Business 303 Sheppard Business Society & Ethics, Week 6: Corporate Social Responsibility (CSR) In Practice Business Society & Ethics, Week 6: Corporate.

Business 303 SheppardBusiness 303 Sheppard Business 303 SheppardBusiness 303 Sheppard

Business Society & Ethics, Week 6:

Corporate Social Responsibility (CSR)

In Practice

Business Society & Ethics, Week 6:

Corporate Social Responsibility (CSR)

In Practice

Wk. 6-2

BUSINESS ETHICS WEEK 6: BUSINESS ETHICS WEEK 6: MAIN QUESTIONSMAIN QUESTIONS1.1. Why has tort liability expanded?Why has tort liability expanded?

2.2. What are the basic features of the corp.?What are the basic features of the corp.?

3.3. What’s the Received Legal Model?What’s the Received Legal Model?

4.4. What’s the Managerial Domination Model?What’s the Managerial Domination Model?

5.5. What are ways to increase the corp.'s What are ways to increase the corp.'s responsiveness to stockholders. responsiveness to stockholders.

6.6. What are the individual failures What are the individual failures that lead to corporate problems?that lead to corporate problems?

At a minimum shouldn’t we be responsible At a minimum shouldn’t we be responsible to the customer or at least to the shareholder?to the customer or at least to the shareholder?

Wk. 6-3

1.1. Who is Responsible? Who is Responsible? (1/3)(1/3)

• Firm, consumer, or government? [373]Firm, consumer, or government? [373]• Who assumes the risk and liability [355]Who assumes the risk and liability [355]

– Lockean ProvisoLockean Proviso

• Is there an even playing field? Is there an even playing field?

• Legal Responsibility Legal Responsibility – Tort Liability [356]Tort Liability [356] – Unintended injuries [357] Unintended injuries [357]

Pricey way to handle a market info. failure?Pricey way to handle a market info. failure? A peculiarly American institution? A peculiarly American institution? A lack of desire to regulate arbitration? A lack of desire to regulate arbitration? The move from contractual consent The move from contractual consent

to coercion to pay a liability tax. to coercion to pay a liability tax.

Wk. 6-4

1.1. Who is Responsible? Who is Responsible? (2/3)(2/3)

• Legal Responsibility & Tort Liability [361]Legal Responsibility & Tort Liability [361]

– Implied warranties [360]Implied warranties [360]– No-fault system [365]No-fault system [365]

http://archives.cbc.ca/IDD-1-75-88/science_technology/thalidomide/

““Drugs & pharmaceutical devices were among the last Drugs & pharmaceutical devices were among the last products to be swept up in the design defect litigation.products to be swept up in the design defect litigation.

Until well into the 1970s, most courts accepted that Until well into the 1970s, most courts accepted that potent drugs often have unavoidable side effects…potent drugs often have unavoidable side effects…

Courts began to find design defects in… Courts began to find design defects in… [a list ending [a list ending with]with] morning sickness drugs, & intrauterine devices.” morning sickness drugs, & intrauterine devices.”

Wk. 6-5

1.1. Who is Responsible? Who is Responsible? (3/3)(3/3)

• Responsibility of the Consumer? Responsibility of the Consumer? – Calculation of risk and benefit [362]Calculation of risk and benefit [362]– Imposed versus voluntary risk [362]Imposed versus voluntary risk [362]

The need for personal responsibilityThe need for personal responsibility

• Responsibility of the firm?Responsibility of the firm?– Strict (not absolute) product liability [367]? Strict (not absolute) product liability [367]? – Reduce the risks of the product [369]Reduce the risks of the product [369]– Avoid deception and fraud [370]Avoid deception and fraud [370]– Access to information [371]Access to information [371]– Compensatory justice [372]Compensatory justice [372]

Wk. 6-6

2.2. Background on the Corporation Background on the Corporation (1/2)(1/2)

• Previous Issues Previous Issues Limits & controls to corp. behavior include:Limits & controls to corp. behavior include:– Lockean provisoLockean proviso

