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MGMT 1040 Chapter Notes -John Kenneth Galbraith, Business Ethics, Invisible Hand

Course Code
MGMT 1040
William(bill) Woof

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Moral Issues in Business Chapter 5 – Corporations
Modern organizations are in 3 – parts:
1. Stockholders  provide the capital, own the corporation, and have limited
2. Managers  run the business operations
3. Employees  produce the goods/services
limited liability  a key feature of the modern corporation. It means that the
members of the corporation are financially liable for corporate debts only up to
the extent of their investments.
Corporations differ from other forms of businesses in 2 ways:
1. A corporation isn’t formed by an agreement; it becomes incorporated by being
publicly registered or by having its existence acknowledged by law.
2. The shareholder in a corporation is entitled to a dividend from the company’s
profits only when it has been “declared.”
Corporations can be either for profit or non-profit. They may be privately owned
or owned (in part or whole) by the government.
All companies whose stocks are listed on a stock exchange are publicly held
As the corporations became modernized, 2 theories became dominant:
1. Adam Smith’s invisible hand  the market would direct its activities in a socially
beneficial direction more effectively than any public official could.
2. The idea of laissez-fair  leave the corporation alone. Any petitioning body with
the minimal qualifications has the right to receive the corporate character.
Corporate Moral Agency
Corporations  seen as “humans” and/or “persons” in some views. This
means that they have moral obligations and can be blameworthy if these
obligations aren’t met.
Corporate Internal Decision (CID) structures amount to established
procedures for accomplishing specific goals. The main goal is to get a
“perfect corporate fit.”
Some philosophers claim that the CID structure lays out lines of authority and
stipulates under what conditions personal actions become official corporate
actions. They argue that corporations cannot have characteristics such as
honesty, considerateness, and sympathy; only individuals working in the
corporations can have those characters.
Other philosophers claim that CID collects data about the impact of its
actions; monitors work conditions, employee efficiency and productivity, and
environmental impacts. They claim that the corporations can have moral

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Thomas Donaldson: a corporation can be a moral agent if moral reasons
enter into its decision making and if its decision-making process controls not
just the company’s actions but also its structure of policies and rules.
Peter French says corporations should have moral characters while Manuel
Velasquez-demurs claims that individuals in a corporation can have moral
characteristics; not the corporation itself.
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
Profit Maximization:
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
- 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 public.”
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

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Moral Issues in Business Chapter 5 – Corporations
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 widgets.
- 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 does downstream.
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 have direct contact with the managers of the company or even know or care
who they are.
“A share of stock does not confer ownership of the underlying assets owned by
the corporation. Instead, it provides the holder with a right to share in the
financial returns produced y the corporations’ business.”
Debating Corporate Responsibility:
The Invisible-Hand Argument:
Adam Smith claimed that when each of us acts in a free market environment to
promote our own economic interests, we are led by an “invisible hand” to
promote the general good.
If businesses are permitted to seek self-interest, their activities will inevitably
yield the greatest good for society as a whole.
Businesses shouldn’t be invited to fight racial injustice, poverty, pollution,
broaden competition, or to help reduce prices or increase accessibility to
products unless it enhances profits.
Corporations shouldn’t be held morally responsible for non-economic matters; to
do would distort the economic mission of business in society and undermine the
foundations of the free enterprise system.
This argument favours the narrow view of CSR open to criticism. Corporations
today find themselves in a social and political environment in which they are
pressured by public opinion, politicians, the media, and various activist groups to
act or at least perceived to be acting as socially responsible corporate
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