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Lecture 11

LAW 534 Lecture Notes - Lecture 11: Regulatory Compliance, Mitigating Factor, Complex Analysis

Law and Business
Course Code
LAW 534
Andre Serero

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LAW 534 Week 11
Today’s Class
1. Review of Last Class
2. Chapter 8: Individual Liability within Organizations
3. Chapter 10: Risk Management Systems for Individuals
4. Final Exam Review
Corporate Models
- Defined as theoretical ways in which one may view a corporation
- Moral Corporation model:
oJohnson & Johnson pulled all Tylenol products from market (not just Chicago)
after scare in 1982. Worked with regulator to design new tamper-proof
packaging. Moral high road led to eventual increase in market share for the
oAlso, example of Pepsi & Co. returning trade secrets to Coca-Cola.
oMoral conduct is easy (easier?) when profits are being made. What if ethical
conduct is not reconcilable with profits? What then?
- Economic Corporation model:
obased on traditional notion of board of directors being accountable to
shareholders and responsible for maximizing the shareholders’ investment.
oAccording to this theory, CSR will conflict with the duty of managers to produce
maximum profits for shareholders.
oWhat about role of lenders? Who is really calling the shots?
oWhat about illegal activities? Should corporations break the law if this will
maximize profits? (Most penalties are fines so can do a “cost-benefit” analysis.)
Is this the logical end point of a pure “economics model”?
- Legal Corporation model:
oFocused primarily on regulators (democratically elected or appointed as
government bureaucrats) setting minimum standards. Most closely resembles
views of the textbook authors.
oExample: public companies in Norway need to have a certain minimum number
of women on public-company board of directors – legal model not waiting for
legal model to catch up.
oKey criticism: how are laws made? Do corporations (those that will be regulated)
have undue influence on the rules themselves (via lobbying, campaign
contributions, etc.)?
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- Overlapping models:
omore sophisticated views – models overlap and are not necessarily the only way
of viewing the corporation (although sometimes the models will compete with
each other)
oRegulatory compliance is good business (not “either/or”) - can maximize profits
by avoiding negative consequences of offences and create the right culture via
employee empowerment, etc.
oThe key is looking beyond the short-term – even if regulatory violations can lead
to profits in the short term, long term damage to an organization’s reputation
makes it much riskier…also, maybe having more women on boards is simply
good business…
Broader View of Corporations
- Two important Supreme Court of Canada cases have broadened the traditional view of
the corporation:
o(1) Peoples v. Wise (2004)
o(2) BCE Inc. v. 1976 Debentureholders (2008)
- Remember: directors have two duties to the corporation
o(1) fiduciary duty (act honestly and in good faith with a view to the best interests
of the corporation)
o(2) duty of care (competency, “act with the proper skill and diligence…”)
- A crucial question addressed by the SCC in these cases is: what does “corporation”
mean for purposes of the directors fiduciary duty?
Peoples vs. Wise
- Although the SCC found that the directors did not breach their duties in this case, the
SCC went on to state that the directors had fiduciary duty to the corporation a
consideration of the interests of: “shareholders, employees, suppliers, creditors,
consumers, governments and the environment”
- This comment threw the corporate world upside - for a long time, the debate had been
whether “best interests of the corporation” meant the best interests of the
shareholders only (i.e. maximize their profits/value of investment) or whether it
extended to a broader group of stakeholders
- The SCC’s comment that it is a broader set of stakeholders was met with both praise and
- Authors appear sympathetic with the SCC approach and use it to argue for better
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BCE Inc. vs. 1976 Debentureholders
- This case clarifies the SCC’s ruling in the Peoples v. Wise case
- In this case, the SCC confirms that director’s fiduciary duty is to act in the best interests
of the corporation (and not in the best interests of any stakeholders)
- In exercising that duty, the SCC clarified that, although not mandatory, the directors
may consider the impact of their decisions on a broader constituency of stakeholders
(including shareholders, employees, suppliers, creditors, consumers, governments and
the environment”
What now?
- What does corporate law discussion here have to do with our course?
oThe two SCC cases discussed make it clear that the duty of directors duty may
involve complex analysis of what constitutes the “best interests of the
oDirectors may be fearful of the risk of not complying with their duties as
oAuthors suggest that Chapter 1 principles of risk management can assist
oWe study it to understand role of executives and risk management within bus
Chapter 8
Individual Liability within Organizations
- In chapters 5 and 6, the focus was on organizational liability
- This chapter focuses on the 5 different ways that an individual (presumably working
within an organization) may be exposed to legal liability
- Recent corporate scandals have increased the call for heightened individual liability for
those involved in breaking the law
- What sends the most powerful message for individuals to act ethically? More ind’ liab’
5 Types of Individual Liability
- Overview of five (5) types of liability (discussed in detail in following slides):
oPrincipal – individual actually commits the offence
oParty to an offence- type of guilt by association
oAcquiescence to an offence by director or officer
Acquiescence: to agree to or to submit
oSpecific duty on director or officer to exercise reasonable care
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