INTRODUCTION TO BUSINESS LAW

COURSE CODE: BUS 360

FRAMING BUSINESS ETHICS

SOURCE: BUSINESS ETHICS, 3RD EDITION BY ANDREW CRANE AND DIRK MATTEN
 Who is a stakeholder?
2

 A stakeholder of a corporation is an individual or a

group which either: is harmed by, or benefits from,
the corporation; or whose rights can be violated, or
have to be respected, by the corporation.
 Stakeholder Theory of the Firm
3

 The corporations are not simply managed in the

interests of their shareholders alone, there is a
whole range of group or stakeholders that have a
legitimate interest in the corporation as well.
 Why stakeholders matter?
4

a.1 It is simply not true to say that the only group with
legitimate interest in the corporation are shareholders.
a.2 From a legal perspective, there are far more groups apart
from shareholders that appear to hold a legitimate stake in
the corporation since their interest is already protected in
some way.
a.3 For example, there are legally binding contracts to
suppliers, employees, or customers.
a.4 Also, increasingly dense network of laws and regulations
are ensuring stakeholders’ certain rights and claims on
corporations .
 Why stakeholders matter?
5

b.1 From an economic perspective, there is a problem

with traditional stockholder view.
b.2 For example, if a firm closes a plant in a small
community and lays off workers, it is not only the
relation with the employees that is directly affected,
shop-owners will lose their business, tax payments
to fund schools and other public services will also
suffer.
 Why stakeholders matter?
6

c.1 One key argument is that majority of the shareholders do

not invest in shares predominantly to own a company nor
do they necessarily seek for the firm to maximize its long
term profitability. The predominant reason is they often
buy shares for the development of share price.
c.2 Most shareholders can sell their share far more easily
than most employees can find another job. Therefore, it is
not evident why the short term interests of shareholders
should preside over the often long term interests of other
groups such as employees, suppliers and customers.
 Towards framing business ethics
7

If companies provide us with great products that we

want to buy, employ workers to produce them, and
pay taxes to government, aren’t they already
providing a sufficient contribution to the
society?

It is the definition and justification of potentially

wider responsibilities that is the subject of this
chapter.
 Why do we need to understand what a
corporation is
8

Practical and legal identification of the

corporation within any given society has
significant implications for how, and
whether, certain types of responsibility
can be assigned to such an entity.
 Key features of a corporation?
9

1. Corporation are typically regarded as ‘artificial

persons’ in the eyes of the law. That is, they have
certain rights and responsibilities in society, just as
am individual citizen might.
2. Corporations are notionally owned by
shareholders but exist independently of them. The
corporations holds its own assets and shareholders
are not responsible for the debts and damages caused
by the corporation (they have limited liability).
 Key features of a corporation?
10

3. Managers and directors have a ‘fiduciary’

responsibility to protect the investment of
shareholders. This means that senior management
is expected to hold shareholders’ investment in
trust and to act in their best interest.
 Can a corporation have social
responsibilities? Milton Friedman’s
11
arguments
Nobel prize winning economist Milton Friedman’s
arguments against the notion of social responsibility
of corporations are as follows.
1. 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 the individual human beings, it is those
human beings who are then individually responsible
for the actions of the corporation.
 Can a corporation have social
responsibilities? Milton Friedman’s
12
arguments
2. It is the managers’ responsibility to act solely in
the interest of shareholders. The only
responsibility of the managers of the corporation is
to make profit, because it is for the task that the
firm has been set up and the managers have been
employed. Acting for any other purpose constitutes
a betrayal of their special responsibility to
shareholders and thus represents a ‘theft’ from
shareholders’ pockets.
 Can a corporation have social
responsibilities? Milton Friedman’s
13
arguments
3. Social issues and problems are the area of the
state rather than the corporate managers.
Managers should not and can not decide what is in
society’s best interests. This is the job of the
government. Corporate managers are neither
trained to set and achieve social goals nor (unlike
politicians) are they democratically elected to do
so.
 Addressing Friedman’s first argument:
Can a corporation be morally responsible for its actions?
14

Organizational culture: a set of beliefs and values that

set out what is generally regarded as right or wrong.
These values and beliefs are widely believed to be a
strong influence on an individual’s ethical decision
making and behavior. Many of the issues for which
corporations receive either praise or blame can be
traced back to the company’s culture.
Therefore, we can say, corporation appears to have
moral agency of sort that shapes the decisions made
by those in the corporation.
 Addressing Friedman’s second argument: Why
do corporations have social responsibilities?
15

 Having a better brand reputation: corporations perceived as being

socially responsible might be rewarded with extra/more satisfied
customers, whilst perceived irresponsibility may result in boycotts or
other undesirable customer actions.
 Fair employee treatment: employees might be attracted to work for
and be even more committed to corporations perceived as being socially
responsible.
 Voluntarily committing to social actions and program may forestall
legislation and ensure greater corporate independence from
government
 Making a positive contribution to society might be regarded as a long
term investment in a safer, better educated and more equitable
community, which subsequently benefits the corporation by creating an
improved and stable competitive context in which to do business.
 What is the nature of CSR
16

 Economic responsibility: companies have

shareholders who demand a reasonable return on their
investments, they have employees who want fairly
paid jobs, customers who demand good quality
product at a fair price.
 Legal responsibility: The US software giant
Microsoft has faced a long running anti trust case in
Europe for abusing the monopolistic position to
disadvantage competitors, resulting in a fine of 280.5
million euro for insufficient supply of information.
 What is the nature of CSR
17

 Ethical responsibility: In North America a

consistent regulatory framework has yet to be
developed. Nevertheless, the companies feel
mounting pressure from consumers, general public,
and employees to reduce greenhouse gas emissions
 Philanthropic responsibility: charitable
donations, building of recreational facilities for
employees and their families, support for local
schools, sponsoring of art and sport events.
 4 Strategies of social responsiveness
18

Reaction: The corporation denies any responsibility for social

issues. For example, by arguing that they are the
responsibility of the government.
Defense: The corporation admits responsibility. But fights it.
The corporation may adopt an approach based on superficial
public relations rather than positive actions.
Accommodation: The corporation accepts responsibility and
does what is demanded of it by relevant groups.
Pro-action: the corporation seeks to go beyond industry norms
and anticipates future expectation by doing more than
expected.