Justice and Economic Systems

&
Corporations, Morality, and
Corporate Social Responsibility

Justice and Economic Systems

Moral Evaluation of Economic Systems
Economic systems can be evaluated in 2 ways
Structural analysis.
Involves evaluating the morality of the basic
economic relation on which it is built,
and analyzing the actions that follow as a
result of that relation.

End-state approach.
Involves looking at what the system as a whole
does to the people affected by it.
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Economic Models and Games

Though economics might be considered a game,
economic systems when actually implemented are
not games (Were not bluffing here).
Frequently, economics is studied as if it had nothing
to do with people, as if it was simply the study of
abstract concepts (supply, demand, money, price, profits).
Ultimately, economic systems are the ways in which
people are related.
Their relations are mediated by money, commodities,
prices and wages, and supply and demand.

Economic systems arent, ultimately, morally neutral.

They should be examined from a moral point of view.

Capitalist Model
There are three defining features of the model of
classical capitalism:
an available accumulation of industrial capital,
private ownership of the means of production, and
a free-market system.

The model of classical capitalism includes

industrialization and capital.
It does not question where capital comes from or how it
was developed.
Because the model is not an historical account but an
analytic tool, the presence of capital is given.
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Capitalist Model
(Accumulation of Industrial Capital)
Capitalism derives its name from the notion
that it is a system based on accumulated
industrial capital.
In a barter economy there is no accumulation
of capital. Goods are exchanged for goods of
equal value; there is no residue.

Capitalist Model
(Private Ownership)
The distinguishing characteristic of capitalism is
sometimes said to be private ownership of the
means of production.
But this does not mean that everyone owns the
means of production.
The majority of people in our model of capitalism
do not individually own means of production they
use; theyre employed by others & work for wages.

Wages are the dominant source of income for

the vast majority in our capitalist model.

Capitalist Model
(Free-Market System)
A free market is one that is not controlled either by
government or by any small group of individuals.
In a free market, government does not:
set the price of goods
set wages or
control production.

Competition is also vital to a free-market system.

To try to achieve greater returns on investment,
perhaps by taking more risk, resources must be
free to move within the system to whichever portion
of it someone believes will bring the greatest return.

Capitalism and Government

First, the model of Laissez-Faire capitalism.
This model, fails to take into adequate account
the good of society as a whole, opposed simply
to the good of those who enter into economic
transactions.

A second model depicts government as the

protector of capitalists at the expense of the
other members of society [Fascism].
The third version of the model is one of
governmental protectionism [Infant Industry].
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Capitalism and Government

A fourth model assigns to government a
variety of different tasks vis--vis business,
all of which are responsive to the general
interests of the citizens [Basic U.S. Model].
In the fifth version of the model, government
and business cooperate for the sake of both
business and the society as a whole
[Industrial Policy].
The sixth version of the model comes closest
to socialism [Democratic Socialism].

Socialist Model
There is no classical model of socialism as a purely
economic system. Historically, a number of very
diverse societies have been called, socialistic.
To the extent that socialism involves government
ownership, it is very difficult, if not impossible, to
separate socialism as an economic system from
socialism as a political system.
Socialism should not be identified with or confused
with communism.
Communism, as an economic system, has never been
achieved, though some countries, like the USSR, claimed
to have been developing such an economy.
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Socialist Model
A partial model of socialism which is restricted
to socialism as an economic system could be
characterized by three features:
an industrial base,
social ownership of the means of production, and
centralized planning.

Crown Corporations as Socialism?

Pay your socialist auto insurance premium?!

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Economic Systems and Justice

We cant be moral & espouse an inherently immoral
economic system. But, theres no moral imperative
mandating we choose one over another.
Distributive justice: justice in allocation of benefits &
burdens, is often thought to be the most important
moral component of any economic system.
In the capitalist system, justice demands equality of
opportunity; it does not demand equality of results.
Justice in a socialist system consists not only in
equality of opportunity, but allows for proportionality
of differential rewards. It may guarantee all receive
rewards, but limits the amount of rewards one gets.

