Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
Yayoi Kasuma, Colour Dots (Tate Museum 2012)
Module II – Corporations and Policy
Chapter 4
Corporate Social Responsibility
• Who does corporation serve?
Bar
exam
Corporate
practice
• Private parties (property)
• Stakeholders (social institution)
• Classic answer: Dodge v. Ford Motor
• Meaning of case
• Other constituency statutes
• Modern answer: corporate charity
Law
profession
Citizen of
world
Corporations:
A Contemporary Approach
• Corporate law
• Who should decide?
• Role of directors and lawyers
• Choices in takeover
• Choices in offshore operations
Chapter 4
Corporate Social Responsibility
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Purpose of corporation
• Private property?
• Social institution?
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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SALES (cars)
1910
1911
1912
1913
1914
1915
1916
18,664
34,466
68,544
168,304
248,307
264,351
472,350
(60% annual growth)
Corporations:
A Contemporary Approach
PROFITS
Ford Profits (1910-1916)
$4,521,509
$6,275,031
$13,057,312
$25,046,767
$30,338,454
$24,641,423
$59,994,918
(45% annual growth)
Chapter 4
Corporate Social Responsibility
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Henry Ford’s vision
“My ambition is to employ still
more men, to spread the benefits
of this industrial system to the
greatest possible number, to help
them build up their lives and their
homes. To do this we are putting
the greatest share of the profits
back in the business.”
Henry Ford
(interview with newspaper)
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Henry Ford’s business plan
• Product pricing
• Semi-eleemosynary
• Vertical integration
Is he nuts?
Would you have invested?
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
Henry Ford
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Henry Ford’s financing plan
Continue regular dividends
– Since 1908 $1.2 million
annually
– 60% return on investors'
original $2 million investment
Discontinue special dividends
–
–
–
–
–
1911
1912
1913
1914
1915
Corporations:
A Contemporary Approach
$1,000,000
$4,000,000
$10,000,000
$11,000,000
$15,000,000
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Corporate Social Responsibility
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Your advice …
(as Ford Motor’s lawyer)
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Michigan Sup Ct
Dividend policy
Vertical integration
“A business corporation is
organized and carried on
primarily for the profit of the
stockholders. The powers of the
directors are to be employed for
that end. The discretion of
directors is to be exercised in the
choice of means to attain that
end, and does not extend to a
change in the end itself, to the
reduction of profits, or to the
nondistribution of profits among
stockholders in order to devote
them to other purposes."
"We are not, however, persuaded
that we should interfere with the
proposed expansion of the
business of the Ford Motor
Company. ... The judges are not
business experts. It is
recognized that plans must
often be made for a long future,
for expected competition, for a
continuing as well as an
immediately profitable
venture. The experience of the
Ford Motor Company is
evidence of capable
management of its affairs.”
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Meaning of
Dodge v. Ford Motor?
Social institution
(CSR)
Property
(SWM)
anagnorisis (an-ag-NOR-uh-sis) noun
The moment of recognition or discovery (in a play, etc.)
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Modern non-shareholder
constituency statutes
Assume Ford has new plans
• Drop workers' wages to $2 per
day -- the market rate.
• Raise the price of Ford cars by
20% -- the market will bear it.
Can employees and customers
complain under modern "other
constituencies" statutes?
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Pennsylvania Business Corporation Law
§ 1715. Exercise of powers generally
(a) General rule.--In discharging the duties of their respective
positions, the board of directors ... may in considering the best
interests of the corporation, consider to the extent they deem
appropriate:
(1) The effects of any action upon any or all groups affected by
such action, including shareholders, employees, suppliers,
customers and creditors of the corporation, and upon
communities in which offices or other establishments of the
corporation are located.
(2) The short-term and long-term interests of the corporation,
including benefits that may accrue to the corporation from its
long-term plans and the possibility that these interests may be
best served by the continued independence of the corporation.
(3) The resources, intent and conduct (past, stated and potential) of
any person seeking to acquire control of the corporation.
(4) All other pertinent factors.
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A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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ALI Principles of Corporate Governance
§ 2.01 The Objective and Conduct of the Corporation
(a) Subject to the provisions of Subsection (b), a corporation
should have as its objective the conduct of business
activities with a view to enhancing corporate profit and
shareholder gain.
(b) Even if corporate profit and shareholder gain are not
thereby enhanced, the corporation, in the conduct of its
business:
(1) Is obliged, to the same extent as a natural person, to act
within the boundaries set by law;
(2) May take into account ethical considerations that are
reasonably regarded as appropriate to the responsible conduct
of business; and
(3) May devote a reasonable amount of resources to public
welfare, humanitarian, educational, and philanthropic
purposes.
