Strategic Leadership -

Strategic Leadership -

Business Business 303 303 Sheppard Sheppard Business Society & Ethics, Week 6: Corporate Social Responsibility (CSR) In Practice BUSINESS ETHICS WEEK 6: MAIN QUESTIONS 1. 2. 3. 4. 5. Why has tort liability expanded? What are the basic features of the corp.? Whats the Received Legal Model? Whats the Managerial Domination Model?

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 shouldnt we be responsible to the customer or at least to the shareholder? Wk. 6-2 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. Wk. 6-3 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] Wk. 6-4 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] Wk. 6-5

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] Wk. 6-6 2. Background on the Corporation (2/2) The necessary legal fiction Legal lets pretend England / church 1100 AD Incorporate to promote the public good The incorporated city England

Dutch & English trading ventures Capital pooling Holland / U.K. 1500 AD 1600 AD Public works to promote public good Govt. Corp.s / canals U.K. / Hol. / U.S. 1700 AD Incorporation to business ventures Private corp. for mfg. U.K., Hol. U.S. Incorporation to holding companies Co. owns other co. 1800 AD

N.J. Del. Intl. 1900 AD 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 powers in a corp. charter Implied powers (free speech) Limits legalities & the changing face of the law Responsibilities: Corporate Liability Civil Liability Corp. has deep pockets Criminal Liability The 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 shareholders 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 corporations behalf Corporate Disclosure The Annual Report Want More and itll cost! Selling the Shares 5. The Received Legal Model (1/3) How the Corporation is run by law Annuit Coeptis

Government Board of Directors SMhaanraegheor sl d e r s & Officers Board of Directors S h a r e h o l d e r M a n as 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 theres 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

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 6. Managerial Domination Model (1/5) How the Corporation is really run? Num Me Vexo Management

Government Shareholders 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 Pick government you want to be regulated by 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 a Russian industrial company and Classified seaworthy by U.S. shipping auth.s. Where do you begin, or end? 6. Managerial Domination Model (4/5) Management Influences on Shareholders Information Shareholders 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 & dont Uncontrolled managers wield great influence: 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 Wk. 6-22 7. The Corp. Governance Critique (3/3) Agency Theory An agency relationship exists when: Shareholders (Principals) Firm Owners

Hire Managers (Agents) Decision Makers Agency Relationship Risk Bearing Specialist (Principal) Managerial DecisionMaking Specialist (Agent) which creates 8. Increase Corp. Responsiveness (1/9) 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 8. Increase Corp. Responsiveness (2/9) Percent Adoption of TSE Corp. Governance Guidelines by Companies listed on the T.S.E. TSE Guideline* % Adoption Board size suitable for individual accountability

95% Strategic planning involvement 79% Board constituted with majority of unrelated directors 77% Internal controls & management information systems 76% Satisfactory compensation to directors 76% Independence: Non-CEO Chair or lead director

69% Only non-management nominating committee members 68% Risk management systems in place 60% (* Only those guidelines where a majority of firms have adopted the guideline are shown.) Wk. 6-25 From R.M Corbin, 1999, Report on Corporate Governance, 1999, Five Years to the Dey, Toronto Stock Exchange,3 8. Increase Corp. Responsiveness (3/9) Executive Compensation Salary, Bonuses, Long term incentive compensation Exec. decisions are complex & non-routine Stock ownership (long-term incentive compensation) makes managers more susceptible to market

changes which are beyond their control Incentive systems do not guarantee managers w make the right decisions They do increase the likelihood that managers will do the things for which they are rewarded * Wk. 6-26 8. Increase Corp. Responsiveness (4/9) 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 White knights, etc. 8. Increase Corp. Responsiveness (5/9) 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 board doesn't approve, buyer must offer to buy whole corp.

8. Increase Corp. Responsiveness (6/9) Big Sums in Union & Retirement Funds These stockholders are forced to take an active interest in the corporation 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 8. Increase Corp. Responsiveness (7/9) Ownership Concentration - Large block shareholders have a strong incentive to monitor management closely - In Canada such shareholders account for 65% to . 70% of publicly traded stocks (59% in the U.S.)

- Their large stakes make it worth their while to . spend time, effort & expense to monitor closely - They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats) 8. Increase Corp. Responsiveness (8/9) . Pressure it . Trust it - Political coercion - C.S.R. . Ignore it . Regulate it

- Command & Control . Democratize it - Command & Control . Nationalize it - Market Failure Dealing with failed firms [596-605] - Let it do its econ. job . Induce it - Pollution

Tax option . Restore it - S-holder Demo. Wk. 6-31 8. Increase Corp. Responsiveness (9/9) Radical Corporate Governance: Strong Participation Rights [606-13] Dignity Fairness Self-respect Health Democracy Autonomy Utility Wk. 6-32 9. On International Corp. Governance Big firms often have a major s-holder (a bank)

Larger German firms have a 2-tiered system Banks (especially a firms main bank) are highly influential with a firms managers Employees, union members & shareholders appoint a group to select the board Japanese Banks (especially a firms main bank) are influential with a firms managers Passive, stable shareholders exert little control Virtual absence of external mkt. for corp. control Strong government intervention; close relations Wk. 6-33 10. 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 Wk. 6-34 10. 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] Wk. 6-35 Bye Bye

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