CHAPTER 2

Framing Business Ethics:

Corporate Responsibility, Stakeholders, and Citizenship

What is a corporation?
 A corporation is essentially defined in terms of legal status (persona jurídica).

Legally, corporations are regarded as independent from those who work in them, manage them, invest
in them, or receive products or services from them. Corporations are separate entities in their own right.
For this reason, corporations are regarded as having perpetual succession, i.e. as an entity, they can
survive the death of any individual investors, employees, or customers—they simply need to find new
ones.

The corporation owns its own assets. The factories, offices, computers, machines, and other assets
operated by, say, Samsung, are the property of Samsung, not of its shareholders. Shareholders simply
own a share in the company that entitles them to a dividend and some say in certain decisions affecting
the company.

 Corporations are typically regarded as ‘artificial persons’ in the eyes of the law. That is, they
have certain rights and responsibilities in society, just as an individual citizen might.

 Corporations are notionally ‘owned’ by shareholders, but exist independently of them. The
corporation holds its own assets, and shareholders are not responsible for the debts or
damages caused by the corporation (they have limited liability).

 Managers and directors have a ‘fiduciary’ responsibility to protect the investment of

shareholders (owners). This means that senior management is expected to hold shareholders’
investment in trust and to act in their best interests.

Activity in class: Can a corporation have social responsibilities?

Yes, most big companies have a corporate social responsibility (voluntary, not mandatory) where they
show respect for their employees, supply chain workers, the environment, the economy, donations to
organizations.

Even though this shows the respect of companies to the outside world, some companies just have it to
seem socially correct, they do not fully act in accordance with their CSR.

• Milton Friedman’s classic article is “The social responsibility of business is to increase its
profits” (1970)

• Friedman vigorously argued against the notion of social responsibilities for corporations based
on three main arguments:

– Only human beings have a moral responsibility for their actions. Corporations are not
human beings and therefore cannot assume true moral responsibility for their actions .
Since corporations are set up by individual human beings, it is those human beings
who have moral responsibility for the actions of the corporation.

– It is managers’ responsibility to act solely in the interests of shareholders, making

profit

– Social issues and problems are the proper province of the state/government rather
than corporate managers.

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“Few trends could more completely undermine the very foundations of a free society than for corporate
leaders to accept any social responsibility beyond that of trying to maximize profits for their
shareholders..”

Can a corporation be morally responsible for its actions? 4 considerations:

• Legal identity. Perhaps the strongest case for assigning responsibility to a corporation comes from the
legal perspective because corporations have a distinct legal identity. Corporations enter into contracts,
they are subject to a host of legal requirements, including paying taxes, ensuring the safety of their
products and meeting environmental obligations.

• Agency. Corporations can also be said to decide and act independent of their members (Moore 1999).
This argument is based on the idea that every organization has a corporate internal decision structure
that directs corporate decisions in line with predetermined goals (French 1979). Such an internal
decision structure is manifested in various elements—such as corporate policies and procedures—that,
acting together, result in the majority of corporate actions being regarded as the result of corporate, not
individual, decisions. This does not completely deny individual agency and there are still quite a number
of decisions that can be directly traced back to individual actors. The crucial point is that corporations
have an organized framework of decision making that establishes an explicit or implicit purpose for
these decisions.

• Organizational culture. A further argument supporting the moral dimension of corporate

responsibility is the fact that all companies not only have an organized corporate internal decision
structure, but also a set of beliefs and values that set out what is generally regarded as right or wrong in
the corporation—namely, the organizational culture (Moore 1999).
For example, the executive director of Ethisphere, which produces an annual list of the ‘world’s most
ethical companies’ argues that ‘a culture of ethics is crucial to sustainable excellence’ (Smith 2013).

• Functional identity. Finally, on a more general level we observe that corporations present themselves
and interact with customers and other stakeholders as if they were distinct persons. Often associated
with their brand, companies interact with customers as objects of affection, or companionship, or just
put up a human face as the brand to begin with.

We can therefore conclude that corporations do indeed have some level of moral responsibility
that is more than the responsibility of the individuals constituting the corporation.

