganddeterringindividualwrongdoersthanarenewlawsandregulations.18

Freemarketsrequirecertainconditionsforbusinessactivitytohelpsociety.Theseconditionsinclude(1)minimalmoralrestraintstoenablebusinessestooperateandpreventillegalactivitiessuchastheft,fraud,andblackmail;(2)fullcompetitivenesswithentryandexit;(3)relevantinformationneededtotransactbusinessavailabletoeveryone;and(4)accuratereflectionofallproductioncostsinthepricesthatconsumersandfirmspay(including


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thecostsofjob-relatedaccidents,injuriesfromunsafeproducts,andexternalities,whicharespillovercoststhatarenotpaidbymanufacturersorcompanies,butthatconsumersandtaxpayersoftenpay,e.g.,pollutioncosts).Legalandethicalproblemsarisewhensomeoralloftheseconditionsareviolated,asinthischapter’sopeningcase.

ProblemswiththeFree-MarketTheoryAlthoughthefree-markettheorycontinuestohaveitsadvocates,controversyalsoexistsregardingitsassumptionsaboutstakeholdersandconsumer-businessrelationships.Forexample,considerthesearguments:

1.Mostbusinessesarenotonanequalfootingwithstakeholdersandconsumersatlarge.Largefirmsspendsizableamountsonresearchaimedatanalyzing,creating,and—someargue—manipulatingthedemandofcertaintargetedbuyersandgroups.Childrenandothervulnerablegroups,forexample,arenotawareoftheeffectsofadvertisingontheirbuyingchoices.

2.AsdiscussedinChapter5,ithasbeenquestionedastowhethermanyfirms’advertisingactivitiestruthfullyinformconsumersaboutproductreliability,possibleproductdangers,andproperproductuse.Athinlineexistsbetweendeceitandartisticexaggerationinadvertising.

3.The“invisiblehand”isoftennonexistentformanystakeholdersand,inparticular,forconsumersinneedofprotectionagainstquestionable,poorlymanufacturedproductsthatarereleasedtomarket.Onereasonastakeholderviewhasbecomeausefulapproachfordeterminingmoral,legal,andeconomicresponsibilityisthattheissuessurroundingproductsafety,forexample,arecomplexandcontroversial.

Anotherimportantargumentagainstfree-markettheoryisbasedonwhateconomistsrefertoas“imperfectmarkets,”thatis,marketsinwhichcompetition“isflawedbytheabilityofoneormorepartiestoinfluenceprices.”19

Intermediaries:BridgingtheDisclosureGapInequalityofinformationavailabletocompaniesandstakeholdersisattributableinparttoimperfectmarkets.Investors,forexample,rarelyhaveaccesstocompleteinformationtomakeinvestmentdecisions.Theymustsettleforincompleteand/orinaccurateinformation.Thepresenceof“intermediaries”canhelpmanagersandotherdesignatedofficersobtainaccurateinformationthatmightotherwisebewillfullywithheldand/ormanipulatedforpersonalgainormisplacedandlostfromneglect.

Twogeneraltypesofintermediariesarefinancialandinformation.Financialintermediariesincludeventurecapitalists,banks,andinsurancecompanies;informationintermediariesincludeauditors,analysts,ratingagencies,andthepress.Theseintermediariesobtaininformationtoprovidestakeholderswithamorecompleteandaccuratefinancialpictureofthecompany’spositioninmarkets.Intermediariescanpreventleadersandmanagersofcompaniesfromtakingunfairadvantageofimperfectmarketsbyintentionallyfailingtodiscloseinformationtorelevantstockholdersandstakeholders.TheLehmanBrothers,for


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example,usedwhatiscalleda“Repo105”schemetofalselyincreasetheirbalancesheetbybillionsofdollars,therebymisleadingstakeholdersinandsince2007.Thisschemeinvolvedrepurchaseagreements,inwhichLehmanBrothersenteredintoagreementsto“sell”andthen“buyback”toxicassetsfromotherbanks.Thissecretiveprocessmisledinvestorssincethecompanyrecordedtheagreementsassalesandremovedthebadassetsfromthefinancialstatements,thusshowingstakeholdersincorrectandmisleadinginformationaboutthecompany’sfinancialperformance.Lehmanhadmoreinformationthanitsstakeholdersandintentionallychosenottodiscloseitscompleteandaccuratebooks.20

AnotherexampleofimperfectandskewedmarketpoweroccursinAfrica,“whereafewpharmaceuticalcompanieseffectivelycontroltheavailabilityofseveralkeydrugs.Ineffect,theyarebeyondthefinancialmeansofmillionsofAfricansortheirgovernments.WhenafewdominatingcompaniescutthepricesofseveralkeyingredientsoftheAIDScocktail,theydemonstratedthispower.Butthisalsorevealedafurtherimperfectionintherealmarket,whereonlyricketysystems,ifany,existtodeliverthedrugstopatientsrequiringsophisticatedandcontinuousfollow-upcare.”21

Mixed-MarketEconomiesThedebateregardingfreemarkets,imperfectmarkets,andotherformsofsocialorganizationisinterestingbutnotalwayshelpfulindescribinghowthesesystemsactuallyworkinthemarketplace.Thefree-marketsystemhasbeenmoreaccuratelydescribedbyeconomistPaulSamuelsonasa“mixedeconomy.”22Mixedeconomiesincludeabalancebetweenprivatepropertysystemsandthegovernmentlaws,policies,andregulationsthatprotectconsumersandcitizens.Inmixedeconomies,ethicsbecomespartoflegalandbusinessdebates.Principlesofjustice,rights,anddutycoexistwithutilitarianandmarketprinciples.

Arealisticapproachtomanagingsocialresponsibilityinamixed-marketeconomyisthestakeholdermanagementapproach.Insteadofseparatingprofit-makingfromsocialandethicalgoals,corporateleaderscanaccomplishboth,asthefollowingsectionsshow.

POINT/COUNTERPOINTTooBigtoFail(TBTF)

The“theory”behind“toobigtofail”(TBTF)institutionswasinvokedduringthemostrecentU.S.financialcrisis.Governmentalassistancetolargefailingfinancialinstitutions,mainlysomeofthelargestbanks,wasnecessarybecausetheirfailurewouldhavebeencatastrophicfortheU.S.andevenglobaleconomies.TheideawasandisunpopularinpartbecauseitjustifiessubsidizingtheWallStreetinstitutionsthatplayedasignificantpartinthatnearmeltdown.Sincebanksandtheselargerfinancialinstitutionsarereturningtotheirpreviouspractices,thenextmajormeltdownmaybecloserthanpreviouslybelievedpossible.

Ontheotherhand,someprogresshasbeenmade.TheFederalDepositInsuranceCorp.claimsitisnowpreparedtotakeovertheparentcompaniesoflargefailinglenders,ifnecessary.Makingbankssaferfortheeconomymeansopeningmorecapitaltofacilitateinvestmentsandloans.Bankshavetobeabletoinvesttosurviveandthrive.Thefinancial


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healthofthefourTBTFbanks(BankofAmerica,Citigroup,JPMorgan,WellsFargo)iscentraltotheU.S.economyasthiscountryfacesthecontinueddebateonthedebtceilingandthefailedmonetarypolicythatwillsoonbeledbythenewFederalReservechairperson.Thelargerafirm’scapitalisatanytime,thelargertheshrinkageinassetvaluesitcansufferbeforebecominginsolvent.Itseemsobviousthatthepurposeofhelpingalargebankandfinancialinstitutiongainsafetyandprotectionfromfailureistoraiseitscapitalrequirements,soitcantakeanyshocktothevalueofitsassets.

Butagain,TBTFhelpslargebanksattheexpenseofcommunitybanks,whicharealsoessentialtooureconomy,smallinvestors,andindividuals.Bymakingfailurelesscommon,itcreates“moralhazard”(thesubsidizationofbadbehavior)inourfinancialsystem.Toavoidanother2008nearmeltdown,arobustplantotakeoverafailingfinancialfirmisneeded,andmarketparticipantsneedtounderstandthattheyhavetoabsorbtheirownlosses—nottaxpayers.Investorshavetobelievethatbanksare“toobigtobail.”Ontheotherhand,shareholders,creditors,andtheparentcompanywouldhavetotakethepain—eventothepointofgoingoutofbusiness.Shareholderswouldbeoutofbusiness,creditorswouldsustainhugelosses,andtopexecutivesprobablywouldbefired.Instructions:(1)EachstudentindividuallyadoptseitherthePointorCounterPointargumentbelow,justifyingtheirreasons(usingargumentsfromthiscaseandotherevidence/opinions).(2)Then,eitherinteamsordesignatedarrangements,eachsharestheirreasons.(3)Classdebriefandsharingofinsights.POINT:Letthemfailiftheybringitonthemselvesandeverybodyelse.WallStreettitans,riskybankers,andinvestorswhoseekonlyfinancialgainhaveforgottentheoriginalmissionofbanksandfinancialinvestmentfirms:tohelpsmallbusinesses,individualinvestors,andfamiliesneedingmortgagestogetthosefunds.Thisiswhatgrowingandsustainingamiddleclass,ademocraticsociety,andasociallyresponsiblebusinessenvironmentisallabout;theU.S.stockmarketandbusinesssystemisbasedonhonestyet“competitiveenough”strategiesandpractices.COUNTERPOINT:LargefinancialinstitutionsandbanksmustbesupportedtocompetewithglobalrivalsandtoprotecttheU.S.standardoflivingandwayoflife.Suchinstitutionsarelargebutrequiresupport.

Itisnaivetobelievethatsmallbanksandfinancialinstitutionscanfinancemultimillion-dollarrealestateandotherprojectsthatsupporttheeconomicandsocialgrowththatsustainsthestandardoflivingofAmericansandotherglobalcitizens.Enablingbankstogrowcapitaltoprotecttheirassetsduringdowntimesisoneoftheonlywaystopermitthemtosurvive;otherwise,thegovernmentandtaxpayerdollarswillbeneeded.TheUnitedStatesisnotasocialistorgovernment-runsociety,ratheritisbasedonfreeenterprisewheretherearenoartificialceilingsforgrowth.

SOURCESGuerrera,Francesco.(September30,2013).Toobigtobailappearstotakehold.Blogs.WSJ.com.http://blogs.wsj.com/moneybeat/2013/09/30/too-big-to-bail-appears-to-take-hold/,accessedJanuary8,2014.


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http://blogs.wsj.com/moneybeat/2013/09/30/too-big-to-bail-appears-to-take-hold/

Guttentag,JackM.(October16,2013).Isthe“toobigtofail”problemtoobigtosolve?PartII.HuffingtonPost.com.http://www.huffingtonpost.com/jack-m-guttentag/is-the-too-big-to-fail-problem_b_4101117.html,accessedJanuary8,2014.

Heineman,BenW.,Jr.(October3,2013).Toobigtomanage:JPMorganandthemegabanks.HBRBlogNetwork.http://blogs.hbr.org/2013/10/too-big-to-manage-jp-morgan-and-the-mega-banks/,accessedJanuary8,2014.

Shah,Neil.(October16,2013).Howtodealwith“toobigtofail.”Blogs.WSJ.com.http://blogs.wsj.com/economics/2013/10/16/how-to-deal-with-too-big-to-fail/,accessedJanuary8,2014.

Simon,Ammon.(October21,2013).Howtofixtoobigtofail.NationalReviewOnline.http://www.nationalreview.com/article/361719/how-fix-too-big-fail-ammon-simon,accessedJanuary8,2014.

4.2ManagingCorporateResponsibilitywithExternalStakeholders

TheCorporationasSocialandEconomicStakeholderThestakeholdermanagementapproachviewsthecorporationasalegalentityandalsoasacollectiveofindividualsandgroups.TheCEOandtop-levelmanagersarehiredtomaximizeprofitsfortheownersandshareholders.Theboardofdirectorsisresponsibleforoverseeingthedirection,strategy,andaccountabilityoftheofficersandthefirm.Toaccomplishthis,corporationsmustrespondtoavarietyofstakeholders’needs,rights,andlegitimatedemands.Fromthisperspective,thecorporationhasprimaryobligationstotheeconomicmandatesofitsowners;however,tosurviveandsucceed,itmustalsorespondtolegal,social,political,andenvironmentalclaimsfromstakeholders,asnotedearlier.Figure4.1illustratesthemoralstakesandcorporateresponsibilitiesoffirms’obligationstowardtheirdifferentstakeholders.


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http://www.huffingtonpost.com/jack-m-guttentag/is-the-too-big-to-fail-problem_b_4101117.html

http://blogs.hbr.org/2013/10/too-big-to-manage-jp-morgan-and-the-mega-banks/

http://blogs.wsj.com/economics/2013/10/16/how-to-deal-with-too-big-to-fail/

http://www.nationalreview.com/article/361719/how-fix-too-big-fail-ammon-simon

Figure4.1ExternalStakeholders,MoralStakes,andCorporateResponsibilities

Source:BasedonCauxRoundTable.(March2009;updatedMay2010).Principlesforbusiness.CauxRoundTable.org.http://www.cauxroundtable.org/index.cfm?menuid=8,accessedJanuary10,2014.

Onestudyhasarguedthat“Usingcorporateresourcesforsocialissuesnotrelatedtoprimarystakeholdersmaynotcreatevalueforshareholders.”23Thisfindingdoesnotsuggestthatcorporationsrefrainfromphilanthropicactivities;rather,“Theemphasisonshareholdervaluecreationtodayshouldnotbeconstruedascomingattheexpenseoftheinterestsofotherprimarystakeholders.”24

Shareholdervalueobsessionbeganin1976,whenitwasarguedthattheownersofcompanieswerenotgettingfull,open,andhonestdisclosurefromprofessionalmanagers.25Amajorproblemwasandisnotwithplacingtheemphasison“shareholdervalue,”buton“theuseofshort-termincreasesinafirm’ssharepriceasaproxyforit.”“Ironically,shareholdersthemselveshavehelpedspreadthisconfusion.Alongwithactivisthedgefunds,manyinstitutionalinvestorshaveidolizedshort-termprofitsandshare-priceincreasesratherthanengagingrecalcitrantmanagersindiscussionsaboutcorporategovernanceorexecutivepay.Givingshareholdersmorepowertoinfluencemanagement(especiallyinAmerica)andencouragingthemtouseitshouldpromptthemandthemanagerstheyemploytotakealongerview.”26


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http://www.cauxroundtable.org/index.cfm?menuid=8

Criticshavenotidentifiedarealisticalternativemeasureofsuccesstoshareholdervalue.Criticsoftheshareholdermodelendorsea“stakeholder”modelasdescribedandusedinthistext.27“Forcapitalismtothrive,iturgentlyneedsreforminthreeareas:shiftingfromanarrowfocusonshareholderstoabroadercommunityofstakeholders;adoptinganowner-basedgovernancemodelaimedatbuildingcompanieswithhighlongevity;andmovingfromquarterlymeasuresofperformancetomuchlongertimeframes.”28

Corporationsareeconomicandsocialstakeholders.Thisisnotacontradictionbutaleadershipawarenessandchoicethatrequiresbalancingeconomicandmoralpriorities.Inthediscussionbelow,weexploretheethicalbasisonwhichtherelationshipsbetweencorporationsandtheirstakeholdersaregrounded.Wethenturntotheexternalcomplianceandlegaldimensionofstakeholdermanagement,whichisalsorequiredforeffectivelydealingwithexternalconstituencies.

TheSocialContract:DeadorDesperatelyNeeded?Thestakeholdermanagementapproachofthecorporationisgroundedintheconceptofasocialcontract.Developedbyearlypoliticalphilosophers,asocialcontractisasetofrulesandassumptionsaboutbehaviorpatternsamongthevariouselementsofsociety.Muchofthesocialcontractisembeddedinthecustomsofsociety.Someofthe“contractprovisions”resultfrompracticesbetweenparties.Likealegalcontract,thesocialcontractofteninvolvesaquidproquo(somethingforsomething)exchange.Althoughglobalization,massivedownsizing,andrelatedcorporatepracticescontinuetopressuremanyemployer—employeerelationships,theunderlyingprinciplesofthesocialcontract,likemutualtrustandcollaboration,remainessential.Reputationofafirm,aswellasforleaders,managersandprofessionals,isstillafoundationforbusinessaswellassocialexchanges,contracts,andpractices.

Thesocialcontractbetweenacorporationanditsstakeholdersisoftenbasedonimplicitaswellasexplicitagreements.Forexample,asFigure4.1indicates,whencorporationsandstakeholdersbasetheirnegotiationsandprovisionsofservicesandproductsonmoralstandardsaswellasproduction-orientedmetrics,thesuccessofthebusinessandthesatisfactionofthestakeholdersincrease,andthepublic’sconfidenceinthebusinessesalsoisenhanced.Alossofpublicconfidencecanbedetrimentaltothefirmandtoitsinvestors.Onewaytoretainandtoreinforcepublicconfidenceisbyactinginanethicalmanner,amannerthatshowsaconcernfortheinvestingpublicandthecustomersofthefirm.29Thequestionisnotreallywhetherasocialcontractbetweenacorporationanditsstakeholdersexists,butwhatthenatureofthecontractisandwhetherallpartiesaresatisfiedwithit.Arecustomerssatisfiedwiththeproductsandservicesandhowtheyaretreatedbyacompany’srepresentatives?Aresuppliers,distributors,andvendorsallsatisfiedbythecontractualagreementswiththecorporation?Domembersofthecommunitiesacompanyislocatedinandservesbelievethecompanyisaresponsibleandresponsivecitizen?Doesthecompanypayitsfairshareoftaxes?Doemployeesbelievetheyarepaidafairwage,haveadequateworkingconditions,andarebeingdeveloped?


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BalancebetweenEthicalMotivationandComplianceEthicsprograms,aspartofthesocialcontract,areessentialmotivatorsinorganizations.Studiessuggestthatethicsprogramsmattermorethancomplianceprogramsonseveraldimensionsofethics,forexample,awarenessofissues,searchforadvice,reportingviolations,decisionmaking,andcommitmenttothefirm.30Businessrelationshipsbasedonmutualtrustandethicalprinciplescombinedwithregulationresultinlong-termeconomicgainsfororganizations,shareholders,andstakeholders.31Ifcorporateleadersandtheirfirmscommitillegalacts,taxpayersenduppayingthesecosts.Corporateleadersandtheirstakeholders,therefore,haveaninterestinsupportingtheirimplicitsocialcontractaswellastheirlegallybindingobligations.

Thereisabalancetobemaintainedbetweenexternalregulationandself-regulationbasedonthepublic’strustincorporations.A2011Maritzpollfoundthat“approximately25%ofemployeesreporthavinglesstrustinmanagementthantheydidlastyear.Only10percentofemployeestrustmanagementtomaketherightdecisionintimesofuncertainty.Thepercentageincreasesto16%amongemployees18–24yearsofagewhoonlyrecentlyenteredtheworkforceanddidn’tdirectlyexperiencemanyofthemanagementscandalsofthepast10years.”Thepollalsonotesthatonly“slightlymorethanoneintenAmericans(14%)believestheircompany’sleadersareethicalandhonest.Inaddition,thepollfoundthatonly12%ofemployeesbelievetheiremployergenuinelylistenstoandcaresaboutitsemployees,andonlysevenpercentofemployeesbelieveseniormanagement’sactionsarecompletelyconsistentwiththeirwords.”32Thismistrusthastranslatedintoaglobalcallforgreaterregulationoflargecompanies.Apollof20nationsfoundthat“solidmajoritiesineverycountryfavoredmoreregulationoflargecompaniestoprotecttherightsofworkers,therightsofconsumers,andtheenvironment.Amajorityin15ofthe20countriesalsofavoredgreatergovernmentregulationtoprotecttherightsofinvestors.”33

CovenantalEthicThecovenantalethicconceptisrelatedtothesocialcontractandisalsocentraltoastakeholdermanagementapproach.Thecovenantalethicfocusesontheimportanceofrelationships—socialaswellaseconomic—betweenbusinesses,customers,andstakeholders.Relationshipsandsocialcontracts(orcovenants)betweencorporatemanagersandcustomersembodya“sellermustcare”attitude,notonly“buyerbeware.”34Amanager’sunderstandingofproblemsismeasurednotonlyovertheshortterm,inviewofconcreteproducts,specificcostreductions,orevenbalancesheets(thoughobviouslyimportanttoacompany’sresults),butalsooverthelongterm,inviewofthequalityofrelationshipsthatarecreatedandsustainedbybusinessactivity.35Itmayalsobehelpfultounderstandtheconceptofacovenantalethicinanorganizationalcontextbypointingouthowgreatleadersareabletoattractandmobilizefollowerstoavisionandbeliefsbasedontherelationshiptheydevelopwiththosebeingled.ClassicleaderslikeFranklinRoosevelt,JohnF.Kennedy,andMartinLutherKingJr.instilledanenduringtrustandcredibilitywiththeirfollowers.WeexplainmoreofthesedynamicsinChapter6;here,thepointisthatcorporateleadersstillinspireandmotivatefollowersthrough


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theirvision,purposivemission,andleading-by-examplethatresultinatypeofsocialcontract.WarrenBuffet,BillGates,andRichardBransonaresuchexamples.

TheMoralBasisandSocialPowerofCorporationsasStakeholdersKeithDavisarguesthatthesocialresponsibilityofcorporationsisbasedonsocialpower,andthat“ifabusinesshasthepower,thenajustrelationshipdemandsthatbusinessalsobearresponsibilityforitsactionsintheseareas.”Hetermsthisviewthe“ironlawofresponsibility”andmaintainsthat“inthelongrun,thosewhodonotusepowerinamannerinwhichsocietyconsidersresponsiblewilltendtoloseit.”Davisdiscussesfivebroadguidelinesorobligationsbusinessprofessionalsshouldfollowtobesociallyresponsible:

1.Businesseshaveasocialroleof“trusteeforsociety’sresources.”Sincesocietyentrustsbusinesseswithitsresources,businessesmustwiselyservetheinterestsofalltheirstakeholders,notjustthoseofowners,consumers,orlabor.

2.Businessshalloperateasatwo-wayopensystemwithopenreceiptofinputsfromsocietyandopendisclosureofitsoperationstothepublic.

3.“Socialcostsaswellasbenefitsofanactivity,product,orserviceshallbethoroughlycalculatedandconsideredinordertodecidewhethertoproceedwithit.”Technicalandeconomiccriteriamustbesupplementedwiththesocialeffectsofbusinessactivities,goods,orservicesbeforeacompanyproceeds.

4.Thesocialcostsofeachactivity,product,orserviceshallbepricedintoitsothattheconsumer(user)paysfortheeffectsofhisconsumptiononsociety.

5.Businessinstitutionsascitizenshaveresponsibilitiesforsocialinvolvementinareasoftheircompetencewheremajorsocialneedsexist.36

Theaboveguidelinesprovideafoundationforcreatingandreviewingthemoralbasesofcorporatestakeholderrelationships.Thepublicisintolerantofcorporationsthatabusethismutualtrust,asrecentsurveysshow.Forexample,aBusinessWeek/HarrisPollfoundthat“72%ofAmericanssaytheybelievethatbusinesshastoomuchpoweroverAmericanlife.Furthermore,66%ofthosepolledagreethatcompaniescaremoreaboutmakinglargeprofitsthanaboutsellingsafe,reliable,qualityproducts.Atthesametime,pressureforcompaniestotakeonmoreresponsibilitiesintheircommunitiesseemstoberising.”37

TheMSNMoneyCustomerServiceHallofFameincludesthe10companiesoutof150ofthecountry’slargestconsumernamesmostoftenratedas“excellent”forcustomerserviceinMSNMoney’ssurvey.In2013,theywereAmazon.com,Marriott,Hilton,UPS,FedEx,Google,StateFarm,Samsung,TraderJoe’sandLowe’s.Amongthetenworstcompaniesforcustomerservicein2013werefinancialinstitutionsandcableandinsuranceproviders:BankofAmerica(bank),Comcast,BankofAmerica(creditcard),DishNetwork,Citigroup(creditcard),WellsFargo(creditcard),WellsFargo(bank),Citibank(bank),AT&T,andDiscoverFinancialServices.Whereaseconomic,environmental,andotherfactorsaffectcustomersatisfactionwithcompaniesandindustries—especiallythoselistedinthissurveyatthistime—ifanindustryorcompanycontinuestoscorelowontheindex,itshouldserveasawakeup


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calltothestockholdersandcorporateleaders.Manytimessomeelementofpoorstakeholdermanagementcanalsobepartoftheproblem,whetherperceivedorexperienced.38

CorporatePhilanthropyCorporationspracticesocialresponsibilityinseveralways,alsoknownas“externalengagements,”whichmeanstheeffortsacompanymakestomanageitsrelationshipswithstakeholdersandgroupsandinstitutionsinneedofassistance.Theserelationshipscanandshouldincludeawidevarietyofactivities:notjustcorporatephilanthropy,communityprograms,andpoliticallobbying,butalsoaspectsofproductdesign,recruitingpolicy,andprojectexecution.“Inpractice,however,mostcompanieshavereliedonthreetoolsforexternalengagement:afull-timeCSRteamintheheadoffice,somehigh-profile(butrelativelycheap)initiatives,andaglossyannualreviewofprogress.”39

Suchactivitiesareoftenmeasuredthroughtheimpactofcorporatephilanthropybycountingthenumberofindividualswhoarehelpedbyaparticularprogram.Philanthropy,however,canalsoreducebusinessrisk,openupnewmarkets,engageemployees,buildthebrand,reducecosts,advancetechnology,anddelivercompetitivereturns.“Corporatephilanthropyisusuallydefinedincontrasttovarious‘shared’or‘blended’valueapproachestocorporatesocialresponsibility(CSR),inwhichcompaniesseektodowellbydoinggood.”Itismorehelpfultoviewcorporatephilanthropyasadiscoveryphaseininvestmentinasocialissue.Suchphilanthropicinvestmentscanserveasincubatorsforpromisingideasandmechanismsforlearningbothcommunityandcorporateneeds.“MuchlikeR&D,philanthropyallowscompaniestomakethoughtfulinvestmentsinsectorswherethereturnprofileistypicallymorespeculative.Ofcourse,philanthropyisnottheonlystrategyforcompaniestoplaymeaningfulcorporate-citizenshiproles.BusinessleadersshoulduseeverytoolintheirCSRportfoliotohelpcreateeconomicvaluethatcanhelpaddressrelevantsocietalissues.”40

Acorporation’ssocialresponsibilityalsoincludescertaintypesofphilanthropicresponsibilities,inadditiontoitseconomic,legal,andethicalobligations.Corporatephilanthropyisanimportantpartofacompany’sroleas“goodcitizen”attheglobal,national,andlocallevels.Thepublicexpects,butdoesnotrequire,corporationstocontributeand“giveback”tothecommunitiesthatsupporttheiroperations.Procter&Gamble’sreputationhasbeenenhancedbyitsglobalcontributions.SomeofthegreatestrecentcorporatephilanthropistsincludeWarrenBuffet,BillandMelindaGates,andMarkZuckerberg.41Buffettpledged12,220,852sharesofBerkshireHathawayclass“B”stock,valuedatmorethan$1billion,toeachofhisthreechildren’sfoundations.TheHowardG.BuffettFoundationhascontributedfundstoagriculturaldevelopment,clean-waterprojects,andprogramsworkingtofightpoverty.42

ManagingStakeholdersProfitablyandResponsibly:ReputationCountsGlobalizationandtheshiftingcentersoffinancialpowerandinfluence,theongoingdiffusionofinformationtechnology,andthethreatofotherEnronscontinuetopressurecorporatecompetition,alongwithincreasinglywidershareholderactivism.“Theresultisthatmany


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employees,investors,andconsumersareseekingassurancesthatthegoodsandservicestheyareproducing,financing,orpurchasingarenotdamagingtoworkers,theenvironment,orcommunitiesbywhomandwheretheyaremade.”43Thereis,consequently,renewedinterestintheareaofCSR;thatis,howabusinessrespectsandrespondsresponsiblytoitsstakeholdersandsocietyaswellastoitsstockholders.44

EthicalInsight4.2

Employers’AgreedonGoalsforCollegesandUniversities

ArecentonlinesurveybyHartResearchAssociatesshowedthatemployersplacethegreatestdegreeofimportanceonthefollowingareas:

•Ethics:“Demonstrateethicaljudgmentandintegrity”(96%important;76%veryimportant).

