The Corporate Environment
William J. Frey
College of Business Administration
University of Puerto Rico at Mayaguez
Some sources
• Stone, C. D. (1975) Where the Law Ends: The Social
Control of Corporate Behavior. Prospect Heights, IL:
Waveland Press, INC: 1-30. (History of Corporation)
• French, P.A. (1984) Collective and Corporate
Responsibility. New York: Columbia University Press.
(Corporate Responsibility based on CIDS)
• Fisse, B. and French, P.A., eds. (1985) Corrigible
Corporations and Unruly Law. San Antonio, TX: Trinity
University Press. (Corporate Punishment)
• P.T. Leeson. (2009). The Invisible Hook: The Hidden
Economics of Pirates. Princeton: Princeton University
Press: 44-81. (Pirate Articles of Agreement)
Terms from History of Corporation
• Property
– Des Jardins (a business ethicist) characterizes property, not as a single right,
but as a “bundle of associated rights.” These include the right to “possess,
control, use, benefit from, dispose of, and exclude others” from one’s property
• Ultra Vires
– Literally “beyond the power”. If a corporate charter designates something as
“ultra vires” in relation to the corporation, it literally means that this action
goes beyond the legitimate powers of the corporation.
• Implied Powers
– If a company knows of an activity (or should know of it) and still permits the
activity to continue, then its consent is implied and the power to perform the
action implied.
• Joint stock company
– 17th and 18th centuries in Great Britain. Companies were formed to carry out
complex business activities. Investors put their money into the venture and
managers oversaw the activities. Joint Stock Companies produced problems
because of unlimited liability
• Corporate shield
– The corporate shield protects investors by distributing financial risk. Investor
liability limited to amount of investment.
Agency and Charters
• Law of Agency
– Responsibility of agents to remain faithful to the interests of principals
• Principal
– Originate action and determine its goal. Delegate executive authority
to agent if unable to execute action working alone
• Agent
– Carries out or completes action originated by another. Responsible to
principal to remain faithful to the principal’s goals and interests
• Corporate Charter
– Founding document of corporation
– Originally the charter was a device of corporate control because it
outlined what the corporation could and could not do. If not
permitted by charter it was ultra vires (=beyond the power).
• Charter Mongering
– Charters allow incorporation for all legal activities. Charter no longer
defines boundaries for legitimate and illegitimate corporate activities
Corporate legal and moral responsibility
• Corporation Internal Decision Structure or CIDS
– Corporate goals, decision recognition rules, roles, and organizational flow chart
– Licenses re-describing individual actions as corporate actions.
• Corporate Responsibility
– Holding corporations legally and morally responsible for actions performed in their
name. Creates philosophical problems concerning the meaning of “personhood”
and “agency.”
• Legal Person
– Created in and through the law. A legal person has legal standing: it can sue and be
sued. Legal persons also have legal rights and duties.
• Natural Person
– Primarily human beings. Natural persons act through the medium of their bodies.
Natural persons also have minds which form intentions (goals, purposes). Criminal
law applies to natural persons who have minds (that form intentions), bodies (that
act to realize intentions) and a connection between the two such that minds direct
the activities of bodies.
• Principle of Responsive Adjustment
– Moral agents have an obligation to adjust their actions and habits to respond to
lessons learned from the past.
• Stock Dilution
– A corporate punishment (a fine) that goes beyond the deterrence trap by tapping
into the future earnings of a corporation. The stock of a company is divided (or
diluted) and the additional shares are distributed to the victims of corporate
wrongdoing or to the state. These shares are, then, liquidated at some future date.