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Reasons for being socially responsible
• Business reasons (‘enlightened self-interest’)

– Extra and/or more satisfied customers

– Employees may be more attracted/committed

– Forestall legislation

– Long-term investment which benefits corporation

• Moral reasons:

– Corporations cause social problems

– Corporations should use their power responsibly

– All corporate activities have some social impacts

– Corporations rely on the contribution of a wide set of stakeholders in society, not just
shareholders

Activity in class: Reasons for not being socially responsible

- Less profit

- More effort, more time, more responsibilities

- Lack of knowledge and resources

- Capitalism

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Moral arguments for CSR:

• The externalities argument: Externalities are the positive and social impacts of an economic
transaction that are borne by those other than the parties engaging in the transaction. Corporations
create a variety of externalities of one sort or the other.
Whether through the provision of products and services, the employment of workers, or through their
ubiquitous advertising—corporations cannot escape responsibility for these impacts, whether they are
positive, negative, or neutral. Many regard corporations to have a moral responsibility to deal with, in
particular, the negative externalities they cause, such as pollution, resource depletion, or community
problems, insofar as these are not dealt with by governments.
• The power argument: Another important argument is that as powerful social actors, with recourse to
substantial resources, corporations should use the power and resources responsibly in society. Some
refer to this as the Spiderman maxim: ‘with great power comes great responsibility’.
• The dependency argument: Corporations rely on the contribution of a much wider set of
constituencies, or stakeholders in society (such as consumers, suppliers, local communities), rather than
just shareholders, and hence have a duty to take into account the interests and goals of these
stakeholders as well as those of shareholders.

What is the corporate social responsibilities?

The attempt by companies to meet the economic, legal, ethical, and philanthropic demands of a given
society at a particular point in time. (p. 50) READ PAGES 51, 52 BOOK

CSR in an international context

• CSR strong in US. Influence elsewhere is more recent. This is partly explained by explicit vs.
implicit CSR

– US tends to leave more discretion to companies over their social responsibilities. This
has led to a model of explicit CSR, which means that CSR is a distinct, named activity of
private companies.

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 – Other countries have operated more of an implicit CSR model that sees social
responsibilities of business tightly embedded in the legal and institutional framework
of the society.

• In Europe this has been achieved mainly through regulation, whereas in

Africa or Asia other, softer institutions such as religious, customary or tribal
traditions have shaped expectations on business.

• Regional differences exist with respect to all CSR levels:

– Economic responsibility

• Focus in USA on shareholders, profitability; France has extensive

responsibility for employees; India has tradition of investment in the local
community

– Legal responsibility

• State seen in Europe as key enforcer of rules; elsewhere government seen

with more scepticism (e.g. corrupt, interfering with liberty)

– Ethical responsibility

• Wide range of local ethical values & preferences: expectations vary

– Philanthropic responsibility

• Europe tends to compel giving via legal framework; elsewhere (e.g., USA,
India, China), companies are expected to share their wealth.

• Strategies of CSR

– Traditional CSR

• Focus on risk. Reactive.

• No clear link to value creation and business model. CSR is distribution of

created value.

• “CSR is bolted on”

‘Traditional CSR’ is a rather long-standing approach to social responsibility, which in some ways has
been practised since the industrial revolution, but is still widespread around the globe. It considers CSR
as part of a strategy where a company generates its profits without too much consideration for wider
societal expectations. However, once the profit is generated, the company then distributes some of
the value created to projects, activities and causes that are important to stakeholders and will
ultimately enhance the wider image of the company and bolster its brand identity. Thus, CSR is
‘bolted on’ to the firm but without any real integration with its core business. In Carroll’s model, CSR
for these companies is mostly about philanthropy and has very little to do with the other, lower levels of
the pyramid. Typically, companies will adopt a defensive or reactive approach to new societal demands,
seeking to protect the company and denying responsibility for the social issues at stake (Carroll 1979).

– Contemporary CSR

• Focus on reward. Proactive.

• Clear link to value creation and business model. CSR is value creation.

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 • ¨CSR is built-in¨

In the ‘Contemporary CSR’ approach companies see responsible behaviour as an opportunity to

generate profits while at the same time living up to expectations of society. Rather than unilaterally
‘dishing out’ money, they work with stakeholders to understand their interests and expectations, and
attempt to cater to their needs by offering business solutions that drive additional value for the firm and
their constituencies. CSR for these companies is integral, or ‘built in’ to core business. Companies that
are active in green technologies, develop new or cheaper health-care products, invest in more humane
workplaces—just to name some examples—would attempt to proactively integrate social expectations
directly into their core operations and ultimately see CSR as a way to drive new business at a profit.

Both strategic approaches ultimately then ask for ways of conceptualizing observable outcomes of
business commitment to CSR, namely corporate social performance

If we are able to measure, rate and classify companies on their economic performance… Why should it
not be possible to do the same with its social performance as well?