•InterculturalSkills:“Comfortableworkingwithcolleagues,customers,and/orclientsfromdiverseculturalbackgrounds”(96%important,63%veryimportant).

•ProfessionalDevelopment:“Demonstratethecapacityforprofessionaldevelopmentandcontinuednewlearning”(94%important,61%veryimportant).

QuestionsforDiscussion1.Doyouagreethatcollege/universityeducationshouldemphasizeethicaljudgmentandintegrityasapriorityinlearning?Whyorwhynot?

2.Ifso,doyoubelievelearningethicaljudgmentandintegrityareasimportantasthemajoronechoosesasaconcentration?Explain.

Source:HartResearchAssociates.(April13,2013).Ittakesmorethanamajor:Employerprioritiesforcollegelearningandstudentsuccess,anonlinesurveyamongemployersconductedonbehalfof:theAssociationofAmericanCollegesandUniversities,p.6(4thareaofonlinesurveyoutof11).AACU.org.http://www.aacu.org/leap/documents/2013_EmployerSurvey.pdf,accessedJanuary8,2014.

Mostexecutivesandprofessionalsareinterestedintheirstakeholdersandarelawabiding.Reputationremainsoneofthemostpowerfulassetsindeterminingtheextenttowhichacompanymanagesitsstakeholderseffectively.Thereisalsoevidencethatsociallyresponsiblecorporationshaveacompetitiveadvantageinthefollowingareas:

1.Reputation.45

2.Successfulsocialinvestmentportfolios.46

3.Abilitytoattractqualityemployees.47


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http://www.aacu.org/leap/documents/2013_EmployerSurvey.pdf

TheorganizationBusinessEthicsranksthetop100sociallyresponsiblecorporationsintermsofcitizenship.BusinessEthicsusesitsowncollecteddata,includingtheDomini400SocialIndex(whichalsotracks,measures,andpublishesinformationoncompaniesthatactsociallyresponsible).TheStandard&Poor’s500plus150publiclyownedcompaniesarerankedonascalethatmeasuresstakeholderratings.HarrisInteractive,Inc.andReputationInstitute,aNewYork-basedresearchgroup,conductedanonlinenationwidesurveyof10,830peopletoidentifythecompanieswiththebestcorporatereputationsamongAmericansattheturnofthemillennium.48TheReputationQuotient(RQ)isastandardizedinstrumentthatmeasuresacompany’sreputationbyexamininghowthepublicperceivescompaniesbasedon20positiveattributes,includingemotionalappeal;socialresponsibility;goodcitizenshipinitsdealingswithcommunities,employees,andtheenvironment;thequality,innovation,value,andreliabilityofitsproductsandservices;howwellthecompanyismanaged;howmuchthecompanydemonstratesaclearvisionandstrongleadership;andprofitability,prospects,andrisk.

TheexecutivedirectoroftheReputationInstitute,AnthonyJohndrow,noted,“Reputationismuchmorethananabstractconcept;it’sacorporateassetthatisamagnettoattractcustomers,employees,andinvestors.”49GoogletooktopplaceintheReputationInstitute’sannualGlobalPulseU.S.2011study,withAppleandTheWaltDisneyCompanyfollowingatsecondandthirdplace.Thestudymeasuresan“analysisoftheworld’s100top-ratedcompaniesbasedoninputfromover55,000consumersin15countries.”Thefollowingtrendswerediscoveredasaresultofthisstudy:

•“58%ofpeople’swillingnesstorecommendacompanyisdrivenbytheirperceptionofthecompany;only42%dependsonperceptionsofthecompany’sproductsandservices.

•Two-thirdsofC-suiteexecutivesatthe150largestU.S.companiesbelievewehavealreadyenteredtheReputationEconomy.

•Amongthe150largestcompaniesintheU.S.,25percentnowcoordinatetheirreputationstrategyandenterprisestorythroughtheCEO’soffice.

•CompanieswithexcellentreputationsaretwoandahalftimesmorelikelytohaveCEOssettingthestrategyforenterprisepositioningthanthosewithweakerreputations.”50

Brandsareamongcompanies’most—ifnotthemost—valuedassetsbecausetheyreflectandareanintegralpartoftheirreputationsandidentities.ThetoptenmostandleastreputablebrandsinAmericafor2013arelistedinTable4.1.

Table4.1TenMost-andLeast-ReputableCompaniesinAmerica(2013)

Tenmost-reputable

brandsTenleast-reputable

brandsWeiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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1.Amazon 51.Comcast2.Apple 52.WellsFargo3.WaltDisney 53.JPMorganChase4.Google 54.BP5.Johnson&Johnson 55.Citigroup6.Coca-Cola 56.BankofAmerica7.WholeFoodsMarket 57.AmericanAirlines8.Sony 58.Halliburton9.Procter&Gamble 59.GoldmanSachs

10.Costco 60.AIG

Source:Ragan’sPRDaily.(February14,2013).The10most—andthe10least—reputablebrands.PRDaily.com.http://www.prdaily.com/Main/Articles/The_10_mostand_the_10_leastreputable_bran,13835.aspx#,accessedJanuary9,2014.Permissiongranted;alsofoundintheoriginalsource,HarrisInteractive.(February2013).TheHarrisPoll2013RQ®SummaryReport,p.9.Foramorecompletedescriptionofthisranking,seeASurveyoftheU.S.GeneralPublicUsingtheReputationQuotient®.http://www.harrisinteractive.com/vault/2013%20RQ%20Summary%20Report%20FINAL.pdf,accessedFebruary7,2014.

TheHarrisPollRQrankscompanies’reputationsonsixdimensions:socialresponsibility;visionandleadership;emotionalappeal;productsandservices;financialperformance;andworkplaceenvironment.Thegeneralpublicratescompaniesbycompletingonlinesurveysthatareanalyzedandusedinmarketingandpolicydecisions.Youcanscoreyourownorganization’sreputationinEthicalInsight4.3,“RankYourOrganization’sReputation.”

4.3ManagingandBalancingCorporateGovernance,Compliance,andRegulationWhileleadersandtheirteamsbuildthereputationsoftheircorporationsthroughhighproductivity,trust,andgooddeedsshowntowardtheirstakeholderswhilesatisfyingcompetitivedemandsofthemarketplace,itisalsotruethatlawsandregulationssetstandardsforacceptableandunacceptablebusinesspracticesandbehaviors.Justasthemarketisnotentirely“free,”neitherareallstakeholdersandconstituencieshonest,fair,andjustintheirmotivesandbusinesstransactions.ThecorporatescandalsexemplifiedbyEnronandothersdemonstratedthatentirecorporationscanbebroughtdownbytop-levelexecutivesandtheirteams.Lessonsfromthescandalsalsoshowedthatcorporateboardsofdirectors,CEOs,chieffinancialofficers(CFOs),andothertop-leveladministratorsrequirelegalconstraints,compliancerules,regulation,andthethreatandprovisionofpunishmentwhencrimesarecommitted.Wrongdoersinsideandoutsidecorporationsmusthaveboundariessetanddisciplinaryactionsappliednotonlytoprotecttheinnocent,butalsotoenablebusinessestoexistandsucceed.The“ruleoflaw”enablescapitalismanddemocraciestothrive.Research


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http://www.prdaily.com/Main/Articles/The_10_mostand_the_10_leastreputable_bran,13835.aspx

http://http://www.harrisinteractive.com/vault/2013%20RQ%20Summary%20Report%20FINAL.pdf

alsoshowsthatboth“carrot”(motivational,ethicalincentives)and“stick”(legalcomplianceandpotentialdisciplinaryaction)approachesarenecessarytoenableworkforcesandleaderstobeproductiveandlaw-abiding.Figure4.2illustratesa“carrotandstick”balancingapproachthateffectivecorporationsuseinprovidingbothalegalandethicalcultureandtransactions,internallyandwithexternalstakeholders,asshowninFigure4.2.

Figure4.2CorporateSocialResponsibilityandStakeholderManagement:Balancingthe“Carrot”and“Stick”Approaches

EthicalInsight4.3

RankYourOrganization’sReputation

Scoreacompany,college,oruniversityatwhichyouworkedorstudiedonthefollowingcharacteristics.Beobjective.Answereachquestionbasedonyourexperienceandwhatyouobjectivelyknowaboutthecompany,college,oruniversity.1=verylow;2=somewhatlow;3=average;4=verygood;5=excellent___Emotionalappealoftheorganizationforme___Thesocialresponsibilityoftheorganization___Theorganization’streatmentofemployees,community,andenvironment___Thequality,innovation,value,andreliabilityoftheorganization’sproductsand/orservices___Theclarityofvisionandstrengthoftheorganization’sleadership___Theorganization’sprofitability,prospectsinitsmarket,andhandlingofrisks


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___TotalyourscoreInterpretation:Consider30aperfectscore,24verygood,18average,12low,and6verylow.

QuestionsforDiscussion1.Howdidyourcompany/organizationdoontheranking?Explain.2.Explainyourscoringoneachitem;thatis,givethespecificreasonsthatledyoutoscoreyourcompanyasyoudid.

3.SuggestspecificactionsyourorganizationcouldtaketoincreaseitsReputationQuotient.

Inthissection,wediscussthe“stick”approach(legalcomplianceandregulation)inmoredetail.Withourfocushereonthecorporationandexternalstakeholders,welimitourdiscussionoflawsto(1)theSarbanes-OxleyAct(SOX),andabriefoverviewofthe(2)FederalSentencingGuidelinesforOrganizations(FSGO),andthendiscuss(3)lawsregulatingcompetition,consumerprotection,employmentdiscrimination/pay/safety,andtheenvironment.Chapter5coverslegalandsocialissuesrelatedtothecorporationandconsumerstakeholders,andChapter7addressesemployeestakeholders.

Mostcorporationseffectivelygovernthemselves,toalargeextent,throughtheirowncontrolsystemsandstakeholderrelationships.Apubliccorporation’sfederalandstatecharterprovidesthelegalbasisforitsboardofdirectors,stockholders,andofficerstogovernandoperatethecompany.However,asEnronandothercorporatescandalshavedemonstrated,self-governancecannotbecountedontoworkwellalone.Aquestionoftenrepeatedfromthescandalsis,“Whereweretheboardsofdirectorswhenthewidespreadfraud,deception,andabuseofpoweroccurred?”

ArecentTimemagazinecoverread,“HowWallStreetWon:FiveYearsaftertheCrash,ItCouldHappenAllOverAgain.”51Thearticlemakesfiverecommendationsforpreventinganotherfinancialsubprimemortgagelendingcrisis,basedontheauthor’sresearchandinterviewswithleadingexpertsfromfinancialanduniversityinstitutions:1.FixtheToo-Big-To-FailProblem,2.LimittheLeverage(ofbanks),3.ExposeWeaponsofMassFinancialDestruction(“derivatives”trading),4.BringShadowBankingIntotheLight,and5.ReboottheCultureofFinance.Insummary,thesefiverecommendationsarguethatsomeofthelargestbanksintheUnitedStatesneedcloserself-andgovernmentregulationintheirlendingandinvestingpracticesinordertostopcertainderivativesandhigh-riskinvestingfromwreckingtheeconomyagain.StepstowardthisgoalincludereinstatingtheformerFedchairmanPaulVolcker’sruleto“separategovernment-insuredcommerciallendingfromriskytradingoperations.”Reinstatingandimplementingprovisionsofthe1933Glass-SteagallAct,whichseparatescommercialfromriskylendingpracticesbybanks,alongwiththeDodd-Franklegislation,wouldalsoaddressthisproblem.

Othersuggestionsincludelimitingtheleveragelargerbanksandmortgagecompanieshavetomakeriskyloans.Leveragemeanstheability“toborrowmoremoneythantheycanimmediatelyrepay.”Toomuchleveragegivesbanksincentivestooverinvestmorefundsthantheyhavetomeettheiroperatingobligations.Also,making“shadowbanking”—hidingtheamountandtypesofinvestmentsmade—moretransparentwouldexposethosefinancierswho


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putbanks,customers’money,andtheeconomyatrisk.Finally,“rebootingthecultureoffinance”intheUnitedStatesisnecessary.TheUnitedStatessuffersfromtheWallStreet-driven“financialization”oftheeconomy.Theoriginalpurposeandmissionofbanksistolendtorealpeopleandbusinesses,notusingcustomers’andsmallbusinesses’moneytobankrollhigh-riskinvesting,especiallywhenthelargerbankslimitaccesstocredittosmallbanksandindividuals.Also,thecreditrankingsystemofbanksthatpaysprofessionalsinthatsystemtorankthemmustchange.Thissystemisself-defeating;thecreditratingsdonotchangebankingpractices,andlarge-scalequestionableinvestmentbankingpracticescouldleadtofurthermeltdownsoftheeconomy.52

Thereareanumberofotherreasonswhymanyofthelarger,prominentcorporateboardsofdirectorsindifferentindustries,notonlybanking,didnotexecutetheirmandatedlegalandethicalresponsibilitiesduringthepastfinancialmeltdownandcrisis.Theseincludelackofindependence,insiderrolesandrelationships,conflictsofinterest,overlappingmembershipsofboardmemberswithotherboards,decision-by-committees,well-paidmemberswithfewresponsibilities,andlackoffinancialexpertiseandknowledgeabouthowcompaniesreallyoperate.53There,however,areimprovementsbeingmadelegislativelyandinbusinessandboardpractices.

BestCorporateBoardGovernancePracticesMostcorporateboardsactresponsiblytowardtheirstakeholdersandinthebestinterestsofshareholders.Thewakeofthelargecorporatescandalsoftheearly2000shasledtoseveralbestpracticesforaboardofdirectors.“TheBoardofDirectorsmustbecommittedtoitsfunctions,befunctionalandmakeinformeddecisions.”54Thiscanbeachievedthroughgreaterobjectivity,independence,andoversightbyallboardmembers.55

Withveryfewexceptions,governanceactivistshaveachievedmostofthereformstheyhavesoughttoeffectuate.AccordingtoSpencerStuart’s2012U.S.BoardIndex,84%ofS&P500companieshaveadoptedamajorityvotingstandard,83%haveannuallyelectedboards,and84%oftheirdirectorsareindependent—tonamebutafewofthemoretrendygovernanceissuesinrecentyears.However,thosewhomaketheirlivinginthecorporategovernanceindustrywillundoubtedlycontinuetopushtheseproposalsatsmallercompanies,andcomeupwithadditionalrequirementsandheightenedstandardstoproposewitheachnewproxyseason.Bywayofexample,ISS’s2013corporategovernancepolicyupdatestightenitsboardresponsivenesspolicyandrecommendthatshareholdersvote“against”or“withhold”theirvotesforincumbentdirectorswhofailtoactonashareholderproposalthatreceivedthesupportofamajorityofvotescastinthepreviousyear,ascomparedtoISS’spriorstandard,whichlookedatwhethertheproposalreceivedamajorityofoutstandingsharesthepreviousyearorthesupportofamajorityofvotescastinboththelastyearandoneofthetwoprioryears.56

Thefollowingsectiondiscussesthetwolawsbestknownfordefiningtheregulationsandbestpracticesforcompaniesandtheirboardsofdirectors.

Sarbanes-OxleyActThe2002Sarbanes-OxleyAct(SOX)wasadirectregulatoryresponsebyCongresstocorporatescandals.(PricewaterhouseCooperscalledthislawthemostimportantlegislationaffectingcorporategovernance,financialdisclosure,andpublicaccountingpracticesincethe1930s.)57The“carrot”approach,orcorporateself-regulation,didnotworkforEnronand


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otherfirmsinvolvedinscandals;Congressrealizedthata“stick”approach(laws,regulations,disciplinaryactions)wasalsorequired.AsummaryofSOXshowsthatfederalprovisionswereestablishedtoprovideoversight,accountability,andenforcementoftruthfulandaccuratefinancialreportinginpublicfirms.Someofthemajorissuesincluded(1)alackofanindependentpubliccompanyaccountingboardtooverseeaudits,(2)conflictsofinterestincompaniesservingasauditorsandmanagementconsultantstocompanies,(3)holdingtop-levelofficers(CEOsandCFOs)accountableforfinancialstatements,(4)protectingwhistle-blowers,(5)requiringethicscodesforfinancialofficers,and(6)otherreformsasthelistbelowshows.

ThekeyaspectsofSOXcanbesummarizedasfollows:

•Establishesanindependentpubliccompanyaccountingboardtooverseeauditsofpubliccompanies.

•Requiresonememberoftheauditcommitteetobeanexpertinfinance.•Requiresfulldisclosuretostockholdersofcomplexfinancialtransactions.•RequiresCEOsandCFOstocertifyinwritingthevalidityoftheircompanies’financialstatements.Iftheyknowinglycertifyfalsestatements,theycangotoprisonfor20yearsandbefined$5million.

•Prohibitsaccountingfirmsfromofferingotherservices,likeconsulting,whilealsoperformingaudits.Thisconstitutesaconflictofinterest.

•RequiresethicscodesforfinancialofficersofcompaniesthatareregisteredwiththeSecuritiesandExchangeCommission(SEC).

•Providesa10-yearpenaltyforwireandmailfraud.•Requiresmutualfundprofessionalstodisclosetheirvoteonshareholderproxies,enablinginvestorstoknowhowtheirstocksinfluencedecisions.

•Provideswhistle-blowerprotectionforindividualswhoreportwrongfulactivitiestoauthorities.

•Requiresattorneysofcompaniestodisclosewrongdoingstoseniorofficersandtotheboardofdirectors,ifnecessary;attorneysshouldstopworkingforthecompaniesifseniormanagersignorereportsofwrongdoings.58

SOXalsodefinesseveralreformsaimedatimprovingproblemsofboardsofdirectors.Thereareother“bestpractices”guidelinesforboards,including:

1.SeparatingtheroleofchairmanoftheboardwhentheCEOisalsoaboardmember.2.Settingtenurerulesforboardmembers.3.RegularlyevaluatingitselfandtheCEO’sperformance.4.Prohibitingdirectorsfromservingasconsultantstothecompanieswhichtheyserve.5.Compensatingdirectorswithbothcashandstock.6.ProhibitingretiredCEOsfromcontinuingboardmembership.7.AssigningindependentdirectorstothemajorityofmemberswhomeetperiodicallywithouttheCEO.59


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TherolesandresponsibilitiesofCEOsandorganizationalleadersarediscussedinChapter6.TheJuly/August2012coverstoryofFinancialExecutivewastitled“Sarbanes-Oxley—A

DecadeLater”andsummarizedtheimpactofSOX:TheactcreatedthePublicCompanyAccountingOversightBoardtopolicetheaccountingprofessionandsetauditingstandards.Itshoreduptheroleoftheauditcommittee,makingitindependentandresponsibleforhiring,firingandoverseeingexternalauditors,removingthatauthorityfrommanagement.

UnderSection404,companieswererequiredtoestablishinternalcontrolsandproceduresforfinancialreporting.Anothersectionmandatedthatboththechiefexecutiveandchieffinancialofficerspersonallyattestthattheyhavereviewedtheauditors’reportandthatit“doesnotcontainanymaterialwithuntruestatementsormaterialomission”oranythingthatcouldbe“consideredmisleading.”Sarbanes-Oxleyalsoinstituted“clawback”provisionsrequiringCEOsandCFOstoreturnill-gottengainstotheir

employer.Inonenotablecase,IanMcCarthy,formerCEOatAtlanta-basedBeazerHomesUSAInc.,andformerCFOJamesO’Learybothagreedtoreturnalloftheircashbonuses,incentiveandequity-basedcompensationfor2006.McCarthyhadtorelinquishmorethan$5.7millionincashplus$772,232instocksaleprofits,alongwithsome120,000inrestrictedstockshares;O’Learyreturned$1.4million.60

ButCongresshasbeenmovingintheoppositedirection.Tworecentlaws—theDodd-FrankWallStreetReformandConsumerProtectionActof2010and2013’sJumpstartOurBusinessStartupsAct(theJOBSAct)—havelargelyservedtoweakenSOX.Dodd-Frankexemptedpubliccompanieswitha“publicfloat”below$75million,therebyremoving42%ofpubliccompanies,accordingtofigurescitedbytheCouncilofInstitutionalInvestorsandCenterforAuditQualityinajointletterlastNovember.61TheletterimploredboththechairmanandrankingmembersoftheHouseFinancialServicesCommitteetonotfurtherreducesafeguards,tonoavail.Similarly,abroadrangeofinvestor-protectiongroupsandregulatorshaveexpressedalarmthattheJOBSAct,signedintolawbyPresidentBarackObamainearlyApril,“guts”SOX.Amongotherthings,itexemptsnewlypublic“emerginggrowthcompanies”frommeetingSection404obligationsforfiveyearsfollowinganinitialpublicoffering.62

ProsandConsofImplementingtheSarbanes-OxleyActCriticsofSOXargueagainsttheimplementationandmaintenanceofthelawforthefollowingreasons:

1.Itistoocostly.OneestimatefromasurveybyFinancialExecutivesInternationalstatedthatfirmswith$5billioninrevenuecouldexpecttospendonaverage$4.7millionimplementingtheinternalcontrolsrequired,then$1.5millionannuallytomaintaincompliance.63Anaveragefirst-yearcostforcomplyingwithSection404oftheAct(i.e.,creatingreliableinternalfinancialcontrolsandhavingmanagementandanindependentauditorconfirmthereliability)wasestimatedat$4.36million.64Othersarguethatthecostsexceedthebenefits,especiallyforsmallfirms.“SmallercompaniesthatareauditedbytheBigFourwillhavetopayhigherauditfeeseveniftheyarenotsubjecttoSarbanes-OxleyastheadditionalauditrequirementsofSarbanes-Oxleycreepintotheirmethodologies.ManyprivatecompaniesandsmallerpubliccompaniesarerealizingthattheBigFourhavedesignedtheirauditstoservetheFortune500companiesandthatthismodelisslowandexpensive.”65


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2.Itimpactsnegativelyonafirm’sglobalcompetitiveness.Thisargumentisalsobasedonthecostsofkeepinginternaloperationscompliantwiththeact.Criticsarguethatothercompaniesaroundtheglobedonothavethisexpense,sowhyshouldU.S.publicfirms?

3.Governmentcostsalsoincreasetoregulatethelaw.4.CFOsareoverburdenedandpressuredbyhavingtoenforceandassumeaccountability

requiredbythelaw.5.CriticsclaimthatimplementingSOXrequirementsthroughoutanorganizationistoo

costlyandwastefulforsmallandmid-sizedfirmswishingtogopublic.6.SOXreducesthewillingnessofcorporationstotakerisks.7.Accrualaccountingisseenasbeingmore“expensive”underSOX,ascertainexpenses

likeR&Dmustbeexpensedwhenincurred,reducingcurrentearnings.Thismaymakeearningsmanagementamoreattractiveand“cheaper”optionformanagement.

8.SOXissometimesfaultedfornotpreventingthefinancialcrisisandthegreatrecessionof2008–2009,fromwhichtheU.S.economyhasyettorecover.66

PaulVolckerandArthurLevitt,twowidelyrespectedexpertspreviouslyfromtheSECandFederalReserverespectively,offeredthefollowingcounterclaimstosomeofthepreviouscriticisms:67

1.ThecostsofimplementingSOXareminimalcomparedtothecostsofnothavingit—recallthe$8trillioninstocklossesaloneduringthegreat“recession”andbankingcrisisof2008andthenearcollapseoftheglobaleconomy,notcountingthedamagedonetoemployeefamiliesandeffectsontheeconomyatlarge.

2.“CompanieshavebetterinternalcontrolenvironmentsasaresultofSarbanes-Oxley.Thiswillleadtomoreaccurateinformationbeingavailabletoinvestorswhoaremoreconfidentinmakinginvestingdecisions.Allparticipantsinfinancialreportinghaveincreasedresponsibilitiesandconsequencesfornotlivinguptothoseresponsibilities.”68

3.Thechangesrequiredtoimplementthislawaredifficult;however,arecentCorporateBoardMembermagazinesurveyfoundthatmorethan60%of153directorsofcorporateboardsofdirectorsbelievetheeffectofSOXhasbeenpositivefortheirfirms,andthatmorethan70%viewedthelawasalsopositivefortheirboards.69

4.Thedatadoesnotsupporttheargumentthatthislawpresentsacompetitivedisadvantagetoglobalfirms.TheNASDAQstockexchangeaddedsixinternationallistingsinthesecondquarterof2004.AsurveybyBroadgateCapitalAdvisorsandtheValueAlliancefoundthatonly8%of143foreigncompaniesthatissuestocksthattradeintheUnitedStatesclaimedthatSOXwouldcausethemtorethinkenteringtheU.S.market.70

5.IfacompanyusesSOXasareasontonotgopublic,thefirmshouldnotgopublicoruseinvestors’funds.U.S.marketsareamongthemostadmiredintheworldbecausetheyarethebestregulated.

6.FinancialofficerswhocomplainabouttherequirementsofSOXmayinfactbesufferingfromthelackofinternalcontrolstheyhadbefore.In2003,57companiesofallsizessaidtheyhadmaterialweaknessesintheircontrols,aftertheirauditors,whowerepaidtotestfinancial


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controls,wereterminated.Thesesameauditorsdecreasedtheirtestingofinternalcontrolsbecausetheyfacedpressurestocuttheirfees.

7.Requiringtopexecutivesandfinancialofficerstopersonallysignoffonandtakepersonalownershipofthebooksisaninitialdeterrentoffraudandimprovesorganizationalculture.

8.SOXhasresultedinimprovementsintheaccountingindustryinthewakeofthefallofformeraccountinggiantArthurAndersen,atthehandofthePublicCompanyAccountingOversightBoard.

9.Ernst&Young’sLesBrorsenseescreationofthePCAOBtopolicetheauditingprofession—coupledwithcorporategovernancerules’puttingapubliccompany’sboard-levelauditcommittee,ratherthancompanymanagement,inchargeoftheauditingprocess—as“thetoptwofundamentalchanges”broughtaboutbytheact.“It’sfairtosaythatthelargestsingleimpactofSarbanes-Oxleywastoend100yearsofself-regulation,”hesays.Relatedtothat,Brorsenadds,“Improvedcorporategovernanceisoneofthehallmarksofthelegislation.”71

ThecostsandbenefitsofimplementingSOXcontinuetobedebated.Still,VolckerandLevittarguethat,“Whiletherearedirectmoneycostsinvolvedincompliance,webelievethataninvestmentingoodcorporategovernance,professionalintegrity,andtransparencywillpaydividendsintheformofinvestorconfidence,moreefficientmarkets,andmoremarketparticipationforyearstocome.”72Certainlyguidelinesandspecificwaystosimplify,decreaseunnecessarycosts,andstreamlineimplementationofthislawmustbeaddressedascompaniesstrivetocompetelocally,nationally,andespeciallyglobally.