1. Proto-Corporation is a Passive
Device to hold property
• A monastery is not just the private property of
the abbot
• The Church emerges as an abstract legal entity
that holds property
– No problem of succession when abbot dies; abbot
doesn’t own it—the Church does
– What’s the Church? Something that “owns” property
• Passive: it doesn’t do anything but own property
2. Proto Corporations called Trade Guilds
self-regulate the practice of a trade
• Shoe Makers
– A skilled craft or trade
– Learn to practice by undergoing an apprenticeship
– Self-regulation
• Purpose of Guild: to regulate a practice or trade
– Members make more money—you can command
higher payment for practicing trade if you control who
can practice
– More socially responsible: guild sets standards and
punishes individuals who fall short
3. Proto-Corporations called Joint Stock Companies
pool capital and oversee complex ventures
• Device or Tool to pool capital
– Outfitting a ship to travel to Orient and collect spices
• Device for distributing benefits of enterprise
– Investors pay into venture. If successful they get a share of the
profits
• Unlimited liability
– If venture fails investor liability to creditors is unlimited
• Managers distinguished from investors
– Owners become Principals
– Managers become Agents
Investor liability limited; corporations
controlled through charter
• Financial risk is necessary for the growth of
business
• But unlimited liability discourages potential
investors
– Afraid of going to debtor’s prison
– Limiting liability to original investment distributes risk
and encourages investment
• Corporations controlled by charter which outlines
legitimate activities
Corporations become legal persons
• A series of legal decisions have given corporations
legal rights
– Right to due process under the law (e.g., trial by jury)
– Commercial Speech (Can advertise products and
services)
– Non-commercial Speech (Can take out political
advertisements)
• Dissenting opinion in First National Bank of
Boston v. Bellotti
– Corporate non-commercial speech can drown out the
speech of natural/individual persons
• As powerful artificial persons they could supplant
natural persons
Problem of Agency
• Separation of owners/investors from managers
– Principals: Owners/investors provide funds to finance corporate activity. They
determine the fundamental goals of the corporation
– Agents: Managers are agents of the owners who delegate to them the
responsibility of overseeing the day to day operation of the corporation
• Faithful agency
– Managers (as agents) must remain faithful to the interests set forth by the
owners (principals)
• But if managers are rational, self-interest maximizers, then…
– Why should their interests coincide with those of owners?
– What prevents them from setting aside owner interests and pursuing their
own?
• Corporate governance then becomes a matter of institutionalizing
external measures that compel managers to remain true to owner
interests
– Set corporate directives
– Monitor management compliance
– Punish non-compliance (Business Judgment Rule)
The corporation can be understood as a series of interrelated
solutions to different, successive historical problems
Problem
Solution
Organizational Form
Successfully transferring
stewardship over church
holdings to new abbot
Create a “passive device to
hold property”
Proto-corporation
Control over and regulation Create a device to (a) hold
of a practice or skill
the privileges of some
(monopoly / responsibility) particular trade, (b)
establish rules and
regulations for commerce,
and (c) holds courts to
adjudicate grievances
among members
Pooling capital and
resources and directing
complex ventures
Create a device (a) to hold
privileges of trade (b) where
investors provide capital and
(c) that delegates operations
to managers
Medieval guilds that evolve
into regulated companies
Unchartered joint stock
companies
As modern corporation emerges, limiting
but fixing liability becomes central concern
Problem
Solution
Organizational Form
Limiting investor liability,
limiting manager liability,
and balancing the two
Corporation evolves into a
legal person with (a) legal
rights and duties, (b)
owned by shareholders, (c)
run by managers, (d)
regulated through state
charter
Limited corporation whose
operations are defined in
and limited by the charter
Ultra Vires (charter
prevents growth) and
Charter Mongering
Granted broad powers
through more broadly defined
charters
Corporation as an essential
business tool
Finding agent responsible
for wrongdoing
(a) Due Process, equal
protection, and free speech
rights, (b) legal duties, (c) legal
standing, (d) Federal
Sentencing Guidelines, and
Sarbanes-Oxley Act
Corporation as a legal
person
Human Nature
Homo Economicus
• Humans are rational selfinterest maximizers
• Human nature is complete
apart from any relation to
nature or society
• Principal-Agent relation
requires external sanctions
to keep agents aligned with
principal interest
Aristotle: Humans are political
animals
• Animal spirits deflect from
rational self interest
(justice)
• Humans are related
essentially to social and
natural surroundings
• Agents, because not selfinterest maximizers, can
exercise stewardship over
principal interests
Corporate Internal Decision Structures
• Corporate Goals: Principle objective of the
organization
– Charter
– Informal charter
– Core Values and Mission Statement
• Decision Recognition Structures
– Rules and procedures that help us to recognize an
action or a series of actions as a corporate action
– Example: liquidation travel budge after a trip
Corporate Internal Decision Structures
• Roles
– An individual’s station and its associated duties within the
corporate hierarch itself
• Organizational management structure embodied in the
organization’s flow chart
– How the roles are coordinated with one another within the
corporation’s managerial system.
– Reporting relations. The corporate ombudsperson reports to
the CEO.
• All four components of the CIDS work together to
synthesize, coordinate and subordinate individuals and
their actions in the performance of the corporations
activities.
Pirate Charter
• Articles of Agreement
– Signed by each member of the pirate crew
– Outline the ship’s hierarchical structure
– Detail the different roles of the pirate community
• Recruitment and Public Relations
– Democratic election of captain offered alternative to
authoritarian captains of military and merchant marine
– Attempted to overcome anti-pirate propaganda and portray
pirates more as responders to injustice than parasitic thieves.