– NIMBYNIMBY

– Explicit and implicit lawsExplicit and implicit laws

– Kantian ethics for Kantian ethics for directors [591]directors [591]

2.2. Background on the Corporation Background on the Corporation (2/2)(2/2)

• The necessary legal fictionThe necessary legal fiction – Legal ‘let’s pretend’Legal ‘let’s pretend’ EnglandEngland // churchchurch 11001100 AD AD

• Incorporate to promote the public goodIncorporate to promote the public good– The incorporated cityThe incorporated city England England 15001500

ADAD

• Dutch & English trading venturesDutch & English trading ventures– Capital pooling Capital pooling Holland / U.K.Holland / U.K. 16001600

ADAD

• Public works to promote public good Public works to promote public good – Govt. Corp.s / canalsGovt. Corp.s / canals U.K. / Hol. / U.S.U.K. / Hol. / U.S. 17001700 AD AD

• Incorporation to business ventures Incorporation to business ventures – Private corp. for mfg.Private corp. for mfg. U.K., Hol. U.S.U.K., Hol. U.S. 18001800 ADAD

• Incorporation to holding companies Incorporation to holding companies – Co. owns other co.Co. owns other co. N.J.N.J. Del.Del. Intl.Intl. 19001900 ADAD

3.3. What is the Corporation? What is the Corporation? (1/2)(1/2)

• Characteristics of CorporationsCharacteristics of Corporations– Legal entity Legal entity

Artificial being, invisible, intangible, & Artificial being, invisible, intangible, &

existing only in the contemplation of lawexisting only in the contemplation of law

• Creature of the state Creature of the state – Owes its existence to the government Owes its existence to the government – Allows for free transfer of ownership Allows for free transfer of ownership – Limited liabilityLimited liability – Perpetual existencePerpetual existence

• Moral Agent? Moral Agent? – CID, Corp. Culture, Imprison-able?CID, Corp. Culture, Imprison-able?

3.3. What is the Corporation? What is the Corporation? (2/2) (2/2)

• Powers of the Corporation Powers of the Corporation – Expressed powersExpressed powers in a corp. charterin a corp. charter– Implied powersImplied powers (free speech)(free speech)– Limits Limits legalities & the changing legalities & the changing

face of the law face of the law

• Responsibilities:Responsibilities: Corporate Liability Corporate Liability– Civil LiabilityCivil Liability Corp. has deep pockets Corp. has deep pockets – Criminal LiabilityCriminal Liability The courts would like to The courts would like to

arrest someone! arrest someone!

4.4. Stockholders Stockholders (1/3)(1/3)

• Who are they? Who are they? – Individual InvestorsIndividual Investors

– Institutional InvestorsInstitutional Investors

• Why are they so important?Why are they so important?– ‘‘As residual claimants, if shareholders As residual claimants, if shareholders

needs are met then in theory all other needs are met then in theory all other stakeholder needs are met.’stakeholder needs are met.’ Jay BarneyJay Barney

Fact is, if shareholders needs are not Fact is, if shareholders needs are not met, few other stakeholder needs are met, few other stakeholder needs are likely to be met.likely to be met.

– They may also have a desire for the They may also have a desire for the corporation to behave ethicallycorporation to behave ethically

4.4. Stockholders Stockholders (2/3)(2/3) • Shareholders vote on: Shareholders vote on:

– Mergers / Consolidations Mergers / Consolidations Important shareholder’s Important shareholder’s

investment decisionsinvestment decisions

– Disposing of most corp. assets Disposing of most corp. assets

– Dissolving the corp. / Dissolving the corp. / re-incorporationre-incorporation

– Charter and Bylaw ChangesCharter and Bylaw Changes Proposals by Stockholders Proposals by Stockholders to force corp. to actto force corp. to act

– Elections of Directors Elections of Directors Who should act on corp.’s & shareholders behalfWho should act on corp.’s & shareholders behalf

4.4. Stockholders Stockholders (3/3)(3/3)

• Shareholders Legal Rights: Shareholders Legal Rights: – Shareholder SuitsShareholder Suits

Individual SuitsIndividual Suits Derivative Suits Derivative Suits On the corporation’s behalfOn the corporation’s behalf

– Corporate Disclosure Corporate Disclosure The Annual ReportThe Annual Report Want More and it’ll cost!Want More and it’ll cost!