TheFederalSentencingGuidelinesforOrganizations:ComplianceIncentiveBeforethe2002SOX,the1991FederalSentencingGuidelinesforOrganizations(FSGO)werepassedtohelpfederaljudgessetandmitigatesentencesandfinesincompaniesthathadafew“badapples”whohadcommittedseriouscrimes.TheFSGOwerealsodesignedtoalleviatesentencesoncompaniesthathadethicsandcomplianceprograms.UndertheFSGO,acorporation(largeorsmall)receivesalightersentenceand/orfine—orperhapsnosentenceorprobation—ifconvictedofafederalcrime,providedthatthefirm’sethicsandcomplianceprogramswerejudgedtobe“effective.”TheFSGOchangedtheviewofcorporationsasentitiesthatwerelegallyliableandpunishableforcriminalactscommittedwithintheirboundariestotheviewofthecorporationasamoralagentresponsibleforthebehaviorofitsemployees.Asamoralagent,thecorporationcouldbeevaluatedandjudgedonhoweffectivetheleaders,culture,andethicstrainingprogramsweretowardpreventingmisconductandcrime.73

Companiesthatactedtopreventunethicalandcriminalactswould,undertheFSGO,begivenspecialconsiderationbyjudgeswhenbeingfinedorsentenced.Apointssystemwasestablishedtohelpmitigatethefineand/orsentenceifthecompanydisplayedthefollowingsevencriteria:


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1.Establishedstandardsandprocedurescapableofreducingthechancesofcriminalconduct.2.Appointedcomplianceofficer(s)tooverseeplans.3.Tookduecarenottodelegatesubstantialdiscretionaryauthoritytoindividualswhoarelikelytoengageincriminalconduct.

4.Establishedstepstoeffectivelycommunicatetheorganization’sstandardsandprocedurestoallemployees.

5.Tookstepstoensurecompliancethroughmonitoringandauditing.6.Employedconsistentdisciplinarymechanisms.7.Whenanoffensewasdetected,tookstepstopreventfutureoffenses,includingmodifyingthecomplianceplan,ifappropriate.74

TheFSGOhavebeenrevisedtoreflectthepost-Enroncorporateenvironment.Therevisionsaddspecificitytothe1991version,includetop-levelofficers’accountability,andattempttoincreasetheeffectivenessandintegrationofacompany’sethicsandcomplianceprogramswithitscultureandoperations.EdPetry,formerdirectoroftheEthicsOfficerAssociation(EOA),servedonthefederalcommitteethatrevisedtheFSGO.Petrysummarizedsomeoftheprominentrevisionsasfollows:75

•Complianceandethicsprograms(C&EP)arenowdescribedinastandaloneguideline.

•Theconnectionbetweeneffectivecomplianceandethicalconductisstressed.•Organizationsarerequiredto“promoteanorganizationalculturethatencouragesethicalconductandacommitmenttocompliancewiththelaw.”

In2010,theFSGOwererevisedagain.Themostnotablechangepromotedthepracticeofopeningadirectlineofcommunicationfromthechiefcomplianceofficer,orthosewith“operationalresponsibilityforthecomplianceandethicsprogram,”directlytothegoverningbodyonanyconcernsinvolvingactualorpotentialcriminalconduct.76SOXandtheRevisedFederalSentencingGuidelines(RFSGO)serveasconstraintsanddeterrentstoimmoralandcriminalcorporateconductthatultimatelyaffectsstakeholdersandstockholders.

Table4.2showsRFSGO.SOXisanattemptbytheU.S.federalgovernmenttoprovidestrictercomplianceguidelinesanddisciplinaryactionstocorporationsinthewakeofcorporatescandals.TheRFSGOaddincentivestocompaniestoself-regulatewhilefollowinglawsaimedatprotectingtheinterestsofshareholdersandstakeholders,includingthepublic.Inthefollowingsection,anoverviewoftherolelawsandcongressionalagenciesplayinprotectingthepublic,consumers,andotherstakeholdersisprovided.

Table4.2RevisedFederalSentencingGuidelinesforOrganizations(RFSGO)(2004)

1.Exerciseduediligencetopreventanddetectcriminalconduct.2.Promoteanorganizationalculturethatencouragesethicalconductandacommitmentto


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compliancewiththelaw.3.Theorganizationshallusereasonableeffortsnottoincludewithinthesubstantialauthoritypersonneloftheorganizationanyindividualwhomtheorganizationknew,orshouldhaveknownthroughtheexerciseofduediligence,hasengagedinillegalactivitiesorotherconductinconsistentwithaneffectivecomplianceandethicsprogram.4.(A)Theorganizationshalltakereasonablestepstocommunicateperiodicallyandinapracticalmanneritsstandardsandprocedures,andotheraspectsofthecomplianceandethicsprogram,totheindividualsreferredtoinsubdivision(B)byconductingeffectivetrainingprogramsandotherwisedisseminatinginformationappropriatetosuchindividuals’respectiverolesandresponsibilities.(B)Theindividualsreferredtoinsubdivision(A)arethemembersofthegoverningauthority,high-levelpersonnel,substantialauthoritypersonnel,theorganization’semployees,and,asappropriate,theorganization’sagents.

5.Theorganizationshalltakereasonablesteps:(A)toensurethattheorganization’scomplianceandethicsprogramisfollowed,includingmonitoringandauditingtodetectcriminalconduct;(B)toevaluateperiodicallytheeffectivenessoftheorganization’scomplianceandethicsprogram;(C)tohaveandpublicizeasystem,whichmayincludemechanismsthatallowforanonymityorconfidentiality,wherebytheorganization’semployeesandagentsmayreportorseekguidanceregardingpotentialoractualcriminalconductwithoutfearofretaliation.

6.Theorganization’scomplianceandethicsprogramshallbepromotedandenforcedconsistentlythroughouttheorganizationthrough(A)appropriateincentivestoperforminaccordancewiththecomplianceandethicsprogram;and(B)appropriatedisciplinarymeasuresforengagingincriminalconductandforfailingtotakereasonablestepstopreventordetectcriminalconduct.7.Aftercriminalconducthasbeendetected,theorganizationshalltakereasonablestepstorespondappropriatelytothecriminalconductandtopreventfurthersimilarcriminalconduct,includingmakinganynecessarymodificationstotheorganization’scomplianceandethicsprogram.

Source:2004FederalSentencingGuidelines,chapter8,partB:Remedyingharmfromcriminalconduct,andeffectivecomplianceandethicsprogramsexcerptedfrom§8B2.1.EffectiveComplianceandEthicsProgramofthe2004FederalSentencingGuidelines.http://www.ussc.gov/Guidelines/2004_guidelines/Manual/gl2004.pdf.

4.4TheRoleofLawandRegulatoryAgenciesandCorporateComplianceGovernmentatthefederal,state,andlocallevelsalsoregulatescorporationsthroughlaws,administrativeprocedures,enforcementagencies,andcourts.Regulationbythegovernmentisnecessaryinpartbecauseoffailuresinthefree-marketsystemdiscussedearlier.Thereare


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http://www.ussc.gov/Guidelines/2004_guidelines/Manual/gl2004.pdf

alsopowerimbalancesbetweencorporations,individualconsumers,andcitizens.Individualcitizensandgroupsinsocietyneedahigherauthoritytorepresentandprotecttheirinterestsandthepublicgood.77

Theroleoflawsandthelegalregulatorysystemgoverningbusinessservesfivepurposes:

1.Regulatecompetition.2.Protectconsumers.3.Promoteequityandsafety.4.Protectthenaturalenvironment.5.Ethicsandcomplianceprogramstodeterandprovideforenforcementagainstmisconduct.78

Thecorporatescandalsagainexemplifiedafailureofinternalcorporategovernanceandself-regulationbyallparties(internalandexternaltocorporations)involved.Individualleaders’greed,ineffectiveboards,investmentbanks,andfinancialcompaniesandtradersallconspiredwithEnronandothercompaniesinthescandalstocommitfraud,theft,anddeceit.Corporatescandalscannotbeinitiatedandsustainedwithoutthedirectorindirectassistanceand/ornegligencefromtheSEC,banks,investmenttradersandmanagers,media,WallStreet,federallegislators,andotherplayers.79Thesubprimelendingcrisisalsoshowedhowanentiresystemofstakeholdersinthefinancial,banking,creditandlendingsystem,andgovernmentcanbeinvolvedinacrisisthathasbeenattributedinlargepartto“predatorylending”practices.Aswiththecorporatescandals,inthesubprimecrisisoneasks,“Wherewerethefederal,state,andlocalgovernmentalandcongressionalregulators?”Still,thejusticesystemdidservesentencestoexecutivesinthecorporatescandals.StartingwithEnronandfollowedbyWorldCom,Qwest,Tyco,HealthSouth,andothers,morethan$7trillioninstockmarketlosseswereaccrued.TheselossesalsocostAmericanemployeesandfamiliesmorethan30%oftheirretirementsavings.80Aquicksummarywillillustratetheaftermathofsomeofthemajorscandals.

•EnronCorporation:FormerchairmanandCEOKenLaydiedbeforebeingtriedandsentenced.JeffreySkilling,aformerexecutive,wasfined$45millionandiscurrentlyservinga24-year,4-monthprisonsentenceattheFederalCorrectionalInstitutioninWaseca,Minnesota.81OnJune21,2013,Skillingsucceededingettinghisprisonsentencereducedby10yearsaspartofacourt-orderedreduction.Withcourtaction,victimsofSkilling’scrimeswillfinallyreceivemorethan$40millionthatheowesthem.82TheformerCFO,AndrewFastow,iscurrentlyservingasix-yearprisonsentenceattheFederalDetentionCenterinOakdale,Louisiana.Hiswife,formerEnronassistanttreasurerLeaFastow,wassentencedtooneyearinfederalprisonandoneyearofsupervisedreleaseinahalfwayhouse.83Sinceleavingprisonin2011andresuminglifewithhiswifeLeaandtwosonsinHouston,whereEnronwasbased,Fastowhaskeptalowprofile.Hereportedlynowworks9-to-5asadocument-reviewclerkatthelawfirmthatrepresentedhimincivillitigation.84

•WorldCom,Inc.:FormerCEOBernardEbberspleadednotguiltytofraudandconspiracychargesforallegedlyleadinganaccountingfraudestimatedatmorethan$11billion.A2002


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classactioncivillawsuitagainstEbbersandotherdefendantsresultedinasettlementworthover$6billiontobedistributedtoover830,000individuals.Ebbersiscurrentlyserving25yearsatafederalprisoninLouisiana.85ScottSullivan,formerCFO,pleadedguiltytofraudcharges,testifiedagainstEbbers,andreceivedafive-yearprisonsentence.SullivaniscurrentlyservinghissentenceatthefederalprisoninJessup,Georgia.86

•TycoInternationalLtd.:FormerCEODennisKozlowskiandCFOMarkSwartzwereaccusedofstealing$600millionfromthecompany.ANewYorkstatejudgedeclaredamistrialinthecasebecauseofpressureonajurymember.Kozlowskireceivedasentenceof81/3to25yearsinprison.BothKozlowskiandSwartzcouldbeeligibleforparoleaftersixyears,11months.KozlowskiiscurrentlyservingatleasteightyearsandfourmonthsattheMid-StateCorrectionalFacilityinMarcy,NewYork.Swartzwassentencedtoatleasteightyearsandfourmonthsofprisonandorderedtopay$72millioninfinesandrestitution.87OnSeptember23,2013,bothmenleftaminimum-securityprisoninHarlemforsteadyclericaljobsandovernightsinapartmentsfollowingtheirheadline-grabbing$134millioncorporatefraudconvictions.88

•AdelphiaCommunicationsCorporation:FounderJohnRigaswasconvictedandsentencedto12years.Atage88,Rigascouldbeaposterchildforinmateswhomightseekearlyreleasefromprisonbecauseofthehazardsofadvancedaging.HissonTimothyreceived17yearsforconspiracyandbankandsecuritiesfraud.Rigas’sothersonMichaelwasacquittedofconspiracycharges.89

•CreditSuisseFirstBoston:FrankQuattrone,aformerinvestmentbankingexecutivewhomademillionshelpingInternetcompaniesgopublicduringthedot-comboom,wasconvictedofobstructionofjusticeandsentencedto18months.Hisfirsttrialin2003endedinahungjury.QuattronenowrunsQatalystPartners,aSanFrancisco-basedinvestmentbankfocusedonadvisingtechnologycompaniesonmergersandacquisitions.TheUniversityofPennsylvaniahasreceiveda$15milliongifttoexaminetheU.S.criminaljusticesystemfromsomeonewhohashadsomeexperiencewithit:Quattronehimself.ThejusticecenterwillbehousedatthelawschooloftheIvyLeagueuniversityinPhiladelphia.90

•HealthSouthCorporation:FormerCEORichardScrushywasfederallychargedwithleadingamultibillion-dollarschemethatinflatedHealthSouthearningstoshowthecompanywasmeetingWallStreetforecasts.SixteenformerHealthSouthexecutiveswerechargedaspartofaconspiracytoinflatecompanyearnings.Scrushyistheonlyexecutivewhohasnotpleadedguiltyandisnotcooperatingwithinvestigators.Scrushywasacquittedinafederalcriminaltrialrelatedtothealleged$2.7billionfraud.AtaciviltrialinJeffersonCountyCircuitCourtin2009,however,ScrushywasfoundliablefortheaccountingfraudandorderedtopayHealthSouthnearly$2.9billionindamages.Inanunrelatedcase,in2006ScrushyandformerAlabamagovernorDonSiegelmanwereconvictedofbriberyandhonestservicesfraud.ProsecutorsallegedScrushyboughtaseatonahospitalregulatoryboardbyarranging$500,000indonationstoSiegelman’s1999campaigntoestablishastatelottery.Scrushy,whowasreleasedfromprisonin2012,recentlylosttheappealofthatconvictiontothe11thCircuitCourtofAppeals.HealthSouthassertsScrushyhasnotpaidhisdebttothe


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companyanditsshareholdersbecauseheowesthem$2.8billion,notcountingtherapidlymountingdailyinterest,accordingtoScrushy’sfiling.91

•MarthaStewart,founderofMarthaStewartLivingOmnimedia,wasconvictedofconspiracy,obstructionofjustice,andlyingaboutherpersonalsaleofImCloneSystemsshares.Shewasrefusedanewtrialonperjurychargesagainstagovernmentwitness.Stewartwassentencedtofivemonthsinprison.Herbroker,PeterBacanovic,wasfined$2,000.92

•SamuelD.Waksal,founderandformerCEOofImCloneSystems,wassentencedtosevenyearsinprisonforsecuritiesfraud,perjury,andothercrimeshecommittedwithImClonestocktradestohimself,hisfather,andhisdaughterattheendof2001.WaksalfoundedKadmonin2010asthesuccessortoImClone,thecompanythatdevelopedthecancerdrugErbituxandwasacquiredbyIndianapolis-basedLillyin2008.Hisnewcompanyisalsoworkingoncancermedicines,anddrugsforhepatitisC,inflammatorydisorders,andgeneticdiseases.It’sinthesamebuilding,alongManhattan’sEastRiver,asImClone.Despitethewell-knowntravails,ImClonewasabletobringaverysuccessfuldrugtomarketandthengetitselfacquired.ByWallStreetstandards,that’sasuccess.93

•QwestCommunicationsInternational,Inc.:Denverfederalprosecutorsdidnotwinaconvictionagainstfourformermid-levelexecutivesaccusedofschemingtodeceptivelybook$34millioninrevenueforthecompany.GrantGraham,formerCFOforQwest’sglobalbusinessunit;BryanTreadway,aformerassistantcontroller;ThomasHall,aformerseniorvicepresident;andJohnWalker,aformervicepresident,werefoundnotguiltyon11chargesofconspiracy,securitiesfraud,wirefraud,andmakingfalsestatementstoauditors.Hallreceivedprobationandpaida$5,000fine.94

•AmericanInternationalGroup(AIG):FormervicepresidentChristopherMiltonreceivedafour-yearsentencein2009forhisroleina$500millionfraudcase.Hewasconvictedofconspiracy,mailfraud,securitiesfraud,andmakingfalsestatementstotheSEC.95

•BernardL.MadoffInvestmentSecuritiesLLC:In2009,BernardMadoffwassentencedto150yearsinprisonforhiselaborateandlong-runningPonzischeme.Madoffpledguiltyto11countsoffinancialcrimes.96

•FannieMae:AsaresultoftheFannieMaefraudandthesubprimemortgagecrisis,LeibPinter,aformerexecutiveofOlympiaMortgageCorporation,wassentencedto97monthsinprisononchargesofconspiracytocommitwirefraud.Hewasorderedtopay$43millioninrestitution.InDecemberof2011,theSECchargedsixformertopexecutivesofFannieMaeandFreddieMacwithsecuritiesfraud.97

WhyRegulation?Althoughgovernmentallegislationandoversightofcorporationsisanimperfectsystem,onecanalwaysask:Wouldyouratherliveinasystemwheretheselawsandcontrolsdidnotexist?Itisalsoimportanttonotehere,asFigure4.2shows,thatlawsaredesignedtoprotectandpreventcrimeandharm,monopolies,andthenegative(“externalities”)effectsofcorporate


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activities(pollution,toxicwaste),andalsotopromotesocialandeconomicgrowth,development,andthehealth,careandwelfareofconsumersandthepublic.Lawsprovideabaseline,boundaries,andminimumstandardsfordistinguishingacceptablefromunacceptablebusinesspracticesandbehaviors.Values,motivations,beliefs,andincentivestodowhatisrightarealsonecessaryincorporations,astheyareinotherinstitutionsandsocietyingeneral.Thelegalandregulatorysystemisnecessaryinsocietyandbusinesstoestablishgroundrulesandboundariesfortransactions.Itisnot,however,sufficientalonetoaccomplishthistask.Thesecondobservationtokeepinmindinthisdiscussionisthatevenwithfederal,state,andlocallaws,governmentalregulatoryagenciesincontemporarycapitalistdemocraciesarepartofpoliticalsystems—wherelobbyistsandinterestgroupscompeteforresources,influence,andprogramsfortheirownends.Insuchsystems,thelegislativeandjudicialbranchesofgovernmentaredesignedtoprovidearbitrationandconflictresolutionwithlawenforcement.Thefollowingregulatoryagenciesserveeducationalaswellaslegalpurposesforcorporationsservingconsumersinthemarketplace.

LawsandU.S.RegulatoryAgenciesSomeofthemajorlawspromotingandprohibitingcorporatecompetitioninclude:

•ShermanAntitrustAct,1890:Prohibitsmonopolies,asthecaseofMicrosoftillustrates.

•ClaytonAct,1914:Prohibitspricediscrimination,exclusivity,activitiesrestrictingcompetition.

•FederalTradeCommission(FTC)Act,1914:Enforcesantitrustlawsandactivities.•ConsumerGoodPricingAct,1975:Prohibitspriceagreementsininterstatecommercebetweenmanufacturersandresellers.

•AntitrustImprovementsAct,1976:SupportsexistingantitrustlawsandempowersDepartmentofJusticeinvestigativeauthority.

•FTCImprovementsAct,1980:EmpowerstheFTCtoprohibitunfairindustryactivities.

•TrademarkCounterfeitingAct,1980:Givespenaltiesforpersonsviolatingcounterfeitlawsandregulations.

•DigitalMillenniumCopyrightAct,1998:Protectsdigitalcopyrightedmaterialsuchasmusicandmovies.

LawsProtectingConsumersConsumersrequireinformationandprotectionfromproductsthatmaybeunsafe,unreliable,andevendangerous,asChapter5shows.Whiletobacco(nowalso“smokeless”tobacco),alcohol,andmorerecentlycocaine,alongwithotherso-calleddangerousproductscontinuetobemarketed,consumerlawsandregulatoryagenciesthatyoumayhaveseenonlineorreadabouthavealonghistory:


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•PureFoodandDrugAct,1906:Prohibitsadulteration(ruining)andmislabelingonfoodanddrugsininterstatecommerce.

•FTCAct,1914:CreatestheFTCtogoverntradeandcompetitivepractices.•FederalFood,Drug,andCosmeticAct(FDCA),1938:AmendsthePureFoodandDrugActof1906toprotectconsumersfromadulteratedandmisbrandeditemsandchargedtheFoodandDrugAdministration(FDA)withthesafetyofpublicallymarketeddrugs.

•FederalHazardousSubstancesAct,1960:Controlslabelsonhazardoussubstancesofproductsusedinhouses.

•TruthandLendingAct,1960:Requiresfulldisclosureofcredittermstobuyers.•ConsumerProductSafetyAct,1972:Establishessafetystandardsandregulationsofconsumerproducts(createdtheConsumerProductSafetyCommission[CPSC]).

•FairCreditBillingAct,1974:Requiresaccurate,currentconsumercreditreports.•EqualCreditOpportunityAct(ECOA),1974:Prohibitscreditdiscriminationonthebasisofrace,gender,religion,age,maritalstatus,nationalorigin,orcolor.

•FairDebtCollectionPracticesAct,1978:Prohibitsabusivedebtcollectionpracticesandallowedconsumerstodisputeand/orvalidatedebtinformation.

•NutritionLabelingandEducationAct,1990:Requiresfoodlabelstoincludestandardnutritionalfacts.

•TelephoneConsumerProtectionAct,1991:Issuesprocedurestoavertundesiredtelephonesolicitations.

•Children’sOnlinePrivacyProtectionAct,1998:RequirestheFTCtomakerulestocollectonlineinformationfromchildrenunder13yearsold.

•Gramm-Leach-BlileyAct,1999:Allowscommercialbanks,investmentbanks,insurancecompanies,andsecuritiesfirmstoconsolidate.

•DoNotCallImplementation,2003:CoordinatestheFTCandtheFederalCommunicationsCommission(FCC)toprovideconsistentrulesontelemarketingpractices.

•FairandAccurateCreditTransactionsAct(FACT),2003:Requirescreditagenciestoprovideafreeannualcopyofcreditreportsandcreatedanationalsystemforidentitytheftfraudalert.

LawsProtectingtheEnvironmentMercuryfromChina,dustfromAfrica,smogfromMexico—allofitdriftsfreelyacrossU.S.bordersandcontaminatestheairmillionsofAmericansbreathe,accordingtorecentresearchfromHarvardUniversity,theUniversityofWashington,andmanyotherinstitutionswherescientistsarestudyingairpollution.Therearenoboundariesintheskytostopsuchpollution,noBorderPatrolagentstocaptureit.98

Theenvironmentisseenlessasaninexhaustiblefreesourceofcleanair,water,soil,andfood,andmoreasavaluedresourcethatrequiresprotection—globally,regionally,andlocally.Asthesampleofenvironmentallawsbelowindicates,theenvironmentconstitutessourcesof


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human,food,vegetation,andanimallife.

•FederalInsecticide,Fungicide,andRodenticideAct(FIFRA),1947:Regulatedtheuseofpesticidesandherbicides.The1996amendmentsfacilitateregistrationofpesticidesforspecial(so-calledminor)uses,reauthorizecollectionoffeestosupportreregistration,andrequirecoordinationofregulationsimplementingFIFRAandtheFDCA.99

•CleanAirAct,1970:Designatesair-qualitystandards;stateimplementationplansare,however,requiredforenactmentofpoliciesunderthisAct.In1990severalprogressiveandcreativenewthemeswereembodiedinamendmentstotheAct,themesnecessaryforeffectivelyachievingtheair-qualitygoalsandregulatoryreformexpectedfromthesefarreachingamendments.100ThisAct:

Encouragestheuseofmarket-basedprinciplesandotherinnovativeapproaches,likeperformance-basedstandardsandemissionbankingandtrading.ProvidesaframeworkfromwhichalternativecleanfuelswillbeusedbysettingstandardsinthefleetandCaliforniapilotprogramthatcanbemetbythemostcost-effectivecombinationoffuelsandtechnology.Promotestheuseofcleanlow-sulfurcoalandnaturalgas,aswellasinnovativetechnologiestocleanhigh-sulfurcoalthroughtheacid-rainprogram.Reducesenoughenergywasteandcreatesenoughofamarketforcleanfuelsderivedfromgrainandnaturalgastocutdependencyonoilimportsby1millionbarrels/day.Promotesenergyconservationthroughanacid-rainprogramthatgivesutilitiesflexibilitytoobtainneededemissionreductionsthroughprogramsthatencouragecustomerstoconserveenergy.

•NationalEnvironmentalAct,1970:EstablishespolicygoalsforfederalagenciesandenactstheCouncilonEnvironmentalQualitytomonitorpolicies.Amendedin1986.

•FederalWaterPollutionControlAct,1972:Prevents,reduces,andeliminateswaterpollution.Amendedin1990.

•MarineProtection,Research,andSanctuariesAct,1972:Regulatedthedumpingofmaterialsintotheocean.Amendedin1992.

•NoisePollutionAct,1972:Controlsnoiseemissionofmanufacturedproducts.•EndangeredSpeciesAct,1973:Providesaconservationprogramforthreatenedandendangeredplantsandanimalsandtheirhabitats.

•SafeDrinkingWaterAct,1974:ProtectsthequalityofdrinkingwaterintheUnitedStates;setssafetystandardsforwaterpurityandrequiresownersandoperatorsofpublicwatertocomplywithstandards.

•ToxicSubstancesAct,1976:Requirestestingofcertainchemicalsubstances;restrictsuseofcertainsubstances.Amendedin1992.

•OilPollutionAct,1990:Establishedpenaltiesforoilspillsanddamage.•FoodQualityProtectionAct,1996:Requiresanewsafetystandardthatmustbeappliedtoallpesticidesusedonfoods(reasonablecertaintyofnoharm).


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Otherlawsregardingtheenvironment,consumers,equityanddiscriminationarediscussedinChapter7.Takentogether,thissampleoflawsaimedatprotectingstakeholders,thepublic,andthesysteminwhichbusinessisconductedindicatesthecomplexityoftransactions,responsibilities,andnumberofstakeholderswithwhichcorporationsdobusiness.Businessethicsandsocialresponsibilitycanarguablybeseennotasaluxuryand/ordichotomy,butasanecessityinprovidingforandprotectingthecommongood.Thispointshouldbecomeevenmoreevidentintheconcludingsectionofthischapter,whichillustratesclassiccasesofcorporatecrisesinwhichstakeholderrelationshipswerenotwell-managed.

4.5ManagingExternalIssuesandCrises:LessonsfromthePast(BacktotheFuture?)Companieshavemadeseriousmistakesastheresultofpoorself-regulation.Asseveralcontemporarycorporatecrisesandnow-classicenvironmentalandproduct-andconsumer-relatedcrisesillustrate,corporationshaverespondedandreactedslowlyandmanytimesinsensitivelytocustomersandotherstakeholders.TheInternetmaydecreasethetimeexecutiveshavetorespondtopotentialandactualcrises.

Weconcludethischapterbyreviewingsomeofthemajorcrisesfromthe1970stothepresent,sinceseveraloftheseareonlynowbeingresolved.Thesecasesalsoservetoremindcorporateleadersandthepublicthatthereisabalancebetweenlegalregulationandcorporateself-regulation.Whencorporationsfailtoregulatethemselvesandtoprovidejustandfaircorrectiveactionstotheirfailures,governmentassistanceisneeded.

