The Corporate Environment
William J. Frey
College of Business Administration
University of Puerto Rico at Mayaguez
Read…
• A Short History of the Corporation (m17314)
• Developing Ethics Codes and Statements of
Values (m14319)
• Moral Ecologies in Corporate Governance
(m17353)
• Gray Matters for the Hughes Aircraft Case
(m14036)
Terms from History of Corporation
• 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.
• 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.
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
Sample Corporate Rights
• Conferred by common law precedent
1. Right for judicial review on state legislation
2. Right for judicial review for rights infringement by federal
legislation
3. Protection against “unreasonable searches and seizures”
4. Right to trial by jury
5. Right to compensation for government takings
6. Right to freedom from double jeopardy
7. Right to trial by jury in civil case
8. Right to free commercial speech
9. Right to corporate political speech
10. Right against coerced speech
11. Right to form Political Action Committees and fund them
anonymously
Pirate Inc.
The analogy between the modern
corporation and the pirate ship
CID Structures
•
•
•
•
Corporate Goals
Decision Recognition Rules and Procedures
Corporate Roles
Corporate Organizational or Managerial System
(Flow Chart)
• We can identify CID Structures in…
– business corporations
– Pirate ships
– your work groups
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
individual actions as a corporate actions
– Example: liquidating travel budget after a trip (Not a
private vacation but a corporate activity)
Corporate Internal Decision Structures
• Roles
– An individual’s station and its associated duties within the
corporate hierarchy 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.
Your Challenge…
• Outline your group’s Internal Decision Structure
• Corporate Internal Decision Structure becomes your
Group Internal Decision Structure
– What are your group goals? Is your action designed to
pursue them?
– What rules help us to recognize a decision as belonging to
your group?
• Procedure for realizing value of justice
– What group role are you playing?
• Leader, spokesperson, mediator, secretary/ documenter, devil’s
advocate, motivator, conscience
– What is your organizational flow-chart?
• Horizontally or vertically organized? How are your roles
coordinated and synthesized? What procedures subordinate your
individual actions under group intentions?
Ethics of Teamwork
• Goals
– What are your value goals for the semester?
• Recognition rules and procedures
– What rules and procedures that signal when you are
acting for your group? (When are you subordinating
individual interest to group interest?)
• Roles
– Leader, spokesperson, mediator, secretary/
documenter, devil’s advocate, motivator, conscience
• Flow chart or management system
– How do you coordinate different individuals and their
roles?
Your job this semester as you
“incorporate your group”
• Build a Corporate (group) Internal Decision Structure
– Finalize your goals
– Identify and test procedures that help to recognize actions of your
group’s members as group actions
– Identify and distribute the roles that individuals are playing in your
group
– How is your group organized? How do you synthesize and subordinate
individual actions and decisions into group actions and decisions?
• Draw a picture of your group’s CID Structure
– Organize it as a flow chart from a class assignment to final group
product
– How does your group collect disseminated knowledge and skill from
your individual members?
• What is the greatest challenge you have faced so far?
– What is your response?
– Have you kept your goals and procedures “in tact” as you have faced
these?
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)
Pirate Flow Chart
Directors (Voting
members of crew)
Elect a Captain &
Quartermaster
These appoint…
Skilled Crew: surgeon,
carpenter, caulker,
armorer, musician
Unskilled Crew
(Volunteers)
Unskilled crew:
Draftees (Shanghaied)
Creating Corporate Responsibility and
Agency by Re-Description from CIDS
• 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.)