Business 303 Sheppard

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

BUSINESS ETHICS WEEK 6: MAIN QUESTIONS • Why has tort liability expanded? • What are the basic features of the corp.? • What’s the Received Legal Model? • What’s the Managerial Domination Model? • What are ways to increase the corp.'s responsiveness to stockholders. • 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?

1. Who is Responsible? (1/3) • Firm, consumer, or government? [373] • Who assumes the risk and liability [355] • Lockean Proviso • Is there an even playing field? • 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.

1. Who is Responsible? (2/3) • Legal Responsibility & Tort Liability [361] “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.” • Implied warranties [360] • No-fault system [365] http://archives.cbc.ca/IDD-1-75-88/science_technology/thalidomide/

1. Who is Responsible? (3/3) • Responsibility of the Consumer? • Calculation of risk and benefit [362] • Imposed versus voluntary risk [362] • The need for personal responsibility • 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]

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

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

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

3. What is the Corporation? (2/2) • Powers of the Corporation • Expressed powersin a corp. charter • Implied powers(free speech) • Limits legalities & the changing face of the law • Responsibilities: Corporate Liability • Civil LiabilityCorp. has deep pockets • Criminal LiabilityThe courts would like to arrest someone!

4. Stockholders (1/3) • Who are they? • Individual Investors • Institutional Investors • 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

4.Stockholders (2/3) • 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

4.Stockholders (3/3) • 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

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

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

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

6. Managerial Domination Model (2/5) • 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 • Pickgovernmentyouwant toberegulatedby • Pick several for a range of regulations

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

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

6. Managerial Domination Model (5/5) • 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 • Lack of Access to the Board

7. The Corp. Governance Critique (1/3) • 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 • Uncontrolledmanagerswieldgreatinfluence: • The largest corporations and the assent of people to the top • Conflict with democracy? (Lindblom again)

7.The Corp. Governance Critique (2/3) • New 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 • Owner-management decline [595 too] • Rise in social expectations • The principle agent problem

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

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

8b.Democratize theCorp.(1/2) Radical Corporate Governance: Strong Participation Rights [606-13] • Dignity • Fairness • Self-respect • Health • Democracy • Autonomy • Utility

8b.Democratize theCorp.(1/2) Passive, stable shareholders exert little control Virtual absence of external mkt. for corp. control Powerful government intervention; close relations • International Corporate Governance • 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 • Employees, union members & shareholders appoint a group to select the board • Japanese Banks (especially a firm’s ‘main bank’) are influential with a firm’s managers

. Pressure it - Political coercion . Trust it - C.S.R. . Ignore it - Let it do its econ. job . Regulate it - Command & Control . Induce it - Pollution Tax option . Democratize it - Employee Involvement . Nationalize it - Market Failure . Restore it - S-holder Demo. 8d.RaiseCorp.Responsiveness 2 Dealing with failed firms [596-605]

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

TSE Guideline % Adoption Board size suitable for individual accountability 95% Strategic planning involvement 79% Board constituted with majority of unrelated dir.s 77% Internal controls & management info. systems 76% Satisfactory compensation to directors 76% Independence: Non-CEO Chair or lead director 69% Onlynon-mgmt.nominatingcommittee members 68% Risk management systems in place 60% 8e.Shareholder Democracy (2/7) 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,

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 8e.Shareholder Democracy (3/7) Executive Compensation • They do increase the likelihood that managers will do the things for which they are rewarded

8e.Shareholder Democracy (4/7) • Corporate 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

8e.Shareholder Democracy (5/7) • Sensible 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.

8e.Shareholder Democracy (6/7) • 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 Funds • These stockholders are forced to take an active interest in the corporation

Ownership Concentration -Large block shareholders have a strong incentive to monitor management closely - 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 8e.Shareholder Democracy (7/7) - In Canada such shareholders account for 65% to. 70% of publicly traded stocks (59% in the U.S.) (though financial institutions are legally forbidden from directly holding board seats)

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

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

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Business 303 Sheppard