LEARNING OBJECTIVES CORPORATE RESPONSIBILITY. Session 5. Corporate social responsibility and corporate governance

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1 Session 5 Corporate social responsibility and corporate governance LEARNING OBJECTIVES Define and understand corporate social responsibility and corporate moral responsibility Define the broad and narrow economic views Understand the importance of institutionalising ethics within corporations Explore the stakeholder approach Have a preliminary and basic understanding of stakeholder approach towards corporate governance CORPORATE RESPONSIBILITY For the corporation, the world is without borders or central governance. Corporations represent another source of political and economic power. Of the world s top 10 economies, about half belong to corporations. 3 1

2 WHAT IS A CORPORATION? An entity that can endure beyond the natural lives of its members and that can sue and be sued as an entity. The entity can own property and borrow funds for ventures of limited liability. Limited liability means that the members are liable for the debts of the corporation only up to the extent of their investments. 4 CORPORATIONS Corporations have their existence officially recognised by the law. Shareholders are entitled to a dividend from profits only when dividends are declared by the corporation. Corporations may be either for profit or non-profit. Corporations may be privately owned or owned, in part or whole, by the government. 5 CORPORATE MORAL AGENCY Corporations are legal agents but are they moral agents? Corporations enjoy the same status and functions in society as human beings. They can own property, enter into contracts, and make decisions. Should corporations, then, be held morally responsible for their actions? 6 2

3 VANISHING INDIVIDUAL RESPONSIBILITY The sheer size and impersonal structure of the corporation can result in a diffusion of responsibility. It is difficult to assign individual responsibility because corporate structure envelops members. Who should be responsible for actions? Should we attribute moral agency to corporations? Should we accept that people are willing to abrogate themselves of any personal responsibility? These two options are not necessarily mutually exclusive. 7 RIVAL VIEWS OF CORPORATE RESPONSIBILITY Narrow view: profit maximisation Business has no social responsibilities other than to maximise profits. The purpose of any business is to make profits for its shareholders; management s only duty is to protect the interests of the shareholders. The only obligation that business has to others is to stay within the rules of the game. Broad view social purpose 8 BROAD VIEW: SOCIAL PURPOSE Corporations are a human creation invented to serve human needs. Business has other obligations in addition to the pursuit of profit. Corporations have an obligation to consider the interests of all groups upon which they have an impact. The social contract: business has a duty to consider its impact on society. 9 3

4 DEBATING CORPORATE RESPONSIBILITY Arguments for the narrow view The invisible hand Let government do it. Business can t handle it. Corporations lack the expertise. Corporations will impose their values on us. 10 THE INVISIBLE HAND Corporations should not be held morally responsible for non-economic matters. To do so would distort the economic mission of business. It would undermine the foundations of the freeenterprise system. 11 CRTICISMS OF THE INVISIBLE HAND ARGUMENT Modern corporations bear little resemblance to the selfsufficient farmers and craftspeople that Adam Smith based his theory upon. Modern corporations operate in a political and social environment in which they are pressured by public opinion and other outside influences. Socially responsible corporate behaviour is positively correlated with financial success. 12 4

5 LET GOVERNMENT DO IT Corporations are profit-oriented and will profit themselves while impoverishing society. Only a strong system of government can, and should, bring corporations under control. 13 CRITICISMS OF THIS APPROACH It is a blueprint for an intrusive government. Many questionable activities will be overlooked. Government can only prescribe behaviour for broad issues; it cannot anticipate specific moral challenges. Is government a creditable custodian? 14 THE BUSINESS CAN T HANDLE IT ARGUMENT It is misguided to encourage corporations to address non-business issues. they lack the necessary expertise they will impose their materialistic values on society Yet some corporations have demonstrated that they accept responsibility for the well-being of their immediate and wider communities. 15 5

6 CORPORATIONS LACK THE EXPERTISE Corporate executives lack the moral and social expertise to make anything other than economic decisions. To assign them non-economic responsibilities would be to place social welfare in the hands of inept custodians. Yet, sometimes, it is only business that has the expertise, talent and resources to tackle problems. 16 CORPORATIONS WILL IMPOSE THEIR VALUES ON US If corporations stray from purely economic matters, they will impose their values on society. Rather than moralising corporate activity, they will materialise society. Yet corporations already exert considerable discretionary power over society. 17 SHAREHOLDERS AND THE CORPORATION: NARROW VIEW Corporations should be run entirely for the benefit of its shareholders. Shareholders select corporate managers to act as their agents and advance their interests. This argument only holds true for some smaller companies and venture capitalists investing in a start up company. Management has a fiduciary duty to its shareholders. 18 6

7 SHAREHOLDERS AND THE CORPORATION: THE BROAD VIEW The duty to make a profit does not trump a company s other responsibilities. The agency relationship creates an obligation, but that obligation is not absolute. Firms are so focused on the bottom line that they are willing to sacrifice all other values; they should take a broader view of their responsibilities. 19 ETHICAL CODES AND ECONOMIC EFFICIENCY There are limits to what the law can achieve so it is important that companies examine their implicit and explicit codes of conduct, and their corporate moral culture. 20 ETHICAL CODES AND ECONOMIC EFFICIENCY Although adherents of both the broad and narrow views of CSR tend to assume that ethical behaviour means less economic efficiency, the most morally responsible companies are consistently among the most profitable. 21 7

8 ETHICAL CODES AND ECONOMIC EFFICIENCY Two cases where maximising profits is socially inefficient: Where costs such as pollution are not paid for; and Where the seller has considerably more information about the product he is selling than does the buyer. An effective moral code that, for example, sets minimal standards of performance and requires full disclosure of information enhances economic efficiency by building consumer trust and confidence. 22 CORPORATE MORAL CODES To institutionalise ethics managers must: articulate the firm s goals; adopt an ethical code applicable to all; set up an ethics committee to oversee, develop and monitor the code; and incorporate ethics training into all employee development programs. For a code to be effective, it must be realistic. 23 STAKEHOLDER APPROACH For whose benefit should the corporation be operated? The narrow view contends that a business operates for the benefit of its shareholders. But business operations have an economic and social impact on society that stretches far beyond its shareholders. The stakeholder approach attempts to consider the interests of all upon whom the business has an impact 8

9 STAKEHOLDER APPROACH Primary impact: employees local community suppliers customers shareholders Secondary relationship: government legal bodies the environment 25 9