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)
• Ritz, Dean. (2007) "Can Corporate Personhood Be
Socially Responsible?" in eds. May, S., Cheney, G., and
Roper, J., Oxford, UK: Oxford University Press: 194-195.
Tentative Schedule
• October and November
– 28—Introduce Corporate responsibility
– 30—Groups prepare for town meeting
– 1—Burger Man town meeting
• November
– 4—Debrief Burger Man and Pirate-Corporate Analogy (Corporate Internal
Decision Structures)
– 6—Prisoner’s Dilemma (Cooperation versus Competition)
– 8—Milgram and Zimbardo (How organizational environments constrain
human action and identity)
– 13—Review for Exam
– 15—Third Exam (Codes and Organizations)
– 20—Hughes Case
– 22—Group Preparation for Dramatic Rehearsals
– 25—Dramatic Rehearsals (Acting, Storyboards, Reflections)
– 27—Responsible Dissent (Exit, Voice, Loyalty)
• December
– 2—Class Evaluations/Group Self Evaluations/Hughes Storyboard & Reflections
– 4—Class Evaluations/Group Self-Evaluations/Hughes Reflections & Reflections
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
• Proto Corporations created called Trade Guilds to selfregulate the practice of a trade
• Example: Shoe Makers
– A skilled craft or trade
– Learn through apprenticeship
– Self-regulation
• Purpose: to regulate a practice or trade. Why…?
– Members make more money—guild becomes monopoly
(controls who can practice) and dictates prices for services
– More social responsibility exercised: sets standards and
punishes individuals who fail to meet standards
3. Proto-Corporations called Joint Stock Companies
pool capital to oversee complex ventures
• Problem: How to organize and fund complex trading
ventures
• Solution: Joint Stock Companies
– Device to “pool” or raise capital/money
• Example: Outfitting a ship to travel to Orient and collect spices
– Also distributed benefits and burdens of enterprise
• Investors pay into venture. If successful they get a share of the profits
• New Problem: Unlimited liability
– Venture fails. Investor liability to creditors is unlimited
• Key Innovation in Joint Stock Companies: Managers
distinguished from investors
– Owners become Principals and originate venture
– Managers become Agents and execute venture
4. Chartered Corporations
• Innovation: Limit Investor liability
– Financial risk is necessary for the growth of business
– Unlimited liability discourages potential investors
• Investors back off due to fear of going to debtor’s prison
– Liability limited to original investment to distribute
risk and encourages investment
• Innovation: Control Corporations by charter
– Legal device that sets boundaries by specifying a
corporation’s legitimate activities
– Anything beyond the charter is “ultra vires” or beyond
the power of the corporation
New Problem: Charter Mongering
• Competition between States for incorporation
privileges leads to watering down of effectiveness
of charter
• Charters now licenses all legally activities
– Illegal actions or activities are literally beyond the
power of the corporation.
– Corporation can do no wrong.
• Period of unprecedented growth in corporate
scope and power
5. Corporations become legal persons
• Solution: Control corporations through law—
corporation becomes a legal person
– Legal Standing: Right to sue and be sued
– Commercial Free Speech (Advertising)
– Non-commercial Speech (Political Speech)
• First National Bank of Boston v. Bellotti
– Majority Opinion:
• Regulating speech by speaker sets a dangerous
precedent
– Minority Dissenting Opinion:
• Corporate non-commercial speech can drown out the
speech of natural/individual persons
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
• Right for judicial review on state legislation
• Right for judicial review for rights infringement by federal
legislation
• Protection against “unreasonable searches and seizures”
• Right to trial by jury
• Right to compensation for government takings
• Right to freedom from double jeopardy
• Right to trial by jury in civil case
• Right to free commercial speech
• Right to corporate political speech
• Right against coerced speech
• Right to form Political Action Committees and fund them
anonymously
A Problem From Theory of Agency
• Managers (agents) must remain faithful to owner
(=principal) interests
• But managers are rational, self-interest
maximizers, so…
– their interests do not coincide with those of owners
– nothing prevents them setting aside owner interests
and pursuing their own.
• We need a strong Board of Directors where
directors…
– set corporate policies and goals
– monitor management compliance
– punish non-compliance (Business Judgment Rule)
How do we punish corporations?
• Corporations have no soul to damn or body to
kick
– Corporations have no mens rea or guilty state of
mind
– Corporations cannot commit an actus reus (=guilty
action) because corporations do not have bodies
– If there is no mens rea or actua reus, then there
can be no causal relation between the two
• Therefore, corporations cannot be tried under
criminal law
Governance depends on theory of
Human Nature
Homo Economicus requires
compliance approach
Humans are political/social
animals (Requires stewardship
approach)
• 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
• 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
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
• Argument: Burger Man can exercise control
through supplier choice. If they can exercise this
control, then they ought to do so. Also, this does
not go beyond their responsibility as a business
corporation since they are responsible for what
they can causally influence.
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
• Dietary habits are not entirely within the control of
individuals, neither in their acquisition nor in changing
them when they are found unhealthy. Restaurants can
influence the formation of dietary habits both in the menu
options they provide and the way in which they prepare
food (brain awards foods with salt, sugar, and fat).
Consequently, because they can form and change dietary
habits, food servers are responsible for producing good
habits and changing bad ones.
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
• Corporations and the communities in which they
operate are mutually dependent. They have a selfinterest stake in working toward mutual benefit.