• Outcomes of delineated in three concrete areas:

– Social policies

– Social programmes

– Social impacts

Activity in class: Volkswagen:

161/398

Social policies: minimize environmental impact along the entire life cycle + compliance with
environmental regulations

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Social programmes: By 2025, reduce greenhouse gas emissions by passenger cars in 30%,
decarbonization target through a decarbonization index

Social impact: Reduction of 1.7 t of CO2 compared with the adjusted figure of 2020. Environmental
Policy Statement of the Group

Policy: Circular economy strategy through the program goTOzero strategy (Program)

Impact: We have already made some significant progress – by the end of 2020, we had already reduced
the environmental impact of production by 33 percent.”

Stakeholder theory of the firm

The stakeholder theory of the firm is probably the most popular and influential theory to emerge from
business ethics (Stark 1994). While the use of the term ‘stakeholder’ in relation to business was first
noted in the 1960s, the theoretical approach was popularized by Edward Freeman (1984) in the 1980s.
Unlike the CSR approach, which strongly focuses on the corporation and its responsibilities, the
stakeholder approach starts by looking at various groups to which the corporation has a
responsibility. The main starting point is the claim that corporations are not simply managed in the
interests of their shareholders alone, but that there is a whole range of groups, or stakeholders , that
have a legitimate interest in the corporation as well.

• Theory developed by Edward Freeman (1984)

• A stakeholder of an organization is:

– …any group or individual who can affect, or is affected by, the achievement of the
organization’s objectives (Freeman 1984:46)

– More precise definition of ‘affects’ and ‘affected by’ (Evan and Freeman 1993)

– Principle of corporate rights - the corporation has the obligation not to violate the
rights of others

– Principle of corporate effect – companies are responsible for the effects of their
actions on others

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PREGUNTAS CLASE

The network model of stakeholder theory suggests that firms have indirect relationships with a whole
range of constituencies via their immediate stakeholders.

To what extent should corporations also have to respect the rights of these indirect stakeholders? YES at
least know what is happening in reality (subcontractors)

Think, for example, about the case of a Company´s supply chain and all the different tiers of supplier
stakeholders that are involved. Does a Company have responsibilities to suppliers at all tiers?

Why stakeholders matter Read book pages 62-63

• Milton Friedman – businesses should only be run in the interests of their owners
(shareholders)

• Freeman - it is simply not true to say that the only group with a legitimate interest in the
corporation are shareholders. Others have a legitimate claim on the corporation (stakeholders)

– Legal perspective

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 • ‘Stake’ in corporation already protected legally in some way (e.g. legally
binding contracts). There are not only legally binding contracts to suppliers,
employees, or customers, but also an increasingly dense network of laws and
regulations enforced by society, which make it simply a matter of fact that a
large spectrum of different stakeholders have certain rights and claims on the
corporation.

– Economic perspective

• Externalities – outside contractual relationships

• Agency problem – short term interests of ‘owners’ vs. long term interests of
managers, employees, customers etc.

A new role for management

According to Freeman, this broader view of responsibility towards multiple stakeholders assigns a new
role to management. Rather than simply being agents of shareholders, management has to take into
account the rights and interests of all legitimate stakeholders:

• Stakeholder democracy: gives stakeholders an opportunity to influence and control corporate

decisions

• Corporate governance: codifies and regulates the various rights of the stakeholder groups. The
case of Germany: At least one-third of the members on the supervisory board of large public
shareholders-owned corporations have to be representatives of the employees.

PREGUNTA CLASE: Stakeholder democracy: Since companies are obligated to respect the rights of all
stakeholders, this could suggest a further obligation to allow stakeholders to take part in managerial
decisions that substantially affect their welfare and rights.

• To what extent should this be the case?

To a certain extent: achieving the balance of respecting the rights of stakeholders and aiming
for maximizing the profit.

Other opinion: They should directly NOT participate (if they do, decrease of profits) so we
would be talking about the traditional management model

• To what extent does this happen in reality?

Not at all, firms do NOT allow it to happen

• To what extent would this change the economic, social and political system?

The economic theory should be changed (imposing fines for the ones who misbehave)

Stakeholder thinking in an international context

• One could argue that although the terminology of stakeholder theory is relatively new in places
like Europe or Asia, the general principles have actually been practised for some time:

– German supervisory board includes employee representatives

– “Scandinavian Cooperative Advantage” at IKEA, Novo Nordisk, H&M, etc.

