1. The Corporation And External Stakeholders
Chapter Four
The Corporation
And
External Stakeholders

2. 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?

3. 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)

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. “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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. 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

18. 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.

19. 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.