Because companies have a huge impact on community
wellbeing, they have a moral responsibility to choose
their actions responsibly. This includes developing
community development projects beyond business
scope as a part of their corporate social responsibility.
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
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)
• In business corporations
• In Pirate Inc.
• In 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 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.
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.)
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
Arthur Andersen continued
• 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
The Organizational Environment
• Enables
– Distributes risk
– Carries out complex ventures
– Pools capital, expertise, and human resources
• Constrains
– Roles become a part of our identity
• No long act for self but for organization
– Roles set boundaries for what we can do from within
role (Teacher can’t sell insurance to students)
– Roles conflict with one another
– Roles can be wrong or evil (The “morality of the role”)
Finance-Driven Companies
• Managers (line role) make decisions while
professionals (staff role) provide information
• Ethical values are side constraints to the
pursuit of financial value
• Praise goes up while blame goes down the
corporate hierarchy
• Employees generally withhold bad news from
supervisors
• DPOs are considered to be breaches of loyalty
Customer Driven Companies
• Managers make final decisions but professional
employees are expected to advocate for ethical
and professional standards
• Customer satisfaction trumps ethical
considerations when the two conflict; ethical
values are still side constraints but closer to
center
• Professional employees can be blamed for failing
to raise ethical and technical issues
• Bad news is no longer withheld
• Dissent (Bad News) is a part of role responsibility
rather than disloyalty
Quality Driven Companies
• Decisions made in interdisciplinary teams
where all have equal participation (emphasis
on reaching consensus)
• Ethical values are central
• Ethical advocacy no longer necessary; rather
professionals provide effective means to
realize ethical ends
• Bad news not withheld
• Dissent dissolves into lack of consensus which
is met by more discussion
How the organization constrains
the individual
Milgram and authority
Zimbardo’s Prison Experiments
Milgram Experiments
• How much of an electric shock would
experimental subjects give on the basis of
authority?
• Many gave what they thought was a lethal shock
on the basis of the authority of the “scientist”
• But they evidenced conflict
– Acting on their own, they wouldn’t have done it
– But they were playing the role of “teacher” in the
experiment
Zimbardo Prison Experiments
• Stanford University students role play as
prisoners and prison guards in experiment
carried out in 1970s
• Prisoners lose their personal identities and
become “prisoners” and numbers
• Guards become sadistic and become
psychologically and physically abusive
• The roles we play can take over our identities
Counter Activities
• Ten-Step Program advocated by Zimbardo in the
Lucifer Effect (453-4)
– I am responsible
– I will assert my unique identity
– I respect just authority but rebel against unjust
authority
– I will not sacrifice personal or civic freedoms for the
illusion of security
• When Milgram said, “You have no choice but to
continue with the experiment…”
– Jan Rensaleer: “I came here on my own free will”
– Gretchen Brandt: “I think we are here on our own free
will
– “Perhaps we have seen too much pain”
Corporate Control through
Punishment
• Fining doesn’t work
– Deterrence is a function of risk of getting caught times the
gain of breaking the law
– Frequently, to deter the fine must be more than the worth
of the corporation
• Stock dilution gets beyond the deterrence trap by
tapping into the future earnings of the corporation
• But corporations do wrong not just in pursuit of
financial values
– Sub-group power plays
– Individuals who go maverick
Punishment criteria (Table in Module)
• Go after the CEO
– But the corporation functions as a shield (See, hear, speak no evil
defense)
• Target of the Punishment
– Financial and Non-financial values (like reputation)
• Does the punishment deter (i.e., get around the “Deterrence
Trap”)?
– Deterrence is a function of risk times gain
– Deterrence could require setting find beyond worth of corporation
– Stock Dilution does because it taps into future earnings of the
company
• Does the punishment address non-financial values?
– Sub-group conflicts may lead to corporate wrongdoing
• Does punish lead corporation to change itself or is change imposed
from the outside?
– Court ordered adverse publicity or “shaming” the corporation
– Probationary Orders
Punishment criteria (Table in Module)
• Does the punishment encourage a responsive
adjustment?
– Federal Sentencing guidelines require proof of the
corporation’s having taken preventive measures
(social and legal audits)
– Does the punishment encourage a company to
“change its ways” to avoid repeating the wrongdoing?
• Does the punishment interfere with corporate
autonomy (=corporate black box)
– Stone argues that probationary orders that mandate
changes in CIDS are necessary for habitual offenders
Tentative Schedule
• October and November
– 28—Introduce Corporate responsibility
– 30—Groups prepare for town meeting
– 1—Burger Man town meeting
• November
– 4—Debrief Burger Man and Pirate-Corporate Analogy (Corporate Internal
Decision Structures)
– 6—Prisoner’s Dilemma (Cooperation versus Competition)
– 8—Milgram and Zimbardo (How organizational environments constrain
human action and identity)
– 13—Review for Exam
– 15—Third Exam (Codes and Organizations)
– 20—Hughes Case
– 22—Group Preparation for Dramatic Rehearsals
– 25—Dramatic Rehearsals (Acting, Storyboards, Reflections)
– 27—Responsible Dissent (Exit, Voice, Loyalty)
• December
– 2—Class Evaluations/Group Self Evaluations/Hughes Storyboard & Reflections
– 4—Class Evaluations/Group Self-Evaluations/Hughes Reflections & Reflections