Chapter 5 Corporations

Chapter Summary Points

1. The modern business corporation has evolved over several centuries and incorporation is no longer the special privilege it once was. 2. Corporations are legal entities, with legal rights and responsibilities similar but not identical to those enjoyed by individuals. Business corporations are limited-liability companies—that is, their owners or stockholders are liable for corporate debts only up to the extent of their investments. 3. The question of corporate moral agency is whether corporations are the kind of entity that can have moral responsibilities. If corporations can make rational and moral decisions, then they can be held morally blameworthy or praiseworthy for their actions. Philosophers disagree about whether the corporate internal decision (CID) structure makes it reasonable to assign moral responsibility to corporations. 4. This problem is compounded by the difficulty of assigning moral responsibility to individuals inside corporations. 5. Despite these controversies, the courts and the general public find the notion of corporate responsibility useful and intelligible—either in a literal sense or as shorthand for the obligations of individuals in the corporation. 6. The debate over corporate responsibility is whether it should be construed narrowly to cover only profit maximization or more broadly to include acting morally, refraining from socially undesirable behavior, and contributing actively and directly to the public good. 7. Proponents of the narrow view, such as Milton Friedman, contend that diverting corporations from the pursuit of profit makes our economic system less efficient. Business's only social responsibility is to make money within the rules of the game. Private enterprise should not be forced to undertake public responsibilities that properly belong to government. 8. Defenders of the broader view maintain that corporations have additional responsibilities because of their great social and economic power. Business is governed by an implicit social contract that requires it to operate in ways that benefit society. In particular, corporations must take responsibility for the unintended side effects of their business transactions (externalities) and weigh the full social costs of their activities. 9. Advocates of the narrow view stress that management has a duty to the owners (stockholders) of a corporation, which takes priority over any other responsibilities and obligates it to focus on profit maximization alone. Critics challenge this argument because (a) they fear the damage that can be done from a narrow focus on profit maximization, (b) they see nothing absurd in requiring corporations to have a broader view of social responsibility, and (c) they don't think the management-stockholder relationship should forbid people from taking moral considerations seriously other than profit-maximization. 10. Three arguments in favor of the narrow view are the invisible-hand argument, the let- government-do-it argument, and the business-can't-handle-it argument. Finding flaws in each of these arguments, critics claim there is no solid basis for restricting corporate responsibility to profit making. 11. Those proposing broader corporate responsibilities see the creation of an ethical atmosphere within the corporation as an important first step. Essential to this atmosphere are acknowledging the critical importance of ethics, encouraging morally responsible conduct by all employees, recognizing the pluralistic nature of our social system, and openness to public discussion and review. 12. All settled economic life requires trust and confidence. The adoption of realistic and workable codes of ethics in the business world can actually enhance business efficiency. This is particularly true when there is an imbalance of knowledge between the buyer and the seller. 13. To improve the organizational climate so individuals can reasonably be expected to act ethically, corporations should adopt an ethical code, set up a high-ranking ethics committee, and include ethics training in their employee-development programs. Attention to corporate culture is also crucial to the successful institutionalization of ethics inside an organization.

corporation

A limited liability company. A company with one or more shareholders who share ownership while enjoying limited liability.

limited liability

Investors(shareholders)are not responsible for the actual price of damages done by the corporations they own stock in. Instead, they are liable for the amount they invest in the company.

fiduciary duties

The duty of management to make profit for shareholders.

shareholder

The investors (stockholders) who share ownership of a corporation by buying stock.

externalities

Unintended positive and negative effects done to third parties from business transactions, such as pollution.