Corporations, Morality, and

Corporate Social Responsibility
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Private vs. Public Ownership

To some extent, the rules for privately owned
companies are different from the rules for those
that are publicly owned.
Publicly traded companies are obliged to reveal
a good deal of info. about their financial status,
so investors can make informed decisions about
buying & selling their stock.
More is legally required of publicly traded
companies in order to protect the interest of the
shareholders (more on this next class).
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Small & Medium-Sized Businesses

Though giant corp.s tend to dominate business
& are the focus of most discussions about
business & business ethics, small & mediumsized businesses are the most numerous in all
societies & are often the most innovative.
Small and medium-sized businesses are frequently
treated differently under the law.
The emphasis in most discussions of business ethics is
on corporations, & especially on large corporations.

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What is the Corporation? (1/2)

Characteristics of Corporations
Legal entity

Artificial being, invisible, intangible, &

existing only in the contemplation of law

Creature of the state

Owes its existence to the government
Allows for free transfer of ownership
Limited liability
Perpetual existence

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What is the Corporation? (2/2)

Powers of the Corporation
Expressed powers in a corp. charter
Implied powers
(free speech)
Limits
legalities & the changing
face of the law

Responsibilities: Corporate Liability

Civil Liability
Corp. has deep pockets
Criminal Liability The courts would like
to
arrest someone!

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Stockholders
Shareholders vote on:
Mergers / Consolidations
Important shareholders
investment decisions

Disposing of most corp. assets

Dissolving the corp. / re-incorporation
Charter and Bylaw Changes
Proposals by Stockholders to force corp. to act

Elections of Directors
Who should act on corp.s & shareholders behalf
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The Received Legal Model 1/2

How the Corporation is run by law
Annuit

Coeptis
Government

Shareholders
Board of Directors
Managers and OffIcers
W

s
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The Received Legal Model 2/2

Implications
Governmental Power to Charter & Regulate
Fiduciary Duty of Directors to
the company & the Stockholders
Obedience
Fiduciary Duty of Loyalty
Liability under some conditions
Insolvency & CDN wages
Whenever theres a buyout
Pollution

Due Diligence
Oversight which would be used by a
responsible director in a
similar position

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Shareholder vs. Stakeholder 1/3

Corporations have a special status under law in
that they have limited liability.
This means that the owners of stock in the company are
only liable for the amount they have invested in the
companys stock. Their personal assets are not at stake.

The classical concept of the corp. presents the it as

existing primarily to serve the shareholders.
According to this view, the interests of the shareholders
are paramount and come first over all other interests.
Under Canadian law, the corporation may have its own
interests, which means that directors must broadly
consider all stakeholders (BCE).
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Shareholder vs. Stakeholder 2/3

Shareholders, although legally the owners, are very
often simply speculators with no real interest in the
long-range future of the company.
Though stockholders are technically the owners &
have rights, including the right to have the corp. run
well, there are other constituents who have a much
stronger interest & involvement in the firm, & a much
stronger stake in it and in its continuance & success.

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Shareholder vs. Stakeholder 3/3

All those to whom the corp. has any obligations are
collectively referred to as stakeholders in the corp.
A stakeholder analysis of an issue consists of
weighing & balancing all of the competing demands
on a firm by each of those who have a claim on it, to
arrive at the firms obligation in any particular case.
The stakeholder approach has the strength of
forcing us to consider carefully all the obligations
involved, for instance, in a plant closing,
Instead of just looking at the closing from the point of view
of profits, & so from the point of view of the shareholders.
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The BCE Decision 1/4

There is no principle that 1 set of interests, for

example the interests of shareholders, should

prevail over another set of interests.
Everything depends on the particular situation faced by
the directors & whether, having regard to that situation,
they exercised business judgment in a responsible way.
The duty to act in the best interests of the corporation
comprehends a duty to treat individual stakeholders
affected by corporate actions equitably and fairly.

