Chapter 5

Question 1

A corporation is a three-part organization made up of:

Answer 1

1) Stockholders, who provide the capital, own the corporation, and enjoy liability limited to the amount of their investments.
2) Managers, who run the business operations.
3) Employees, who produce the goods and services

Question 2

The concept of limited liability:

2 differences between corporations and other business partnerships:

Answer 2

Members of a corporation are financially responsible for the debts of the organization only up to the extent of their investments.

Differences between corporations and other business partnerships:

1) A corporation requires a public registration or acknowledgement by the law.
2) The shareholder is entitled to a dividend from the company’s profits only when it has been “declared” by the corporation’s directors.

Question 3

Kinds of corporations:

Answer 3

For-profit, nonprofit; privately owned or owned wholly or in part by the government; privately or publicly held.

Question 4

Evolution of the corporation:

Answer 4

Evolution of the corporation:

• The modern business corporation has evolved over several centuries.
• The corporate form developed during the Middle Ages.
• The first corporations were towns, universities, and ecclesiastical orders, chartered by government and regulated by public statute.

Question 5

The birth of the corporation

Answer 5

• These enterprises began in 1600, when Queen Elizabeth I granted to a group of merchants the right to be “one body corporate” and bestowed a trading monopoly to the East Indies.
• The pooling of capital: Members of the earliest corporations financed voyages and absorbed the losses individually if vessels sank – since ships became larger and more expensive, buyers had to pool capital and share the losses.

Question 6

The final stage of corporate evolution:

Answer 6

The traditional system of incorporation involved petitioning the Crown (in England) or the state government (in the U.S.) for charter

In the 19th century, this was replaced by a system in which corporate status was granted essentially to any organization that filled out the forms and payed the fees.

Question 7

Two ideas motivated the change behind the new system in the 19th century

Answer 7

1) The belief that a business corporation should not be directly tied to any public policy.
2) The view that a corporation is a by-product of the people’s right of association, not a gift from the state.

Question 8

What does corporations as legal persons means:

Answer 8

In the eyes of the law, corporations are legal persons.

• This means they enjoy rights and protections that any ordinary individuals do.
• These include the right to free speech, due process, against unreasonable searches and seizures, jury trial, and freedom from double jeopardy.

Question 9

What kind of person is a corporation?

Answer 9

A corporation is an artificial person,

Its existence within the legal system raises the question of its status as a moral agent

Question 10

Can corporations make moral decisions?

Answer 10

The process of moral corporate decision making is filtered through the framework of the corporate internal decision (CID) structures.

This framework consists of individuals although it ultimately operates like a machine.

Question 11

Can corporations make moral decisions?

Answer 11

• Only the individuals within the structure can act morally or immorally, and can be consequently held morally responsible for their actions.
• So philosophers disagree as to whether the structure as a whole can be liable for criminal offenses and punishable by the law.
• It seems that not every form of punishment can be applied to corporations.

Question 12

Vanishing individual responsibility:

Diffusion of responsibility

Answer 12

Vanishing individual responsibility: Acting within the confines of a given CID framework makes it difficult to assign individual responsibility for corporate outcomes.

Diffusion of responsibility - which means that no particular person(s) can be held morally responsible.

• One response to the tendency of vanishing individual responsibility is to attribute moral agency to the corporation itself.
• Another response is to refuse to let individuals duck their personal responsibility.

Question 13

Rival views of corporate responsibility: The debate over corporate responsibility involves several elements:

Answer 13

• Whether it should be construed narrowly to cover only profit maximization.
• Whether it should be considered more broadly to include acting morally, refraining from socially undesirable behavior, and contributing actively and directly to the public good.

Question 14

The narrow view: profit maximization: Milton Friedman.

Answer 14

In his book Capitalism and Freedom, economist Milton Friedman (1912–2006) argues 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.

Question 15

Broader view – corporate social responsibility:

The social entity model or the stakeholder model.

Answer 15

A corp has obligations not only to its stockholders, but to all other constituencies that affect, or are affected by, its behavior.

Includes all parties that have a stake in what the corporation does or doesn’t do – employees, customers, and the public at large.

Relationship between business and society is an implicit social contract that requires business to operate in socially beneficial ways.
Corps must take responsibility for the unintended side effects of business transactions (externalities) and weigh the full social costs of their activities.

Question 16

Proponents of the narrow view vs. Proponents of the broader view

Answer 16

Proponents of the narrow view argue that management’s responsibility to maximize shareholder wealth outweighs any other obligations.

Proponents of the broader view argue that management has fiduciary responsibilities to other constituencies as well (to employees, bondholders, and consumers).

Question 17

Who controls the corporation?

Answer 17

Few economists or theorists believe that stockholders are really in charge of the companies whose shares they hold or that they select the managers who run them.

Today, as most business observers acknowledge, management handpicks the board of directors, thus controlling the body that is supposed to police it.

Question 18

The invisible-hand argument:

Objection:

Answer 18

The invisible-hand argument: Corporations should not be held accountable for non-economic matters – this distorts business’s mission and undermine the free-enterprise system.

Objection: Does not apply to modern conditions in the free market – corporations are extremely powerful but are pressured by public opinion to present themselves as responsible citizens.

Question 19

The let-government-do-it argument:

Objection:

Answer 19

The corporation has a natural and insatiable appetite for profit – should be controlled through a government imposed system of laws and incentives.

Objection: Government can’t anticipate all moral corporate challenges – but manifests many of the same structural characteristics that test moral behavior inside the corporation.

Question 20

The business-can’t-handle-it argument:

Answer 20

• Corporations lack the expertise: Corporate executives lack the moral and social expertise to make other-than-economic decisions.
• Corporations will impose their values on us: Broadening corporate responsibility will “materialize’’ society rather than “moralize’’ corporate activity.

Question 21

To make ethics a priority, corporations should: (4)

Answer 21

1) Acknowledge the importance, even necessity, of conducting business morally.
2) Make a real effort to encourage their members to take moral responsibilities seriously.
3) End their defensiveness in the face of criticism, and invite public discussion and review.
4) Recognize the pluralistic nature of the social system of which they are a part.

Question 22

Limits to what the law can do: Defenders of the broader view of corporate responsibility argue that the law is a fully adequate vehicle for the control of business practices.

But the law is limited in what it can achieve: Why? (4)

Answer 22

But the law is limited in what it can achieve:

1) Many laws are passed only after there is general awareness of the problem.
2) It is difficult to design effective regulations and appropriate laws.
3) Enforcing the law is often cumbersome.

Question 23

Ethical codes and economic efficiency: Exclusive concern with profit maximization is socially inefficient in two situations:

Answer 23

1) When costs are not paid for.
2) When the buyer lacks the expertise and knowledge of the seller.

Efficient economic life requires public trust and confidence.

The adoption of realistic and workable codes of ethics in the business world can contribute immensely to business efficiency.

Question 24

Corporate moral codes: Several steps companies should take to institutionalize ethics:

Answer 24

1) Articulate the firm’s values and goals.
2) Adopt a moral code applicable to all members of the company.
3) Set up a high-ranking ethics committee to oversee, develop, and enforce the code.
4) Incorporate ethics training into all employee-development programs.

Question 25

Corporate culture:

Answer 25

The set of explicit and implicit values, beliefs, and behaviors that shape the experiences of the members of a corporation.

• Organizational theorists stress monitoring and managing corporate culture (and understanding each corporation’s distinctive culture) to prevent dysfunctional behavior and processes.
• Management must pay attention to the values and behavior reinforced by its corporate culture.

Question 26

Externalities

Answer 26

In intended Side effects of business activities on a third party