– Selling the SharesSelling the Shares

S h a r e h o l d e r S h a r e h o l d e r ss

B o a r d B o a r d o f D i r e c t o r s o f D i r e c t o r s

Officers Officers & Managers & Managers

GovernmentGovernment

S h a r e h o l d e r sS h a r e h o l d e r s

B o a r d o f D i r e c t o r sB o a r d o f D i r e c t o r s

M a n a g e r s a n d O f f i c e r s M a n a g e r s a n d O f f i c e r s

W o r k e r s W o r k e r s

Annuit CoeptisAnnuit Coeptis

5.5. The Received Legal Model The Received Legal Model (1/3)(1/3)

• How the Corporation is run by lawHow the Corporation is run by law

– Governmental Power to Charter & RegulateGovernmental Power to Charter & Regulate

– Fiduciary Duty of Directors to Fiduciary Duty of Directors to the company & the Stockholders the company & the Stockholders

ObedienceObedience Fiduciary Duty of Loyalty Fiduciary Duty of Loyalty Liability under some conditionsLiability under some conditions

– Insolvency & CDN wages Insolvency & CDN wages – Whenever there’s a buyout Whenever there’s a buyout – PollutionPollution

Due DiligenceDue Diligence – Oversight which would be used by a Oversight which would be used by a

responsible director in a similar positionresponsible director in a similar position

5.5. The Received Legal Model The Received Legal Model (2/3)(2/3)

• Implications Implications

• The Board of Directors The Board of Directors – Number & TypeNumber & Type

Inside Directors Inside Directors in-house directorsin-house directors Outside Directors Outside Directors out-house directorsout-house directors

– ElectionElection MajorityMajority takes all the board (this is the slate of takes all the board (this is the slate of

candidates: vote yes or no) ORcandidates: vote yes or no) OR Cumulative VotingCumulative Voting

one vote for each share times the one vote for each share times the number of directors being elected such that number of directors being elected such that shareholders with a large minority can elect a shareholders with a large minority can elect a directordirector

Staggered Term BoardsStaggered Term Boards e.g. only elect 2 members / year for a 3 e.g. only elect 2 members / year for a 3 year term on a 6 member board for continuityyear term on a 6 member board for continuity

5.5. The Received Legal Model The Received Legal Model (2/3)(2/3)

Govern-Govern-m e n tm e n t

Share-Share-holdersholders

Board of Board of DirectorsDirectors

ManagementManagement

Workers Workers

Num Me V e x oNum Me V e x o

6.6. Managerial Domination Model Managerial Domination Model (1/5)(1/5)

• How the Corporation is really run?How the Corporation is really run?

6.6. Managerial Domination Model Managerial Domination Model (2/5)(2/5)

• Management Influences on Government Management Influences on Government – Competition for chartering Competition for chartering

More a U.S. & international problemMore a U.S. & international problem

– Political influence Political influence LindblomLindblom: : Why government must cater to big businessWhy government must cater to big business

– Capital MobilityCapital Mobility Ability to pick places for the 'right' regulations Ability to pick places for the 'right' regulations

– PickPick governmentgovernment youyou want towant to bebe regulatedregulated byby Pick several for a range of regulations Pick several for a range of regulations

6.6. Managerial Domination Model Managerial Domination Model (3/5)(3/5)

• Picking several governments at once:Picking several governments at once:

11/13/0211/13/02 A 15m hole opens in the oil tanker Prestige, A 15m hole opens in the oil tanker Prestige, Nearby France, Spain & Portugal block entry.Nearby France, Spain & Portugal block entry.

