1. Business 303 Sheppard Business Society & Ethics, Week 6: Corporate Social Responsibility (CSR) In Practice Business Society & Ethics, Week 6: Corporate Social Responsibility (CSR) In Practice

2. Wk. 6-2 BUSINESS ETHICS WEEK 6: MAIN QUESTIONS 1.Why has tort liability expanded? 2.What are the basic features of the corp.? 3.What’s the Received Legal Model? 4.What’s the Managerial Domination Model? 5.What are ways to increase the corp.'s responsiveness to stockholders. 6.What are the individual failures that lead to corporate problems? At a minimum shouldn’t we be responsible to the customer or at least to the shareholder?

3. Wk. 6-3 1. Who is Responsible? (1/3) Firm, consumer, or government? [373]Firm, consumer, or government? [373] Who assumes the risk and liability [355]Who assumes the risk and liability [355] –Lockean Proviso Is there an even playing field?Is there an even playing field? Legal Responsibility Legal Responsibility –Tort Liability [356] –Unintended injuries [357]  Pricey way to handle a market info. failure?  A peculiarly American institution?  A lack of desire to regulate arbitration?  The move from contractual consent to coercion to pay a liability tax.

4. Wk. 6-4 1. Who is Responsible? (2/3) Legal Responsibility & Tort Liability [361] Legal Responsibility & Tort Liability [361] –Implied warranties [360] –No-fault system [365] http://archives.cbc.ca/IDD-1-75-88/science_technology/thalidomide/ “Drugs & pharmaceutical devices were among the last products to be swept up in the design defect litigation. Until well into the 1970s, most courts accepted that potent drugs often have unavoidable side effects… Courts began to find design defects in… [a list ending with] morning sickness drugs, & intrauterine devices.”

5. Wk. 6-5 1. Who is Responsible? (3/3) Responsibility of the Consumer?Responsibility of the Consumer? –Calculation of risk and benefit [362] –Imposed versus voluntary risk [362]  The need for personal responsibility Responsibility of the firm? Responsibility of the firm? –Strict (not absolute) product liability [367]? –Reduce the risks of the product [369] –Avoid deception and fraud [370] –Access to information [371] –Compensatory justice [372]

6. Wk. 6-6 2. Background on the Corporation (1/2) Previous Issues Limits & controls to corp. behavior include:Previous Issues Limits & controls to corp. behavior include: –Lockean proviso –NIMBY –Explicit and implicit laws –Kantian ethics for directors [591]

7. 2. Background on the Corporation (2/2) The necessary legal fictionThe necessary legal fiction –Legal ‘let’s pretend’ England / church1100 AD Incorporate to promote the public goodIncorporate to promote the public good –The incorporated city England 1500 AD Dutch & English trading venturesDutch & English trading ventures –Capital pooling Holland / U.K. 1600 AD Public works to promote public goodPublic works to promote public good –Govt. Corp.s / canals U.K. / Hol. / U.S.1700 AD Incorporation to business venturesIncorporation to business ventures –Private corp. for mfg. U.K., Hol. U.S.1800 AD Incorporation to holding companiesIncorporation to holding companies –Co. owns other co. N.J.  Del.  Intl.1900 AD

8. 3. What is the Corporation? (1/2) Characteristics of CorporationsCharacteristics of Corporations –Legal entity  Artificial being, invisible, intangible, & existing only in the contemplation of law existing only in the contemplation of law Creature of the stateCreature of the state –Owes its existence to the government –Allows for free transfer of ownership –Limited liability –Perpetual existence Moral Agent?Moral Agent? –CID, Corp. Culture, Imprison-able?

9. 3. What is the Corporation? (2/2) Powers of the CorporationPowers of the Corporation –Expressed powers in a corp. charter –Implied powers (free speech) –Limits legalities & the changing face of the law Responsibilities: Corporate LiabilityResponsibilities: Corporate Liability –Civil Liability Corp. has deep pockets –Criminal Liability The courts would like to arrest someone!

10. 4. Stockholders (1/3) Who are they?Who are they? –Individual Investors –Institutional Investors Why are they so important?Why are they so important? –‘As residual claimants, if shareholders needs are met then in theory all other stakeholder needs are met.’ Jay Barney  Fact is, if shareholders needs are not met, few other stakeholder needs are likely to be met. –They may also have a desire for the corporation to behave ethically

11. 4. Stockholders (2/3) 4. Stockholders (2/3) Shareholders vote on:Shareholders vote on: –Mergers / Consolidations  Important shareholder’s investment decisions –Disposing of most corp. assets –Dissolving the corp. / re-incorporation –Charter and Bylaw Changes  Proposals by Stockholders to force corp. to act –Elections of Directors  Who should act on corp.’s & shareholders behalf

12. 4. Stockholders (3/3) 4. Stockholders (3/3) Shareholders Legal Rights:Shareholders Legal Rights: –Shareholder Suits  Individual Suits  Derivative Suits On the corporation’s behalf –Corporate Disclosure  The Annual Report  Want More and it’ll cost! –Selling the Shares

