Ethics Chapter 5 Notes
The Limited-Liability Company
Corporation: an organization that can endure beyond the natural lives of its members and that
has incorporators who may sue and be sued as a unit and who are able to consign part of their
property to the corporation for ventures of limited liability.
Limited liability: members of the corporation are financially liable for corporate debts only up to
the extent of their investments
- They differ from other forms of business’ in two ways: 1) it becomes incorporated by having
their existence fully recognized by the law instead of being formed by an agreement between
members. 2) the shareholder in a corporation is entitled to a dividend from the company’s
profits only when it has been “declared”. Dividends are declared by directors of a corporation
“privately held corporation”- only a small group of investors own all of its outstanding shares
“publically held”-stocks are listed on stock exchanges and can be trades amongst the general
The corporate formed itself during the Middle Ages. The first corporations were towns,
universities, and ecclesiastical (church) orders. By the 15 century the principle of limited
liability came into play. Religion began uniting members of the corporations.
Until the mid 1800s, prospective corporations had to apply for charters. Gov’t officials studied
applications- rejecting some and burdening other with special conditions. Critics stated this
promoted favoritism, corruption, and unfair monopolies. The old system became replaced by
today’s system- corporate status is granted by filling out forms and paying fees.
This change caused 2 theoretical shifts: 1) the old system stated that a corporation’s acitivities
should advance a public purpose. Hamilton and Smith stated the new system followed the
“invisible hand”(the market would direct activities in a socially beneficial direction more
effectively than any public official could.) 2) Any petitioning body with the minimal qualifications
has the right to receive the corporate character. (laissez-faire)
Corporate Moral Agency
Can Corporations make Moral Decisions?
The CID (Corporate Internal Decision) structure lays out lines of authority and specifies
under what conditions personal actions becomes official corporate actions.
Some philosophers argue that corporate decision making is like a machine and is
incapable of making moral or rational decisions because the profit motive will override
all moral considerations. Individuals within corporations can be morally responsible, but
that doesn't mean a corporation can be morally responsible.
On the other hand some people, such as Kenneth E. Goodpastor and John B. Mathews,
have argued that corporate decision making is equivalent to human deliberation
because many conflicting goals can be relevant other than profit. There is no reason
why a corporation can’t show the same kind of rationality and respect for persons and
individual humans can.
Manual Velasquez states only corporate members, not the corporation itself, can be helf
What is a corporation? Corporations are “limited liability companies” created by “incorporators” and owned by
investors called “stockholders” or “shareholders” who have certain rights and responsibilities.
Stockholders “may sue and be sued as a unit and... are able to consign part of their property to
the corporation for ventures of limited liability” (160). The investors enjoy “limited liability”
meaning that investors can't be sued for all their worth. They aren't liable to the amount of
damage they can do to society and customers. Instead, they can only be sued for the amount
equal to their investment.
Limited liability extends to investors who have little influence on the corporation they (partially)
own, but limited liability doesn't extend to anyone who has an active role when making illegal
decisions. These people can face legal action for the crimes they commit. The investors often
have little to no idea what is going on in their corporation, and the illegal actions of the
employees are often dealt with separately.
The term “limited liability” is a bit deceptive because I think we can all agree that investors who
know little about what the corporation they invest in is doing should have less liability than is
humanly possible, and “limited liability” is actually “limited immunity.” A person can invest in a
horrible corporation that does an incredible amount of damage and that person is immune from
being responsible for any damage beyond the investment made.
Are corporations morally justified?
Corporations were originally considered to be morally justified because they were created to
advance public interests. However, that's no longer the case. Corporations no longer need to
serve the public good and can just try to make a profit. This change was caused (in part) due to
the arguments of Adam Smith and Alexander Hamilton, who concluded that corporations
shouldn't be required to serve the good for at least two reasons:
One, they thought that the “invisible hand” of a free market would assure us that corporations
would serve the public interest without doing so intentionally. Due to the invisible hand,
corporations offer the best goods and services at the lowest prices to remain competitive and
Two, they thought that people should have the right to create corporations due to a “right of
Punishing a corporation by fining them, for instance, can have an impact on innocent parties
such as layoffs, plant closures or high prices for consumers.
Living corporation : a corporation whose conduct and personality are the collective effort and
responsibility of its employees, officers, directors, and shareholders.
Rival Views of Corporate Responsibility
What responsibilities does a corporation have? Is it to just make profit or to refrain from
harming society and contribute to the public good?
Milton Freidman (narrow view): argues that the business has no social responsibilities other
than to maximize profits as long as it follows the rules of the game. He believes that by
allowing the market to operate with only minimal restrictions necessary to prevent fraud
and force, society will maximize its overall economic well-being. He claims that most
companies label their self-interest as “social responsibility.” The bottom line – making a
profit - is all that should count.
Levitt (broader view): business has other obligations in addition to pursuing profits.
- The “social entity model” or the “stakeholder model” maintains that a corporation has
obligations, not just to its stockholders, but also to all the parties that have a stake in what a
corporation does or doesn’t do.
- social responsibility arises from social power: if a business has power, then a just
relationship demands that business also bear responsibility for its actions in minority
employment and environmental pollution.
Social responsibility implies that a business decision maker in the process of serving his own
business interests is obliged to take actions that also protect and enhance society’s
interests. The net effect is to improve the quality of life in the broadest possible way in
order to achieve harmony b/w business’s actions and the larger social system - systems
thinking is a must.
Melvin Anshen : claims that there is an implicit “social contract” b/w business and society.
Society always structures the guidelines within which business is permitted to operate in order
to derive certain benefits from business activity.
- he claims that “it will no longer be acceptable for corporations to manage their affairs solely in
terms of the traditional internal costs of doing business, while thrusting external costs on the
Externalities: unintended negative (or in some cases positive) consequences that an economic
transaction b/w two parties can have on some third party.
ex: a company makes widgets and sells them to your firm. A by-product of this economic
transaction is the waste that the rain wash from the factory yard into the local river, waste that
damages recreational and commercial fishing interests downstream. This damage to the third
party is an unintended side-effect of the economic transaction b/w the seller and buyer of
- externalities must be “internalized” : the factory should be made to absorbs the cost, either by
disposing of its waste in an environmentally safe way or by paying for the damage the waste
The narrow view states that the corporation should be run entirely for the benefit of
stakeholders, that their interests always take priority over the interests of everyone else.
The broader view states the management has fiduciary responsibilities to other constituencies
as well – to employees, bondholders, and consumers. The duty to make money for a
stakeholder is real, but it doesn’t trump all of a company’s other responsibilities.
Narrow view of CSR: stockholders own the corporation and select managers to run it for them.
Stockholders have no legal obligation to the company. They rarely ever hav