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A Contemporary Approach
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Pop quiz
(CSR)
1. CSR is:
a. Preferring non-Sh
constituencies at expense
of Shs
b. Greenwashing – that is, a
publicity stunt
c. Increased business social
consciousness
3. In the case, Henry Ford argued
that his plans/policies:
a. Reflected that Shs
already got enough
b. Were designed to create
a “new industrialism”
c. Were permitted under
corporate statutes
2. Dodge v Ford Motor
establishes the principle of
“shareholder primacy” in US
corporate law. True or false?
4.
Corporations:
A Contemporary Approach
The Michigan Supreme Court
held that Ford Motor was not
allowed to engage in
charitable acts. True or
false?
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5. The holding of Dodge v. Ford
Motor is-a. Vertical integration was
protected by BJR
b. Changing the dividend
policy requires Sh vote
c. Minority Shs must receive
dividends, if there are
company profits
6. Modern “non-shareholder”
constituency statutes require
that boards of directors
consider Shs and other nonSh constituencies. True or
false?
7. A corporate board faced with a
hostile takeover bid could
choose to defend to protect
“corporate culture.” True or
false?
8. The ALI Principles of
Corporate Governance a. Reflect the law in a
majority of states
b. Allow for corporate
illegality when net
profitable
c. Are cited regularly,
especially in Delaware.
Answers: 1- C / 2-F / 3-B / 4-F / 5-A / 6-F / 7-T / 8-B
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Corporate charity
(1) Corporate power?
(2) Proper under fiduciary duties?
(3) What role for shareholders?
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A Contemporary Approach
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Corporate Social Responsibility
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(1) Legal under corporate statute?
MBCA § 3.02 GENERAL POWERS
Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its
corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its
business and affairs, including without limitation power:
(1) to sue and be sued, complain and defend in its corporate name;
(2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other
manner reproducing it;
(3) to make and amend bylaws, not inconsistent with its articles of incorporation or with the laws of this state, for managing the
business and regulating the affairs of the corporation;
(4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal
property, or any legal or equitable interest in property, wherever located;
(5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;
(6) to purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose
of; and deal in and with shares or other interests in, or obligations of, any other entity;
(7) to make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations (which may be
convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by
mortgage or pledge of any of its property, franchises, or income;
(8) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment;
(9) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
(10) to conduct its business, locate offices, and exercise the powers granted by this Act within or without this state;
(11) to elect directors and appoint officers, employees, and agents of the corporation, define their duties, fix their compensation, and
lend them money and credit;
(12) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and
benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents;
(13) to make donations for the public welfare or for charitable, scientific, or educational
purposes;
(14) to transact any lawful business that will aid governmental policy;
(15) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the
corporation.
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A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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(1) Legal under tax law?
Internal Revenue Code § 170. Charitable
contributions and gifts
(a) Allowance of deduction.
(1) General rule. There shall be allowed as a
deduction any charitable contribution payment
of which is made within the taxable year. ***
(b) Percentage limitations. ***
(2) Corporations. In the case of a
corporation-(A) In general. The total deductions under
subsection (a) for any taxable year … shall not
exceed 10 percent of the taxpayer's taxable
income.
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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(1) Legal under
corporate law (SWM)?
Theodora Holding Corp.
v. Henderson
(Del. Ch. 1969)
Theodora
(Mrs. Henderson)
Mr. Henderson
Boys Camp -Alexander Dawson
Foundation
Theodora
Holding Corp.
Board
$$ / stock
Alexander
Dawson, Inc.
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A Contemporary Approach
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Corporate Social Responsibility
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The test to be applied ... on the validity of a
[corporate] gift … is that of reasonableness,
[for which the IRC] furnishes a useful guide.
Contemporary courts recognize that unless
corporations carry an increasing share of the
burden of supporting charitable and
educational causes that the business
advantages now reposed in corporations by
law may well prove to be unacceptable to …
an aroused public.
The contribution … "cost" … some fifteen cents
per dollar of contribution, taking into
consideration the federal tax provisions …
William Marvel (1954-1982)
… rehabilitation and education of deprived but
deserving young people is peculiarly
appropriate in an age when a large segment of
youth is alienated even from parents who are
not entirely satisfied with our present social
and economic system.