13. S h a r e h o l d e r s B o a r d o f D i r e c t o r s Officers & Managers Government S h a r e h o l d e r s B o a r d o f D i r e c t o r s M a n a g e r s a n d O f f i c e r s W o r k e r s Annuit Coeptis 5. The Received Legal Model (1/3) How the Corporation is run by law How the Corporation is run by law

14. –Governmental Power to Charter & Regulate –Fiduciary Duty of Directors to the company & the Stockholders  Obedience  Fiduciary Duty of Loyalty  Liability under some conditions –Insolvency & CDN wages –Whenever there’s a buyout –Pollution  Due Diligence –Oversight which would be used by a responsible director in a similar position 5. The Received Legal Model (2/3) Implications Implications

15. The Board of DirectorsThe Board of Directors –Number & Type  Inside Directors in-house directors  Outside Directors out-house directors –Election  Majority takes all the board (this is the slate of candidates: vote yes or no) OR  Cumulative Voting one vote for each share times the number of directors being elected such that shareholders with a large minority can elect a director  Staggered Term Boards e.g. only elect 2 members / year for a 3 year term on a 6 member board for continuity 5. The Received Legal Model (2/3)

16. Govern- m e n t Share- holders Board of Directors Management Workers Num Me V e x o 6. Managerial Domination Model (1/5) How the Corporation is really run? How the Corporation is really run?

17. 6. Managerial Domination Model (2/5) Management Influences on Government Management Influences on Government – Competition for chartering  More a U.S. & international problem – Political influence Lindblom:  Why government must cater to big business – Capital Mobility  Ability to pick places for the 'right' regulations – Pick government you want to be regulated by  Pick several for a range of regulations

18. 6. Managerial Domination Model (3/5) Picking several governments at once: Picking several governments at once: 11/13/02 A 15m hole opens in the oil tanker Prestige, 11/13/02 A 15m hole opens in the oil tanker Prestige, Nearby France, Spain & Portugal block entry. Nearby France, Spain & Portugal block entry. 11/19/02 The tanker breaks in half and sinks, 11/19/02 The tanker breaks in half and sinks, Oil spoils 600km of Spanish & French coast, Oil spoils 600km of Spanish & French coast, Est. Damage of about $3 billion. Est. Damage of about $3 billion. Who was responsible? Who was responsible? Tanker was Japanese built, Liberian owned, Tanker was Japanese built, Liberian owned, Bahamian registered, Greek operated, Bahamian registered, Greek operated, Swiss-based Corp. chartered as a sub. of a Russian industrial company and Swiss-based Corp. chartered as a sub. of a Russian industrial company and Classified seaworthy by U.S. shipping auth.s. Classified seaworthy by U.S. shipping auth.s. Where do you begin, or end? Where do you begin, or end?

19. 6. Managerial Domination Model (4/5) Management Influences on Shareholders – Information  Shareholder’s Lists – Money  Proxy Process  Greenmail – Disbursed Shareholders with little real power with little real power  Berle & Means – Different Classes of Stock with Different Voting Rights with Different Voting Rights

20. 6. Managerial Domination Model (5/5) Management Influences on the Board Management Influences on the Board –The Proxy Process –Staggered Boards –Treating Outside Directors Like Mushrooms  Outhouse directors –Liability Insurance –Non-Cumulative Voting Management Influences on the Workers Management Influences on the Workers – Lack of Access to the Board

21. 7. The Corp. Governance Critique (1/3) So what about the Mgr. Dom. Model?So what about the Mgr. Dom. Model? –Firms behave in inefficiently:  Owners that should rid themselves of poor management don't  (Capital) Market forces that should have great influence & don’t –Uncontrolled managers wield great influence: –The largest corporations and the assent of people to the top  Conflict with democracy? (Lindblom again)

22. Wk. 6-22 7. The Corp. Governance Critique (2/3) New Issue SummaryNew Issue Summary –Management autocracy [583-4] –The board as rubber-stamp [585]  Or source of policies [592] –Consent of the governed [588] –Growth of firms Berle & Means again  Berle & Means again –Owner-management decline [595 too] –Rise in social expectations –The principle agent problem

23. Agency Relationship Risk Bearing Specialist (Principal) Managers (Agents) Decision Makers which creates Managerial Decision- Making Specialist (Agent) Hire An agency relationship exists when: S hareholders (Principals) Firm Owners Agency Theory 7. The Corp. Governance Critique (3/3)

24. Wk. 6-24. Nationalize it - Market Failure - Market Failure. Democratize it - Employee Involvement - Employee Involvement Dealing with failed firms [596-605] 8a. Raise Corp. Responsiveness 1 Nationalized Company Examples: Manitoba’s take- over of New Flyer Federal takeover CDN National RR

25. Wk. 6-25 Radical Corporate Governance: Strong Participation Rights [606-13] Radical Corporate Governance: Strong Participation Rights [606-13] –Dignity –Fairness –Self-respect –Health –Democracy –Autonomy –Utility 8b. Democratize the Corp. (1/2)

