BA 300 Unit 4

Impact of Normative CSR

- Going concern: shareholders' expectations are undermined, and owners of record at announcement pay for entire CSR redirection - Startup: investors purchase IPO shares with full knowledge of potential for lower market price

principle of limited liability

- Important feature of shareholder rights - Shareholders are typically immune from paying any debts of the corporation beyond their initial investment in purchasing shares

Shareholder Value Perspective

- Maximize profits within the law (and morality)

Corporate Social Responsibility

"Commitment to corporate actions beyond maximizing profits within the law" /morality

John Mackey CEO of Whole Foods advocates stakeholder theory

- Each stakeholder group (including investors) will define the purpose of the business in terms of its own needs and desires- each perspective is valid and legitimate - Function of company leadership to develop solutions that continually work for the common good, finding appropriate balance

Ethical egoism

the normative view that people ought to do whatever is in their self-interests

Power of corporations

- 2015- 69% of the top 100 economic entities were corporations rather than nation-states - Corporations are located within and across nation-states and GDP is constituted in part by the sales of these corporations - States have armies, engage in coercive activities, and enforce laws; they have citizens and governments - Corporations have employees and managers and boards of directors and shareholders; operate in a stable legal environment

The Power Argument

- A corporation's purpose is to "use its resources to advance the interests of all those who are most affected by its corporate activities" - "With greater power comes great responsibility" - "The limited capacities of government and the power and influence of corporations require that the corporations address these social problems"

Steps of Whistleblowing

- Approach your immediate manager first - Discuss the issue with your family - Take it to the next level - Contact your company's ethics officer - Consider going outside your chain of command - Go outside the company - Leave the company

What Do Shareholders Own?

- At IPO, shareholders invest in the promise of maximum shareholder value within legal and moral constraints, in exchange for taking on the firm's residual risk - That promise stays with shares as they change from hand to hand over time

Debates about Shareholder rights and Managerial Duties

- By granting that shareholders are the legitimate owners of the corporation, almost any other position can seem irrelevant - Idea that managers can pursue other goals appears to violate the property rights of the owners - But, for the position to express an ethical argument, the position is underdeveloped - The idea of ownership doesn't settle the specific property rights of the owner - The assertion of ownership does not yet constitute an argument for shareholder primacy theory - How do shareholder primacy advocates defend the account of shareholder property rights and managerial duties - Should shareholders have a claim-right that managers always try to increase profits within the law? - Are managers' sole duties to maximize profits for its shareholders? - These questions can be developed descriptively or normatively

Significant intervention

- CSR as legal mandate (ex: codetermination laws)

Shareholder primacy theory

- Corporate purpose: advance shareholder interests by maximizing profits within the law

Summary

- Corporate responsibility is not about philanthropy or pursuing goals apart from increasing profits - It's about good corporate governance which guards against managers padding their own self-interests in conflict with their duty to shareholders - System values liberty and efficiency

Precursors to Whistleblowing

- Dealing with a serious issue - Assembled the facts - Checked to be sure facts are accurate - Asked peers or manager for advice - See a law or policy about to be violated

Corporations: The Fundamentals

- Definition: "legal entity chartered by the state with rights and responsibilities apart from the persons running or working for the corporation - Separation of ownership and control - Shareholder rights vs managerial discretion - What are the roles and responsibilities of a corporation?

Challenges to Shareholder Value

- Difficult to rely on self-interested business people to act on others' behalf (including shareholders'); market mechanisms are required to rein them in - Shareholder value proponents think that corporate responsibility lies in devising effective corporate governance mechanisms to protect the long-term interests of shareholders

Debates about corporate responsibilities often lead to broader debates about the types of motives people can and should expect from each other in their economic lives

- Ex: difference between saying people are greedy and saying that greed is good - Long term self-interest is best interpreted as the interests of the self and the best way to respect our individuality is to pursue these self-oriented interests (writer Ayn Rand) - She develops a normative defense of self-interest over altruism (she sees as sacrifice of the self) - Others disagree, emphasizing the importance of getting "outside yourself" by becoming immersed in a community with others, or by caring for others in ways that redefine or dissolve the egoistic sense of self