Theodora Holding Corp. v. Henderson
(Del. Ch. 1969)
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A Contemporary Approach
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(2) Fiduciary duties?
(pet charities …)
Kahn v. Sullivan
(Del. 1991)
Shareholders
$$
Board
Occidental
Petroleum
Corporations:
A Contemporary Approach
Armand Hammer
Museum
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Corporate Social Responsibility
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Delaware Supreme Court (quoting Vice
Chancellor):
If the Court was a stockholder of
Occidental it might vote for new
directors, if it was on the Board it
might vote for new management and
if it was a member of the Special
Committee it might vote against the
Museum project.
… gift to the Museum was within the
range of reasonableness [Theodora
Holdings]
Justice Randy Holland
… Occidental received an economic
benefit in the form of good will from
the charitable donation …
Kahn v. Sullivan
(Del. 1991)
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A Contemporary Approach
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Corporate Social Responsibility
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(3) Role for shareholders?
Would you put money in bank if your
banker said he would choose and
give up to 10% of your interest to
charities of his choice?
Why do shareholders tolerate that
1.8% of pretax corporate profits go
to charities chosen by managers?
Shouldn’t shareholders be able to vote
on giving their money away?
Prof. Victor
Brudney
Prof. Allan
Ferrell
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A Contemporary Approach
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Group hypo - Corporate lawyers in CSR?
(who do you want to be?)
Morals of
marketplace
Duty of
independence
Justice Potter
Stewart
Chancellor Wm.
Allen
Corporations:
A Contemporary Approach
Chapter 4
Corporate Social Responsibility
Lawyer
interdependence
Prof. Richard
Painter
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ABA Model Rules of Professional Conduct
Rule 2.1 Advisor
In representing a client, a lawyer shall exercise independent
professional judgment and render candid advice. In rendering
advice, a lawyer may refer not only to law but to other
considerations such as moral, economic, social and political factors,
that may be relevant to the client’s situation.
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A Contemporary Approach
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Foreign Corrupt Practices Act
Securities Exchange Act § 13(b)(2)(A): Public companies must keep
books and records that “accurately and fairly reflect the transactions
and dispositions of the assets of the issuer.”
FCPA: Public companies cannot pay foreign government officials to
induce action or non-action in their official capacity for the purpose
of obtaining or retaining business (with an exception for bribes to
“expedite or secure performance of routine government action”).
Violations can result in civil penalties and criminal prosecution.
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A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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Group Hypo
You represent Exogen Corporation as outside counsel.
The company has a “situation.” OSHA is thinking of banning
one of the chemicals used in the company’s
manufacturing process – Durasol. The company, at the
same time, is exploring moving its manufacturing to
Ruranesia. The world is flat.
The company knows occupational health regulation is lax in
Ruranesia, and government regulators are poorly paid
and often corrupt. The proposal before the board is to
move the company’s manufacturing to Ruranesia ASAP.
The board asks your opinion about this plan.
In your groups, please consider and answer two questions:
(1) What kind of lawyer are you?
(2) What is your advice to the board on the plan?
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A Contemporary Approach
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Corporate Social Responsibility
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Exogen
Group responses
Lawyering style
• Morals of marketplace 6
• Independence
3
• Interdependence
8
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A Contemporary Approach
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Corporate Social Responsibility
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Advice to Board
Advice to Board (continued)
•
•
Use of Durosal
–
–
–
–
–
–
–
–
•
Consider alternative / protection
6
Investigatex effects further (industry) 4
Stop using chemical (in US)
3
Stop using chemical (even Indo)
1
Wait (delay) until OSHA bans
2
Work with OSHA (even tax)
5
Get OSHA to prohibit!
2
Move to Ruranesia fast
1
Potential downside
–
–
–
–
–
Tort/products liability in US
Effect on company reputation
Effect on SH value (if use)
Effect on SH value (if move)
Consider harm to Indo workers
Corporations:
A Contemporary Approach
3
8
2
3
4
FCPA concerns
–
–
–
–
–
•
Corporate/individual liability
Put in US manager / training
Violation costs more than savings
Bribery hurts reputation
Bribery is unethical
5
1
1
3
1
Bottom line
–
–
–
–
–
–
Chapter 4
Corporate Social Responsibility
Discontinue + CSR ad campaign
Board chooses which option
Consider the long run
Continued use is unethical
Lobbying OSHA unethical
Our law firm’s role in illegality?
2
4
3
1
1
1
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The end
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A Contemporary Approach
Chapter 4
Corporate Social Responsibility
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