WenotedinChapter3thatissuesandcrisismanagementshouldbepartofacompany’smanagementstrategyandplanningprocess.Failuretoeffectivelyanticipateandrespondtoseriousissuesthateruptintocriseshavebeenasdamagingtocompaniesasthecrisesthemselves.PriortotheBPDeepwaterHorizonoilrigexplosionandspill,theExxonValdezoilspillwasbiggestU.S.environmentaldisaster.TheManvilleCorporation’sasbestoscrisisisanother,almostforgottendisaster,thatisalsosummarizedinthefeatureboxesonthefollowingpages.AsthephilosopherGeorgeSantayanaisnotedforsaying,“Thosewhodonotrememberthepastarecondemnedtorepeatit.”Asampleofotherclassiccrisesincludesthefollowing:

•InJune2001,KatsuhikoKawasoe,MitsubishiMotorCompany’spresident,apologizedforthatfirm’s20-yearcover-upofconsumersafetycomplaints.(Thecompanyalsoagreedin1998topay$34milliontosettle300sexualharassmentlawsuitsfiledbywomeninitsNormal,Illinois,plant.Thisisoneofthelargestsexual-harassmentsettlementsinU.S.history.)

•Bytheendof2001,theAmericanHomeProductsCorporationpaidmorethan$11.2billiontosettleabout50,000consumerlawsuitsrelatedtothediet-drugcombinationoffenfluramineandphentermine,commonlyknownas“fen-phen.”Inaddition,thecompanyputaside$1billiontocoverfuturemedicalcheckupsforformerfen-phenusersand$2.35billiontosettleindividualsuits.


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•Between1971and1974,morethan5,000productliabilitylawsuitswerefiledbywomenwhohadsufferedseveregynecologicaldamagefromA.H.RobinsCompany’sDalkonShield,anintrauterinecontraceptivedevice.Althoughthecompanyneverrecalleditsproduct,itpaidmorethan$314milliontosettle8,300lawsuits.Italsoestablisheda$1.75billiontrusttosettleongoingclaims.Thefirmavoideditsresponsibilitytowarditscustomersbynotconsideringarecallfornineyearsaftertheproblemwasknown.

•Procter&Gamble’sRelytamponwaspulledfromthemarketin1980after25deathswereallegedlyassociatedwithtoxicshocksyndromecausedbytamponuse.

•Firestone’sproblemsfirstcametolightin1978,whentheCenterforAutoSafetysaidithadreportsthatFirestone’ssteel-beltedradialTPC500tirewasresponsiblefor15deathsand12injuries.InOctober1978,afterattackingthepublicitythisproductreceived,Firestoneexecutivesrecalled10millionofthe500-seriestires.Firestonerecentlypaid$7.5millioninadditionto$350,000tosettlethefirstcaseintheBridgestone/FirestoneFordExplorercrisis.Twohundredinjuryanddeathlawsuitshavebeensettledsincetherecall,anditisestimatedthatitwillcost$50milliontosettlethelawsuits.

•AfederalbankruptcyjudgeapprovedDowCorningCorporation’s$4.5billionreorganizationplan,with$3.2billiontobeusedtosettleclaimsfromrecipientsofthecompany’ssiliconegelbreastimplantsandtheother$1.3billiontobepaidtoitscommercialcreditors.Ajuryhadalreadyawarded$7.3milliontoonewomanwhoseimplantburst,causingherillness.Thecompanyisallegedtohaverushedtheproducttomarketin1975withoutcompletingpropersafetytestsandtohavemisledplasticsurgeonsaboutthepotentialforsiliconetoleakoutofthesurgicallyimplanteddevices.Morethan600,000implantsweresubsequentlyperformed.

JohnsManvilleCorporationAsbestosLegacy:StillPaying,2013

“They’llbefollowinginourfootsteps,”saidRobertA.Falise,chairmanoftheManvillePersonalInjurySettlementTrust,whichwascreatedbythebankruptcycourttoensureasteadysourceofmoneytopayclaimsfiledagainstJohnsManvilleCorporation(JM)byworkersexposedtoasbestosintheirworkplaces.Thecompanywillberespondingtooutstandingclaimsbyasbestosvictimsandtheirfamiliesforseveraldecades.Infact,“asofthefirstquarterof2012,thetrusthadpaid773,990claimsintheamountofapproximately$4.3billion,andthetrustexpectstoreceivemoreclaims.”

InJune2000,thecompanywassoldtoWarrenBuffettfor$1.9billionincashandtheassumptionof$300millionindebt.Theasbestos-relatedtrust,createdtopayclaimants,received$1.5billion.AsofMarch2001,thetrusthadpaidmorethan$2.5billionto


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350,000beneficiaries.Therearestillmorethanahalfmillionclaimantsandanotherhalfmillionexpectedtofile.Lookingback,reviewsofJM’ssocialresponsibilitymanagementofthecomplexwebofissuessurroundingitsasbestosproductionaremixed.

Asbestosis,mesothelioma,andlungcancer—alllife-threateningdiseases—shareacommoncause:inhalationofmicroscopicparticlesofasbestosoveranextendedperiodoftime.Thelinkbetweenthesediseasesandenoughinhaledasbestosparticlesisamedicalfact.JMisamultinationalminingandforestproductmanufacturer,anditwasaleadingcommercialproducerofasbestos.AsofMarch1977,271asbestos-relateddamagessuitswerefiledagainstthefirmbyworkers.Thevictimsclaimedthecompanydidnotwarnthemofthelife-threateningdangersofasbestos.Since1968,thecompanyhaspaidmorethan$2.5billioninsuchclaims.Andsincethe1950s,ithasfacedhundredsoflawsuitsfromworkers:theirestimatedvalueismorethan$1billion.By1982,JMwasfacingmorethan500newasbestoslawsuitsfiledeachmonth.Consequently,inAugust1982,thecompanyfiledforChapter11bankruptcyinordertoreorganizeandremainsolventinthefaceofthelawsuits;thefirmwaslosingmorethanhalfthecasesthatreachedtrial.Thereorganizationwasapproved,anda$2.5billiontrustfundwassetuptopayasbestosclaimants.Shareholderssurrenderedhalftheirvalueinstock,anditwasagreedthatprojectedearningsover25yearswouldbereducedtosupportthetrust.

JMdevisedasettlementthatgavetheManvillePersonalInjurySettlementTrustenoughcashtocontinuemeetingclaimsfiledbyasbestosvictims.Underthesettlement,thebuildingproductsdivisionstateditwouldgivethetrust20%ofManville’sstockandwouldpayaspecial$772milliondividendinexchangeforthetrust’sreleasingitsrighttoreceive20%ofManville’sprofits.Afterthetransaction,thetrustwouldown80%ofManvilleandhave$1.2billionincashandmarketablesecurities,plus$2.3billioninassets.ThistransactionenabledJMtorectifyitsbalancesheet.Also,itchangeditsnametoSchullerCorporation.

AfterJMspentseveralyearsoperatingunderChapter11oftheU.S.BankruptcyCode,thecompanyemergedwith$850millionincash,50%ofitscommonstock,aclaimon20%ofthecompany’sconsolidatedprofits,andbondswithafacevalueof$1.3billion.Thetrustisexpectedtopay10%ofanestimated$18billioninpresentandfutureasbestosclaimsto275,000victimswhoalreadyhavefiledclaims.

JM’ssocialresponsibilitytowarditsworkers,thelitigants,thecommunitiesitserves,andsocietyhas,atbest,beenuneven.Since1972,thecompanyhasbeenactiveandcooperativewiththeU.S.DepartmentofLaborandtheAmericanFederationofLaborandCongressofIndustrialOrganizations(AFL–CIO)indevelopingstandardstoprotectasbestosworkers.However,Dr.KennethSmith—themedicaldirectorofoneofthefirm’splantsinCanada—refusedinthe1970stoinformJMworkersthattheyhadasbestosis.

Thereisalsothecomplicationandconfusionofevolvingandchanginglegislationonasbestos.TheU.S.SupremeCourt,asstakeholder,hasnottakenastandonwhoisliable


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inthesesituations:Areinsurancefirmsliablewhenworkersareinitiallyexposedtoasbestosandlaterdevelopcancer,oraretheyliable20yearslater?Also,right-to-knowlawsarenotdefinitiveinstatelegislatures.DoesthatleaveJMandothercorporationsliableforthegovernment’slegalindecision?

Oftheoriginal16,500personalinjuryplaintiffs,2,000havediedsincethereorganizationin1982.WithWarrenBuffet’spurchaseofthecompanyandtheasbestostrustsolidified,themanagementofthisissueforthecompanyisover.

Notethatcompaniescontinuetosettleasbestoslawsuits.TheMesotheliomaReporterwebsite(www.mesotheliomareporter.org)tracksandreportsthesesettlements.Forexample,arecentsettlementwasreportedforPfizersubsidiaryQuigleyCo.andotherswhoweredefendantsinatrial“thatallegedthattheycausedpersonalinjurybyexposuretoasbestos.Theasbestossometimescausedmesothelioma.”ThatwebsitereportedABCNewsasstatingthat“Pfizerwillestablishatrustforthepaymentofpendingclaimsaswellasanyfutureclaims.Itwillcontribute$405milliontothetrustover40yearsthroughanote,andabout$100millionininsurance.Pfizerwillalsoforgivea$30millionloantoQuigley.”Aswithothercorporatecrises,theaftermathcontinues.

SOURCES

Gross,D.(April29,2001).Recoverylessonsfromanindustrialphoenix.NewYorkTimes.http://www.nytimes.com/2001/04/29/business/business-recovery-lessons-from-an-industrial-phoenix.html.Updatescanalsobefoundonthefollowingsites:http://www.asbestos.com,http://www.claimsres.com/andhttp://www.law360.com/companies/johns-manville-corp.

JohnsMansville(n.d.).Asbestos.com.http://www.asbestos.com/companies/johns-manville.php,accessedOctober25,2013.

Pfizertopay$430milliontosettleasbestosclaims.(September3,2004).MesotheliomaReporter.

Tejada,C.(1996).Manvillesettlementgivestrustenoughcashforasbestosclaims.WallStreetJournal.

QUESTIONSFORDISCUSSION

1.Shouldasbestosvictims’claimsbetheliabilityofJohnsManvilleorofthedecisionmakerswhoauthorizedtheworkpoliciesandorders?

2.Whowasoristoblamefortheasbestos-relateddeathsandinjuriesinthiscase?3.IsthedeclarationofChapter11bankruptcyandthecreationofatrustthebestoronlysolutioninthiscase?Whowinsandwholoseswiththistypeofsettlement?Why?

4.Whatethicalprinciple(s)didJohnsManville’sownersandofficersuseregardingthistypeofsettlement?Whatprinciple(s)doyoubelievetheyshouldhaveused?Explain.


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http://www.mesotheliomareporter.org

http://www.nytimes.com/2001/04/29/business/business-recovery-lessons-from-an-industrial-phoenix.html

http://www.asbestos.com

http://www.claimsres.com/

http://www.law360.com/companies/johns-manville-corp

http://www.asbestos.com/companies/johns-manville.php

TheExxonValdez,SecondWorstOilSpillinU.S.History:Twenty-FiveYearsLater,ExxonStillHasn’tPaidforLong-TermEnvironmentalDamages

“AyearaftertheExxonValdezrippedopenitsbottomonBlighReef[offtheAlaskancoast]anddumped11milliongallonsofcrudeoil,thenation’sworstoilspillisnotover.Likemajorspillsinthepast,thisunnaturaldisastersparkedafrenzyofreactions:congressionalhearings,stateandfederallegislativeproposalsfornewpreventivemeasures,dozensofstudies,andinnumerablelawsuits.”ThegroundingoftheoiltankeronMarch24,1989,spreadoilovermorethan700miles.Oilcovered1,300milesofcoastlineandkilled250,000birds,2,800seaotters,300seals,250baldeagles,andbillionsofsalmonandherringeggs,accordingtotheExxonValdezOilSpillTrusteeCouncil,whichmanagesExxonsettlementmoney.SoundssomewhatliketheBPoildisaster,doesn’tit?

Fastforwardto2013,andnotethefollowing:“Today,governmentstudiesconfirmthatmostofthepopulationsandhabitatsinjuredbythespillhavenotfullyrecovered,andsomearenotrecoveringatall.Despitethis,thegovernment’sReopenerclaimfocusessolelyonremediatingintertidaloil.GovernmentstudiesreportthousandsofgallonsofExxonValdezoilstillinbeachestoday,thatthisoilisstill‘nearlyastoxicasitwasthefirstfewweeksafterthespill,’that‘theremainingoilwilltakedecadesandpossiblycenturiestodisappearentirely,’andthattestsonnearshoreanimals‘indicateacontinuingexposuretooil.’”

Exxon’sfailuretopaythe$5billioninassesseddamagesisnoteworthy.“After14yearsofappeals,in2008theU.S.SupremeCourt(invokingapeculiar1818maritimeruling)reducedthepunitivejudgmenttoonly$507million,withtheappealscourtaddinganother$470millionininterest....AlthoughExxonhasnotpaidtheclaim,thegovernmentspillaccounttodayhas$195million,muchofwhichcanbeusedtofundbeachremediationwork,inexpectationthatthiswillbereimbursedifandwhenExxonfinallypaystheclaim.”

AgrandjuryindictedExxoninFebruary1990.Atthattime,thefirmfacedfinestotalingmorethan$600millionifconvictedonthefelonycounts.Morethan150lawsuitsand30,000damageclaimswerereportedlyfiledagainstExxon,andmosthadnotbeensettledbyJuly1991,whenExxonmadeasecretagreementwithsevenSeattlefishprocessors.Underthatarrangement,Exxonagreedtopay$70milliontosettletheprocessors’oil-spillclaimsagainstExxon.However,inreturnfortherelativelyquicksettlementofthoseclaims,theprocessorsagreedtoreturntoExxonmostofanypunitivedamagestheymightbeawardedinlaterExxonspill-relatedcases.

Exxonpaidabout$300millionindamagesclaimsinthefirstfewyearsafterthespill.However,“lawyersforpeoplewhohadbeenharmedcalledthatameredown


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paymentonlossesthataveragedmorethan$200,000perfishermanfrom1990to1994.”Twenty-fiveyearsafterthedisaster,“theU.S.JusticeDepartmentandStateofAlaskasaytheyarestillwaitingforlongoverduescientificstudiesbeforecollectingafinal$92millionclaimtoimplementtherecoveryplanforunanticipatedharmtofish,wildlifeandhabitat.”

ThechargethatthecaptainoftheExxonValdez,JosephHazelwood,hadablood-alcoholcontentabove0.04%wasdropped,buthewasconvictedofnegligentlydischargingoilandorderedtopay$50,000asrestitutiontothestateofAlaskaandtoserve1,000hourscleaningupthebeachesoverfiveyears.Exxonexecutivesandstockholdershavebeenembroiledwithcourts,environmentalgroups,themedia,andpublicgroupsoverthecrisis.Exxonhaspaid$300milliontodateinnonpunitivedamagesto10,000commercialfishermen,businessowners,andnativeAlaskanvillages.

In1996,agrandjuryorderedExxontopay$5billioninpunitivedamagestothevictimsofthe1989oilspill.AtthetimethatthefishprocessorshadenteredthesecretagreementwithExxon,theydidnotknowtheAlaskanjurywouldslapthecompanywiththe$5billionpunitivedamagesaward.Oneofthejudgesclaimedthathadthejuryknownaboutthissecretagreement,itwouldhavechargedExxonevenmorepunitivedamages.Asof2001,Exxonhadnotpaidanyofthesedamages.ItisalsoestimatedthatwithExxon’sreportedrateofreturnonitsinvestments,itmakes$800millioneveryyearonthe$5billionitdoesnotpay.(Thecompanywouldhavemadebackthe$5billionitrefusedtopaywithaccruedinterestby2002.)BrianO’Neill,theMinneapolislawyerwhorepresents60,000plaintiffsinthesuitagainstExxon,stated,“Ihavehadthousandsofclientsthathavegonebankrupt,gotdivorced,died,orbeendownontheirfinancialluck”whilewaitingforthesettlement.Lookingbackonthiscase,theNovember2001federalappealscourtrulingopenedthewayforajudgetoreducethe$5billionpunitiveverdict.(However,the1994juryawardof$287milliontocompensatecommercialfishermenwasnotreduced.)

In2004,theEnvironmentalNewsNetwork(ENN)reportedthatlocalresidentsandseveralgovernmentscientistsarestillatoddsasto“whetherExxonMobilCorporationshouldbeforcedtopayanadditionalcivilpenaltyforthespill....Thelandmark$900millioncivilsettlementExxonsignedin1991toresolvefederalandstateenvironmentalclaimsincludeda$100millionre-openerclausefordamagesthat‘couldnotreasonablyhavebeenknown’oranticipated.”

EPILOGUE

OnJune25,2008,theSupremeCourtreducedthepreviouslydetermined$5billionpunitivedamagesawardagainstExxonMobilto$507.5million.SinceJusticeSamuelA.AlitoJr.ownsExxonstock,hedidnotparticipateinthefinaldecision.WithregardtowhetherExxonshouldbeheldaccountableforCaptainHazelwood’sirresponsibilityinthecase,thecourtsplit4-to-4.“Theeffectofthesplitwastoleaveintacttherulingofthelowercourt,theUnitedStatesCourtofAppealsfortheNinthCircuit,whichsaidExxon


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mightbeheldresponsible.”JusticeDavidSouterhintedinhislastparagraphonbehalfofthe5-to-3majoritythat

thisdecisionreflectedtherulehewasannouncingforfederalmaritimecasesintheExxoncase,“arulethatgenerallydictatesamaximum1:1ratiobetweenapunitivedamagesawardandajury’scompensatoryaward.”Ineffect,byreducingtheExxonValdezverdictto$500million,thecourtseta1:1ratiobypassingthe$507.5millioncompensatorydamageportionofthejury’sawardinthiscase.Stakeholdersweredividedontheoutcomeofthecase.ItshouldberecalledthatExxonhadpreviouslypaidover$2billionduringthepast19yearsonenvironmentalcleanupand$1.4billioninfinesandcompensationtothousandsoffishermenandcanneryworkers.

ExxonchairmanandCEORexTillersonrecentlystatedthat“Wehaveworkedhardovermanyyearstoaddresstheimpactsofthespillandtopreventsuchaccidentsfromhappeninginourcompanyagain.”Adifferentreactioncamefromthehard-hitAlaskantownofCordova,wherefishermenandlocalbusinessessufferedbankruptciesandevensuicidesinthelongaftermathofthecrises:“Thepunitivedamagesclaim‘wasaboutpunishing[Exxon]sotheywouldn’tdoitsomewhereelse,’saidSylviaLange,whoownsahotelandbarfrequentedbyfishermen.‘Wewerethemousethatroared,butwegotsquished.’”AsaresultoftheJune2008SupremeCourtdecision,fishermenandothershurtbythedisasterwillreceiveabout$15,000insteadof$75,000.Notethatin2007,ExxonMobilearnedarecord$40.6billioninprofits.Thecompanycouldpaythepunitiveawardwithfourdaysprofits.

LaRueToneHosmer,anotedethicist,stated,“ThemostbasiclessoninaccidentpreventionthatcanbedrawnfromthewreckoftheExxonValdezisthatmanagementismuchmorethanjustlookingatrevenues,costs,andprofits.Managementrequirestheimaginationtounderstandthefullmixtureofpotentialbenefitsandharmsgeneratedbytheoperationsofthefirm,theempathytoconsiderthefullrangeoflegitimateinterestsrepresentedbytheconstituenciesofthefirm,andthecouragetoactwhensomeoftheharmsarenotcertainandmanyoftheconstituenciesarenotpowerful.Thelackofimagination,empathy,andcourageatthemostseniorlevelsofthecompanywasthetruecauseofthewreckoftheExxonValdez.”KileyKroh,deputyeditoroftheClimateProgressblog,statedthat“CriticsofthedelaysaytheongoingstruggletoholdExxonaccountableforunanticipatedenvironmentaldamagesinAlaskaoffersclearlessonstobelearnedregardingthecontinuingprocessofdeterminingBP’slong-termliabilityfortheDeepwaterHorizoncatastrophe,aspillthatwas20timeslargerthanExxonValdez.”

SOURCES

Allen,S.(March7,1999).Deepproblems10yearsafterExxonValdez/WorstoilspillinUShaslingeringeffectsforAlaska,industries.WallStreetJournal,A1.

Dumanoski,D.(April2,1990).Oneyearlater—ThelessonsofValdez.BostonGlobe,29.

ExxonValdezfineexcessive,courtsays.(November8,2001).USAToday,6A.Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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Hosmer,L.(1998).LessonsfromthewreckoftheExxonValdez:Theneedforimagination,empathy,andcourage.BusinessEthicsQuarterly,122.

Kroh,K.(2013).25yearsafterExxonValdezoilspill,companystillhasn’tpaidforlong-termenvironmentaldamages.ThinkProgress.org.http://thinkprogress.org/climate/2013/07/15/2301451/,accessedJanuary8,2014.

Liptak,A.(June26,2008).DamagescutagainstExxoninValdezcase.NYTimes.com.http://www.nytimes.com/2008/06/26/washington/26punitive.html?_r=0,accessedJanuary8,2014.

McCoy,Charles.(June13,1996).Exxon’ssecretValdezdealsangerjudge.WallStreetJournal,A3.

Parloff,R.(June25,2008).SupremeCourtslashes$2.5BExxonValdezaward.Fortune.com.http://legalpad.blogs.fortune.cnn.com/2008/06/25/supreme-court-slashes-25b-exxon-valdez-award/,accessed2008.

Rawkins,R.(February28,1990).U.S.indictsExxoninoilspill.MiamiHerald,5.Savage,D.(June26,2008).PunitivedamagesagainstExxoninoilspillcaseslashedby80%.LATimes.com.http://www.latimes.com/news/nationworld/nation/la-na-valdez26-2008jun26,0,3673626.

Steiner,R.(August26,2013).Exxonspillcasestillunresolved.JuneauEmpire.com.http://juneauempire.com/opinion/2013-08-26/exxon-spill-case-still-unresolved#.UmvoE_mTySo,accessedJanuary8,2014.Alsoseehttp://www.adn.com/2013/09/16/3078683/compass-exxon-valdez-spill-is.html#storylink=cpy.

QUESTIONSFORDISCUSSION

1.Whowasatfaultinthiscaseandwhy?2.ShouldCaptainHazelwoodhavebeenconvictedofcriminaldrunkennessinthiscase?Ifso,howwouldthathavechangedtheoutcomeofthesettlement?Ifnot,why?

3.DidCaptainHazelwoodsettlehis“debt”inthiscasebyagreeingtoserve1,000hoursincleanuptimeinAlaska?Explain.

4.DescribeExxon’sethicstowardthisdisasterbasedonwhatithadpaidovertheyearsuptotheJune15,2008,SupremeCourtdecision.

5.Howmuchshouldthe33,000commercialfishermen,AlaskaNativepeoples,landowners,businesses,andlocalgovernmentshavebeenpaidascompensation,andwhy?

6.RespondtoHosmer’sstatement.Doyoubelievethissentimentappliestoallresponsibilitiesofseniorexecutivesincorporations;thatis,dotheyneedtoshowimagination,empathy,andcouragetowardalltheirconstituencies?Explainyouranswer.


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http://thinkprogress.org/climate/2013/07/15/2301451/

http://www.nytimes.com/2008/06/26/washington/26punitive.html?_r=0

http://legalpad.blogs.fortune.cnn.com/2008/06/25/supreme-court-slashes-25b-exxon-valdez-award/

http://www.latimes.com/news/nationworld/nation/la-na-valdez26-2008jun26,0,3673626

http://juneauempire.com/opinion/2013-08-26/exxon-spill-case-still-unresolved#.UmvoE_mTySo

http://www.adn.com/2013/09/16/3078683/compass-exxon-valdez-spill-is.html#storylink=cpy

ChapterSummaryManagingcorporatesocialresponsibility(CSR)fromthecorporateboardofdirectorstothemarketplacerequirescommitment,andsignificanttime,effort,andresourcesfromorganizations.Atstakeisacompany’sreputation,andevensurvival.Externalregulationisalsorequiredtohelpdefineguidelinesandpracticesforcompaniestoactresponsiblytowardtheirstakeholders,communities,andsociety.

Thecorporationassocialandeconomicstakeholderwaspresentedfromtheperspectivesofthesocialcontractandcovenantalethic.Corporatesocialresponsibilitywasalsodiscussedfromlegal,ethical,philanthropic,andpragmaticviewpoints.ManagingandbalancinglegalcompliancewithethicalmotivationwasillustratedbytheSarbanes-OxleyActandtheRevisedFederalSentencingGuidelinesforOrganizations.Asectiononlegalandregulatorylawsandcompliancepresentedthecomplexityofareasinwhichcorporationsmustnavigatewithfederal,state,andlocalagenciesbeforecreatinganddistributingtheirproductsandservices.Asummaryofrecentcorporatescandalswasgiventodemonstratetheneedforlegalcomplianceincorporations.Argumentswereofferedtoexplainthatlegalcompliancelegislationandprogramsalonearenecessarybutnotsufficientenoughtomotivateethicalandlegalbehaviorinorganizations.

Corporateresponsibilitytowardconsumerswaspresentedbyexplainingthesecorporateduties:(1)thedutytoinformconsumerstruthfully;(2)thedutynottomisrepresentorwithholdinformation;(3)thedutynottounreasonablyforceconsumerchoiceortakeundueadvantageofconsumersthroughfearorstress;and(4)thedutytotake“duecare”topreventanyforeseeableinjuries.Theuseofautilitarianethicwasdiscussedtoshowtheproblemsinholdingcorporationsaccountableforproductrisksandinjuriesbeyondtheircontrol.

Thefree-markettheoryofAdamSmithwassummarizedbywayofexplainingthemarketcontextgoverningtheexchangeofproducersandbuyers.Severallimitsofthefreemarketwereoffered:thatimperfectmarketsexist;thepowerbetweenbuyersandsellersisnotsymmetrical;andthelinebetweentellingthetruthandlyingaboutproductsisverythin.EconomistPaulSamuelson’s“mixedeconomy”wasintroducedtoofferamorebalancedviewoffree-markettheoryandoftheunrealisticdemandsoftenplacedoncorporationsinmarketingnewproducts.

Anoverviewoftwoclassicbusinessethicscases,JohnsManvilleCorporationandtheExxonValdezoilspill,werepresentedtoillustratehowlegalandregulatoryagenciesarepartofamuchbroaderstakeholdersysteminvolvingcommunitiesandgroupsinthemarketplace.Lawsandregulations,asmentionedearlier,arenecessarybutnotsufficientenoughforceswithwhichcorporateleadersmustadheretoinordertoactfairlytowardtheirconstituencieswhilebeingprofitable.

Questions1.Identifyacompanyororganizationinthemediaorwithwhichyouarefamiliarthatoperatesethically.Whatarethereasonsthiscompany/organizationisethical?(Youmayrefertotheleadership,management,products,orservicesoftheorganization.)


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2.DoyoubelievethattheSarbanes-OxleyActisnotneeded?Explainorofferadifferentargument.

3.Arethe2004RevisedFederalSentencingGuidelines,inyouropinion,helpfultoorganizationalleadersandboardsofdirectorsinpromotingmoreethicalbehavior?Explain.Whatotheractions,policies,orprocedureswouldyourecommend?