Advance Shareholder Interests By Maximizing Profits Within The Law

- Expanding views of Milton Friedman and his supporters - Friedman represents the view of a culture in the broad public and in dominant assumptions that drive conversations in business and economics - Shareholders become part owners of a corporation by purchasing shares with the expectation that managers will be working on their behalf - These purchases are not gifts, but are exchanges - Shareholders expect to receive returns on their investment - Role and duty of management is to make good on the owners' investment by increasing profits within the law

Ethical Justifications

- For proponents, a corporate system defined in terms of maximizing profits within the law best protects individual liberty and promotes economic efficiency Believe critics of capitalism have a one-sided understanding on the realities of history - The Structure of an Ethical Argument -Structure begins with a normative presence (ex: about value of freedom and efficiency) - Ends with a normative conclusion (ex: advocacy for the legal and customary rights associated with shareholder primacy theory) - Empirical facts and data are means to establish how the conclusion is a reasonable inference from the premise Ex: 1. People should aspire to live in a world that promotes and and respects freedom and equality (normative premise) 2. As a matter of observable fact, the institutions associated with shareholder primacy theory create or promote freedom and efficiency (descriptive premise) 3. Therefore, people should advocate for institutions that reflect shareholder primacy theory - Efficiency and liberty are most common values at core of shareholder primacy theory

Interpreting the CSR Movement From a Stakeholder Perspective

- For stakeholder proponents, CSR refers to corporate responsibilities beyond making profits within the law, which is best fulfilled by advancing stakeholder interests - Pursuit of CSR is sometimes called corporate citizenship, sustainability, social performance, dual purpose, or the pursuit of the triple bottom line (people, planet, and profits) - For stakeholders CSR movement is not hypocritical but rather expresses that customary norms of society are changing and that corporations have heightened responsibilities in global society

How not to blow the whistle example

- High-level investment banker - Trainee in asian country wrote long message on email system

Milton Friedman Nobel Prize winner in econ advocates shareholder perspective

- In practice, the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions - Maximize profits for the investors

Personal and Institutional Points of View Revisited

- Institutional: normative debate about role and function of corporations in society - Personal: theories are designed to guide ethical decision-making for people in their roles in the business system

Ethical Justifications

- Institutions with great power can and should help alleviate global inequalities - Freedom is better promoted through a stakeholder approach- like liberty for all - Efficiency considerations give their theory the advantage - Capitalism has the potential to improve people's welfare and create long term efficiencies only if enough people accept the legitimacy of a global economic system - Widespread acceptance by those affected by the global economy can only occur if corporations take a broad range of stakeholder interests seriously - Therefore, corporations must take the stakeholder interests seriously to sustain long-term efficiencies - Not the shareholders who do the work for the corporation- it's the employees - Intrinsic value of nature and community- places people, the environment, and the community alongside the goal for profits

"Instrumental" vs "Normative" CSR

- Instrumental/Strategic: how corporations should engage in CSR programs in order to maximize profits within legal and moral constraints - Normative: how corporations should engage in CSR programs because it's the right or moral thing to do, even at the expense of profits

Corporate Purpose, Stakeholder Rights, and Managerial Duties

- Large corporations exert great power that profoundly impacts people's lives - Their sheer size and impact- with great power comes great responsibility - Purpose of a corporation is to use its resources to advance the interests of all those who are most affected by its corporate activities - Corporations exist for all of these stakeholders - Stakeholder theory different from shareholder primacy theory - Offers contrasting view about corporate purpose - Endorse a different norm for corporate governance and the rights and dties of shareholders and management - Management: duties to advance the interests of the stakeholders consistent with making profits - Still shares perspective that shareholder claim rights to profits ought to be limited by basic ethical constraints or goals independent from law - Additional responsibilities - Some stakeholder proponents emphasize employee rights and other obligations to employees - Others emphasize supplier relationships - Others emphasize vulnerable and poor populations nearby - Each relevant stakeholder has a set of legitimate interests that a corporation is ethically obligated to consider as part of normal business operations Stakeholder approaches - Develop responsibilities directly connected to a a corporate sphere of operations - Constraints on behavior such as doing no harm Social goals related to core business functions (ex: paying a livable wage) - Develop an account of responsibility tied to normal business operations, not solving general social problems - Promoting responsibilities that may take corporations beyond their immediate sphere of operations - United Nations Global Compact takes stakeholder ideas seriously 10 principles regarding human rights, labor, environment, and anti-corruption - Common aim of stakeholder theory: create norms that promote stakeholder interests within daily business operations - Argument is fundamentally normative: whatever economic role people occupy in society, they should accept that corporations ought to advance stakeholder interests beyond maximizing profits within the law