• Pirate crew, itself, plays the role of directors of the pirate
corporation when it holds an election of captain and
quartermaster
Pirate Decision Recognition Rules
• Majority vote by crew to elect captain and
quartermaster
– Captain Roberts: “Every Man has a Vote in the
Affairs of Moment; has equal Title to the fresh
Provisions, or strong Liquors, at any Time seized,
and may use them at Pleasure, unless a Scarcity
make it necessary, for the Good of all, to vote a
Retrenchment.” From Leeson, 62
Pirate Roles
• Directors
– By charter, members of crew become directors when they elect by
vote the captain and quartermaster
• Managers
– Captain and Quartermaster: Crew has to follow orders of captain when
the ship is engaged in battle; otherwise, they can remove “managers”
by vote (Something like the Business Judgment rule which allows
stakeholders to sue managers)
• Professional Crew (individuals with highly valued knowledge and
skill)
– Surgeon, carpenter, caulker, armorer, musician
– “Ye ship’s surgeon shall have two hundred crowns for the maintenance
of his medicine chest and he shall receive one part of the spoil.”
(Custom of the Brothers of the Coast)
– Unskilled Crew
– Draftees (Kidnapped or Shanghaied)
Pirate Flow Chart
Directors (Voting
members of crew)
Elect a Captain &
Quartermaster
These appoint…
Skilled Crew: surgeon,
carpenter, caulker,
armorer, mucian
Unskilled Crew
(Volunteers)
Unskilled crew:
Draftees (Shanghaied)
Creating Corporate Responsibility Via
Re-Description
• CID Structure licenses (permits) a re-description of a
human action as a corporate action if it can be directly
related to all elements of the corporation’s Internal
Decision Structure.
• Thus X (an action performed by an individual) can be
re-described as Y (a corporate action) if…
– It carries out a corporate policy as outlined in the charter,
mission statement, or values statement
– Takes place in accordance with a decision recognition rule
– Is performed as a part of carrying out a corporate role
– And this role has a clear and designated location in the
corporate flow chart
Example from Pirate World
• Setting aside 200 crowns for the maintenance of the
surgeon’s medicine chest…
– Contributes to the pirate ship’s overall objective of
maintaining a healthy crew
– Conforms to a decision recognition rule spelled out in the
pirate ship “Articles of Agreement”
– Carries out a role responsibility (It’s the quartermaster’s
job who has the overall responsibility of distributing spoils)
– And the quartermaster role has a clearly designated place
in the overall pirate ship hierarchy (Quartermaster is
selected by the crew serving as directors, reports to the
captain, etc.)
Example from Business
• Arthur Andersen (consulting, not accounting) shred
documents to coverup accounting irregularities with
Enron
• AA charter (any corporate charter) stipulates that
illegal activities are ultra vires (beyond the power of
the corporation)
– So blame our employees who were acting alone without
corporate sanction or authority
• Nevertheless the U.S. prosecutor decided to prosecute
AA to the fullest extent of the law
– Their actions, for a time, benefitted the corporation
– Supervisors did not stop them (=implied powers)
• AA no longer exists
– Corporate death sentence
Schedule
• April
– 8—Finish corporate responsibility
– 10—Group day to prepare for town meeting
– 12—Burger Man town meeting
• April
– 16 and 17—Pirate Code of Ethics and ADEM SOV Challenge
• April
– 22—Hughes Aircraft Case (Summary)
– 24—Drama Preparation Class
– 26—Hughes Dramas
• April and May
– 29—Review for Exam
– 1—Third Exam
– 3—Meeting with groups 1 and 2
• May
–
–
–
–
6—Meeting with groups 3 and 4
8—Meeting with groups 5 and 6
10—Open class
13—Evaluation and Closure
Burger Man
• Stakeholder: Animal Rights/Welfare Group
and Agriculture Suppliers (Cattle People)
• Issue: Burger Man is responsible for humane
treatment of animals and is culpable if
suppliers mistreat animals
Burger Man
• Stakeholders: Burger Man shareholders
(accionistas) and Consumer Health Advocacy
Group
• Issue: Burger Man is responsible for the bad
dietary habits of its customers
Burger Man
• Stakeholders: Local Government (representing
local community in which Burger Man
operates) and Burger Man management
• Issue: Burger Man has special responsibilities
for the welfare and wellbeing of the local
communities in which it operates
Your task
• Assess and/or outline Burger Man’s social
responsibilities as a corporation
– Make arguments with premises (evidence) and conclusions
(Take a position and state it at the beginning and end of
your presentaiton)
– Your arguments must support a position on corporate
responsibility
– Your arguments must have ethical content (tests, values,
concepts)
• Address responsibility specifically in the context of your
issue from the point of view of your stakeholder
• Be civil and make a special effort to listen carefully and
respond thoughtfully to the arguments of other groups