4.Whichofthecorporatecrisessummarizedattheendofthechapterwereyouunfamiliarwith?Doyoubelievethesecrisesrepresent“businessasusual”orseriousbreakdownsinacompany’ssystem?Why?

5.AfterreadingtheJohnsManvilleandExxonValdezsummaries,identifysomewaysthesecrisescouldhavebeen(1)avoidedand(2)managedmoreresponsiblyaftertheyoccurred.

6.Whatwasyourscoreonthe“RankYourOrganization’sReputation”quizinEthicalInsight4.3?Afterreadingpreviouschaptersinthisbook,howwouldyoudescribethe“ethics”ofyourorganization,university,orcollegetowarditscustomersandstakeholders?Explain.

7.DoyoubelievethecovenantalethicandsocialcontractviewsarerealisticforlargeorganizationslikeBankofAmerica,JPMorgan,ExxonMobil,andCitibank,orfederalagenciesliketheFTCandtheDepartmentofDefense?Whyorwhynot?Explain.

8.Whatisthefree-markettheoryofcorporateresponsibility,andwhataresomeoftheproblemsassociatedwiththisview?ComparethisviewwiththesocialcontractandstakeholderperspectivesofCSR.

9.Ifyouhadtoselecteitherthelegal/compliance(“stick”)approachorthevoluntary/ethicalcompliance(“carrot”)approachtowardrunningacorporation,whichwouldyouchoose,andwhy?Whatwouldbelikelyconsequences(positiveandnegative)ofyourchoice?Explain.

Exercises1.Inthischapter’sopeningcase,whydoyouthinkittooksuchalarge-scalesecuritybreachforTJXtostartaseriouscorporate“ethics”program?

2.OutlinesomestepsyouwouldrecommendforpreventingfuturecorporatescandalslikeEnron,WorldCom,andthesubprimelendingcrisisbasedonthecontentsofthischapter.

3.Ifyouwereconsultingwithalargecorporation’sexecutiveteamandwereaskedtotalkabouthowthatteamcouldthinkaboutasocialcontractincludingstakeholdermanagementreasoning,whatwouldyourecommend?Writedownyouradvice.

4.YouhavebeeninvitedasastudentwhohasstudiedbusinessethicstopresentacasetoaCEO,CFO,andethicsofficerofamid-sizefirmwantingtobeSarbanes-Oxleycompliant.Youhavebeenaskedtodiscussandhelpthemarguetheprosandconsofimplementingthislaw.Layoutyourapproachandarguments,andbereadytotellthemwhatyouwouldrecommendtheydoandwhy.

5.Alargecompanyhasinvitedyoutojoininadiscussionwiththeirlegalandhumanresourceofficersaboutintegratingethicsintoandbetweentheirdepartments.Theywantyourideas.UseFigure4.2andanyotherideasfromthisandpreviouschapterstooutlinewhatyouwouldcontribute.Writeupaparagraphtosharewithyourclass/group.


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6.Findarecentarticlediscussinganinnovativewayinwhichacorporationishelpingtheenvironment.Explainwhythemethodisinnovative,andwhetheryoubelievethemethodwillactuallyhelptheenvironmentorsimplyhelpthecompanypromoteitsimageasagoodcitizen.Usepartsofthischaptertoevaluateyouranswer.

Real-TimeEthicalDilemmaMyjobrequiresthatIlieeverydayIgotowork.IworkforaprivateinvestigationagencycalledXRT.MostoftheworkIdoinvolvesundercoveroperations,mobilesurveillances,andgroundworksearchestodeterminethewhereaboutsofmanufacturersthatproducecounterfeitmerchandise.

EachassignmentItakerequiressomedeceptiononmypart.RecentlyIhavebecomeveryconsciousofthefactthatIfrequentlyhavetolietoobtainconcreteevidenceforaclient.IsometimesdigmyselfsodeeplyintoaliethatInaturallytakeittothenextlevel,withouteveraccomplishingthecorepurposeoftheinvestigation.

Workingforaninvestigativeagencyengagesmeinassignmentsthatvaryonaday-to-daybasis.IchoosetoworkforXRTbecauseitisnotaroutine9-to-5deskjob.ButtocontinueworkingfortheagencymeansIwillconstantlybedevelopingnewuntruthfulstories.AndthelongerIdecidetostayatXRT,themoreinvolvedtheassignmentswillbe.ToleavewouldprobablyforcemeintoajobphotocopyingandfilingpaperworkonceIgraduatefromcollege.

RecentlyIwasgivenanassignmentwhichIbelievedwouldleadmetoentrapasubjecttoobtainevidenceforaclient.Thesubjecthadfiledfordisabilityonworkers’compensationafterbeinghitbyatruck.Becausethesubjectrefusedtopartakeinanystrenuousactivitybecauseoftheaccident,Iwasinstructedtofakeaflattireandvideotapethesubjectchangingitforme.AlthoughIdidnotfeelcomfortableengaginginthistypeofact,mysupervisorsassuredmethatitwasethicalpracticeandnotentrapment.Coworkersandothersupervisorsassuredmethatthiswasastandard“industrypractice,”andthatwewouldgooutofbusinessifwedidn’t“fudge”thefactsonceinawhile.Iwastold,“Doyouthinkeverybusinessdoesitsworkandmakesprofitsinapurelyethicalway?Getreal.Idon’tknowwhatthey’reteachingyouincollege,butthisistherealworld.”Itwaseitherdotheassignmentorfindmyselfonthestreet—inaneconomywithnojobs.

Questions1.Whatisthedilemmahere,orisn’tthereone?2.Whatwouldyouhavedoneinthewriter’ssituation?Explain.3.Reacttothecomment,“Doyouthinkeverybusinessdoesitsworkandmakesprofitsinapurelyethicalway?Getreal.Idon’tknowwhatthey’reteachingyouincollege,butthisistherealworld.”Doyouagreeordisagree?Why?

4.Describetheethicsofthiscompany.5.Compareandcontrastyourpersonalethicswiththecompanyethicsrevealedhere.


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Cases

Case9ConsciousCapitalism:WhatIsIt?WhyDoWeNeedIt?DoesItWork?

IntroductionConsciousCapitalism:LiberatingtheHeroicSpiritofBusiness(2013)isabest-sellingbookwrittenbyJohnMackey,CEOofWholeFoods,andRajendraSisodia,amanagementprofessoratBabsonCollege.Amajortenetofthebookstates,“Consciouscapitalismisanevolvingparadigmforbusinessthatsimultaneouslycreatesmultiplekindsofvalueandwell-beingforallstakeholders:financial,intellectual,physical,ecological,social,cultural,emotional,ethicalandevenspiritual.Thisnewoperatingsystemforbusinessisinfargreaterharmonywiththeethosofourtimesandtheessenceofourevolvingbeings.”Thefourcoretenetsunderlyingthebusinesspracticesofconsciouscapitalisminclude“higherpurposeandcorevalues,stakeholderintegration,consciousleadershipandconsciouscultureandmanagement.”Mackey’sWholeFoodsbusinessembodiestheseprinciples,asdoseveralotherselectedcompaniesthatthebookexemplifies.Thiscasepresentsthepurpose,goal,andneedforconsciouscapitalismthat,sincethepublicationofthebook,hasnowbecomeamovement.

WhyConsciousCapitalism?MackeyandSisodia’sbookisnotthefirsttoinitiateachangeinthewaysbusinessesshouldchange.InhisreviewofConsciousCapitalism,AlanMurraystatesthat“Capitalistguiltisnearlyasoldascapitalismitself,butithasseenaresurgencesincethefinancialcrisesof2007.”BillGatescalledforanewsystemof“creativecapitalism”in2008ataWorldEconomicForuminDavos,Switzerland.Hewasupsetthatpharmaceuticalspaidmoreattentiontobaldnessthancuringglobaldiseaseslikemalaria.MichaelPorter,aHarvardBusinessSchoolprofessor,in2011calledfor“shared-valuecapitalism,”arguingthatbusinessleadersweretoooccupiedbyshort-termfinancialprofits,moresothan“thewell-beingofcustomers,thedepletionofnaturalresources,theviabilityofsuppliers,andtheconcernsofthecommunitiesinwhichtheyproduceandsell.”MackeyandSisodiacontinueinthistradition,writingthat“Withfewexceptions,entrepreneurswhostartsuccessfulbusinessesdon’tdosotomaximizeprofits.Ofcoursetheywanttomakemoney,butthatisnotwhatdrivesmostofthem.Theyareinspiredtodosomethingthattheybelieveneedsdoing.Theheroicstoryoffree-enterprisecapitalismisoneofentrepreneursusingtheirdreamsandpassionasfueltocreateextraordinaryvalueforcustomers,teammembers,suppliers,society,andinvestors.”

SincethefalloftheBerlinWallin1989,ithasbeenundisputedinbusinesscirclesthatcapitalismandfreemarketsarethebestwaytopromoteprosperityandgroweconomiesinternationally.Significantprogresshasbeenmadesincetheinceptionoffree-enterprisecapitalism.Manybelievethatmostoftheworld’sproblemstoday,suchaspoverty,educationinequality,andproblemsinundevelopednations,canbesolvedthroughinnovationsbroughtaboutbyfreemarketsandfree-enterprisecapitalism.Thepoorestnationsmightbeencouraged


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toembracetheideasoffree-enterprisecapitalismtoachievesimilarsuccessesasthedevelopedcountries,suchastheUnitedStates,Japan,andothers.

Free-enterprisecapitalismisapproximately200yearsold.Belowisapartiallistofaccomplishmentsduringthepasttwocenturies,attributedtofree-enterprisecapitalism.

•Averageincomepercapitaonagloballevelhasincreasedbyover1,000%since1800.

•Averagelifeexpectancygloballyhasincreasedto68years,muchgreaterthanthehistoricalaverageof30years.

•Twohundredyearsago,85%oftheworld’spopulationlivedonlessthan$1adayintoday’sterms.Todaythatnumberis16%.

•Injustthelast40years,undernourishedpeoplegloballyhasdecreasedfrom26%to13%;ifthecurrenttrendcontinues,itisestimatedhungerwillbevirtuallyeliminatedinthetwenty-firstcentury.

•Twohundredyearsago,theworldwasalmostcompletelyilliterateandtoday84%ofadultshavetheabilitytoread.

•Witheconomicfreedomhascomepoliticalfreedom:53%ofpeoplecurrentlyliveincountriesthathavedemocraticgovernmentselectedbyuniversalsuffrage,comparedtozeropeople120yearsago.

•Twokeyfactorsthathaveledtothesuccessoffree-enterprisecapitalismhavebeenentrepreneurshipandinnovation,combinedwithfreedomanddignityofthosetransactingbusiness.Botharenecessaryforcapitalism’scontinuedprogressgoingforward.Entrepreneursarealsotobeadmiredinaneconomydevotedtofree-enterprisecapitalismbecausetheyarethedriversofinnovationthatimprovesourlives,companies’competitiveposition,andeconomies.

WhyisCapitalismunderAttack?Despitetheachievementsoffree-marketcapitalism,itiscriticizedbymanyaroundtheworld.Capitalismhasabrandingproblem,inwhichitsimagehasbeentarnishedforvariousreasons.Entrepreneursdrivingcapitalismshouldbeadmired,yetsomanyarevilified.Capitalismbymanyaroundtheworldisdepictedasazero-sumgame,inwhichworkersareexploitedandconsumersarecheatedbybusinessowners.Criticsofcapitalismarguethatthisalleged,intentionalprocessresultsingreaterinequalitybetweentherichandthepoor,fragmentationamongcommunities,andenvironmentaldegradation,allwiththemotivationofmakingaprofit.Inthisportrayal,businessownersandentrepreneursaredepictedasbeingmotivatedbygreed,seekingprofitmaximizationasawayofdoingbusiness,sinceethicaltheoryclaimsthatpeoplewillonlypursuetheirself-interestattheexpenseofothers.

Underlyingreasonsofcapitalism’sbrandingproblemstem,inpart,fromthecorporatescandalsthatrockedtheUnitedStatesin2000–2002.Someofthemorewell-knownscandalsincludeEnron,WorldCom,Tyco,andAdelphiaCable,allofwhichinvolvedexecutivemischief,causingwidespreadlossesforinvestors,partners,andcommunitiesalike.ThelatestwidespreadscandalintheUnitedStates—thesubprimelendingcrisisin2008—ledtothe


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longestrecessionsincetheGreatDepression.Thiscrisiswascausedbyillegalandunethicalactionsoflargecorporationsandcompaniesacrossalllevelsofthefinancialsector.Manyofthemajorbankswerelendingtothosewhodidnotqualify,andthensecuritizingthoseloansforsaletootherbanksandconsumers.Theratingagencies,whoweregettingpaidfeesbythemajorbanks,evaluatedallofthesesecuritizedmortgageproductsasAAA(risk-free).Consumersduringthattimewereoverwhelmedbydebtthattheycouldnotafford.TheseactionsresultedinacontinuingwidespreadfinancialcrisisthatfurtherdividedMainStreetfromWallStreetandsocietyingeneralfromcapitalism.

MackeyandSisodiabelievethereareseveralreasonsfortheattacksoncapitalism.First,theyarguethattherehasbeenanintellectualhijackingofcapitalismbyeconomistsandcritics.Thesepartieshaveplacedcapitalisminanarrow,self-servingidentityhelpingtopaintcapitalismasaprofit-maximizingmachine.Second,manybusinessesareoperatingatalowlevelofconsciousnessregardingtheirpurposeandthelargeimpacttheyhaveontheworld.Third,theindustrialerathatgaverisetoamechanisticviewofbusiness,inwhichemployeeswereseenasresourcesofproduction,embracedthegoalofreceivingthemostoutputfromaslittleinputaspossible.Andfinally,expandingregulationsandthesizeofthegovernmenthasproducedamutantformofcapitalism,dubbed“cronycapitalism.”

Thisbiasedthinkingisprevalentintheconsciousnessofmanytoday.WallStreetanalystsmustmeetquarterlyearningsprojectionsforallpubliccompanies.Manyoftheseanalyststendtoviewanystakeholder(otherthanstockholders)asnetdrainersofvalue;thatis,ifyoupayemployeesmore,youwillearnlessinprofits.Thisisamisunderstandingamongmanytodayaboutbusinessingeneral,whichdatesbacktotheturnofthetwentiethcenturywhenso-called“robberbarons”wieldedvastsumsofwealthandwerenotashamedtoflauntit.Forexample,CorneliusVanderbiltwasallegedtohavesaidthefollowingwhenhewaswarnedaboutviolatingthelaw:“Law?Whocaresaboutthelaw?Hain’tIgotthepower?”

Thisdatedwayofthinking,althoughseeminglystillpracticedbysomeasevidencedinthecorporatescandalsbetween2000and2002,showsalowconsciousnessandmoralconcernforstakeholders,whichcanleadtounintendedconsequencesthataffectstockholdersaswellasstakeholders—and,infact,theentireglobaleconomy.Thiszero-sumconceptleadstoshort-termthinkingandcaninadvertentlysupportrecklessrisk-takingamongthosedrivenonlybyshort-termprofits.Ifacompanyseeksonlyormainlytomaximizeprofits,itwillpressureitsentiresupplychaintodisregardreal-timedataandconstraints.Forexample,supplierswhoarecontinuallydictatedtoprovideproductandservicestomeetunrealisticgoalsmayberewardedforafewquarters,butinthelong-termsuchsupplierswilldooneofthreethings:gooutofbusiness;dobusinesselsewhere;orprovideproductsoflowerquality,allofwhichcausehavoctoacompany’ssupplychain.Otherconsequences,suchasdisregardfortheenvironmentandlowemployeeengagement,haveledtothepublicperceptionofcorporationsasgreedy,selfish,exploitative,anduntrustworthy.MackeyandSisodiawritethat“Businessisgoodbecauseitcreatesvalue,itisethicalbecauseitisbasedonvoluntaryexchange,itisnoblebecauseitliftspeopleoutofpovertyandcreatesprosperity.”Capitalismisthereforechallengedtobecomemore“conscious”ofitsheroicnature.

In2002,aGalluppolldelineatedproblemswiththeperceptionsofcorporations.Thepollfoundthat“90%ofAmericansfeltthatpeoplerunningcorporationscouldnotbetrustedtolook


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aftertheinterestsoftheiremployees,andonly18%thoughtthatcorporationslookedaftertheirshareholders.43%believedseniorexecutiveswereonlyinitforthemselves.”TheNewYorkTimeswasalsoquoted,stating“themajorityofthepublic...believesthatexecutivesarebentondestroyingtheenvironment,cookingthebooksandliningtheirownpockets.”Onereasonfordistrustofexecutives,inadditiontothe2000–2002scandals,isexorbitantexecutivepay.TheInstituteofPolicyStudiesshowedthattheratioofCEOtoaverageemployeesalariesin1980was42to1,in1990itwas107to1,andin2000itwas525to1.Inrecentyearstheratiohasdeclinedto325to1,howeverthediscrepancyisstilltoolarge,evenoutrageouscomparedtoallotherprofessionalpay-scalecomparisons.

ThepublicimagespurredbyrecentcorporateEnronandlargebanks’“toobigtofail”crisescausedbygreedandrecklesspracticeshavetaintedtrustofbusinessesandevencapitalism.ChrisMeyerandJuliaKirbystatedthefollowinginakeynoteaddressatBentleyUniversity(Waltham,MA)onthefutureofcapitalism:“Wecapitalistsarestuckintwodeeprutsrightnow.Oneofthoserutsisanoveremphasisonreturnonequity,asithasbecomeoneoftheprimary(ifnottheprimary)barometerofsuccessforacompany.”MeyerandKirbyarguethatafixtureonreturnonequityaloneisnotanappropriateproxyofthevalueacompanyprovides,andthatbyfixatingonasinglemetric,businessiscommittingsocialsuicide.MeyerandKirbyalsoassertthatbusinessesingeneralareobsessedwithcompetition,whichcanbejustasharmfulashelpful.Competitioninfreemarketshasdriveninnovationinthepast,ascompaniesseekoutcompetitiveadvantageswithnewproductsandwaystoimprovetheworld;butaninfatuationwithcompetition,simplyforitsownsake,willnothelpdrivetheinnovationneededifpeopleandcompaniesarehinderedfrombeingcollaborativeandinspiringproductivechange.FormerDupontCEOCharlesHollidayhasstatedthat“Dupont’slonghistoryhasshownusthatnocompany,howeverstrongandcompetitive,cangoitalone.Involvementinoutsideorganizationsandendeavorsisawayoflearningandleading.”

So,wheredowegofromhere?TheCEOofGeneralElectric,JackImmelt,isquotedinRajendraSisodia’sbookFirmsofEndearmentassaying,“Tobeagreatcompanytoday,youhavetobeagoodcompany.”Underconsciouscapitalism,goodbusinessesmakemoneybycreatingvalueforothers,notonlybymaximizingprofits.Itisessentialforfree-enterprisecapitalismtobegroundedinanethicalsystembasedonsharedvaluecreationforallstakeholders.Toprosper,companieswillhavetoshiftmindsetsandpracticesbylisteningtoandlearningfromtoday’scustomers.Thisshiftrepresentsachangenotonlyinwhatpeoplewantbutalsoinhowproductsshouldbedesignedbothaestheticallyandfunctionally.Forbusinessestoreachfullpotential,anewparadigmmustbecreatedtomovebeyondthesimplisticmodelstowardahigherpurposeandvaluecreationforallparties.Consciouscapitalismisonestepinthatdirection.

WhatIsConsciousCapitalism?DougRauch,formerCEOofTraderJoe’sandcurrentCEOofConsciousCapitalism,Inc.,definesconsciouscapitalismas“recognitionthatweareinterconnectedandinterrelated.Thatbusinessatitscoreisastoryofus.”JackCanfield,oneofmycompany’sadvisoryboardmembers,describestheconsciouscapitalismprocessasbuilding“sustainable,trusting


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partnershipswithpeopleandtheearth,adheringtothecorevaluesofrespect,integrity,andethics.”

Adistinctionmustbemade,however,betweenconsciouscapitalismandcorporatesocialresponsibility(CSR)—somebelievetheseareoneinthesame.CSRisgenerallydefinedasacompany’seffortsthatgobeyondwhatisrequiredbyregulatorsintermsofsocietalandenvironmentalimpacts.TofurtherdelineatethedistinctionsbetweenconsciouscapitalismandCSR,EdwardFreeman,athoughtleaderonstakeholderrelationshipmanagement,hasstated,

AssumeyouareCEOandyouareaskedthefollowing:Yourcompany’sproductsimprovelives.Supplierswanttodobusinesswithyourcompanybecausetheybenefitfromthisrelationship.Employeesreallywanttoworkforyourcompany,andaresatisfiedwiththeirremunerationandprofessionaldevelopment.Andyou’reagoodcitizeninthecommunitieswhereyouarelocated;amongotherthings,youpaytaxesontheprofitsyoumake.Youcompetehardbutfairly.Youalsomakeanattractivereturnoncapitalforshareholderandotherfinanciers.However,areyousociallyresponsible?(Freeman,2006,4)

FreemannotesthatCSR,althoughintendedtobebeneficial,actuallyhelpstoreinforcethe“separationthesis”thatbusinessandsocietyaretwodistinctentities.Atitsworst,theseparationthesiscangenerateadestructiveideaofcapitalism,inwhichCSRbecomesanadd-ontobusinesstohelplessentheharshconsequencesofdoingcapitalisticbusiness.Thisstyleofthinkingfailstorecognizethecentralrolebusinessplaysintheglobalimprovementinthewell-beingandprosperityofmankind.CSRisgenerallyseenasbeneficialtoandcontributingpositiveimpactsonsocieties.However,becauseoftheseparationthesis,peoplemaystillviewcapitalismasharmfulandinterpretCSRasanextensionofbusiness—notintegraltocorporations’actualfunctioning.

FreemanhasthereforedevelopedhisownversionofCSR(companystakeholderresponsibility),whichbreaksdowntheseparationthesisanddescribesbusinessasanenterprisewithmoralramifications,notneedingthearmofsocialresponsibility.Inthisview,capitalismisasystemofsocialcooperationworkingtogethertocreatevaluethatcouldnotbecreatedbyindividuals.FromFreeman’sperspective,theideaofcorporatesocialresponsibilityisunnecessaryandthebaselineforconsciouscapitalism(i.e.,astakeholderapproach)isset.

TheFourTenetsofConsciousCapitalismThebaseofconsciouscapitalismliesinfourtenets:higherpurpose;stakeholderintegration;consciousleadership;andconsciouscultureandmanagement.Tofullyunderstandthetenets,furtherdelineationisnecessary.Thetenetofhigherpurposedepictsthepowerfulandbroadimpactsbusinesshasontheworld.Theseimpactscanbemuchgreaterwhenbusinessisbasedonahigherpurposethatgoesbeyondjustgeneratingprofitsandshareholdervalue.Purposeisthereasonacompanyexists.Yes,allcompaniesneedtomakemoneytosurvive,buttheydonotsurvivetomakemoney.Professionssuchaslawyers,doctors,teachers,etc.,putanemphasisonpublicgoodandhavepurposesbeyondself-interest;soshouldbusiness.Whenentrepreneursoriginallycreatetheircompanies,themajoritycreatethemforapurpose,tofillaneedinsociety.Havingahigherpurposehelpstocreateahighdegreeofengagementamongallstakeholders,rallyingaroundasingularidea.Thishelpscatalyzecreativity,innovation,andorganizationalcommitment—allbenefitsofpursuingahigherpurposebeyondprofits.


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Thesecondtenetofconsciouscapitalismisstakeholderintegration.ThistenetisrathersimilartotheFreemanstyleofmanagementdiscussedearlier.Astakeholderisconsideredtobeanentitythatimpactsorisimpactedbyabusiness.Stakeholdersincludeemployees,suppliers,theenvironment,investors,andmore.Consciousbusinessesrecognizethatstakeholdersareinterdependentandthattheirbusinessmustbeorganizedtoprovideoptimalvaluecreationforallparties.Stakeholderscannotbetreatedasindividualsbecausebusinessisaworldofinterconnectedparties.Optimizingvaluecreationforallstakeholdersenablesthewholesystemtoflourish,notjustthecompanyatthecenter.Italsohelpstocreateaharmonyofinterestsamongtheinterdependentstakeholders,sothateachpartyknowsitispartofamuchlargerecosystem.

Toachieveacommitmenttothestakeholderapproach,werevisitFreemanandhisversionofCSR,inwhichhestatestherearefourlevelsofcommitment.Level1isabasicvalueproposition,inwhichacompanymustaskitselfhowitmakesitsstakeholdersbetteroffandwhatthecompanystandsfor.Level2involvessustainedcooperationamongstakeholders,inwhichtheprinciplesandvaluesareestablishedtobaseeverydayengagementbetweentheparties.Level3dealswithunderstandingbroadersocietalissues.Atthislevel,companiesmustaskthemselveshowthebasicvaluepropositionstagedinLevel1andtheprinciplesofLevel2eitherfitorcontradictkeytrendsandopinionsinsociety.Level4dealswithethicalleadership,whichfallsunderthethirdtenetofconsciouscapitalism.

Thethirdtenetofconsciouscapitalismisconsciousleadership.Everyconsciousbusinessneedsaconsciousleader;itisnearly(ifnotfully)impossibletohaveaconsciousbusinesswithoutaleaderatthehelmwhosharesthevaluesofthefirmanditshigherpurpose.Tobeaconsciousleader,onemustbemotivatedfirstandforemostbyservicetothehigherpurposeofthefirmandcreatingvalueforallstakeholders.Consciousleadersrejecttheoldmodeloffear-basedcommand-and-controlleadershipandacceptthe“carrotandsticks”modelasprimarymotivationaltools.Thismodelseekstomentor,motivate,andinspirepeopleintoaccomplishingtheirtasksandseekstostimulateinnovationandcreativityoverfear.Consciousleadersmustalsoknowwhatvaluesandprinciplesinformtheirleadership,theirindividualsenseofpurpose,andwhattheystandforasaleader.Withconsciousleadershipinplace,thefourthtenetofconsciouscapitalismbecomeseasiertoachieve.

Thefourthtenetofconsciouscapitalismisconsciouscultureandmanagement.Inaconsciousbusiness,theculturewithinthefirmisatremendoussourceofstrengthandcontinuity.Thistypeofculturenaturallyevolvesfromthefirm’sandmanagement’scommitmentstohigherpurpose,stakeholderinterdependence,andconsciousleadership.Apurefocusonthefirstthreetenetsofconsciouscapitalismshouldultimatelyleadtoaconsciouscultureinspiredbycommitment,innovation,andcreativity.Somemayaskwhycultureissoimportant.A2005studybytheEconomistIntelligenceUnitfoundthat56%ofU.S.executivesfeltthatthesinglegreatestobstacletogrowthfortheirfirmwascorporateculture.Consciousbusinesses,becauseoftheirculture,donotfacetheseobstaclesontheirpathtogrowth.Thekeytoestablishingconsciouscultureandachievingthefourthtenetistounderstandtheconnectionbetweenmanagementandculture.


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Figure1CultureandManagementMustConnect

Source:BasedonapresentationthatR.Sisodiagaveatthe2012ConsciousCapitalismConferenceatBentleyUniversity,Waltham,MA.