Arguments for Shareholder Value

- Legal argument - Economic imperative - Ethical justifications - Efficiency- resources pulled to their most valued uses - Liberty- individuals are free to participate or not

Corporations and Government

- Limited capacities of gov and the power and influence of corporations require that corporations address social problems when they can - Stakeholder theorists differ Top down vs bottom up - Codetermination?

Types of Government Intervention

- Limited intervention - Significant intervention

Debates about Shareholder rights and Managerial Duties: Normatively

- Managers have duties to shareholders - Not merely the law or management that have the power to specify the rights and responsibilities - Culture at large exerts a power

When do you blow the whistle?

- Once a manager is alerted, it's their responsibility to deal with issues like expense reports, except in extraordinary circumstances - Gut feeling When it can cause harm, reputation, break law, etc - Usually CEO is one of your last resorts

Ethics, Self-Interests, and Markets

- People want to know that ethical motives are possible in business - System that can support ethical motives not only can curtail harms that markets can cause, but also enable people to live with ethical integrity and maintain personal character - Larger expectations that we put on ourselves- corporate responsibility - Want to convince everyone to adjust their decision making as consumers, as nestors, as citizens, as shareholders, as a board of directors, as employees, managers, or executives

Stakeholder theory of corporations

- Places primary emphasis on a wider vision of the stakeholders of a corporation

Shareholder primacy theory of corporations

- Places primary emphasis on the interests of the shareholder of a corporation

A Key CSR Distinction

- Repair externalities/ "do no harm," but not responsible for general social problems - Advance the common good, "whether or not it's directly related to their core business

A Global Perspective: "All Is Not Well"

- Responsibilities of multinational corporations in a global economy - Management has at least one duty that is not to the shareholder- duty to follow the law - Question: whether following the law is also a duty beyond rational calculations of self-interest - Stakeholder advocates now have a point of leverage to engage shareholder theorists: granting an ethical duty (to follow the law), why believe that this duty is the only ethical demand on corporations - Debate: not whether management bears ethical responsibilities beyond maximizing profits, its about the reach and scope of these responsibilities and whether shareholder and stakeholder theory offers the better analysis - Stakeholder proponents - Emphasize that law is not a bright line - Corporations are not at liberty to do anything in the name of profits in instances where there is little or no effective law If a strong sense of ethical responsibilities are not woven into business operations, the pursuit of profit could cease to be market activities altogether, and instead become acquisition by coercion and violence - Focus on the ethics of international business and globalization

Separating the Roles of Business and Government

- Role of the government to address social problems, not business - Government creates the laws that constrain what management may or may not do in pursuit of profits, and should address social concerns through its public policies - Business and government should have distinct and separate roles in society - Government creates and enforces coercive laws that are made legitimate through democrateic procedures - Whatever those conditions are, businesses create goods and service through markets within those legal constraints - Three observations - Some people may interpret the position as maximizing profits without any legal constraints but not true - The debate is about the extent of the role - Tension in the view - One hand: proponents admit a governmental role for addressing social problems - On other hand: often advocate limited gov role - Deregulation and limited government are not necessarily implied by shareholder theory

