The Corporation And External Stakeholders Chapter Four The Corporation And External Stakeholders

Corporate Social Responsibility Corporate social responsibility (CSR) involves an organization’s duty and obligation to respond to its stakeholders’ and the stockholders’ economic, legal, ethical, and philanthropic concerns and issues Social concerns of stakeholders Corporate interests What is the philosophical and ethical context from which corporate social responsibility and ethical decisions are made? What role does the free market play?

Free Market Constraints Minimal moral restraints Full competitiveness with entry and exit Relevant information available to everyone Accurate reflection of all production costs in prices (assumes an equal balance of power, knowledge, and sophistication) Problems: Resource-rich firms create unequal information Advertising is used questionably “Invisible hand” does not exist for all situations (imperfect markets)

Social Contract A set of rules and assumptions about behavior patterns among the parties to the contract Changing Used to be: stable, reliable, predictable Now: disregard for safety, equity, responsibilities toward customers and society as a whole Uneasiness with corporate power and influence (violates the quid pro quo norm) Covenantal Ethics – concerned with both social and economic relationships

Figure 4.1: External Stakeholders, Moral Stakes, and Corporate Responsibilities

Moral Bases for Social Responsibility Trustee for society’s resources Two-way open system, open disclosure Social costs and benefits Consumer pays for consumption and effects on society Social involvement in core competency areas

Competitive Advantages for Socially Responsible Firms Reputation Successful social investment portfolios Ability to attract quality employees Expectation of public that organizations will engage in philanthropy

Corporate Social Responsibility and Stakeholder Management Balancing “Carrot” and “Stick” approaches Carrot – voluntary self-regulation Vision/Mission/Values Ethics programs Best Practices/Risk Management Philanthropy Stick – external regulatory compliance Laws; court cases Regulation Congressional oversight

Summary of Sarbanes-Oxley 2002 Establishes an independent public company accounting board to oversee audits of public companies Requires one member of the audit committee to be an expert in finance Requires full disclosure to stockholders of complex financial transactions Requires CEOs and CFOs to certify in writing the validity of their companies’ financial statements Prohibits accounting firms from offering other services, like consulting, while also performing audits

Summary of Sarbanes-Oxley 2002 (con’t) Requires ethics codes, registered with the Securities and Exchange Commission (SEC), for financial officers Provides a 10-year penalty for wire and mail fraud Requires mutual fund professionals to disclose their vote on shareholder proxies, enabling investors to know how their stocks influence decisions Provides whistle-blower protection for individuals who report wrongful activities to authorities Requires attorneys of companies to disclose wrongdoing to senior officers and to the board of directors, if necessary

“Best Practices” for Corporate Boards of Governance Separating the role of chairman of the board when the CEO is also a board member Setting tenure rules for board members Regularly evaluating itself and the CEO’s performance Prohibiting directors from serving as consultants to the companies which they serve Compensating directors with both cash and stock Prohibiting retired CEOs from continuing board membership Assigning independent directors to the majority of members who meet periodically without the CEO

Cons and Pros of Sarbanes-Oxley It is too costly Government costs also increase to regulate the law It impacts negatively on a firm’s global competitiveness CFOs are overburdened and pressured by having to enforce and assume accountability An exodus will occur of public companies returning to private ownership Pros The costs of implementing is minimal compared to the costs of not having it The changes required to enact this law are difficult, but more than 70% of directors viewed the law as positive The data does not support the argument that this law presents a competitive disadvantage to global firms Financial officers may in fact be suffering from the lack of internal controls they had before If a company uses the Sarbanes-Oxley Act as a reason to not go public, the firm should not go public or use investors’ funds

Revised 1991 Federal Sentencing Guidelines: Compliance Incentive Established standards and procedures capable of reducing the chances of criminal conduct Appointment of compliance officer(s) to oversee plans Took due care not to delegate substantial discretionary authority to individuals who are likely to engage in criminal conduct Established steps to effectively communicate the organization’s standards and procedures to all employees Took steps to ensure compliance through monitoring and auditing Employed consistent disciplinary mechanisms When an offense was detected, took steps to prevent future offenses, including modifying the compliance plan, if appropriate

The Role of Laws and the Regulatory System in Corporate Governance Regulate competition Protect consumers Promote equity and safety Protect the natural environment Ethics and compliance programs to deter and provide for enforcement against misconduct

Five Goals of Government Policy Makers toward Consumers Providing consumers with reliable information about purchases Providing legislation to protect consumers against hazardous products Providing laws to encourage competitive pricing Providing laws to promote consumer choice Protecting consumers’ privacy

Examples of Laws Promoting and Prohibiting Corporate Competition Sherman Antitrust Act, 1890: Prohibits monopolies Clayton Act, 1914: Prohibits price discrimination, exclusivity, activities restricting competition. Federal Trade Commission Act, 1914: Enforces antitrust laws and activities. Consumer Good Pricing Act, 1975: Prohibits price agreements in interstate commerce between manufacturers and resellers. FTC Improvement Act: Empowers the FTC to prohibit unfair industry activities. Antitrust Improvements Act, 1976: Supports existing antitrust laws and empowers Justice Department investigative authority. Trademark Counterfeiting Act, 1980: Gives penalties for persons violating counterfeit laws and regulations. Digital Millennium Copyright Act, 1998: Protects digital copyrighted material such as music and movies.

Responsibility toward Consumers Duty to inform fully and truthfully Duty to not misrepresent or withhold information Duty to not force or take undue advantage of through fear or stress Duty to take ‘due care’ to prevent foreseeable injuries

Examples of Laws Protecting Consumers Pure Food and Drug Act, 1906: Prohibits mislabels on food and drugs in interstate commerce. Federal Hazardous Substances Act, 1960: Controls labels on hazardous substances of products used in houses. Truth and Lending Act, 1960: Requires full disclosure of credit terms to buyers. Consumer Product Safety Act, 1972: Establishes safety standards and regulations of consumer products (created the Consumer Product Safety Commission (CPSC)). Fair Credit Billing Act, 1974: Requires accurate, current consumer credit reports. Telephone Consumer Protection Act, 1991: Issues procedures to avert undesired telephone solicitations. Children’s Online Privacy Protection Act, 1998: Requires the FTC to make rules to collect online information from children under 13 years old Do Not Call Implementation, 2003: Coordinates the FTC and FCC to provide consistence rules on telemarketing practices.

Examples of Laws Protecting the Environment Clean Air Act, 1970: Designated air-quality standards; state implementation plans required for approval. National Environmental Act, 1970: Established policy goals for federal agencies; enacted the Council on Environmental Quality to monitor policies. Federal Water Pollution Control Act, 1972: Prevents, reduces, and eliminates water pollution. Endangered Species Act, 1973: Provides a conservation program for threatened and endangered plants and animals and their habitats. Noise Pollution Act, 1972: Controls noise emission of manufactured products. Safe Drinking Water Act, 1974: Protects the quality of drinking water in the U.S; sets safety standards for water purity and requires owners and operators of public water to comply with standards. Toxic Substances Act, 1976: Requires testing of certain chemical substances; restricts use of certain substances. Food Quality Protection Act, 1996: Requires a new safety standard that must be applied to all pesticides used on foods: reasonable certainty of no harm.