26. Wk. 6-26 – Big firms often have a major s-holder (a bank) – Larger German firms have a 2-tiered system  Banks (especially a firm’s ‘main bank’) are highly influential with a firm’s managers highly influential with a firm’s managers  Employees, union members & shareholders appoint a group to select the board appoint a group to select the board – Japanese Banks (especially a firm’s ‘main bank’) are influential with a firm’s managers bank’) are influential with a firm’s managers 8b. Democratize the Corp. (1/2) International Corporate Governance Powerful government intervention; close relations Passive, stable shareholders exert little control Virtual absence of external mkt. for corp. control

27. Wk. 6-27. Regulate it - Command - Command & Control & Control. Nationalize it - Market Failure - Market Failure. Pressure it - Political coercion - Political coercion. Democratize it - Employee Involvement - Employee Involvement. Induce it - Pollution Tax option - Pollution Tax option. Ignore it - Let it do its - Let it do its econ. job econ. job. T r u s t i t - C.S.R. - C.S.R.. Restore it - S-holder Demo. - S-holder Demo. Dealing with failed firms [596-605] 8d. Raise Corp. Responsiveness 2

28. 8e. Shareholder Democracy (1/7) Reforming the Board –Professional, Full Time Directors –Ethics & Public Affairs Committees –Separate Post of Board Chair & Pres.  Poor idea when fast action is needed –Increasing Director's Liability  Barbarians at the gates –Concentrated Ownership

29. Wk. 6-29 Adoption of TSE Corp. Governance Guidelines by TSE listed Companies From R.M Corbin, 1999, Report on Corporate Governance, 1999, Five Years to the Dey, Toronto Stock Exchange, TSE Guideline % Adoption Board size suitable for individual accountability Strategic planning involvement 95% 79% Board constituted with majority of unrelated dir.s Internal controls & management info. systems 77% 76% Only non - mgmt. nominating committee members Risk management systems in place 68% 60% Satisfactory compensation to directors Independence: Non-CEO Chair or lead director 76% 69% 8e. Shareholder Democracy (2/7)

30. Wk. 6-30 Executive Compensation Salary, Bonuses, LT incentive compensation that makes managers act like principles Stock ownership makes managers more susceptible to market changes Incentive systems do not guarantee managers will make the ‘right’ decisions  They do increase the likelihood that managers will do the things for which they are rewarded will do the things for which they are rewarded 8e. Shareholder Democracy (3/7)

31. 8e. Shareholder Democracy (4/7) Corporate Raiders & Takeover ArtistsCorporate Raiders & Takeover Artists –Help get Rid of Bad Management –Downside Effects: Management destroying value via:  Management concentrating on short run profits to avoid a raid  Greenmail  Golden Parachutes  Poison Pills

32. 8e. Shareholder Democracy (5/7) Sensible Defences against Corporate Raiders & Takeover ArtistsSensible Defences against Corporate Raiders & Takeover Artists –Restrictions to min. effects of Raiders vs. Managers on stockholders –All anti-takeover devices to be approved/renewed periodically –Board approval for purchase of more than X% of a company –If the board doesn't approve, buyer must offer to buy whole corp.

33. 8e. Shareholder Democracy (6/7) LBOs to address Principle/Agent Prob.LBOs to address Principle/Agent Prob. –A Buyout gives former investors cash that can put it to productive use –Managers make efficient resource use due to need to meet interest payments –Management incentives are greater: they own a bigger slice of the company Big Sums in Union & Retirement FundsBig Sums in Union & Retirement Funds –These stockholders are forced to take an active interest in the corporation

34. Ownership Concentration incentive to monitor management closely - Large block shareholders have a strong - Their large stakes make it worth their while to spend time, effort & expense to monitor firms - Their large stakes make it worth their while to. spend time, effort & expense to monitor firms - They may also obtain Board representation to enhance their ability to monitor effectively to enhance their ability to monitor effectively (though financial institutions are legally forbidden from directly holding board seats) from directly holding board seats) - In Canada such shareholders account for 65% to 70% of publicly traded stocks (59% in the U.S.) - In Canada such shareholders account for 65% to. 70% of publicly traded stocks (59% in the U.S.) 8e. Shareholder Democracy (7/7)

35. Wk. 6-35 9. Autocracy : Symptoms / Side-effects (1/2) WorkaholismWorkaholism –Not just a work ethic –Relations to others –Business schools? –Physical & psychological harm –Ethics GroupthinkGroupthink –Grandiosity –Management will solve it –Scapegoating –Ethics & Loyalty

36. Wk. 6-36 EscalationEscalation –Love of conflict –Self-destructiveness –Denial –Ethics 9. Autocracy : Symptoms / Side-effects (2/2) Diffusion of responsibility –Result of autocracy –Indifference –Tragedy of commons –Ethics –Case of WorldCom [615-619]

37. B y e B y e