– ‘Keiretsu’ system in Japan (Chaebol in Korea), a network of banks, manufacturers,

suppliers and service providers

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Donaldson & Preston (1995):

- Normative stakeholder theory: attempts to provide a reason why corporations should take into
account stakeholder interests

- Descriptive stakeholder theory: attempts to ascertain whether (and how) corporations actually do
take into account stakeholder interests

- Instrumental stakeholder theory: attempts to answer the question of whether it is beneficial for the
corporation to take into account stakeholder interests

Corporate citizenship (CC): The firms as a “political” actor

The corporate role in governing citizenship rights for individuals

• In Friedman´s (1970) view, corporation should not undertake social policies and programmes
because this is the task of government.

• Government are elected by the public to pursue social goals whereas corporate managers are
acting on behalf of shareholders, so their accountability is primarily to shareholders, not the
public.

• However…. The main challenge to Friedman´s view comes from the fact that corporations
today have taken on a role in society that overlaps and interferes quite substantially with
that of governments.

• Firms have begun to take on the role of ‘political’ actors – taken up many of the functions
previously undertaken by government because:

• Governmental failure

• Increasing power and influence of corporations

Three main areas where this has happened:

Governments retreating from catering to social needs.

Throughout the 20th century many societies saw the provision of water, electricity, education,
healthcare, public safety or telecommunication as part of what governments provided to their citizens.
In many countries, however, these services have been privatized and are now in the hands of
companies.

Governments unable or unwilling to address social needs.

In some contexts, especially in less-developed countries, business often faces governments that lack the
resources to cater effectively for basic social need (mining companies that build road…)

Governments can only address social problems within their reach.

Areas such as the global financial markets, the climate of the planet, and the internet are somewhat
unwieldy and no single government is able to influence and govern them.

ETHICAL DILEMMA ON SLIDES 46-50; book page 70

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Corporate accountability refers to whether a corporation is answerable in some way for the
consequences of its actions.

• Who controls corporations?

• To whom are corporations accountable?

• Key to corporate accountability is transparency

Transparency is the degree to which corporate decisions, policies, activities and impacts are
acknowledged and made visible to relevant stakeholders.

The scope of the corporate role in governing citizenship rights for individuals

A limited view of CC: this essentially equates CC with corporate philanthropy

An equivalent view of CC: this essentially equates CC with CSR

An extended view of CC: this acknowledges the extended political role of the corporation in society

- Social rights or positive rights - these provide the individual with the freedom to participate in society
(education, healthcare…). “positive rights”

In developing countries where governments simply cannot afford a welfare state, the task of improving
working conditions providing schools, medical centres, and roads, or even providing financial support for
schooling of child laborer’s are all activities in which corporations such as Shell, Nike, Levi Strauss, and
others have engaged under the label of corporate citizenship.

- Civil rights or negative rights – these provide freedom from abuses and interference by third parties
(own property, engage in free markets, freedom to speech…) “negative rights”.

– Google as guardians of people’s right to free speech in the face of government

restrictions.

– Facebook faced several court cases because of alleged infringements of the rights to
privacy of its users.

As a global space not monitored by any single government, the internet is a good example of one of
those areas where corporation are exposed to dealing with core civil rights of individuals

- Political rights – these include the right to vote or the right to hold office and, generally speaking,
enable the individual to participate in the process of governance beyond the sphere of his or her own
privacy.

Extended view of CC adds something significant that helps us frame business ethics in new ways:

• Helps us better see the political role of the corporation

• Clarifies the demand for corporate accountability

• Helps to understand business in relation to common citizenship rights within different cultures
and some of the challenges posed by globalization

• The rights of citizenship have strong links to the goal of sustainability

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 • Provides a critical perspective on corporations’ social role that is more in keeping with non-US
ways of thinking about business ethics.

PREGUNTA CLASE:

Do companies represent a risk for democracy? Yes, influence on economy of power on democracy. For
example, companies that use their economic power to influence political decisions or elections, or that
engage in corrupt practices, can undermine the integrity of the democratic process. Moreover, when
companies prioritize their own interests over those of society as a whole, they can contribute to the
concentration of wealth and power in the hands of a few, which can erode the foundations of
democratic governance.

On the other hand, companies can also play a positive role in democracy by promoting transparency,
accountability, and responsible corporate citizenship. For example, companies that adhere to high
ethical standards, respect human rights, and engage in constructive dialogue with civil society can
contribute to the development of a more robust and inclusive democratic system.

In short, companies can represent a risk for democracy if they act in ways that undermine democratic
values and institutions, but they can also be important stakeholders in promoting and strengthening
democracy if they act responsibly and in the public interest.

Criticize the documentary

Good actions from corporations in today’s world,

See 58/59

Book: algo que añadir desde la pagina 76?

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