11/19/02 11/19/02 The tanker breaks in half and sinks, The tanker breaks in half and sinks, Oil spoils 600km of Spanish & French coast,Oil spoils 600km of Spanish & French coast,

Est. Damage of about $3 billion. Est. Damage of about $3 billion.

Who was responsible? Who was responsible?

Tanker was Tanker was Japanese built,Japanese built, Liberian owned, Liberian owned, Bahamian registered,Bahamian registered, Greek operated,Greek operated, Swiss-based Corp. chartered as a sub. of aSwiss-based Corp. chartered as a sub. of a Russian industrial company and Russian industrial company and ClassifiedClassified seaworthyseaworthy byby U.S.U.S. shippingshipping auth.s.auth.s.

Where do you begin, or end?Where do you begin, or end?

6.6. Managerial Domination Model Managerial Domination Model (4/5)(4/5)

• Management Influences on ShareholdersManagement Influences on Shareholders– Information Information

Shareholder’s ListsShareholder’s Lists

– MoneyMoney Proxy Process Proxy Process GreenmailGreenmail

– Disbursed ShareholdersDisbursed Shareholders

with little real powerwith little real power Berle & MeansBerle & Means

– Different Classes of Stock Different Classes of Stock

with Different Voting Rightswith Different Voting Rights

6.6. Managerial Domination Model Managerial Domination Model (5/5)(5/5)

• Management Influences on the BoardManagement Influences on the Board

– The Proxy ProcessThe Proxy Process – Staggered Boards Staggered Boards – Treating Outside Directors Treating Outside Directors

Like MushroomsLike Mushrooms Outhouse directorsOuthouse directors

– Liability InsuranceLiability Insurance– Non-Cumulative VotingNon-Cumulative Voting

• Management Influences on the WorkersManagement Influences on the Workers– Lack of Access to the BoardLack of Access to the Board

7.7. The Corp. Governance Critique The Corp. Governance Critique (1/3)(1/3)

• So what about the Mgr. Dom. Model?So what about the Mgr. Dom. Model?– Firms behave in inefficiently:Firms behave in inefficiently:

Owners that should rid themselves Owners that should rid themselves of poor management don't of poor management don't

(Capital) Market forces that should (Capital) Market forces that should have great influence & don’t have great influence & don’t

– UncontrolledUncontrolled managersmanagers wieldwield greatgreat influence:influence:

– The largest corporations and the assent of The largest corporations and the assent of people to the top people to the top

Conflict with democracy? Conflict with democracy? (Lindblom again)(Lindblom again)

Wk. 6-22

7.7. The Corp. Governance Critique The Corp. Governance Critique (2/3)(2/3) • New Issue SummaryNew Issue Summary

– Management autocracy [583-4]Management autocracy [583-4]– The board as rubber-stamp [585] The board as rubber-stamp [585]

Or source of policies [592]Or source of policies [592]

– Consent of the governed [588]Consent of the governed [588]– Growth of firmsGrowth of firms

Berle & Means againBerle & Means again

– Owner-management decline [595 too] Owner-management decline [595 too] – Rise in social expectationsRise in social expectations– The principle agent problemThe principle agent problem

Agency Relationship

Risk Bearing Specialist(Principal)

Managers (Agents)

DecisionMakers

which createswhich creates

Managerial Decision-Making Specialist

(Agent)Hire

An agency relationship exists when:

Shareholders (Principals)

Firm Owners

Agency Theory7.7. The Corp. Governance Critique The Corp. Governance Critique (3/3)(3/3)

Wk. 6-24

. . Nationalize it Nationalize it - Market Failure- Market Failure

. . Democratize itDemocratize it - Employee - Employee

InvolvementInvolvement

Dealing Dealing with with

failed failed firmsfirms

[596-605] [596-605]

8a.8a. RaiseRaise Corp.Corp. Responsiveness 1Responsiveness 1

Nationalized Nationalized Company Company Examples:Examples:

