EIB 4 Ch. 5
21 flashcards · Other · by Daniel F.
Corporation
legal entity that is separate and distinct from its owners can endure beyond the natural lives of its members and that has incorporators who may sue and be sued as a unit who are able to consign part of their property to the corporation for ventures of limited liability
Limited liability vs partnership
LL: members of the corporation are financially liable for the debts of the organization only up to the extent of their investments Vs Partnership Legal entity: An organization becomes incorporated by being publicity registered or having its existence officially acknowledged by the law Dividends are declared: The shareholder in a corporation is entitled to a dividend from the company's profits only when its declared
Types of corporations
Profit/Nonprofit: Aiming to make money for shareholders or serving a public benefit. Privately/Publicly Owned: Owned by a small group of investors or with stock traded publicly.
Evolution of the Corporation
Early Stages (Middle Ages): Corporations were primarily towns, universities, and religious orders chartered by governments. Elizabethan Era: Business corporations emerged, often with government-granted trading monopolies (e.g., East India Company). 19th Century: Loosening of government restrictions on incorporation, driven by: Mercantilist to Laissez-Faire Shift: From corporations serving specific public purposes to the belief in the "invisible hand" guiding business towards social benefit. Rig…
Are corporations moral agents?
Can corporations, as legal entities, be considered moral agents capable of making moral decisions and bearing responsibility for their actions? Pro Corporate Internal Decision (CID) Structures: Corporations, through their structures and procedures, can gather information, monitor actions, and make decisions that impact stakeholders, similar to individuals. Corporate Intentions: CID structures can be seen as absorbing individual intentions and actions, leading to "corporate decisions" for which…
Corporate Punishment
If corporations are moral agents, punishment can deter unethical behavior and encourage restitution. However, traditional forms of punishment like imprisonment are not applicable
Rival Views of Corporate Responsibility
Narrow View (Profit Maximization) Broader View (Corporate Social Responsibility)
Narrow View (Profit Maximization/shareholder) of CR
Milton Friedman's Argument: A corporation's sole responsibility is to maximize profits within the rules of the game (no deception, fraud, or illegal activities). Justification: Managers are agents of shareholders, obligated to act in their best financial interests. Social responsibility beyond profit maximization is seen as a form of taxation without representation. Only humans have moral responsibility Freedom of choice Knowledge of alternatives Causal connection between action and consequence…
Broader View (Corporate Social Responsibility/stakeholder) of CR
Social Entity/Stakeholder Model: Corporations have responsibilities to all stakeholders, including employees, consumers, the community, and society at large. Principle of corporate rights: corporation has obligation not to violate rights of others Principle of corporate effect: corporation is responsible for effects of actions on others Justification: Corporations wield significant social and economic power, necessitating responsibility for their actions and impact. Externalities: Corporations…
Carrol's model of CSR
Economic reasons Extra and/or more satisfied customers Employees may be more attracted/committed Forestall legislation Example: Divest from industries that may risk becoming stranded assets Moral reasons All corporate activities have social impacts Businessmen cannot make decisions that are solely economic decisions, because they are interrelated with the whole social system Corporations cause social problems Corporations must take responsibility for negative externalities like pollution Corpor…
Debating Corporate Responsibility
Invisible-Hand Argument: Allowing corporations to pursue self-interest will ultimately benefit society. Criticism: Modern corporations are not analogous to small, competitive producers of classical economics. Their size and influence require broader responsibility. Let-Government-Do-It Argument: Government regulation should control corporate behavior and ensure social good. Criticism: Government regulation is often reactive, difficult to formulate and enforce, and susceptible to corporate lobby…
Institutionalizing Ethics Within Corporations
Importance: To create an environment where ethical conduct is expected and rewarded. Steps: Articulate clear ethical values and goals. Adopt a comprehensive moral code applicable to all members. Establish a high-ranking ethics committee to oversee and enforce the code. Integrate ethics training into employee development programs. Corporate Culture: Definition: The shared values, beliefs, and norms that shape behavior within an organization. Importance: Management must actively shape corporate c…
Limits to What the Law Can Do for CSR
Law alone cannot guarantee ethical behavior. Corporations must adopt high moral standards and monitor their own conduct. Laws often address problems after damage has occurred. Creating effective laws and regulations is complex, and enforcement can be cumbersome. Corporations can influence legislation and regulatory processes.
Importance of effective ethical codes Arrows's theory
Ethical behavior is often seen as coming at the expense of economic efficiency. Kenneth Arrow: Ethical behavior, particularly in situations of information asymmetry, can enhance economic efficiency by fostering trust and confidence. Importance of Effective Codes: Realistic and enforceable ethical codes, integrated into corporate culture, can benefit both business and society.
Sustainable development for companies, tripple bottom line, esg
Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs Triple bottom line Long-term maintenance of systems according to: Economic factors Social factors Environmental considerations ESG environmental (pollution, greenhouse gas emissions, biodiversity, climate change, circular economy) Social (equality and diversity, workplace safety, working conditions, freedom of association, work-life balance) g…
Principal - agent problem of shareholders and managers
Rights of Shareholders The right to sell their stock The right to vote in the general meeting The right to certain information about the company The right to sue the managers for (alleged) misconduct Certain residual rights in case of the corporation's liquidation Duties of Managers Duty to act for the benefit of the company Duty of care and skill Duty of diligence
align the interests of shareholders and managers
1. Executive accountability and control: a board consisting of executives and non-executives 2. Pay executives in the same currency that matters to shareholders: dividends and (options to buy) shares!
Ethical isues with Executive Remuneration
CEO salary increases outstrip shareholder returns Skyrocketing salaries cause unrest within corporations (and society) Global pressures drive up CEO salaries internationally Do we want to incentivize managers in this way?
Credit-rating Agencies
Features CRAs are set up to bridge information asymmetries between shareholders and corporate actors Provide a 'true and fair' view of the firm Exampes are Fitch Ratings, Moody's Investors Service, and Standards & Poor's Financial services Problems They have a lot of power and influence in financial markets - What if they get things wrong (e.g. the financial crisis)? There can be conflicts of interest between CRAs and their clients
Sustainable finance - Shareholder democracy
Socially responsible investment is the use of ethical, social and environmental criteria in the selection and management of investment portfolios, generally consisting of company shares
Dow Jones Sustainability Index
Good evaluation, sometimes based on questionable data