Ethics in the
corporation
What is a corporation?
There are two main views:
1.
2.
Corporations are legal creations, fictional persons
with no emotions, intelligence, or will. Their legal
personality is narrow, directed to one end only:
generating wealth for their owners. (Tönnies; Chief
Justice Marshall)
Corporations are very much like people or
communities and may be treated as such. Likewise,
the people who run them carry the responsibility of
the corporate direction and must be accountable for
its “state of mind”. (Lord Denning)
Chief Justice Marshall,
Dartmouth College v. Woodward,
1819
“A corporation is an artificial being, invisible,
intangible, and existing only in the
contemplation of the law. Being the mere
creature of law, it possesses only those
properties … as are best calculated to
effect the object for which it was created.”
(quoted by De George, 122)
Denning L.J in H.L. Bolton (Engineering) Co.
Ltd. v T.J. Graham & Sons Ltd [1951] 1 Q.B. 159
at 172.
A company may in many ways be likened to a human body.
It has a brain and nerve centre which controls what it
does. It also has hands which hold the tools and act in
accordance with directions from the centre. Some of the
people in the company are mere servants and agents
who are nothing more than hands to do the work and
cannot be said to represent the mind or will. Others are
directors and managers who represent the directing
mind and will of the company, and control what it does.
The state of mind of these managers is the state of mind
of the company and is treated by the law as such.
The joint stock company
Allowed many contributors to pool their capital,
usually with monopoly rights



the Russia Company (1553)
the East India Company (1600)
the Hudson Bay Company (1670)
Owners have liability to the extent of the fully paid
up value of their shares. The price they pay is
not having much say in the running or
management of the company.
Limited liability
The Joint Stock Company Act 1856;
Company Act 1862; House of Lords,
Salomon v. Salomon & Co (1897)
established the separate legal personality
of the joint stock corporation.
The liabilities of the company are not those
of the owners, the shareholders.
Exceptions do occur
Where the courts believe that a corporation is
being used as a front to evade contracts or
statute law, they may lift the corporate veil.
In Gilford Motor Co Ltd v. Horne (1933), the court
found that Horne had formed a company to evade
contractual obligations to a former employer and
stopped that company from trading.
How can ethics apply to a
corporation?
 When
the owners do not bear
responsibility or liability for its acts?
 When responsibility is delegated to
directors who are protected by a corporate
veil?
 When a corporation is a legal instrument
for achieving a limited range of objectives,
principally profit?
Can a corporation have a
conscience?
 “Did
you ever expect a corporation to have
a conscience when it has no soul to be
damned, and no body to be kicked?” First
Baron Thurlow, Chancellor of England, c1600.
 A corporation
can commit crimes and it
can be punished. But can it be unethical?
Ethical standards for
corporations
Let us grant that corporations are legal
persons. Are they only legal entities?
 If corporations should observe legal
standards, why should not they observe
ethical ones?
 Corporations act, so why should not they
act according to ethical standards?
Two replies
Philosophers argue about whether an
organisation can act.
Pragmatically, the law and people do regard
corporations as actors, and the latter make
moral judgments about corporate conduct.
Making moral judgments about corporations
is intelligible and often persuasive.
Corporate morality limited
 Corporations
have a different moral status
from natural persons.
 Their moral obligations are fewer.
 They can still be held accountable and
liable.
 Those within them can be held
accountable and responsible.
The ethics of role
 Role
adds specific responsibilities:
• Father/mother; citizen; occupation
 Role
requires more of a person.
 Following directions is a valid reason for
acting as long as those directions are
ethical.
What about role could exempt from
ordinary moral requirements?
Is it a particular place in the hierarchy of the
organisation:
•
•
•
•
Just following the orders of superiors?
Others would do the same thing in my place?
This is acceptable in this organisation?
Somebody had to use their authority to save the
company?
• My actions were necessary in my position?
Accountability the key

Can the person with responsibility account
satisfactorily for their actions?
 Even if there is an unsatisfactory aspect to these
actions, were they done maliciously?
 Were the actions proportionate to the objective?
 Were other less harmful alternatives
considered?
The danger of double
standards
 In
corporations there are often two
versions of reality: the one for external
consumption (and accountability) and what
actually happens.
 If the latter is too far from the former,
people get the message that requirements
for good practice are only for show and
that they can cut corners.
Societal Norms
Organisational Counternorms
•Be open & honest
•Be secretive & deceitful
•Conscientiously adhere to
rules
•Do whatever it takes to do the job
•Use it or lose it
•Be cost effective
•Pass the buck
•Take responsibility
•Be a team player
•Take credit for your own actions (&
take credit for the actions of others,
if you can)
Accountability

historical track

tick the box

reveals liability
Responsibility




proactive
“take
responsibility
for”
discretion
ethical
empowerment
Stakeholder theory and the
manager
How are stakeholders to be ranked?
 The traditional view is to place owners the shareholders - first and last.
 A modern view demands that shareholders
share their claims upon directors and
managers with all those affected by the
corporation’s operations.
Corporate personality helps
rank priorities

The aims and purposes of the corporation (eg.
articles of association) define its range of
activities.
 Corporations - unlike natural persons - are not
ends in themselves: they are not moral persons.
 Directors and managers are employees of the
corporation, not of its shareholders.
 Directors have fiduciary duties to shareholders,
but this does not exhaust their obligations.
Conflict of interest: a case of
understanding good judgment