Forconsciousbusinessestothrive,aconsciouscultureisnecessary,whichentailsmanagementpromotingadifferenttypeofleadershipstyle.Thetypeofmanagementapproachtoleadershipcaneithermagnifyordepressthehumanneedtocare.Emphasizingaleadershipstylethatconnectswhatpeoplefeelandvaluetohowpeopleworkpromotesachievementbeyondtheordinaryscopeoftraditionalbusinesses.Theleadershipstylefoundinconsciousbusinessesfocusesondecentralization,empowerment,andcollaboration.Thisstyleofmanagementleadstoanamplifiedabilityofthefirmtocontinuouslyinnovateandcreatemultiplekindsofvalueandwealth(notjustfinancial)forallstakeholdersasdescribedbytheflowchartinFigure1,whichillustratestheinterconnectednessrequiredbetweencultureandmanagementinconsciouscapitalismfirms.

FirmsofEndearment(FoEs)SowhatexactlyisaFoE?Itisa“companythatendearsitselftostakeholdersbybringingtheinterestsofallstakeholdergroupsintostrategicalignment.Nostakeholderbenefitsattheexpenseofanyotherstakeholdergroupandeachprospersastheothersdo.”FoEsembraceadifferentideathanmostcompanies.Whenlookingatcustomers,theystriveforshareofheart,andnotshareofwallet.Thethemewiththisformofthoughtisifyouearnashareofthecustomer’sheart,shewillgladlyofferyouabiggershareofherwallet;dothesameforanemployeeandthatemployeewillgivebackwithsubstantialincreasesinproductivityand


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overallworkquality.FoEsdefinetheconsciouscapitalismmovementandareattheforefrontofconsciousbusinesspractices,leadingthebusinessworldintoitsmuch-neededevolution.FoEsincludeAmazon,Honda,Southwest,BMW,IDEO,Starbucks,CarMax,IKEA,Timberland,Caterpillar,JetBlue,Toyota,CommerceBank,Johnson&Johnson,TraderJoe’s,TheContainerStore,Jordan’sFurniture,UPS,Costco,LLBean,Wegmans,eBay,NewBalance,WholeFoods,Google,Patagonia,Harley-Davidson,andREI.

FoEshaveadistinctsetofcorevaluesthathelpdifferentiatethemfromcompetitors.Someofthevalueshavealreadybeenmentioned,suchasaligningstakeholderinterests.ThereisalaundrylistofvaluesdistincttoFoEs,anditispertinenttopointoutafewhere.First,employeecompensationandbenefitsaresignificantlygreaterthanthestandardforthecompany’scategory/industry,whileexecutivesalariesaremodest,leadingtoasmallerratioofCEOpaytoaveragepay.FoEsalsodevotelargeramountsoftimetoemployeetrainingthantheircompetitors,partofthereasonforlowerFoEemployeeturnoverthantheindustryaverage.FoEsconsidercorporateculturetobetheirgreatestassetandthereforetheirprimarysourceofcompetitiveadvantage.Theyseektokeepitthatwaybyhumanizingthecompanyexperienceforcustomersandemployeesalike,byprojectingagenuinepassionandconnectingemotionally.

FromaFoEperspective,stakeholdersareunderstoodthroughtheacronymSPICE,whichstandsforsociety,partners,investors,customers,andemployees.SocietyispartofthelocalcommunitiesinwhichFoEsareembedded,aswellaslargercommunitiesinneedofresourcesforsocietalimprovement.FoEsincludegovernmentsandnon-governmentalorganizations(NGOs)aswell.Partnersincludeupstreampartnerssuchassuppliers,aswellasdownstreampartnerssuchasretailers,thusrepresentingthebroadspectrumofwhatbusinesseswouldconsiderpartners.Investorsasastakeholderincludebothindividualandinstitutionalshareholders,aswellaslenderswhohavehelpedfinancethecompany.Customersincludebothindividualandorganizational(business)customers,butextendbeyondthecurrentcustomer.FoEsviewcustomerspast,present,andfuturewithequalaffectionandseekforshareofheartfromall.ThisisasimilarviewpointtohowFoEsviewemployees.Employeespast,present,andfutureareallstakeholders.Familiesarealsoincludedintheirconsiderationofemployeesasstakeholders.Allinall,FoEshaveanextremelybroadviewofstakeholdersandtakeeachintoequalconsiderationwhenplanningfirmstrategy.

ThebestwaytounderstandaFoEistounderstandhowoneoperates.ForourpurposeswewillfocusonWholeFoodsasanexampleofaFoE.MackeydefinesthevaluesandconceptsthathavehelpedWholeFoodsestablishandmaintainitsconsciousculture,aswellasitscompetitiveadvantageagainstothergrocers.ForMackey,purposeinvolvesbusinessesneedingtoshiftfromprofitmaximizationtopurposemaximizationinanefforttoresurrectthebrandofbusiness.Purposemaximizationisapowerfulconceptinthatitdriveseverythingthefirmdoes.Italignsstakeholdersbyfocusingonapurpose,andironically,ittypicallyresultsinmakingmoremoneythaneverthoughtpossible(evenmorethanprofitmaximization).MackeyfurtherdelineatesWholeFoods’culturebydiscussingtheconceptofdecentralization,whichinvolveshaving8–10teamswithineachstoreandeachteambeingself-managed.Theteamsareresponsiblefortheoperationsoftheirspecificstore.Theymakedecisionsregardinghiring,productselection,merchandising,compensation,andmore.Teamsarerewarded


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throughgain-sharingandnotindividualperformance;92%ofWholeFoodsstockoptionsaregrantedtononexecutives,whereasinatypicalcorporation,75%ofoptionswillgotothetopfiveexecutives.Thekeytothistypeofdecentralizationisthatitempowersemployeestomaketheirowndecisions.Byallowingtheteamstomakedecisionsontheirown,empowermentisgreatlyincreasedwhichhelpsleadtogreaterloyalty.Mackeyclaimsthatwithoutempowerment,decentralizationisuseless.

NotonlydoesWholeFoodsfocusondecentralization,buttheyalsofocusonauthenticityandtransparency,bothofwhichfostertrust.Thecurrentsystemofinformation-sharinginbusinessis“needtoknow,”whichdepressestrustwithinanorganization.FoEsfocusonbeingtransparentwithallstakeholders.WholeFoodsaccomplishesthisbysharingallrelevantfinancialinformationwithteammembers,includingcompensation.AnotherFoE,TheContainerStore,isaprivatecompanyandthereforehasnoobligationtoshareitsfinancialinformation,andyetthestoresharesallofitsfinancialstatementswithallofitsemployeeseveryyear.WholeFoodsalsoseekstopromoteloveandcarewithinitsorganization.Onewayofdoingsoisthrough“Appreciations.”EverymeetingatWholeFoodsisendedbyoneemployeevoluntarilyexpressinganappreciationforanotheremployee,thushelpingtoshifttheculturefromjudgmenttolove.Allofthisleadstocontinuousinnovation,whichisthekeytohavingasustainablecompetitiveadvantage.Lastly,WholeFoodsiscommittedtocollaboration,becauseinnovationwithoutcollaborationisfarlessvaluable.CollaborationcombinedwiththeotherelementslistedaboveistherecipeforsuccesswithWholeFoodsandmanyFoEs,makingthemthetrulygreatfirmstheyare.

ConsciousCapitalism:ADifferentViewThethemeofthissectionhasbeentoucheduponthroughoutthecase,butitisimportantforreaderstoremainfocusedonhowconsciouscapitalismisanevolutionandimprovementofthecurrentU.S.systemofcapitalism.Consciouscapitalismopensupadifferentmindset.Thetrade-offthinkingofthecurrentsystemcreatesan“if/then”mindsetleadingtorestrictedoptionsformanagers.Consciouscapitalismcreates“both/and”thinking,whichallowsmanagers,entrepreneurs,andambassadorsofcapitalismtoopentheirmindtoseeminglycontradictoryconditions,suchaspayingemployeeshigherwagesthanindustryaveragesandyethavinghigherprofitmarginsthanindustryaverages.Further,the“if/then”thinkingleadstoazero-summindset,inwhichonestakeholdercanonlybenefitattheexpenseofanotherandthissystemisbecomingunsustainableforreasonsillustratedpreviously.Inorderforvaluetobecreatedbycapitalism,eachparticipantmustmakeaprofit;thatis,eachstakeholdermustreceivebackmorevaluethantheyoriginallyinvested.Ifstakeholdersdonotreceivevaluefromtakingpartinthesystem,theywilleventuallydropout.Theexclusivepursuitofprofitmaximizationhasdoneenormousdamagetothissystemandthereputationofcapitalismasprofitmaximization,bydefinition,meansgivingaslittleandgettingasmuchaspossible.Theconsciouscapitalismsystemofsharedvaluecreationincreasesopportunitiesbyanorderofmagnitudeasthemindbreaksfreeofzero-sum,profit-maximizationthinking.

Theheroicstoryoffree-enterprisecapitalismisnotoneofprofitmaximization;itisoneofentrepreneursusingtheirpassionasfueltocreateextraordinaryvalueforcustomers,team


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members,suppliers,investors,andsociety.Businessisfargreaterthanjustthesumoftheindividualstakeholders.Businessistheinterrelationship,interconnection,sharedpurpose,andsharedvaluesthatvariousstakeholdersofthebusinesscocreateandcoevolvetogether.FoEsandproponentsofconsciouscapitalismdonotviewstakeholdersascompetingclaimantsonthevaluepool,butratherasactivecontributorstoit.Overall,consciouscapitalismcreatesabetterenvironmentthanthecurrentsystem.Companiesmotivatedbyhigherpurposescreatesustainedwealthforinvestors(seeFigure2);improvethelivesofcustomersbysatisfyingtheirneeds;elevatehumansatisfactionthroughfulfillingwork;andbuildthesocial,cultural,infrastructural,andecologicalwealthofsociety.

Consciouscapitalismis,then,arevolutionoftraditionalfree-enterprisecapitalismthatopensupthinkingtosharedvaluecreationforallstakeholders.Companiesthatfollowthismodelaregiventhetitle“FirmofEndearment”andbasetheirbusinessmodelsofftrust,authenticity,innovationandmore.Thesefirmstendtopayemployeesmore,workwithsupplierstostrengthenbothfirms,andhavelowerexecutivepaythanmostbusinessestoday.Thebrandofbusinessneedsrejuvenationandconsciouscapitalismisattheforefrontofrevitalizingthenaturalgoodthatbusinesscreates.Butdoesconsciouscapitalism’sbusinessmodelprovidefinancialsuccess?

ConsciousCompaniesPresentationofOriginalResearchCriticsofconsciouscapitalismarguethatifemployeesarepaidmore,suppliersaretreatedwellandpaidafairprice,etc.,thesenumbersshouldultimatelyhitthebottomlineoftheconsciousfirms,thusaffectingtheirstockprice.Researchhasbeendoneonthissubjectandprovidesamazingresults.StudiesonthosefirmsthatMackeyandSisodiaselectandlabelasFoEsfoundthatthosecompaniesgenerallyearnhighershareholderreturns,havepremiumprice-to-earningsratios,andearnapremiumreturnonequity,allwhileincurringnomoreriskthantheoverallstockmarket.Overa10-yeartimeperiod,FoEsproducedacumulativereturnof1,026%,whiletheS&P500managedonly122%.Therewasalsoanotherseriesoffirmscalled“GoodtoGreat,”basedontheJamesCollinsbookbythesametitle,withmostofthesefirmsfocusedstrictlyonprofits.ThesefirmsalsooutperformedtheS&P500butdramaticallyunderperformedFoEswithacumulativereturnof331%,asseeninFigure2.NotethecomparisonofFoEs’cumulative10-yearstockmarketperformance(1,026%)withtheexemplarycompanysampleinGoodtoGreat(331%),andtotheS&P500(122%)forthatsameperiod.


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Figure210-YearFoEPerformance

Source:Sisodia,R.,Wolfe,D.,andSheth,J.(2007).Firmsofendearment:Howworld-classcompaniesprofitfrompassionandpurpose,137.UpperSaddleRiver,NJ:WhartonSchoolPublishing.

Additionally,FoEshadanaverageprice-to-earningsratioof26.8,whiletheS&P500’swas18.4andGoodtoGreatcompanies’16.8.Sisodiaandhiscoauthorsexaminedtheaveragebetaofthesefirms.Betaisthetendencyofasecurity’sreturnstorespondtoswingsinthemarketandiscommonlyusedasameasureofrisk.Theaveragebetaisthatofthemarket(S&P500),whichis1.Abetaunder1suggeststhatastock,orgroupofstocks,islessriskythantheoverallmarket.SisodiaandhiscoauthorsfoundthatFoEshadanaveragebetaof.92,thusleadingtotheconclusionthatFoEsproducesuperiorreturnswithlessriskthantheoverallmarket,theidealrisk-returnrelationshipforinvestors.

UpdatedFinancialAnalysisofFoEsTheresearchpresentedabovewaspublishedin2004andincluded17publiccompanies.Anupdated2012analysisconsistedof75publiccompaniessplitintofourdifferenttiers:highlyconscious(elite);conscious;nearlyconscious;andinternational.The“highlyconscious”tierconsistsof10companiesthatembracethefourtenetsofconsciouscapitalism.The“conscious”tierhas35companiesthatembracemostaspectsofconsciouscapitalism.Thesefirmscouldimproveoneortwooftheconsciouscapitalismtenetsinordertobeconsideredhighlyconsciouscompanies.The“nearlyconscious”tierconsistsof12firmsthathadoneortwolargerissuesintheirperformanceandrecordofconduct,indicatingissuestheyhadwithatleastoneimportantstakeholdergroup.Finally,the“international”tierconsistsof18companieswithheadquartersandoperationslocatedoutsidetheUnitedStates.RepresentedcountriesincludeIndia,Germany,theUnitedKingdom,andCanada.MethodofAnalysisinUpdatedStudy


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Theanalysisusedthefourtiersnotedabove,comparingeachtierindividuallytotheS&P500,DowJonesIndustrialAverage(DJIA),andtheRussell3000.Ananalysiswasalsoperformedcombiningthefirmsinthe“conscious”and“highlyconscious”tiers,comparingthemtothesamethreeindices.Theanalysisdatesbackto1997,withseparateanalysesdoneonthe3-,5-,10-and15-yearstockpriceperformanceoftheselectedfirms.Thestudyfocusedonthestockpricesandbetaoftheselectedfirms,withtheobjectiveofduplicatingtheresultsfoundpreviouslyusingalargersamplesizeandalsoshowingtheeffectsdifferentlevelsofconsciousnesshaveonthefinancialperformanceofacompany.Essentially,thehypothesisisthatFoEsprovidesuperiorreturnsthantheoverallmarketwithlessrisk.

ThestockpriceanddividenddatawaspulledfromBloombergterminalsandwasusedtocalculatequarterlyholdingperiodreturnsfrom12/31/1997to12/31/2012.Forfirmsthathavebeenpubliclessthan15years,theyweresimplyaddedintotheanalysisoncepublicstockpricedatabecameavailable.Thiswasdonesothatnothavingastockprice(returnwouldbezero)wouldnotdragdownthereturnsforoverallindex.Thequarterlyreturnswerethenaveragedtogethertocreateanindexforeachtieroffirms.Thequarterlyreturnsfortheindexwerethencompoundedtoaccountforreinvestingdividends.ThebetaswerealsopulledfromBloombergfortheindividualfirmsusingalinearstockpriceregressionfrom12/31/1997to12/31/2012andthenaveragedtogethertocreateanindexbetaforeachtieroffirms.

ResultsoftheAnalysisTheresultsofthefinancialanalysisaffirmedthepreviouslypublishedresultsregardingFoEs,evenwiththeexpansiontoalargernumberoffirmsincludinginternationalfirms.Figures3and4illustratethecumulativeandannualizedperformanceofeachtierofthefirmsexplainedabove,incomparisontotheS&P500,DJIA,andRussell3000.Itisinterestingtonotethatthe“EliteFoEs”havethebestperformanceofallthefirms,withthe“Conscious”(secondtier)firmslaggingthefirsttierbutvastlyoutperformingthemajorstockindices.Finally,the“NearlyConscious”firmsstilltripletheperformanceofthemajorindices.

Anotherinterestingobservationisthatthe“ConsciousInternational”firmsalsovastlyoutperformthemarketasawhole,validatingthatthemodelworksinternationallyaswellasdomestically.Itisalsoimportanttonotethedifferencesinreturnsoverthedifferenttimeperiods.Inthethree-yearanalysis,whiletheselectedfirmsstilloutperformthemajorindices,theydosobyasmallermarginthanthe5-,10-,and15-yearanalysis,withthegapswideningthelongertheanalysisisperformed.Thisfurthersupportstheargumentthattheconsciousbusinessmodeliseffectiveoverthelong-termperformanceofacompany,bothfinanciallyandsocially.


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Figure3ResultsofCumulativePerformanceofTieredFirms

Theparadoxofprofitsholdstrueasthesefirmsdonotpursueprofitastheirobjectiveforbeing,asindicatedpreviously,butratherpursueahigherpurpose,enablingamoreholisticviewofwhatbusinesscanbe.Theargumentthatthesefirmscannotsucceedfinanciallyissimplyafallacyasevidencedbytheanalysispresentedhere,asultimatelyallfinancialperformanceisenvelopedinthestockpriceofafirm.

Intheupdatedbetaanalysis,thereisaslightdiversionfromtheresearchpresentedpreviously.TheFoEsanalyzedinFirmsofEndearmenthadabetaof.92,whilethefirmsintheupdatedanalysishavebetasslightlyhigherthan1,asshowninFigure5.

Figure4CumulativePerformanceSummaryComparingFundIndices


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Figure5BetaofIndices

Althoughthebetasofthefirmsarehigherthanthemarketaverageof1,theyareonlyslightlyhigher,andwiththeirvastoutperformanceofthemarketitisfairtosaythatinvestorsinthesefirmswilltolerateslightlyhighervolatility.Also,thebetaisonlyonemeasureofrisk,measuringvolatility.Along-terminvestorseekingfirmsthatoutperformthemarketover3,5,10,etc.,yearsisnotasconcernedwithvolatilityasaWallStreettraderseekingtotakeadvantageofday-to-daypricemovements.Essentiallythepointtobemadeisthatthesefirmscarrylittletonoextrariskincomparisontotheoverallmarketandyetvastlyoutperformthemarketoverthelongterm.

ConclusionConsciouscapitalism’sbusinessmodelistimely,evenlongoverdue.Businessesshouldnotbesolelyfocusedonprofits,butshouldadoptamoreholisticapproachtodoingbusiness.Consciouscapitalismintegratesallstakeholders,creatingagreaterpoolofwealthforallinvolvedintheecosystem.Embracingconsciouscapitalismhasproventobodewellforthecompaniesthatchoosetodoso.Consciousfirmsarehealthy,growingbusinessesabletosurvivelong-term,outperformcompetitors,andcangenerateoutstandingreturnsinthestockmarket.Throughthefreemarketsandcompetitionmechanismsoffree-enterprisecapitalism,it


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ismybeliefthatfirmsembracingconsciouscapitalismwillrisefurthertothetop,andmorecompanieswillembracethemodelasitbecomestheonlywaytocompeteinthemarketplacewithshiftingdynamics,wants,andneeds.Consciouscapitalismisthefutureofbusiness.

QuestionsforDiscussion1.Whyarethereasonsconsciouscapitalismresurfacedanimportanttopicinthepress?2.WhatarethebasicprinciplesandtenetsofMackeyandSisodia’sbookandtheconsciouscapitalismmovementthatmakeitdifferentfromotherrelatedmovementsandsimilartopics?

3.WhatdoesethicshavetodowithconsciouscapitalismaspresentedbyMackeyandSisodia?

4.Whyisconsciouscapitalismnotjustatheory?5.Whatdoresearchresultsfromtheupdatedstudyinthearticleshow?

SourcesCollins,J.(2001).GoodtoGreat.NewYork:HarperCollins.EdSitement.(n.d.).TheIndustrialAgeinAmerica:RobberBaronsandCaptainsofIndustry.http://edsitement.neh.gov/lesson-plan/industrial-age-america-robber-barons-and-captains-industry.

Freeman,E.(2006).BusinessRoundtableInstituteforCorporateEthics.BusinessRoundtableInstituteforCorporateEthics.BridgePapers.Charlottesville,Virginia.Print.

Mackey,J.(2007).Consciouscapitalism:Creatinganewparadigmforbusiness.WholeFoodsMarket.com.http://www.wholefoodsmarket.com/blog/john-mackeys-blog/conscious-capitalism-creating-new-paradigm-for%C2%A0business,accessedFebruary27,2014.

Mackey,J.(2012).KeynoteAddress:WholeFoodsMarket’sConsciousCulture.ConsciousCapitalismInstitute.BentleyUniversity,Waltham,MA,21.ConsciousCultures:BuildingaFlourishingBusinessonLoveandCare.

Meyer,C.,andJ.Kirby.(2012).KeynoteAddress:StandingontheSun:TheFutureofCapitalism.ConsciousCapitalismInstitute.BentleyUniversity,Waltham,MA.ConsciousCultures:BuildingaFlourishingBusinessonLoveandCare.

Murray,A.(January16,2013).ChickensoupforaDavossoul.WSJ.com.http://online.wsj.com/news/articles/SB10001424127887324235104578243673073627726,accessedJanuary7,2014.

Sadar,A.(2013).BookReview:ConsciousCapitalism.WashingtonTimes.http://www.washingtontimes.com/news/2013/mar/20/book-review-conscious-capitalism/,accessedMarch20,2013.

Sisodia,R.(2012).KeynoteAddress:ConsciousCultures:BuildingaFlourishingBusinessonLoveandCare.ConsciousCapitalismInstitute.BentleyUniversity,Waltham,MA.

Sisodia,R.,andJ.Mackey,(2013).Consciouscapitalism:Liberatingtheheroicspiritofbusiness.Cambridge,MA:HarvardBusinessPress.

Sisodia,R.,D.B.Wolfe,andJ.Sheth,(2007).Firmsofendearment:HowworldclassWeiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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http://edsitement.neh.gov/lesson-plan/industrial-age-america-robber-barons-and-captains-industry

http://www.wholefoodsmarket.com/blog/john-mackeys-blog/conscious-capitalism-creating-new-paradigm-for%C2%A0business

http://online.wsj.com/news/articles/SB10001424127887324235104578243673073627726

http://www.washingtontimes.com/news/2013/mar/20/book-review-conscious-capitalism/

companiesprofitfrompassionandpurpose.UpperSaddleRiver,NJ:PrenticeHall.


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Case10GoldmanSachs:HedgingaBetandDefraudingInvestors

SecuritiesExchangeCommissionChargesGoldmanSachsOnApril16,2010,theSecuritiesandExchangeCommission(SEC)chargedGoldmanSachs&Co.andoneofitsvicepresidentswithdefraudinginvestors.Duringthistime,theU.S.economywasinastateofsevererecessionfollowingthesubprimemortgagecrisis.GoldmanSachswaschargedwithdefraudinginvestorsbymisstatingandomittingkeyfactsaboutafinancialproductlinkedtosubprimemortgages.ThecompanyhadsoldafinancialproducttoinvestorscreatedbythehedgefundPaulson&Co.,whichhadbetagainstthesuccessoftheproduct.Thiscasedetailstheactionsleadingtothelargest-eversettlementpaidbyaWallStreetfirmtotheSEC.

TheABACUS2007-AC1ProductDevelopmentoftheABACUS2007-AC1productbeganin2007.Itwasacollateralizeddebtobligation(CDO).CDOsarebasedontheperformanceofsubprimeresidentialmortgage-backedsecurities.Paulson&Co.,oneofthelargestandmostprofitablehedgefunds,approachedGoldmanSachsandpaidthefirmtostructureadealinwhichPaulson&Co.wouldaddthemortgagesecuritiestotheirportfolio.Thehedgefundtooka“shortposition”againsttheABACUSproductandthemortgagesecurities,bettingonresidentialmortgagestofail.PlacingthesecuritiesinaCDOwouldtemporarilyhidethetruevalueoftheloansandmisleadinvestors;andwhentheloanswentintodefault,thepriceoftheproductwouldplummet.ThosewhobetagainsttheCDOstoodtomakesignificantprofits.

OnApril26,2007,thetransactionbetweenGoldmanSachsandPaulson&Co.closed.Paulson&Co.paidGoldmanSachs$15milliontostructureandmarkettheABACUSproduct.Paulson&Co.isoneofthemostprofitablehedgefundsinhistory,overseeingmorethan$32billioninassets.FoundedbyJohnPaulson,aHarvardMBAgraduateandoneoftheworld’swealthiestpeople,thehedgefundhadearningsinthetensofbillionsineachofthemostrecentfiscalyears.ThemajorityofPaulson’sprofitscamefromthecollapseofthehousingmarket.Hepredictedthebillion-dollarwrite-downsofmortgage-backedsecuritiesandtookadvantageofthatforesight.PaulsonfoundsubprimemortgageswithadjustableratesinareaslikeCalifornia,Arizona,Florida,andNevada—statesthathadexperiencedhighincreasesinhomepricesthatwereseverelyinflatedandwoulddropsignificantly.

GoldmanSachsknewofPaulson&Co.’sstrategicapproachtotheABACUS2007-AC1.InmarketingtheABACUSproduct,GoldmanSachsstatedthatthesecuritieswereselectedbyACAManagementLLC.ACAwasareputablethirdpartywithexperienceinresidentialmortgage-backedsecurities.InvestorswerenotinformedthatPaulson&Co.hadalsoplayedasignificantroleinselectingthesecuritiesintheportfolioandthatPaulson&Co.stoodtobenefitiftheABACUSsecuritiesdefaulted.ACAandtheotherinvestors,IKBBank,werestillresponsibleforduediligenceregardingtheinvestment.WhilePaulson&Co.engagedintheselectionprocessofthesecuritiesintheABACUSportfolio,ACAanalyzedandapprovedeverysecurityinthedeal.ACAhadthefinalauthorityoverthesecuritiesincludedin


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ABACUS.ThefactthatACA,anobjectivethirdparty,hadthefinalapprovalintheselectionofthe

portfoliowasimportanttoinvestors.IKB,aGermanbank,statedthatifithadknownofPaulson&Co.’sroleintheselectionofthemortgage-backedsecuritiesandtheirintendedshortposition,itwouldnothaveinvestedintheproduct.

GoldmanSachsknewofthepotentialharmfulconsequencesinsellingtheABACUSproductbutchosetoignoretherisksinfavorofprofits.CDOswerefinancialproductsthathedgefundslikePaulson&Co.couldbetonwithverylittlerisk.GoldmanSachswasnottheonlyfirmtoengageinthepracticeofcreatingCDOs.Morethan$250billionoftheseproductsweresoldintothemarketinthetwoyearsleadinguptotheU.S.financialcrisis.ManyhavespeculatedthatamajorityoftheseCDOsweredeliberatelydesignedtofail,similartotheABACUS.

TheCaseagainstFabriceTourreThemanresponsibleforABACUSwasFabriceTourre.Tourrewasa31-year-oldmid-leveltraderwho’dbeenworkingatGoldmanSachssince2001.Tourreforesawthedownfallofhighlyleveragedsecuritiesasearlyas2005.HewasoneofthefewwhounderstoodthecomplexityofthesecuritiesandsawanopportunitytohelpGoldmanSachsoffsetsomeofitsimpendinglosses.TourreoversawtheABACUSproductfromthebeginning.Hestructuredthetransaction,marketedtheproduct,andspokedirectlywithinvestors.WiththeknowledgethatPaulson&Co.haddesignedABACUStofail,TourreandGoldmanSachschosenottodisclosethisinformationtoinvestors.Tourrealsomisledtheso-calledthird-partycreatorsofABACUS,ACA,intobelievingthatPaulson&Co.hadcontributedapproximately$200milliontotheequityofABACUS.GoldmanSachsagaindidnotdisclosethatPaulson&Co.’sinterestswerecontrarytoACA’s.