Self-Interest and Markets

- Self interest is the primary if not only ultimate mover of human behavior - Design of an economic system: one that can create desirable outcomes through the self-interested motives of its participants - Specifying a duty as modest as advancing shareholder interests is still asking a lot of management, and this will likely lead to scandals and corruption based on the overpowering lure of self-interests - Shareholder primacy theory doesn't deny ethical responsibilities for management, but wisdom counsels for a limited set of ethical rules aligned with self-interested incentives as far as possible - Greatest challenge of ethics: understand the separation of ownership and control as part of corporate governance - Securities and Exchange Commission (SEC): federal regulatory body to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation - Few debates: -Protection of shareholder interests and reforming corporate governance structures to advance shareholders' interests - Huge compensation packages of leading executives in the face of poor financial performance - Proper role of a board of directors, and the appropriate structure of board members to perform their roles effectively - Weakness in compliance, governance, and accountability are the focal points for ethical concern - Law doesn't directly mandate the duty, at least not in a way that precludes management from exercising discretion to pursue other goals - Investors can exit the relationship at will - Alternative statement of the shareholder primacy position: describe a managerial liberty by which managers run their operations as they see fit within the law, and then investors can walk (sell off) if they do not support their managerial decisions Nuance- whether shareholders have - Claim rights that managers focus solely on maximizing profits within the law or - Claim rights that managers be transparent about their objectives, with a liberty to shape mission as they wish, which allows shareholders to exercise their liberties as they wish

Two main competing perspectives

- Shareholder primacy theory of corporations - Stakeholder theory of corporations - Each theory provides a comprehensive and competing normative and descriptive perspective about the role and responsibilities of corporations in society

Interpreting the CSR Movement From the Shareholder Perspective

- Shareholder proponents respond that CSR initiatives shouldn't be taken at face value - "Hypocritical window dressing" -Freidman Corporations are endorsing social duties beyond the shareholder but are driven to perform solely for the benefit of shareholder returns - Any real act of social responsibility beyond maximizing profits would conflict with managerial duties to the stakeholder - Some shareholder proponents interpret the efforts as part of the struggle to balance short and long-term investor interests - Acts of social responsibility may conflict with short-term profits, but they are an assessment of the investments necessary to encourage a stable environment for future growth and profitability - Believe that people should interpret and explain the CSR movement entirely in strategic terms, consistent with their understanding of corporate purpose

Debates about Shareholder rights and Managerial Duties: Descriptively

- Show that existing law settles the matter - Legal ambiguity - In practice courts have repeatedly deferred to the judgment of businesspeople about how to run the firm's operations both in how they conceive the purpose of corporations and in what decisions they make - In effect the courts say they do not exercise the legal power to settle by law the question of managerial duties at stake in debates about corporate responsibility - Show that managers are subject to a economic mandate to create profits - Competitive markets- little choice but to maximize profits

Evidence of CSR Popularity

- Socially responsible investing - CSR-related shareholder proposals - Nongovernmental organizations - Benefit corporations: special legal status for for-profit businesses that include social responsibility in their core mission

First statement of the shareholder primacy view

- Specifies the purpose of corporations in terms of shareholders' property rights and managerial responsibilities - Shareholders are the owners or principals of the corporation and managers are agents whose duty toward those shareholders is to maximize profits within the law - Ex: bank's charitable gifts decreased interest payments to you - How would you react to this? - This helps state what proponents believe is obvious about corporations - Managers are hired to run a business and to create returns to the owners - Management has a duty to increase profits for owners who are not on the scene to control and monitor what happens - This duty guards against temptation for managers to use their position for self-enrichment at the expense of shareholder interests

Stakeholder Theory

- Stakeholders: "entities significantly affected by the firm's activity, such as employees, customers, shareholders, the community or broader society, the environment, and suppliers" - "The debate is not whether management bears ethical responsibilities... it is about the reach and scope of these responsibilities"

Businesses also take other legal forms

- These include one or more owners who are typically liable for any debts incurred by the firm's activities - And they generally control the business with extensive claims, liberties, and powers over all aspects of its operations - Corporation- top management runs the business but doesn't own it- shareholders do

Limited intervention

- Top-down process: international organizations (ex: the UN) specify norms endorsed by executives - Bottom-up processes: "ethical norms are rewarded by the purchasing decisions of consumers and investors"

Whistleblowing "Triggers"

- Truth - Employee or customer rights - Trust - Harm - Your personal reputation - Your organization's reputation - Breaking the law