Corp. decisions may now need a more rigorous

analytical approach, but, if a proper decision-making
process is followed & documented, corp. decisionmakers may take comfort that their decisions are
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less likely to be second-guessed by courts.

The BCE Decision 2/4

Everything depends on the particular situation faced
& whether, having regard to that situation, directors
exercised business judgment in a responsible way.
Thus, corp. decision-makers may have greater latitude to
make decisions provided appropriate process is followed.

What is the Business Judgment Rule?

Courts will grant deference to a business decision so
long as it lies within a range of reasonable alternatives.
The rule reflects a reality that directors & officers are
often better suited than judges (exercising perfect hindsight) to
determine what is in the best interests of the corporation.
The business judgment rule applies to decisions on
stakeholders interests as much as other decisions.
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The BCE Decision 3/4

Decision-makers need to turn their minds to a range

of affected stakeholders & consider their reasonable
expectations in making significant corp. decisions.
- Corporate decision-makers need only consider the
reasonable expectations of stakeholders.
- The profit motive is not to be abandoned.
- The corp. & shareholders are entitled to max. profit &
share value but not by treating individual stakeholders
unfairly. Fair treatment is most fundamentally what
stakeholders are entitled to reasonably expect.

Where a directors decision is reasonable in light of all

circumstances the director knew or ought to have
known, courts will not interfere with that decision.
A courts inquiry will generally focus on whether directors
applied an appropriate degree of prudence and diligence.

The BCE Decision 4/4

Stakeholders cited by the Supreme Court included:
Employees, Creditors, Consumers, Governments, The Environment.

Directors must consider what are the reasonable

expectations of the stakeholders identified.

Commercial / past practice

The relationship between the parties
Steps the claimant could have taken to protect itself
Representations and agreements
Fair resolution of conflicting interests between stakeholders
Public statements and disclosures
(including ethics policies and codes of conduct).

Properly document proceedings (with appropriate evidence).

Solicit outside advice where necessary.
Consider the public disclosure of possible decisions.

Corporate Moral Responsibility 1/5

A corp. has the same ethical obligations to its shareholders, employees, customers, suppliers, and the
community & the same responsibilities with respect
to the environment whether it is conceived on the
shareholder or the stakeholder model.
General obligations of corp.s stem from the nature of
the firm, society & implicit agreement among them.
The first is the obligation to Do no harm.
The second general obligation is the moral obligation not to
undermine the freedom and the values of the system.
The third general obligation is to be fair in the transactions
in which it engages.
The fourth general obligation is to live up to the contracts
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into which one enters freely.

Corporate Moral Responsibility 2/5

Members of the Board of Directors (BoD).
Are responsible to the shareholders for selecting
honest, effective managers, especially the CEO.
They may also be responsible for choosing executive
V.P.s & other V.P.s. Theyre morally responsible for the
tone of the corp. & for its major policies. They can set
a moral tone, or they can condone immoral practices.

Management is responsible to the board.

Mgmt. is responsible for setting a firms moral tone
Unless those at the top insist on ethical conduct, set an
example of moral conduct, punish unethical conduct
and reward ethical conduct, the corp. tend to function
without considering the moral dimensions of its actions.
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Corporate Moral Responsibility 3/5

Management and Workers.
Mgmt. is responsible to the workers. Workers are
responsible for doing the jobs theyre hired for.
From a moral point of view, ones job can never
legitimately involve breaking the law or doing what is
unethical, even if one is ordered to do so.
But within the guidelines of ones job description,
employees are expected to carry out their jobs as
instructed by those above them.

Corporations and the consumer.