Manitoba’s take-Manitoba’s take-over of New Flyerover of New Flyer

Federal takeover Federal takeover CDN National RRCDN National RR

Wk. 6-25

• Radical Corporate Governance: Radical Corporate Governance: Strong Participation Rights [606-13] Strong Participation Rights [606-13]

– DignityDignity

– FairnessFairness

– Self-respectSelf-respect

– Health Health

– DemocracyDemocracy

– AutonomyAutonomy

– UtilityUtility

8b.8b. Democratize theDemocratize the Corp.Corp. (1/2)(1/2)

Wk. 6-26

– Big firms often have a major s-holder Big firms often have a major s-holder (a bank)(a bank)

– Larger German firms have a 2-tiered systemLarger German firms have a 2-tiered system Banks (especially a firm’s ‘main bank’) areBanks (especially a firm’s ‘main bank’) are

highly influential with a firm’s managershighly influential with a firm’s managers Employees, union members & shareholdersEmployees, union members & shareholders appoint a group to select the boardappoint a group to select the board

– Japanese Banks (especially a firm’s ‘main Japanese Banks (especially a firm’s ‘main bank’) are influential with a firm’s managersbank’) are influential with a firm’s managers

8b.8b. Democratize theDemocratize the Corp.Corp. (1/2)(1/2)

• International Corporate Governance

Powerful government intervention; close relations

Passive, stable shareholders exert little controlVirtual absence of external mkt. for corp. control

Wk. 6-27

. . Regulate itRegulate it - Command - Command & Control& Control

. . Nationalize it Nationalize it - Market Failure- Market Failure

. . Pressure it Pressure it - Political coercion- Political coercion

. . Democratize itDemocratize it - Employee - Employee

InvolvementInvolvement

. . Induce itInduce it - Pollution - Pollution

Tax optionTax option

. . Ignore itIgnore it - Let it do its - Let it do its econ. jobecon. job

. . TT rr uu ss t it i tt - C.S.R.- C.S.R.

. . Restore it Restore it - S-holder Demo.- S-holder Demo.

Dealing Dealing with with

failed failed firmsfirms

[596-605] [596-605]

8d.8d. RaiseRaise Corp.Corp. Responsiveness 2Responsiveness 2

8e8e.. Shareholder DemocracyShareholder Democracy (1/7) (1/7) • Reforming the Board

– Professional, Full Time DirectorsProfessional, Full Time Directors

– Ethics & Public Affairs CommitteesEthics & Public Affairs Committees

– Separate Post of Board ChairSeparate Post of Board Chair & & PresPres.. Poor idea when fast action is neededPoor idea when fast action is needed

– Increasing Director's Liability Increasing Director's Liability Barbarians at the gatesBarbarians at the gates

– Concentrated Concentrated OwnershipOwnership

Wk. 6-29

Adoption of TSE Corp. Governance Guidelines by TSE listed Companies

From R.M Corbin, 1999, Report on Corporate Governance, 1999, Five Years to the Dey, Toronto Stock Exchange,

TSE Guideline % Adoption

Board size suitable for individual accountability

Strategic planning involvement

95%  

79%    

Board constituted with majority of unrelated dir.s

Internal controls & management info. systems

77%

76%

Only non-mgmt. nominating committee members

Risk management systems in place

68%

60%

 Satisfactory compensation to directors

Independence: Non-CEO Chair or lead director

76%

69%

8e8e.. Shareholder DemocracyShareholder Democracy (2/7) (2/7)

Wk. 6-30

Executive CompensationExecutive Compensation

Salary, Bonuses, LT incentive compensation Salary, Bonuses, LT incentive compensation that makes managers act like principlesthat makes managers act like principles

Stock ownership makes managers more Stock ownership makes managers more susceptible to market changessusceptible to market changes

Incentive systems do not guarantee Incentive systems do not guarantee managers will make the ‘right’ decisionsmanagers will make the ‘right’ decisions They do increase the likelihood that managersThey do increase the likelihood that managers will do the things for which they are rewardedwill do the things for which they are rewarded