OncetheSEClawsuitwasfiled,GoldmanSachsveryquicklydistanceditselffromTourre;continuallydeclinedtocommentonTourre’scase;andevenaidedtheSECinvestigationofhisactions.Tourredefendedhimselfvigorouslyandclaimedthathedidnotintentionallymisleadinvestors.HestatedthatthemarketingmaterialsforABACUSwereincompleteandthatadditionalinformationmayhavebeenneeded.Manytimes,Tourrecalledhimself“theFabulousFab.”Whenaskedifheregrettedhisactions,Tourre’sonlyresponsewasthathewas“sadandhumbledaboutwhathappenedinthemarket.”Tourre’sactionsreceivedrespectfromWallStreetbankersandtraders,whoadmiredthewayheforesawthecollapseinthehousingmarketand,inturn,structuredalucrativedealforhisclient,Paulson&Co.Inthebankingindustry,hewasalegend.

TheDownfallABACUSwascreatedinAprilof2007.ItreceivedaAAAratingfrombothcredit-ratingagencies,Moody’sandStandard&Poor’s.Theseagenciesareneverinformedoftheidentityoftheinvestorswhoparticipatedinthedeal.Duetotheeventssurroundingthehousingmarketbubble,thecreditagencies’abilitytoratesecuritieswascalledintoquestion.

During2007,aninternalconversationbeganwithinMoody’stodeterminewhetherlowerratingsshouldbeissuedonCDOsandotherdealsinvolvingmortgagebondsorotherassets.It


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wasdeterminedthatmoreevidencewasneededtoproveanydeteriorationinthehousingmarket.Otherratingfirmsactedsimilarly,choosingtoignorethesignsofanimpendingcollapseandallowingmanyABACUS-likestructureddealstoenterthemarket.

ByOctober2007,83%oftheresidentialmortgage-backedsecuritiesintheABACUSportfoliohadbeendowngraded,andtheremaining17%weretrendingnegative.ByJanuary2008,99%ofthesecuritieshadbeendowngraded.TheGermanBank,IKB,investorsintoABACUS2007-AC1,allegedlylostmorethan$1billion.

InApril2010,theSECfiledcomplaintchargesagainstGoldmanSachsandFabriceTourrefortheactionstakeninstructuringandmarketingtheABACUS2007-AC1.TheSECreportedviolationsofsection17(a)oftheSecuritiesActof1933;section10(b)oftheSecuritiesExchangeActof1934;andExchangeActRule10b-5.TheSECwasseekinginjunctiverelief,disgorgementofprofits,prejudgmentinterest,andfinancialpenalties.ThechairmanandCEOofGoldmanSachs,LloydBlankfein,spokecandidlyandproclaimedthatthedaythesuitbytheSECwasfiledwas“oneoftheworstdaysinmyprofessionallife.”

TheSettlementOnJuly15,2010,GoldmanSachsenteredintoasettlementwiththeSEC,neitheracknowledginganywrongdoingnordenyingtheSEC’sallegations.InastatementmadebyGoldmanSachs,theonlyadmittancemadebythefirmwas“thatthemarketingmaterialsfortheABACUS2007-AC1transactioncontainedincompleteinformation.Inparticular,itwasamistakefortheGoldmanmarketingmaterialstostatethatthereferenceportfoliowas‘selectedby’ACAManagementLLCwithoutdisclosingtheroleofPaulson&Co.Inc.intheportfolioselectionprocessandthatPaulson’seconomicinterestswereadversetoCDOinvestors.Goldmanregretsthatthemarketingmaterialsdidnotcontainthatdisclosure.”

ThetimingofthesettlementannouncementcameonlyhoursaftertheSenatehadpassedlegislationtoreformtheU.S.financialsystem.ManysawthisaspoliticalposturingbytheSECandamessagefortherestofthefinancialindustry.GoldmanSachspaidtheSEC$550milliontosettlethecharges.ItwasthelargestsettlementeverpaidtotheSECbyaWallStreetfirm.Onthedaythesettlementwasannounced,GoldmanSachs’stockpriceroseover4%.Thesettlementagreementendedthreemonthsofuncertaintywiththefirm.Investorssawitasapositivestep,notingthattopmanagementwaskeptintact.The$550-millionfigurewasfarlowerthantheanticipated$1-billionestimatepredictedbymanyanalysts.

Inadditiontothemonetarysettlement,GoldmanSachswasforcedtomakeseveralinternalchanges.Thefirmwasrequiredtoincreasetrainingforemployeeswhodealwithmortgagesecuritiesandincreaseoversightinthestructuringandmarketingofthosesecurities.Thesettlementresultedinnewindustry-wideregulation.InitshandlingofGoldmanSachs,theSECanditsdirectorofenforcement,RobertKhuzami,madeitclearthattheagencywantedtosendamessagenotonlytothefirm,buttotheentireindustry.

Follow-upFabriceTourre’sbattle,however,didnotstopthere.AstheNewYorkTimesstated,“Mr.TourrewasfoundliableinAugust[2013]onsixcountsofcivilsecuritiesfraudafterathree-


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weekjurytrialinLowerManhattan.”Hehassincefiledforaretrial(September2013)because“therewasalackofevidencetosupportthejury’sdecisiononsomecountsandthatevidencewasnotpresentedtothejuryinotherinstances.”Tourreisstillawaitingajudgment.

ReflectionsonGoldmanSachsandtheABACUSProductTheeconomicenvironmentisoftenoneoftheprimaryforcesbehindstakeholderdecisions,asinthiscase.Thewayinwhichtheeconomicclimateistrendingmaybeapredictorofmanybusinessdecisions.ThiswasundoubtedlythecaseinGoldmanSachs’decisiontostructure,market,andsellCDOs.GoldmanSachsandFabriceTourrerealizedtheimpendingcollapseofthehousingmarketandtheresultinglossesforthefirm.Paulson&Co.alsounderstoodtheeconomicclimateandbetagainstthemortgage-backedsecuritiesthatGoldmanSachssoldtoinvestors.

ThegovernmentandlegalenvironmentalsomadeitpossibleforGoldmanSachstoengageinunethicalpractices.ThelackoftransparencyinmarketingmaterialsfortheABACUSproductwasnotuncommon.Investmentbankswerenotforcedtodisclosetoratingagenciestheinvestorsintheproduct,norweretheyrequiredtoidentifythesecurityselectionprocess.ACA,theobjectivethirdparty,hadtheopportunitytoreviewallthesecuritiesintheportfolio,aswastheirlegalright,butbecauseofthelackofalegalobligationforGoldmanSachstodisclosecertaininformation,ACAwasataconsiderabledisadvantagewhenitcametimetoevaluatemanyoftheunderlyingassetsintheportfolio.

CorporateCrisisManagementPhasesAninterestingaspectoftheGoldmanSachscasewasthereactionofthefirmtothefilingoftheSEClawsuit.ThecorporatesocialresponsestagesincrisismanagementframeworksappropriatelydescribetheexperiencesthatcharacterizedGoldmanSachs’dealingwiththelawsuit.Duringthe“reaction”stage—whenthecrisisfirstoccurred—afirmisunsureofallthefactssurroundingthecrisis,butmustlookconfidentforitsstakeholders.GoldmanSachs’stockplummetedwhenwordofthelawsuithitWallStreet.CEOLloydBlankfeincategoricallydeniedanywrongdoing,insistingthatthechargeswerefraudulent.Thisledtothesecondstage,“defense,”whenafirm’sreputationisatriskandspeculationarisesastothefutureofthefirm.InGoldman’scase,analystswerepredictingbillion-dollarfinesandchangesatthemanagementlevel.The“insight”stagesoonfollowsasafirmisforcedtoconsiderthefactthattheymaybeatfault.ToappeasetheSEC,GoldmanSachsnotonlyconductedaninternalreviewoftheABACUSproduct,butalsoofmanysimilarproducts.Thisledtothefourthstage,“accommodation,”whenafirmacknowledgeswrongdoing,apologizes,andreassuresthepublicofitsstability.GoldmanSachsapparentlyturnedtraderFabriceTourreintoascapegoat,distancingitselffromhimandclaimingthathehadcontrolovertheABACUSproduct.ThefirmalsosettledwiththeSECforarecordsum,butstillfarshortofthepredictedestimates.TheSECvowedtoimplementregulationthatwouldincreasetransparencyinthemarketingofcomplexsecurities,andGoldmanSachspledgedtoincreaseoversightinthestructuringandsellingofthesesecurities.GoldmanSachs’stockishigheratthetimeofwritingthanitwasprevioustothelawsuit.


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QuestionsforDiscussion1.WasGoldmanSachsjusttakingadvantageofasituationalopportunityinthemarketplaceinthiscase?Explainandjustifyyouranswer.

2.Who,ifanyone,wastoblamefortheillegalactionstakeninthiscaseandwhyorwhynot?3.Whopaidandatwhat“price”forthefinancial/economicandsocialcostsofthetransactionsandresultsoftransactionshere?

4.Dotheendsjustifythemeansinthiscase,asitturnsout?Explainandofferevidence.5.Whatethicalandsocialresponsibilitylessonscanyouofferfromthiscaseandtheaftermath?Explain.

SourcesThiscasewasdevelopedfrommaterialcontainedinthefollowingsources:

Barr,Colin.(April16,2010).SECchargesGoldmanSachswithfraud.CNNMoney.http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm,accessedJanuary7,2014.

Cook,Nancy.(May5,2010).FabriceTourre’snewstreetcred.Newsweek.com.http://www.newsweek.com/2010/05/05/fabrice-tourre-s-new-street-cred.html,accessedJanuary7,2014.

Craig,S.(October1,2013).FabriceTourreseeksanewtrial.DealBookNYTimes.com.http://dealbook.nytimes.com/2013/10/01/fabrice-tourre-seeks-a-new-trial/,accessedJanuary7,2014.

FabriceTourre:“Ididnotmisleadinvestors.”(April27,2010).CBSNews.com.http://www.cbsnews.com/stories/2010/04/27/business/main6436951.shtml,accessedJanuary7,2014.

Goldfarb,ZacharyA.(April24,2010).SECconfidentonIKBpartofGoldmanSachslawsuit.WashingtonPost.com.http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042305223.html,accessedJanuary7,2014.

Goldman,Sachs&Co.(July15,2010).SettlementwiththeSEC.GoldmanSachs.com.http://www2.goldmansachs.com/our-firm/on-the-issues/sec-settlement.html,accessedFebruary5,2011.

GoldmanSachs“victory”usherschangeforWallStreet.(July16,2010).Bloomberg.com.http://www.businessweek.com/news/2010-07-16/goldman-sachs-victory-ushers-change-for-wall-street.html,accessedJanuary7,2014.

GoldmansettleswithS.E.C.for$550Million.(July15,2010).DealBookNYTimes.com.http://dealbook.nytimes.com/2010/07/15/goldman-to-settle-with-s-e-c-for-550-million/,accessedApril23,2012.

Moyer,L.(April26,2010).Blankfein:SECcasefiling“oneoftheworstdaysinmyprofessionallife.”Forbes.com.http://blogs.forbes.com/streettalk/2010/04/26/blankfein-sec-case-filing-one-of-the-worst-days-in-my-professional-life/,accessedJanuary7,2014.

PaulsonsaysroleinGoldmanCDOwas“appropriate.”(April,212010).Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm

http://www.newsweek.com/2010/05/05/fabrice-tourre-s-new-street-cred.html

http://dealbook.nytimes.com/2013/10/01/fabrice-tourre-seeks-a-new-trial/

http://www.cbsnews.com/stories/2010/04/27/business/main6436951.shtml

http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042305223.html

http://www2.goldmansachs.com/our-firm/on-the-issues/sec-settlement.html

http://www.businessweek.com/news/2010-07-16/goldman-sachs-victory-ushers-change-for-wall-street.html

http://dealbook.nytimes.com/2010/07/15/goldman-to-settle-with-s-e-c-for-550-million/

http://blogs.forbes.com/streettalk/2010/04/26/blankfein-sec-case-filing-one-of-the-worst-days-in-my-professional-life/

http://www.bloomberg.com/news/2010-04-21/paulson-co-tells-investors-its-role-in-goldman-cdo-was-appropriate-.html,accessedJanuary7,2014.

Swanson,Jann.(October22,2008).Ratingagencieshitforroleinfinancialcrisis.MortgageNewsDaily.http://www.mortgagenewsdaily.com/10232008_Ratings_Agencies_.asp,accessedJanuary7,2014.

U.S.SecuritiesandExchangeCommission(SEC).(April16,2010).SECchargesGoldmanSachswithfraudinstructuringandmarketingofCDOtiedtosubprimemortgages.SEC.gov.http://www.sec.gov/news/press/2010/2010-59.html,accessedFebruary4,2011.


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http://www.bloomberg.com/news/2010-04-21/paulson-co-tells-investors-its-role-in-goldman-cdo-was-appropriate-.html

http://www.mortgagenewsdaily.com/10232008_Ratings_Agencies_.asp

http://www.sec.gov/news/press/2010/2010-59.html

Case11GoogleBooks

InOctober2008,abroadclassofauthorsandpublishers,theAuthorsGuild,theAssociationofAmericanPublishers,andGoogleannouncedasettlementagreementthatwillunlockaccesstomillionsofout-of-printbooksintheU.S.andgiveauthorsandpublishersnewwaystodistributeandcontrolaccesstotheirworksonline.IfapprovedbytheCourt,thesettlementwill:•Generategreaterexposureformillionsofin-copyright,out-of-printbooks,byenablingstudents,scholars,andreaderstosearch,preview,andpurchaseonlineaccesstotheseworks;

•Opennewopportunitiesforauthorsandpublisherstoselltheircopyrightedworksandtomaintainongoingcontroloverthewaysthosebookscanbedisplayed;

•Createanindependent,not-for-profitBookRightsRegistrythatwilllocateandrepresentrightsholders,makingiteasierforeveryone,includingGoogle’scompetitors,tolicenseworks;

•OfferameansforU.S.colleges,universities,andotherorganizationstoobtainsubscriptionsforonlineaccesstocollectionsfromsomeoftheworld’smostrenownedlibraries;

•Providefree,full-text,onlineviewingofmillionsofout-of-printbooksatdesignatedcomputersinU.S.publicanduniversitylibraries;and

•Enableunprecedentedaccesstothewrittenliteraryrecordforpeoplewhoarevisuallyimpaired.

Theabovesettlementagreementcontinuestobecontroversialevenaftertherevision.TheCourtdeniedtherequestforfinalsettlementapprovalonMarch22,2011.ThecasethenpingedbackontothedeskofjudgeDennyChin,who,toconsiderfairuse,willhavetolookatissuessuchasthe“purposeandcharacter”ofthecopying.

Googlehasbecomesynonymouswithanewwaveofcompaniesseekingtobecometheleadersintheirindustriesandmakeanimpactontheworldthroughcreativity,socialresponsibility,andethicalbehavior.Googlebeganin1996asBackRub,asearchengineprojectcreatedbytwoStanfordComputerSciencegraduatestudents,LarryPageandSergeyBrin.GooglehassincebuiltsuchstrongbrandrecognitionthatitisnowlistedintheOxfordEnglishDictionaryasaverbcommonlyusedineverydaylanguage.Thecompanyisknownforitsmission“toorganizetheworld’sinformationandmakeituniversallyaccessibleanduseful.”GooglehascreatedmanytoolsandapplicationsthathaverevolutionizedhowpeopleusetheInternetandaccessinformation.Googleisnowaleadingsearchengineandmajorplayerintheadvertisingindustry,withkeywordadvertisingbeingtheprimarysourceofrevenueandmarketcapitalization.

BirthofGoogleBooksIn2003,GooglebeganitsdevelopmentofGoogleBooks,anonlineindexofmillionsofbooksthatcanbepreviewedorreadforfree.TheGooglePrintprogram,whichlaterbecameGoogle


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BookSearch(GoogleBooks)beganinDecember2003asan“experimentalprogramthatindexesexcerptsofpopularbooks,blendingthecontentfromtheseworksintoregularGooglesearchresults.”Atthispointintime,Amazonwasalreadyofferingaservicecalled“SearchInsidetheBook,”whichprovidedcustomerswithscreenshotsofvariouspagesofbooks,insomecasesmakingthefulltextofabookavailableonline.Initially,theGoogleBooksprojectmadeonlyverybriefexcerptsavailablefromsearchresults.Theseshortexcerptsusuallyincludedonlyauthorbiographies,jacketreviews,theinsidejacket,orthebook’sintroduction.IncludedalongwiththebriefexcerptswerelinkstopurchasethebookatAmazon,BarnesandNoble,andBooks-A-Million.Booksellersdidnothavetopayfortheselinks,nordidGoogleseemtobenefitfromanypurchasesresultingfromtheselinks.Googleworkedinpartnershipwithvariousprominentpublishinghouses,suchasDell,Knopf,RandomHouse,andFodor’sonthisprojectandshowedinterestin“workingwithrightsholderswhoownorcontrola‘substantial’amountofcontentforinclusionintheGooglePrintprogram.”

InDecember2004,theGooglePrintprogrampartneredwiththelibrariesofHarvard,Stanford,UniversityofMichigan,Oxford,andtheNewYorkPublicLibraryandbeganscanningbooks.InGoogle’sannouncementofthispartnership,cofounderLarryPageexplainedthat“EvenbeforewestartedGoogle,wedreamedofmakingtheincrediblebreadthofinformationthatlibrarianssolovinglyorganizesearchableonline.”ThispartnershipandthedigitizingofbookswastobeintegratedwiththeGoogleindextomakeitsearchableforusersworldwide,“increas[ing]thevisibilityofinandoutofprintbooks...mak[ing]itpossibletosearchacrosslibrarycollectionsincludingoutofprintbooksandtitlesthatweren’tpreviouslyavailableanywherebutonalibraryshelf...andgenerat[ing]booksalesvia‘BuythisBook’linksandadvertising.”

GoogleScholarInMay2005,Googleadded“institutionalaccess”totheirGoogleScholarprogram(thebetaversionwaslaunchedinOctober2004),whichallowedstudentsandotherresearchersto“locatejournalarticleswithintheirownlibraries.”Studentsandresearcherswerenowprovidedanopportunityto“discoverrelevantinformationsotheycanbuildontheworkofothersand‘standontheshouldersofgiants.’”

Alsoin2005,GoogleshoweditssupportforwritersandproducedthefirstMountainViewbookeventwithMalcolmGladwell,authorofBlinkandTheTippingPoint.ThisbegantheAuthors@Googleprogram,whichhashostedmorethan480authorsin12officesacrosstheUnitedStates,Europe,andIndia.

LegalImplicationsOnSeptember20,2005,theAuthor’sGuild,Inc.andcertainnamedindividualauthorsbroughtaclass-actionsuitagainstGoogleforcopyrightinfringementbyscanninglibrarybooksandintendingtousethescannedworksontheGooglewebsitewithoutpriorauthorizationfromtheauthors/copyrightowners.Amonthlater,agroupofpublishersbroughtasimilarsuit,allegingthatGooglehadrefusedtoobtainpriorauthorizationfrompublishersforitsLibraryProject,relyinginsteadonthedoctrineof“fairuse.”Googleansweredthepublishers’complaintin


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2005andanamendedclass-actioncomplaintinmid-2006,assertingaffirmativedefensesoftheFirstAmendmentoftheUnitedStatesConstitution(freespeech)and“oneormoreoftheexceptionsto17U.S.C.§106[theexclusivecopyrightrights,includingreproductionandpublicdisplay,allegedlyinfringed]setforthat17U.S.C.§§107-122[including“fairuse,”archivaluseandlibraryuse].”The“fairuse”exceptionissetforthasfollows:

§107.Limitationsonexclusiverights:FairuseNotwithstandingtheprovisionsofsections106and106A,thefairuseofacopyrightedwork,includingsuchusebyreproductionincopiesorphono-recordsorbyanyothermeansspecifiedbythatsection,forpurposessuchascriticism,comment,newsreporting,teaching(includingmultiplecopiesforclassroomuse),scholarship,orresearch,isnotaninfringementofcopyright.Indeterminingwhethertheusemadeofaworkinanyparticularcaseisafairusethefactorstobeconsideredshallinclude—(1)thepurposeandcharacteroftheuse,includingwhethersuchuseisofacommercialnatureorisfornonprofiteducationalpurposes;(2)thenatureofthecopyrightedwork;(3)theamountandsubstantialityoftheportionusedinrelationtothecopyrightedworkasawhole;and(4)theeffectoftheuseuponthepotentialmarketfororvalueofthecopyrightedwork.

Thefactthataworkisunpublishedshallnotitselfbarafindingoffairuseifsuchfindingismadeuponconsiderationofalltheabovefactors.

Becausetheentirebookwasscanned,factor(3)weighedagainstGoogle,whoarguedthatonlyportionsweremadeavailableforaparticularsearch(seenextsection)andthatitsusewas“transformative”—itdidn’tservethesamepurposeasthecopyrightedworkrelativetofactor(1),andtheeffectofthesearchuseactuallypromotedthemarketforthefullcopyrightedworks,particularlyout-of-printorobscureworksunderfactor(4),nothwithstandingGoogle’scommercialbenefitthroughadvertisingunderfactor(1).

InAugust2006,100librarieson10campusesoftheUniversityofCaliforniajoinedtheGoogleBooksLibraryProjectandGoogle’sBookSearchbegantoofferfreePDFdownloadsofbooksinthepublicdomain.GoogleBookswasabletoofferitsreaderstheabilitytodownloadandreadPDFversionsofout-of-copyrightbooks.Intheannouncementofthenewpartnership,Googlenoted,“wedonotenabledownloadingofanybookcurrentlyundercopyright.Unlesswehavethepublisher’spermissiontoshowmore,wedisplayonlysmallsnippetsoftext—atmost,twoorthreesentencessurroundingyoursearchterm—tohelpyoudetermineifyou’vefoundwhatyou’relookingfor.”

GooglePatentSearchInDecember2006,GooglereleasedGooglePatentSearch,whichusesthesametechnologyasGoogleBooksSearch.UtilizingtheUnitedStatesPatentandTrademarkOffice(USPTO),GooglePatentSearchsearchespatentsissuedintheUnitedStatesthatarepublic-domaingovernmentinformation,andimagesoftheentiredatabaseofU.S.patentsreadilyavailableonlineviatheUSPTOwebsite.

TheLegalBattleContinuesAsapublicdebateoverGoogle’sfairusecontinued,theGoogleBooksclassactionwentthroughfurtherproceedings.“InOctober2008,Googleannouncedasettlementagreementwithabroadclassofauthorsandpublisherstomaketheworld’sbooksevenmoreaccessibleonline.Ifapproved,theagreementwillhelpreadersaccessmillionsofhard-to-find,out-of-


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printbooks;itwillprovidenewopportunitiesforauthorsandpublisherstoselltheirworks;anditwillfurthertheeffortsofourlibrarypartnerstopreserveandmaintaintheircollectionswhilemakingbooksmoreaccessibleforpeopleontheirhomecomputers,intheiracademicinstitutions,andinpubliclibrariesacrosstheU.S.”

ThesettlementprovidedaRegistryoverseeingcopyrightedworksforwhichpaymentswouldbemadebyGooglefordistributiontocopyrightholdersandthatworkswouldbeautomaticallyincluded,unlessthecopyrightholdersexpresslyoptedout.Sincethattime,hundredsoflettersandformalobjectionshavebeenfiledwiththecourtfromauthorsandpublisherswhooptedout.ManyofthesealsoobjectedtothecontrolGooglehadovercopyrightedworksthroughtheoperationoftheRegistry.Althoughpreliminarilyapproved,afairnesshearingforfinalapprovalofthesettlementagreementwasdelayed.

InDecember2008,GoogleexpandedGoogleBookSearchtoincludemagazinearticlesbypartneringwithdifferentpublishers.Thispartnershipgaveaccesstothearchivesofmagazinesthatwereotherwiseinaccessibletoreaders.

“OnNovember13,2009,thepartiestothesettlementfiledanamendedagreementwiththeU.S.DistrictCourtfortheSouthernDistrictofNewYork.Overthelastseveralmonths,wehavebeencarefullyreviewingthesubmissionsfiledwiththeCourt,includingthatoftheDepartmentofJustice.Thechangesmadetothesettlementweredevelopedtoaddressmanyoftheseconcerns,whilepreservingthecorebenefitsoftheagreement.”

Theamendedagreementcreatedan“UnclaimedWorksFiduciary”toaddresstheinterestsofthosewhohadnotyetclaimedtheirworks,andotherwiseprovidedfornegotiationofrevenuesplits.ThecourtpreliminarilyapprovedtheagreementonNovember19,2009,andafairnesshearingwasscheduledforFebruary18,2010.TheU.S.DepartmentofJusticefiledanobjection,statinginapressreleasethat“thechangesdonotfullyresolvetheUnitedStates’concerns.The...amendedsettlementagreementstillconferssignificantandpossiblyanticompetitiveadvantagesonGoogleasasingleentity,therebyenablingthecompanytobetheonlycompetitorinthedigitalmarketplacewiththerightstodistributeandotherwiseexploitavastarrayofworksinmultipleformats.”

TheAppealCourtrulingisaverystrongsignaltoJudgeDennyChinthatfairusedoesindeedapply.“WebelievethattheresolutionofGoogle’sfairusedefenseinthefirstinstancewillnecessarilyinformandperhapsmootouranalysisofmanyclasscertificationissues,includingthoseregardingthecommonalityofplaintiffs’injuries,thetypicalityoftheirclaims,andthepredominanceofcommonquestionsoflaworfact,”therulingreads.Ashasbeennotedwithregardtothe“fairuse”policy,“GooglehasbeenscanningallsortsofbooksandpublishingtheminthepopularGoogleBooksservice.Booksthatareoutofcopyrightareavailableintheirentiretywhilebooksthatareprobablyprotectedbycopyrightlawsmaybesearchedbutonlysmallsnippetsofthetextaredisplayedtotheuser.”

JudgeBarringtonD.Parkercitedthe“enormoussocietalbenefit”thatwouldresultwhensomeoneathomeinMuncie,Indiana,accessedbooksthatotherwisewouldrequireatriptoadistantlibrary.Thejudgealsoreferredtothe“logicofthething”ashedescribedhowanacademicauthoreagertogetatreatisereadbyotherresearchersmightwelcomeGooglecopyingtheworkratherthancollecting“afewdollarsindamagesbecauseGoogleputitintheirdatabase.”


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TheAuthorsGuildisseeking$750indamagesforeachcopyrightedbookGooglecopied,whichwouldcostGooglemorethan$3billion,GoogleattorneySethWaxmansaid.TheAuthorsGuildarguesGoogleisnotmaking“fairuse”ofcopyrightedmaterialbyofferingsnippetsofworks.Googlehasdefendeditslibrary,sayingitisfullycompliantwithcopyrightlaw.