Corporate ethics is not about the corporation
having a conscience; not about it “feeling good”;
not about it being generous.
 Corporate ethics is about just conduct and
avoiding unjust actions. It is about giving various
stakeholders their due.
 Perhaps the biggest obstacle to this is conflict of
interest.
Conflict of Interest
Conflict of interest  being adversely
affected by a conflict
A person’s having a conflict of interest is
not the same thing as a person’s being
affected by a conflict of interest.
“It’s a matter of where you draw
the line.”
Rather, some things are black,
some things are white, and
some things are grey.
Good judgment
 Begins
with the facts - as they are
available.
 Is principled - expresses ethical principles.
 Is detached but not apathetic.
 Is committed but not fanatical.
 Respects the interests of others and can
look at the issues from the viewpoint of
others.
In 2003, Johnson & Johnson
 Gave
$99 million in cash to welfare
organisations in the US and abroad.
 Gave $285.5 million in non-cash
contributions.
 Gave a total of 3.7% of pretax profit to
charitable causes - see the list in the
report in the readings.
Milton Friedman argues
 “Only
people can have responsibilities.”
Corporations can have responsibilities but
not business in general. Why not?
 Executives are employees of “the owners
of the business” and should act as they
desire, namely to make as much money
as possible. Is this true? Are not
executives employees of the corporation?
Friedman adds

As the agent of others, he may not use their
money for his purposes. Social responsibility
implies that the manager will act contrary to the
interests of shareholders. This robs them, may
raise prices for customers, and may lower
wages for workers.
 Individuals should spend their own money on
socially worthy causes.
 If managers do this, they are “in effect imposing
taxes”.
Alan Greenspan agrees:
“By law, shareholders own our corporations
and, ideally, corporate managers should
be working on behalf of shareholders to
allocate business resources to their
optimum use.”
A stronger view
“Business managers who use business
funds for non-business purposes are guilty
not just of the legal crime of theft, but of
the … offence of teleopathy: in diverting
funds from strictly business objectives to
other purposes, they are pursuing the
wrong ends. … when business pursues
love - or ‘social responsibility’ - rather than
money.” Elaine Sternberg.
This is not the common view
Friedman’s view might be theoretically correct but
there is a practical problem: most people view
corporations as more than wealth generators.
The 1999 Millennium Poll on Corporate Social
Responsibility of 25,000 consumers:
“Two in three citizens want companies to go
beyond their historical role of making a profit,
paying taxes, employing people and obeying
laws; they want companies to contribute to
broader societal goals as well.”
(PricewaterhouseCoopers)
Andrew Carnegie
“… the duty of a man of wealth (is) First, to set an
example of modest, unostentatious living … to
provide moderately for the legitimate wants of
those dependent upon him; and after doing so,
to consider all surplus revenues which come to
him simply as trust funds, which he is called
upon to administer … to produce the most
beneficial results for the community …
Philanthropy
“Why can’t we encourage our major
companies to put major dollars into
healthcare? The Government can only do
so much. I’m not critical of the
Government. I’m critical of the
corporations.” (Rosenfeld, W/end Aus. 2001)
Professor Rosenfeld criticised drug
companies for not investing in research on
diseases prevalent in the Third World.
Corporate giving
Corporations were criticised for not giving
generously to victims of the tsunami.
They have been criticised for being difficult
with insurance payouts, ungenerous with
termination packages, for fighting legal
actions vigorously.
There is a general expectation in the West
that they will give to charities.
Shareholders’ Association
view
The Australian Shareholders Association has taken a tough
line on charity. It believes companies should only give
when there is an economic benefit to shareholders. Chief
executive, Stuart Wilson, said:
"In relation to the tsunami appeal I think it is quite
appropriate for companies with suppliers, customers or
operations in Asia to help the victims."
The problem with
philanthropy
 Directors
and managers can confuse their
generosity with the corporation’s: the
corporation’s money does not belong to
them
 Can raise expectations about the role of
corporations and increase the costs of
doing business. Businesses must remain
competitive in order to serve any social
purposes.
The central issues in
corporate giving are
 That
directors can account for it
 That it is transparent
 That it is related to business purposes
even if it is not central to those purposes
 That it does not harm the competitiveness
of the business
 That is does not violate commutative or
distributive justice
Social costs and social
responsibilities
 The
operations of business incur social
costs. Often those costs are paid socially
as negative externalities rather than
included in the price of products.
 This contravenes principles of fairness and
distributive justice.
Justice requires that
 Businesses
compete on an equal footing
 Social resources not be regarded as free
 That use of social resources should reflect
their cost and especially their cost to third
parties
 That business engage in socially
responsible conduct as a cost of doing
business
Triple bottom line reporting
(Term coined by John Elkington in1997)


To the financial statements attesting to the financial
health of a corporation, 3BL adds environmental and
social performance.
Is a measure of general sustainability of a corporation’s
operations. In order to have a long term future:
• It must be profitable
• It must minimise environmental impacts
• It must meet social expectations
The Merck case
1979, a Merck scientist has a hunch that one of
their products could cure river blindness.
 Cost of development is > $100 million.
 Risk of undermining veterinary product.
 Drug market was crowded and margins were
shrinking.
 No distribution networks where drug most
needed.
 No clear market for product.
 U.S. Govt. and WHO would not fund it.
Should Merck develop the drug?