8e8e.. Shareholder DemocracyShareholder Democracy (3/7) (3/7)

8e8e.. Shareholder DemocracyShareholder Democracy (4/7) (4/7) • Corporate Raiders & Takeover ArtistsCorporate Raiders & Takeover Artists

– Help get Rid of Bad Management Help get Rid of Bad Management

– Downside Effects: Downside Effects: Management destroying value via:Management destroying value via:

Management concentrating on shortManagement concentrating on short run run profits to avoid a raid profits to avoid a raid

Greenmail Greenmail Golden Parachutes Golden Parachutes Poison Pills Poison Pills

8e8e.. Shareholder DemocracyShareholder Democracy (5/7) (5/7)

• Sensible Defences against Corporate Sensible Defences against Corporate Raiders & Takeover ArtistsRaiders & Takeover Artists– Restrictions to min. effects of Restrictions to min. effects of

Raiders vs. Managers on stockholdersRaiders vs. Managers on stockholders – All anti-takeover devices to be All anti-takeover devices to be

approved/renewed periodically approved/renewed periodically – Board approval for purchase of Board approval for purchase of

more than X% of a companymore than X% of a company– If the board doesn't approve, If the board doesn't approve,

buyer must offer to buy buyer must offer to buy whole corp. whole corp.

8e8e.. Shareholder DemocracyShareholder Democracy (6/7) (6/7)

• LBOs to address Principle/Agent Prob. LBOs to address Principle/Agent Prob. – A Buyout gives former investors cash that A Buyout gives former investors cash that

can put it to productive use can put it to productive use – Managers make efficient resource use due Managers make efficient resource use due

to need to meet interest payments to need to meet interest payments – Management incentives are greater: Management incentives are greater:

they own a bigger slice of the company they own a bigger slice of the company

• Big Sums in Union & Retirement FundsBig Sums in Union & Retirement Funds – These stockholders are forced to take an These stockholders are forced to take an

active interest in the corporationactive interest in the corporation

Ownership ConcentrationOwnership Concentration

incentive to monitor management closelyincentive to monitor management closely-- Large block shareholders have a strongLarge block shareholders have a strong

- Their large stakes make it worth their while to- Their large stakes make it worth their while to . spend time, effort & expense to monitor firmsspend time, effort & expense to monitor firms

- - They may also obtain Board representation They may also obtain Board representation to enhance their ability to monitor effectivelyto enhance their ability to monitor effectively(though financial institutions are legally forbidden (though financial institutions are legally forbidden from directly holding board seats)from directly holding board seats)

- In Canada such shareholders account for 65% to- In Canada such shareholders account for 65% to . 70% of publicly traded stocks (59% in the U.S.)70% of publicly traded stocks (59% in the U.S.)

8e8e.. Shareholder DemocracyShareholder Democracy (7/7) (7/7)

Wk. 6-35

9.9. Autocracy Autocracy:: SymptomsSymptoms // Side-effectsSide-effects (1/2)(1/2)

• WorkaholismWorkaholism– Not just a work ethicNot just a work ethic– Relations to othersRelations to others– Business schools? Business schools? – Physical & psychological harmPhysical & psychological harm– EthicsEthics

• GroupthinkGroupthink– GrandiosityGrandiosity– Management will solve itManagement will solve it– ScapegoatingScapegoating– Ethics & LoyaltyEthics & Loyalty

Wk. 6-36

• EscalationEscalation– Love of conflictLove of conflict– Self-destructivenessSelf-destructiveness– DenialDenial– EthicsEthics

9.9. Autocracy Autocracy:: SymptomsSymptoms // Side-effectsSide-effects (2/2)(2/2)

• Diffusion of responsibility– Result of autocracyResult of autocracy– IndifferenceIndifference– Tragedy of commonsTragedy of commons– EthicsEthics– Case of WorldCom [615-619]Case of WorldCom [615-619]

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