GoogleasaStakeholderGoogle’smissionisaltruisticbynature.Thecompanyhandlesitsinternalorganizationandemployeesbyusinganenvironmentoftrustinemployeesandtheirworkethic.Googleachievesitswell-knowncreativeandcasualworkplaceenvironmentthroughanemphasison“teamachievementsandprideinindividualaccomplishmentsthatcontributetoouroverallsuccess...put[ting]greatstockinouremployees–energetic,passionatepeoplefromdiversebackgroundswithcreativeapproachestowork,playandlife.”FosteringcreativityintheiremployeeshasbeenakeyattributeofGoogleandhastrulysetthemapartfromothercompanies.IthasalsobroughtaboutmanyinnovativeprojectsthatGoogleandthegreaterworldhasbeenbeneficiaryto.Googlemakesagreatpriorityofdocumentingthesecompanyidealsthatalignwiththeirmissionandreferencestheseidealsinalloftheirprojects.

ThewaythatGooglehaschosentointerpretandreinterpretitsfamousmissionhasbeenthecenterofmuchdebate,notonlyinregardtoGoogleBooksbutalsoitsrelationshipwithChina.WhenGooglefirstannouncedthatitwouldbeenteringChina,manyofitshistoricallylargestsupportersralliedtoprotestthisexpansion,citingthatifthecompanyenteredChina,itwouldbegoingagainstitsmissionbecauseoftheChinesegovernment’shistoryofcontrollingwhatinformationcitizenswereallowedtoaccess.Googlechosetointerpretitsmissionmorebroadlyandarguedthatitwasbringinginformationtoapopulationthatdeservedsearchcapabilities,notwithstandingsomecensorship.Inrecentmonths,GooglehasunfortunatelystruggledinChina.

AmongthestakeholdersinthiscaseareGoogle’semployees,partners,clients/advertisers,andproductdevelopers.Thepublicshareholders—whoareinterestedinhighersharepricesandpossibledividends—maysupportGoogleBooksandthesettlementifitislikelytoincreaseprofits,withoutregard(necessarily)toGoogle’sstatedmission.Otherstakeholders(withregardtotheGoogleBooksproject)aretheAuthorsGuild,theirauthors,publishers,libraries,schoolsanduniversities,theirprofessors,currentstudents,prospectivestudents,alumni,newspapers,magazines,bloggers,independentwriters,journalistsandresearchers,variousadvocacygroups,variouslaw/researchcommunities(whichincludetheintellectualpropertycommunityetc.),andGoogle’scompetitors,whichincludeAmazon,Apple,andMicrosoft.TheotherstakeholdersthatareinthebroaderreacharetheU.S.government,varioustrade-industrygroups,theprintindustry,internationalgovernments,andotherfarreachingusers.

ConclusionGoogleprogramslikeGoogleBooks,GoogleScholar,andGooglePatentSearchhavethepotentialtoserveasaninvaluableresourcebycompilingandindexingresearchandworks


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fromcountriesacrosstheglobe.Thecompilingprocess,however,presentsseveralethicaldilemmas—particularlyregardingtheownershipofworksscannedandcompiled.Thishasalreadybeenseenthroughlawsuitsliketheclass-actionsuitbroughtbyauthors,publishers,theAuthorsGuild,andtheAssociationofAmericanPublishers,whichresultedintheOctober2008settlement.Thesettlementhassincefallenthroughandtheclass-actionlawsuitwasrestartedbytheAuthorsGuildinDecember2011.TheAuthorsGuildisdemandingthatGooglepayauthorsforworksscannedwithoutpermission.“JimPitkow,whosoldaWeb-searchcompanytoGooglein2001,said‘Googlehasprobablyspenthundredsofmillionsofdollarsscanningbooksandthathasnotbeenlegitimized.’”Anewsurveyhasshown,however,thatauthorsarebenefitingfromtheirworksbeingpostedonGoogleBooksandthatthesitemakesworkseasiertofind.

GoogleisworkingtoaddresscopyrightanddomainissuesinordertomakeitsindexavailabletoworldwideInternetsearchesandfinallysettlethelong-standingbattlewiththeAuthorsGuild.

ManyissuesareatstakeforthesevariousstakeholdersandeachoftheirperspectivescouldprovetohavevariousimpactsandmeaningsforGoogle.Themostprominentviewpointthathasbeenattheheartofthedebateisthatoftheauthors,writers,andcreatorsoftheworksthatarebeingscannedandmadeavailableonGoogleBooks.AsstatementsonGoogleBooksindicate,thesestakeholdersaremadeupof“supportive,”“non-supportive,”and“mixedblessing”stakeholders,asdiscussedinChapter2.Someauthors,particularlylesser-knownandpoorlypublishedones,welcometheaccessibilityoftheirworkstothepublicbecauseoftheGoogleindexingandsearchcapabilities—thesearelikethelesser-knownmusiciansunrepresentedbyrecordlabelswiththeirmarketingpowerwhowelcomedfile-sharing.Popularauthorsandpublishers—likemanypopularmusiciansandtherecordlabels—mayfindtheirworkpiratedinperfectandcostlessdigitalcopies,directlydiminishingtherewardsfortheirefforts.Otherstakeholders,includingsomeauthors,Googlecompetitorsalongitslengthyverticalchain,andtheU.S.DepartmentofJustice,areconcernedaboutthepowerGoogleholdsincontrollingtheRegistryestablishedinthesettlementandamendedsettlement.

Attheheartofauthors’claimsiscopyright.IntheUnitedStates,theConstitution,articleI,section8,clause8,providesforthepowerofCongress“TopromotetheProgressofScienceandusefulArts,bysecuringforlimitedTimestoAuthorsandInventorstheexclusiveRighttotheirrespectiveWritingsandDiscoveries.”Thosewhofavoralimitationofauthors’rightstorestrictdisseminationoftheirworksoftenrefertothisconstitutionalquidproquo,arguingthatcopyrightshouldsupportsociety’sprogressbylimitedincentives,whicharesecondarytothegreatergood.Ofcourse,thesameargumentthatsupportsGoogle’sseekingaprofitforprovidingdigitalmeansofdisseminationofknowledgesupportsanauthor’sseekingaprofitforprovidingcontenttobedisseminated.

Congresscodifiedat17U.S.C.§107,setoutabove,fourfactorstobeassessedindeterminingafairuseexemptionfromcopyrightclaims.Thismeansthatyoucancopysmallpartsforuseinotherworks(suchasapaper)aslongasthiswasnotforprofitorwouldnotaffectthemarketforthecopyrightedwork.Italsoallows“transformativeuses,”suchasthe“HairyWoman”parodyof“PrettyWoman”by2LiveCrew.Also,archiving(digitizing)ofyourowncopiesofbooks—forexample,alibraryphotocopyingitsdecayingmanuscripts—is


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specificallyprovidedinlaw.IntheoriginalGoogleBooksproject,universitylibrarieswerebeingarchived,availingof

thearchiveexceptiontocopyright.Asmentionedabove,Googlealsodefendedthecopyrightinfringementactionsonthebasisofthefairuseofdisplayingsnippetsofacopyrightedworkasresultsforkeywordsearches,arguingthatthiswasatransformativeuse.

Asmentioned,theearlyfearwasthecostlessdigitaldisseminationofcopyrightedworks,asexemplifiedbythedigitization(MP3)andcostlesscopyingofmusicpopularizedfirstbyNapsterfile-sharing.Inanearlier,analogworld,intheBetamaxcase,theSupremeCourtfoundthatdamagetothemarketforcopyrightedtelevisionprogramsbyvideotaperecordingfor“time-shifting”wasspeculative,sosuchrecordingwasfairuse,whichledtothedevelopmentofthevideotapeindustry.Butvideotapescouldnotbecopiedoverandoveragainwithoutdegrading—unliketheperfectcopiesofdigitalmusic.

Thedebate,however,hasnowfocusedonthecontrolofthedistributionbyGoogle.Thequestioniscontrolofpricing.Intheoneprominentdigitalmusicdistributionschemethathasresultedinsteadyrevenues,Apple’siTunes,Applecontrolsdistributionbyroutinelyupdatingitssecuritycodeandbychargingasinglerate($0.99)forasong,popularorunpopular.Asexpected,musicians(ormoreoften,theirrecordinglabels)whoareingreaterdemandcomplainthattheirsongsshouldcommandhigherprices(androyaltiestothem).Interestingly,Amazonfollowedasimilarpricingstrategyinitsstandard$9.99forKindledownloads,butisnowchallengedbyApple,whohasattractedpublishersbygoingto$19.99foriPaddownloads.Amazonhasbeenforcedtobemoreflexibleinitsprices.Isfreerflowofinformationpromotedbylower,standardpricesforbooksestablishedbydistributorssuchasGoogle,Amazon(contestingGoogle)andApple(contestingAmazon)?Ordothein-demandcontentprovidershavethebetterargumentthattheyshouldcommandhigherprices?

Theletterofthecopyrightlawoffairuseisnotclearlydeterminative.Courtsaremovedbypolicyconsiderationsandethicalconcepts.Thus,theBetamaxcaseturnedinpartbecauseFredRogerstestifiedatthetrialcourtthathewantedchildrentobeabletowatchhisprogrambytime-shifting;thatis,recordingforlaterviewing.

Googledidnotgoallthewaytotryitsfair-usedefense,butsettledonarevenuesplittingschemethatpromisestohelplesser-knownauthorstoreaproyalties.Whetherthebetter-knownauthorsandtheirpublisherssucceedinwrestingcontrolmaydependonhowwelltheyassessthemarketatdoubletheAmazonprice.

Inconclusion,Google’sattempttomaintainitsaltruistmission,“toorganizetheworld’sinformationandmakeituniversallyaccessibleanduseful,”assupportedbyitsneedforrevenuestosupportthiseffort,isalignedwithsomeauthors(lesser-knownauthorsinneedofexposure)andwithitsinvestors(ontherevenueside),butitstillconflictswiththeclaimstoincentivesbybetter-knownauthorsandtheirpublishers.Inaddition,Google’scontroloftheRegistryinthesettlementisperceivedbymany(theircompetitors,theU.S.,andinternationalgovernments)asathreattocompetitioninthemarketplace.WhileGooglesettledwithsomeofthe“non-supportive”stakeholders,theyhaveyettosatisfyotherauthorswhoarestillfearfulthattheirworkwillbeundervaluedandpirated.

Thereisamoraltensionbetweenthe“publicgood”rationaleoftheU.S.Constitution


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incentivetoauthorsandanaturalrightthatauthorsfeelexistsregardlessoftheaforementionedpublicgood.InEurope,manyhavebeenrallyingtofighttheGoogleBooksproject,astheybelieveinauthors’naturalrightsand“moralrights”totheircreations.Tomaintaintheintegrityandcontrolofone’screationisaprinciplesharedbymanyandisitselfthoughtofastheultimatepublicgood.

QuestionsforDiscussion1.Inyouropinion,shouldGooglebeallowedtocopybooksandpostthemonlinewithouttheexplicitknowledgeand/orpermissionoftheauthors?Whyorwhynot?

2.Whatcontrolshouldauthorshaveovertheaccesstotheirworksonline?3.IfyouwereGoogle,wouldyouhaveaskedforpermissionpriortopostingbooksorpostedthemandthenaskedforforgivenesswhennecessary?Explain.Howdoesthisreflectyourpersonalethics?

4.DoyouthinkGoogle’sstrongbrandrecognitionandsizeallowsittogetawaywithmorethanothercompaniesorindividuals?Whyorwhynot?

5.IstheGoogleBooksideafundamentallywrong?Whyorwhynot?Whatpotentialbenefitsdoesithavetosociety?

SourcesThiscasewasdevelopedfrommaterialcontainedinthefollowingsources:AmendedSettlementAgreement,TheAuthor’sGuildInc.etal.v.Google,Inc.,No.05CV8136(S.D.N.Y.November13,2009).

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Efrati,A.,andJ.A.Trachtenberg(March23,2011).JudgerejectsGoogleBookssettlement.WSJ.com.http://online.wsj.com/article/SB10001424052748704461304576216923562033348.html,accessedApril18,2012.

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Notes1.TJX’sV.A.L.U.E:Corporatesocialresponsibilityreport2013isavailableat

http://www.tjx.com/images/corp_resp/pdf/TJX2013_CSR_online.pdf,accessedJanuary6,2014.SeealsoTJXCompaniesnow#95largestcompany,surpassingCapitalOneFinancial.(2013).Forbes.com.http://www.forbes.com/sites/dividendchannel/2013/09/18/tjx-compa-nies-now-95-largest-company-surpassing-capital-one-financial/,accessedJanuary6,2014.

2.TheTJXCompanies,Inc.victimizedbycomputersystemsintrusion;providesinformationtohelpprotectcustomers.(January17,2007).BusinessWireNewsReleases.http://finance.boston.com/boston/news/read/911239/the_tjx_companies,accessedFebruary3,2014.

3.VisafinesTJXcreditcardprocessor.(October29,2007).SCMagazine.http://www.scmagazine.com/visa-fines-tjx-credit-card-processor/article/58255/,accessedJanuary6,2014.

4.Lemos,R.(March30,2007).TJXthefttops45.6millioncardnumbers.Security-Focus.http://www.securityfocus.com/news/11455,accessedJanuary6,2014.

5.Kerber,R.(August21,2007).SuspectnamedinTJXcreditcardprobe.Boston.com.http://www.boston.com/business/personalfinance/articles/2007/08/21/suspect_named_in_tjx_credit_card_probe/accessedJanuary6,2014.

6.Goodin,D.(May13,2008).TJXcreditcardheistsuspect,2others,accusedofnewscam.Register.http://www.theregister.co.uk/2008/05/13/trio_accused_in_carding_scam/,accessedJanuary6,2014.

7.TheTJXCompanies,Inc.reportsstrongsecondquarterFY08operatingresults;Estimatesliabilityfromcomputersystemsintrusion(s).(August14,2007).TheTJXCompanies,Inc.viaBusinessWireNewsReleases.http://finance.boston.com/boston/news/read/2899835/the_tjx_companies,accessedFebruary3,2014.

8.Bangemen,E.(May6,2007).Blameforrecord-breakingcreditcarddatatheftlaidatthefeetofWEP.ArsTechnica.http://arstechnica.com/news.ars/post/20070506-blame-for-record-breaking-credit-card-data-theft-laid-at-the-feet-of-wep.html,accessedJanuary6,2014.

9.Lemos,op.cit.10.NewsonArchives.(March26,2008).TJXCos.settleswithMasterCard.

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11.CodeofethicsforTJXexecutives.(n.d).http://www.tjx.com/files/pdf/corp_resp/Code%20of%20Ethics%20for%20TJX%20Executives.pdfaccessedFebruary9,2012.

12.ThesedefinitionsarebasedonCarroll,A.(1979).Athree-dimensionalconceptualmodelofcorporatesocialperformance.AcademyofManagementReview,4(4),39–48;Davis,K.,andR.Blomstrom,(1975).Businessandsociety:Environmentandresponsibility,3rded.,39.NewYork:McGraw-Hill;McGuire,J.(1963).Businessandsociety.NewYork:McGraw-Hill;ForthePatagoniaillustration,see:http://www.patagonia.com/us/patagonia.go?


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assetid=37492.13.HRM’sroleincorporatesocialandenvironmentalsustainability.

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14.Widman,J.(March12,2011).10massivesecuritybreaches.InformationWeek.http://www.informationweek.com/news/galleries/security/attacks/229300675,accessedFebruary9,2012.

15.Szwajkowski,E.(December2000).Simplifyingtheprinciplesofstakeholdermanagement:Thethreemostimportantprinciples.BusinessandSociety,39(4),381.OtheradvocatesofthisinterpretationofSmith’sviewsincludeBishop,J.(1995).AdamSmith’sinvisiblehandargument.JournalofBusinessEthics,14,165;Rothchild,E.(1994).AdamSmithandtheinvisiblehand.AEAPapersandProceedings,8(2),312–322;Winch,D.(1997).AdamSmith’sproblemsandours.ScottishJournalofPoliticalEconomy,44,384–402.

16.Szwajkowski,op.cit.,381.17.Friedman,M.(September13,1970).Socialresponsibilityofbusinessistoincreaseits

profits.NewYorkTimesMagazine,122–136.18.Ibid.19.Bell,C.(April3,2001).Testingrelianceonfreemarket.BostonGlobe,C4.20.Palepu,K.,andP.Healy,(2008).Businessanalysisandvaluation.Mason,OH:

ThomsonSouth-Western.SeealsoSharp,A.(2010).LehmanBrothers’‘Repo105’accountingscandal.WealthDaily.com.http://www.wealthdaily.com/articles/lehman-brothers-enron-accounting-gimmicks/2375,accessedOctober27,2013.

21.Ibid.22.Samuelson,P.(1973).Economics,9thed.,345.NewYork:McGraw-Hill.This

discussionisalsobasedonVelasquez,1998,166–200.Velasquez,M.G.(1998).Businessethics:Conceptsandcases,4thed.EnglewoodCliffs,NJ:PrenticeHall.

23.Hillman,A.,andG.Keim,(2001).Shareholdervalue,stakeholdermanagement,andsocialissues:What’sthebottomline?StrategicManagementJournal,22,125.

24.Ibid.,136.25.Shareholdersvstakeholders:Anewidolatry.(April2010).Economist.

http://www.economist.com/node/15954434,accessedJanuary6,2014.26.Ibid.27.Schumpeter:Thepursuitofshareholdervalueisattractingcriticism—notallofit

foolish.(November2012).Economist.http://www.economist.com/news/business/21567062-pursuit-shareholder-value-attracting-criticismnot-all-it-foolish-taking-long,accessedJanuary6,2014.

28.Barton,Dominic.(May15,2013).Thecityandcapitalismforthelongterm.TheTomorrow’sValueLecture.McKinsey&Company.com.http://www.mckinsey.com/Search.aspx?q=The%20city%20and%20capitalism%20for%20the%20long%20term,accessedMarch3,2104.

29.Torabzadeh,K.,etal.(1989).Theeffectoftherecentinsider-tradingscandalonstockWeiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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http://www.wealthdaily.com/articles/lehman-brothers-enron-accounting-gimmicks/2375

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pricesofsecuritiesfirms.JournalofBusinessEthics,8,303.30.Thomas,T.,J.Schermerhorn,Jr.,andJ.Dienhart,(2004).Strategicleadershipof

ethicalbehaviorinbusiness.AcademyofManagementExecutive,18(2),56–66;Trevino,L.,etal.(1999).Managingethicsandlegalcompliance:Whatworksandwhathurts.CaliforniaManagementReview,41(2),131–151.

31.Trevino,op.cit.32.Drazen,L.(July8,2011).Americansstilllacktrustincompanymanagementpost-

recession.Maritz.http://www.maritz.com/Press-Releases/2011/Americans-Still-Lack-Trust-In-Company-Management-Post-Recession.aspx?intPage=0&Page-size=10,accessedFebruary9,2012.Seealso,20nationpollfindsstrongglobalconsensus:Supportforfreemarketsystem,butalsomoreregulationoflargecompanies.(January11,2006).

33.“20NationPollFindsStrongGlobalConsensus:SupportforFreeMarketSystem,ButalsoMoreRegulationofLargeCompanies.”(January11,2006).WorldPublicOpinion.org.http://www.worldpublicopinion.org/pipa/articles/btglobalizationtradera/154.php?nid=&id=&pnt=154&lb=btgl,accessedFebruary9,2012.

34.Nash,L.(1990).Goodintentionsaside:Amanager’sguidetoresolvingethicalproblems,101.Boston:HarvardBusinessSchool.

35.Ibid.,104.36.Davis,K.,andR.Blomstrom,(1966).Businessanditsenvironment.NewYork:

McGraw-Hill.37.Thomasetal.,op.cit.,60.AlsoseeWebb,D.J.(June22,2005).Theeffectsof

corporatesocialresponsibilityandpriceonconsumerresponses.JournalofConsumerAffairs.http://www.allbusiness.com/sector-92-public-administration/administration/1183444-1.html,accessedFebruary9,2012.

38.Aho,K.(2013).The2013CustomerServiceHallofFame.MSNMoney.http://money.msn.com/investing/2013-customer-service-hall-of-fame,accessedAugust20,2013.

39.Browne,J.,andR.Nuttall,(March2013).Beyondcorporatesocialresponsibility:Integratedexternalengagement.McKinsey&Company.http://www.mckinsey.com/insights/strategy/beyond_corporate_social_responsibility_integrated_external_engagementaccessedJanuary6,2014.

40.Conant,D.(September2013).WhyphilanthropyisR&Dforbusiness.McKinsey&Company.http://www.mckinsey.com/insights/corporate_social_responsibility/why_philanthropy_is_r_and_d_for_businessaccessedJanuary6,2014.

41.Dolan,K.(January1,2014).Billionaires,ledbyZuckerberg,digabitdeeperwith10biggestcharitablegiftsof2013.Forbes.com.http://www.forbes.com/sites/kerryadolan/2014/01/01/billionaires-led-by-zuckerberg-dig-deep-with-10-biggest-charitable-gifts-of-2013/,accessedFebruary27,2014.

42.Mento,M.D.(February10,2013).No.1:WarrenBuffett.ChronicleofPhilanthropy.http://philanthropy.com/article/No-1-Warren-Buffett/137111,accessedAugust20,2013.

43.Carroll,A.(1991).Thepyramidofcorporatesocialresponsibility:TowardthemoralWeiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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http://www.allbusiness.com/sector-92-public-administration/administration/1183444-1.html

http://money.msn.com/investing/2013-customer-service-hall-of-fame

http://www.mckinsey.com/insights/strategy/beyond_corporate_social_responsibility_integrated_external_engagement

http://www.mckinsey.com/insights/corporate_social_responsibility/why_philanthropy_is_r_and_d_for_business

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managementoforganizationalstakeholders.BusinessHorizons,34(4),39–48;CSRhasgainedcredibilityasbeingimportantasoperationaleffectiveness.TheInternationalInstituteforSustainableDevelopment(IISD),isconsideringthecreationofISOstandardsforcorporationsocialresponsibility;seeISOCSRstandards:WhatshouldanISOstandardonsocialresponsibilitylooklike?(July18,2012).IISD.org.http://www.iisd.org/standards/csr.asp,accessedJanuary6,2014.

44.Albinger,H.,andS.Freeman,(2000).Corporatesocialperformanceandattractivenessasanemployertodifferentjobseekingpopulations.JournalofBusinessEthics,28(3),243–253;Fombrun,C.,andM.Shanley,(1990).What’sinaname?Reputationbuildingandcorporatestrategy.AcademyofManagementJournal,33,233–258.SeecurrentarticlesoncorporatereputationintheCorporateReputationReview,onlineathttp://www.ingentaconnect.com/content/pal/crr.

45.SeethecurrentTrendsreportattheSocialInvestmentForum’swebsite,http://www.socialinvest.org.

46.Turban,D.,andD.Greening,(1997).Corporatesocialperformanceandorganizationalattractivenesstoprospectiveemployees.AcademyofManagementJournal,40,648–672.AlsoseeOrlitzky,M.,etal.(May—June2003).Corporatesocialandfinancialperformance:Ameta-analysis.OrganizationalStudies,24,403–442.

47.Alsop,R.(2001).Corporatereputationsareearnedwithtrust,reliability,studyshows.WallStreetJournal.http://webreprints.djreprints.com/00000000000000000012710003.html,accessedFebruary3,2014.

48.ReputationInstitute.(2011).TheGlobalRepTrak100:Astudyoftheworld’smostreputablecompaniesin2011.http://www.reputationinstitute.com/thought-leadership/complimentary-reports-2011,accessedJanuary6,2014.

49.Alsop,R.,op.cit.50.ReputationInstitute,op.cit.51.Foroohar,R.(September23,2013).“HowWallStreetwon:Fiveyearsafterthecrash,

itcouldhappenalloveragain.”Time,30–35.52.Krantz,M.(November24,2002).Webofboardmemberstiestogethercorporate

America.USAToday.http://www.usatoday.com/money/companies/management/2002-11-24-interlock_x.htm,accessedJanuary6,2014;Dallas,L.(1997).Proposalsforreformofcorporateboardofdirectors:Thedualboardandboardombudsperson.WashingtonandLeeLawReview,54(1),91–148;Daily,C.,andD.Dalton,(2003).Conflictsofinterest:Acorporategovernancepitfall.JournalofBusinessStrategy,24(4),7.

53.Lopez-de-Silanes,F.(April9,2002).Thecodeofbestpracticesandtheboardofdirectors.InternationalInstituteforCorporateGovernance.YaleUniversitypresentation.http://www.oecd.org/dataoecd/45/14/2086004.ppt,accessedFebruary13,2012.

54.Ibid.;Lipton,M.(December31,2012).Somethoughtsforboardsofdirectorsin2013.HarvardLawSchoolForumonCorporateGovernanceandFinancialRegulation.http://blogs.law.harvard.edu/corpgov/2012/12/31/some-thoughts-for-boards-of-directors-in-2013/,accessedAugust20,2013.

55.Ibid.Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.Created from apus on 2018-07-27 10:50:16.

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56.SpencerStuart.(2012).SpencerStuartBoardIndex.http://content.spencerstuart.com/sswebsite/pdf/lib/Spencer-Stuart-US-Board-Index-2012_06Nov2012.pdf,accessedFebruary28,2014.

57.TheSarbanes-OxleyActCommunityForum.http://www.sarbanes-oxley-forum.com;Sarbanes-Oxley.http://www.sarbanes-oxley.com;Lawrence,A.,etal.(2005).Businessandsociety,11thed.,305.Boston:McGraw-Hill;Ferrell,O.,etal.(2005).Businessethics,6thed.Boston:HoughtonMifflinCompany.

58.TheSarbanes-OxleyActof2002.(March2003).PricewaterhouseCoopers.http://www.pwc.com/en_US/us/sarbanes-oxley/assets/so_overview_final.pdf,accessedFebruary13,2012.

59.Foroohar,op.cit.60.EndingtheWallStreetwalk:Whycorporategovernancenow?(1996).Corporate

Governance.http://corpgo.fatcow.com/forums/commentary/ending.html,citedinSteiner,G.,andSteiner,J.(2003).Business,government,andsociety,10thed.,675.NewYork:McGraw-Hill.

61.Sweeney,P.(July/August2012).Sarbanes-Oxley—ADecadeLater.FinancialExecutivesInternational.http://www.financialexecutives.org/KenticoCMS/Financial-Executive-Magazine/2012_07/Sarbanes-Oxley--A-Decade-Later.aspx#axzz2cXRlPWK3,accessedFebruary3,2014.

62.Ibid.63.Volcker,P.,andA.Levitt,Jr.(June14,2004).IndefenseofSarbanes-Oxley.WallStreet

Journal,A16.64.Sarbanes-Oxleyactimprovesinvestorconfidence,butatacost.(October2005).CPA

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65.Hazels,D.(May4,2007).WhatarethebiggestprosandconsofSarbanes-Oxleylegislation?KansasCityBusinessJournal.http://kansascity.bizjournals.com/kansascity/stories/2007/05/07/focus3.html,accessedJanuary6,2014.

66.VolckerandLevitt,op.cit.;Lys,T.(November2009).Beneficialordetrimentallegislation?KelloggInsight.http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/beneficial_or_detrimental_legislation/accessedFebruary13,2012.

67.Hazels,op.cit.68.VolckerandLevitt,op.cit.69.Ibid.70.Ibid.71.Ibid.72.Ibid.73.UnitedStatesSentencingCommission.(January2003).Increasedpenaltiesunderthe

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