The corp. is responsible to consumers for its
products. Goods made should be reasonably safe.
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Corporate Moral Responsibility 4/5

Suppliers and Competitors.
Corporations are responsible to their suppliers
and competitors for fair treatment.
Fairness precludes lying about competitors or their
products; it precludes stealing trade secrets, sabotage,
or other direct intervention in the competitors firm.
Fairness in dealing with ones competitor also
precludes colluding with competing firms, price fixing,
manipulating markets, and in other ways acting to
undermine fair competition at the publics expense.

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Corporate Moral Responsibility 5/5

The corporation and the general public.
Finally, the corporation is morally responsible for
its actions to the general public or to society in
general. In particular, it has the moral obligation
not to harm those whom its actions affect.
The first can be called its obligation not to harm the
environment that it shares with its neighbors.
The second group of moral obligations to the general
public concerns the general safety of those who live in
an area affected by a companys plant.
The third set of responsibilities to the public concerns
the location, opening & closing of plants especially
in small communities and one-industry towns.

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Corporate Social Responsibility 1/3

Moral demands stem from the moral law.
The term corporate social responsibility
became popular in the 1960s.
Moral obligations are sometimes correctly put
forth as social obligations because they can
and should be demanded by a moral society.
They are morally justifiable both because they
implement a moral demand & because society has
the right to impose particular demands on corp.s as
a condition for doing business, providing demands
are in the interest of the common good.

Corporate Social Responsibility 2/3

The 5 primary criticisms of CSR programs are:
1. CSR is often confused with a corp.s moral
responsibility, but sometimes equated to it.
2. CSR programs are often self-serving & used by
firms to deflect legitimate moral criticisms.
3. The socially responsible action that a company
undertakes is one of its own choosing.
4. Where laws are absent, exactly what society
expects / demands may be difficult to determine.
5. The extent to which corp.s are not only national
entities but international in both reach and
organization complicates the application of CSR.

Corporate Social Responsibility 3/3

Moral & Social Audits & Standards
The Triple Bottom Line position is that a corp. can &
should be evaluated in terms of its financial,
environmental and its social/ethical bottom line.
The Myth of Amoral Business tends to obscure the
moral obligations of corp.s. & should be put to rest.
Corp.s have moral obligations, & they can be held
morally accountable for fulfilling them.
If an audit were required of all large corp.s, it would
help to replace the Myth of Amoral Business with a
clear & open approach to corp. moral obligations.

Case Analysis

CASE
ANALYSIS

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Corporate Codes
Although corp. codes cant be expected to contain a
detailed presentation of moral reasoning, they can
make reference to general moral principles.
The injunction to employees (found in 1 corp. code)
to act in a way that they would not be ashamed to
have their actions exposed to the public is one step.
A code could appropriately and helpfully refer to the
principles from which the code flows, to principles of
justice and fairness.
Could also refer to moral principles that objectively
weigh consequences to all those affected by ones
actions, respecting the rights of others & the like.
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Advantages of Corporate Codes

The exercise of creating a corp. code is worthwhile.
Compels thought about obligations to each other & public.

A code can also be used to generate continuing

discussion and possible modification of the code.
A code may help inculcate in all new employees:
the perspective of responsibility,
the need to think in moral terms about their actions, &
the need to develop virtues appropriate to their positions.

Codes can be used as documents employees can

refer to when asked to do something contrary to it.
Codes may be used to assure customers that a firm
adheres to moral principles, & provides them with a
touchstone against which they can measure the firm.

Corporate Culture and Moral Firms

Corporate culture is analogous to the culture of a
society, people, or nation.
A moral firm, or a firm that acts with integrity, lives
up to and fulfills its responsibilities.
A moral firm helps its employees to act responsibly
by clarifying their responsibilities, and it encourages
them to assume their responsibilities.
Only when all those within a firm assume
appropriate moral responsibility can the full moral
responsibility of a firm be met.
Ultimately, moral responsibility, and morality itself,
must be self-imposed and self-accepted.
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