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
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 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
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
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 [Type text] [Type text] [Type text]
citizens, as socially conscious enterprise that acknowledge other values beside
profit and that seek to make a positive contribution to our society.
The Let-Government-Do-It Argument
John Kenneth Galbraith is against the invisible hand argument. He claims that if
corporations are left alone to pursue their self-interest, they will continue to
pollute, exploit workers, deceive customers, and strive to eliminate competition
and keep prices high through oligopolistic practices.
He claims that profits should be controlled through government regulation. This
argument rejects the notion of broadening the CSR just as firmly as the invisible
Critics argue that this argument is a blueprint for big, intrusive governments.
They doubt that governments can control any but the most egregious corporate
immorality. Lacking intimate knowledge of the goals and sub-goals of specific
corporations, as well as of their daily operations, government simply can’t
anticipate a specific corporation’s moral challenges. Rather, it can only prescribe
behaviour for issues such as bribery, price-fixing, and unfair competition.
Other critics argue that the government itself isn’t the biggest paragon of virtue.
We cannot expect politicians to bite the hand that feeds them.
The Business-Can’t-Handle-It Argument
Businesses are the wrong group to entrust with a broad responsibility for
promoting the well-being of society. They can’t handle the job, first, because they
lack the necessary expertise and second, because in addressing non-economic
matters, they will inevitably impose their own materialistic values on the rest of
Critics argue that there is nothing about CSR that cannot be learned by the
employees of a corporation. In addition, help from businesses is needed to fight
against issues such as global warming, increasing agricultural productivity, or
reducing risks from pesticides. Therefore, it is important that a business has the
know-how, talent, experience, and organizational resources to tackle certain
Although it is argued that businesses will impose their values on us and the
broadening CSR will “materialize” society instead of “moralizing” corporate
activity, critics say that they already impose their values on through the promotion
of a materialistic lifestyle.
Institutionalizing ethics within corporations
Proponents of broadening CSR feel that actions can be taken to create an ethical
1. Corporations should acknowledge the importance, even necessity, of Moral Issues in Business Chapter 5 – Corporations
conducting business morally. Their commitment to ethical behaviour should be
unequivocal and highly visible, from top management down.
2. Corporations should make a real effort to encourage their members to take
moral responsibilities seriously. This commitment would mean ending all forms of
retaliation against those who buck the system and rewarding employees for
evaluating corporate decisions in their broader social and moral contexts.
3. Corporations should end their defensiveness in the face of public discussions
and criticism. Instead they should actively solicit the views of stakeholders,
communities, and even society as a whole. Corporations should invite outside
opinions and conduct a candid ethical audit of their organizational policies,
priorities, and practices.
4. Corporations must recognize the pluralistic nature of the social system of
which they are a part. Society consists of diverse, interlocked groups, all vying to
maintain their autonomy and advance their interests. These groups are so
related that the actions of one inevitably affect the standing of another on a
variety of levels: economic, political, educational, and cultural. As part of society,
corporations affect many groups, and these groups affect corporations.
Corporations that fail to realize this certainly run the risk of losing sight of the
social framework that governs their relationship with the external environment.
Limits to what law can do:
1. The law can only react once the new problem has occurred.
2. Formulating appropriate laws and designing effective regulations is difficult. It is
hard to achieve consensus on the relevant facts, to determine what remedies will
work, and to decide how to weigh conflicting values.
3. Enforcing the law is often cumbersome. Legal actions against corporations are
expensive and can drag for years; they can leave corporations with an attitude of
“I won’t do anything more than what I am absolutely required to do.”
Conclusion: the law cannot do it alone. Stone argues that we don’t want a system
in which business-people believe that their only obligation is to obey the law and
that it’s morally permissible for them to do anything not (yet) illegal. A socially
responsible business is required to monitor its own behaviour along with
following the law.
Broader and narrow view of CSR:
Makes the assumption that ethical behaviour in business comes at the expense
of economic efficiency
There are two types of situations in which the simple rule of maximizing profits is
1. The case in which costs are not paid for (ex. pollution) [Type text] [Type text] [Type text]
- relates to the demand that corporations “internalize their externalities”
2. The case in which the seller has considerable more knowledge about his
product than the buyer (ex. braking ability of a car)
- enhances economic efficiency
Arrow argues that an ethical code of conduct must be “accepted by the
significant operating institutions and transmitted from one generation of
executives to the next through standard operating procedures and through
education in business schools.”
Ethical behaviour in a corporation must become a fixture.
Professor Milton suggests that in order to institutionalize ethics in organizations,
top management should:
1. Articulate the firm’s values and goals
2. Adopt an ethical code applicable to all members of the company
3. Set up a high ranking ethics committee to oversee, develop, and enforce the
4. Incorporate ethics training into all employee-development programs
The factor that makes one company succeed while another languishes; it is
often the key to a firm’s success.
Corporate culture has various definitions:
1. Culture is the pattern of shared values and beliefs that fives members of an
institution meaning and provides them with the rules for behaviour in an
2. A general constellation of beliefs, mores, customs, value systems, and
behavioural norms, and ways of doing business that are unique to each
corporation, that set a pattern for corporate activities and actions, and that
describes the implicit and emergent patterns of behaviour and emotions
characterizing life in an organization.
3. The shared beliefs top managers have in a company about how they
should manage themselves and other employees, and how they should
conduct their businesses. These beliefs are often invisible to top managers
but have a major impact on their thoughts and actions.
Corporate culture may be both explicit and implicit. The formal culture must be
distinguished from the informal culture that shapes beliefs, values, and
behaviour. There can be multiple overlapping cultures within an organization b/c
employees have different backgrounds, work in different division