unit 4 - corporate responsibility & whistleblowing Flashcards
why is it called corporate responsibility?
corporate issue
corporations have limited liability so owners are protected if the corp goes under.. this makes things for CEOs easier if those under them do shady things
corporation: the fundamentals - definition
Definition of corporation: “Legal entity chartered by the state with rights and responsibilities apart from the persons running or working for the corporation” (Scalet)
Characteristic: set of duties corp will do so that owners have limited liability
Society will invest more in business because they won’t be scared to lose everything they own
corporation: the fundamentals - parts of a corporation
Separation of ownership and control
- limited liability
- IPO (initial public offering) - a lot of investors own a piece of the company so shareholders have some power. You gave up some power so the corp gets money.
Any money you get, you share with shareholders
Shareholder rights vs. managerial discretion
- Shareholders watch over you and your actions because that’s their money too
- Managers have discretion over your money and shareholders watch over closely
What are the roles and responsibilities of a corporation?
- Next slide: society has created it through this structure
two perspectives of shareholder and stakeholders
Shareholder Theory: Maximize profits within the law (and morality)
Shareholders taken a risk and you owe them this
Stakeholder Theory: Advance the interests of all stakeholders (even at the expense of profit)
Focusing on shareholders as a piece of puzzle so if they don’t get money this time it’s ok
board of directors
The role of the board of directors is to oversee the management of the corporation. An historically important feature of shareholder rights is a legal principle of limited liability , which means that shareholders are typically immune from paying any debts of the corporation beyond their initial investment in purchasing shares.
the claim that corporations should advance shareholder interests by maximizing profits creates two separable purposes:
(1) advance shareholder interests (2) maxi-mize profits within law. Advocates of this approach often merge these claims, as is presented in this section, and they express no clear consensus on whether (1) or (2) is more fundamental.
psychological egoism vs. ethical egoism
Psychological egoism is the descriptive view first introduced in Chapter 1 (box) that people are motivated only by their self-interests. Ethical egoism is the normative view that people ought to do whatever is in their self-interests.
Shareholder proponents whose core value leans more toward liberty may find this position attractive. The nuance in shareholder primacy theory is whether shareholders have
(1) claim-rights that managers focus solely on maxi-mizing profits within the law or
(2) claim-rights that managers be transparent about their objec-tives, with a liberty to shape mission as they wish, which allows shareholders to exercise their liberties as they wish (to buy and sell shares based on this information).
Shareholder Value Perspective - 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 (Easterbrook & Fischel, 1991)
Investing in a promise from the company that they will maximize profits in exchange for them taking on firm’s residual risk
- Corporation with shareholders go bankrupt - pay off debt, employees etc. then at the end of the line is the shareholders who get the residual of what is paid over
They take on risk of getting nothing but the company has to try hard to get a lot of money
- That promise is made when they buy and trade the shares
If you bought shares decades ago and it gets traded then the promise is still there
Shareholder value perspective state that it is the company’s obligation to try to maximize shareholder value forever..
Shareholder value perspective
- Maximize profits within the law (and morality)
- Shareholders are people and because of this they have legal and moral constraints
- They want the system to work
- Not taking advantage of each other
arguments for shareholder value
Arguments for shareholder value
1. Legal argument
By law corporations are required to maximize profits/shareholder value
- Economic imperative
Fundamental to market system
Companies must do this so system continues to work
Corporation must do their job which is different from others - Ethical justifications
Efficiency—resources pulled to their most valued uses
Investors will go to companies/consumers that have what they want and will invest more this way
So it is more efficient for companies to do what the market wants
Liberty—individuals are free to participate or not
If people want to buy into a corporation they are free to do that and if they don’t want to then they don’t have to do business with them
challenges to shareholder value
Difficult to rely on self-interested businesspeople to act on others’ behalf (including shareholders’); market mechanisms are required to rein them in
- Humans may be self-interest so board of directors watch over CEO however they are not always there so there must be systems set up so CEO and executives do the right thing when they are not being watched
- Market mechanisms to reign in self-interest folks who should be working for others benefits
Shareholder value proponents think that corporate responsibility lies in devising effective corporate governance mechanisms to protect the long-term interests of shareholders
- Different from stakeholder theory view
- They want this to be voluntary without government involvement
- Use CEO pay and other incentives to keep people in check
corporate social responsibility
Corporate Social Responsibility
Much more expensive than corporate responsibility
Corporation are responsible to various groups
“Commitment to corporate actions beyond maximizing profits within the law” (and morality)
- Corporation says that its not just maximizing shareholder value and take corporate actions that don’t do that
- Pulling back on shareholder maximizing and asking them to do other things
- Shareholders don’t like this
Key that whether you are doing a social responsibility program to maximize profits or expense of profits
instrumental vs normative CSR
Instrumental/Strategic: How corporations should engage in CSR programs in order to maximize profits within legal and moral constraints
- Company that will do a fun run for breast cancer and does promotions. This will increase public relations and make a lot of money for us and our cause.
- Maximizes our profits and can make money for donations
Win-win situation
Shareholders love this
Normative: How corporations should engage in CSR programs because it’s the right or moral thing to do, even at the expense of profits
- Company does a fun run for breast cancer but all money goes to the cause/donation.
- Argument that corporations should take on these social programs even if costs the shareholders money
arguments against normative CSR
Arguments against normative CSR
Violates owners’ property rights
- CEO is using other people’s money without their consent
Presumes that managers have better moral skills than shareholders
- Company gives out dividends to shareholders at end of the year so shareholders might use some of that money to donation but with this, the manager just donates their money anyways
Weakens management’s accountability to shareholders
- Is the CEO being an appropriate shareholder value maximizer
- If a CEO uses money for many programs then how do you measure CEO performance?
Distracts management from its primary purpose
- Point of management is to maximize profits and making the corporation successful not helping other causes
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
- Ben and Jerry told shareholders who went into IPO accepted residual risk: some profits will be used for good causes