Shareholds/Stockholders

- Typically retain claim-rights to sell their shares and receive returns on the profits of the corporation - Have limited control over the firm's operations, apart from a right to nominate and vote for a board of directors - Board of directors oversees the management of the corporation

Arguments against Normative CSR

- Violates owners' property rights Presumes that managers have better moral skills than shareholders - Weakens management's accountability to shareholders - Distracts management from its primary purpose

CSR rating agencies

- an entire industry of orgs that rate corporations on their social and environmental performance beyond their financial performance - Many corporations produce voluntary CSR annual reports - Corporate responsibility officers (CROs) - Show people value CSR - CSR movement provides direct evidence that people do apply ethical values in their business and economic decisions - Socially responsible investing (SRI), CSR-related shareholder proposals, Benefit corporations, social entrepreneurship

Advantage to shareholder theory

- more realistically characterizes the motives that most people bring to business and economic life - Psychological and Ethical egoism

The claim that corporations should advance shareholder interests by maximizing profits creates 2 separate purposes:

1. Advance shareholder interests 2. Maximize profits within the law - Many merge these claims

How to blow the whistle

1. Approach your immediate manager first if you can (if they aren't involved in the problem) - Write memo second time 2. Discuss the issue with your family, keep diary 3. Take it to the next level 4. Contact your company's ethics officer or ombudsman 5. Consider going outside your chain of command - Once you've approached your management, the ethics or compliance office (if have one), and human resources, legal, or audit, you should have received some satisfaction - Last resort is superior management- CEO, president, board of directors but make sure you have your facts straight and documente 6. Go outside the company - Sarbanes-oxley Act: Provides whistle-blowers in publicly traded companies with new protections if they made a disclosure to supervisor - Dodd-frank wall street reform and consumer protection act 7. Leave the company

When you suspect serious wrongdoing within your organization

1. Ask yourself how strongly you feel about the particular issue 2. Ask yourself about your intentions 3. Consider power and influence 4. Weigh risks and benefits of action 5. Think about timing 6. Develop alternatives

Corporate charitable giving can seem like a model of corporate responsibility, but for advocates of the shareholder perspective, broad mandates "to do good" with the profits of a corporation work in the wrong direction. These demands:

1. Violate the property rights of the owners of the corporation, the shareholders 2. Presume that managers have moral competencies superior to shareholders' competencies about what to do with the earnings 3. Weaken management's duty to the shareholder and invite opportunities for managerial self-enrichment under the guise of doing good 4. Distract from the corporation's purpose to run a profitable business - Both managers and shareholders are free to devote their private resources for charitable giving - The problem is when management uses corporate money for this

Other Theories of Corporate Purpose

Purpose to achieve justice in ways similar to expectations in the political sphere

Corporate social responsibility movement

entire range of developments and arguments over the past several decades that convey a commitment to corporate endeavors beyond maximizing profits within the law

Global governance gaps

places with little or no effective law or regulation

Psychological egoism

the descriptive view that people are motivated only by their own self-interests

Contemporary world includes...

the growth and influence of huge corporations around world

Political legitimacy

whatever conditions would justify the government's use of coercive power, where democratic procedures would create those conditions

Ethical Justifications

- Powerful corporations can help alleviate global inequalities - Stakeholder approach leads to greater liberty for the vulnerable - Capitalism will only be efficient if the masses buy into it - Shareholders don't do the real "work" - Consider non-western values: economic actors should pursue what is sufficient

Two Perspectives

- Shareholder value: maximize profits within the law (and morality) - Stakeholder theory: advance the interests of all stakeholders (even at expense of profit)

One of most basic points of contentions: in Shareholder vs. Stakeholder argument

- What is the purpose and responsibilities of corporations? - Do they have responsibilities beyond maximizing profits within the law?

Corporation

- a legal entity chartered by the state with rights and responsibilities apart from the persons running or working for the corporation - Ex: corporation can be sued without individuals working being sued

Stakeholders

- all those who are significantly affected by corporate activities Including shareholders, the community, employees, and the environment

Largest economic entity in the world 2016 measured by GDP

1. US 2. Japan 3. China 4. Germany 10. Walmart