CORPORATE SOCIAL

RESPONSIBILITY
KEY FEATURES OF A
CORPORATION
• Corporations are typically regarded as artificial
persons in the eyes of the law
– They have certain rights and responsibilities as an
individual citizen
• Corporations are notionally owned by the
shareholders but exist independently of them
– Corporation holds its own assets and shareholders are
not responsible for any debts or damages caused by the
corporation (they have limited liability)
• Managers and directors have a fiduciary
responsibilities to protect the investment of
shareholders
– The senior management is expected to hold
shareholders’ investment in trust and act in their
interests
CAN A CORPORATION HAVE
SOCIAL RESPONSIBILITIES?
• As per Nobel prize winning Economist,
Milton Freedman in his article “the social
responsibility of business is to increase its
profits” (1970)
– Only human being have moral responsibilities for
their actions
– It is managers’ responsibility to act solely in the
interests of shareholders
– Social issues and problems are the province of the
‘state’ rather than the ‘corporate managers’
SHAREHOLDERS & BUSINESS
ETHICS
• Whilst shareholders have a crucial stake in the corporation, this has to be
understood within the range of other stakeholders, who are:
– Employees
– Consumers
– Suppliers, etc
• There is a contention that shareholders in some way have a unique and
superior claim upon the corporation
• This relationship,
– confers certain crucial rights to shareholders, as well as
– imposing some quite important responsibilities in terms of the governance and
control of corporation
• The various ethical issues that arise in shareholder relations include
– Insider trading
– Executive pay
– Money laundering
• The cause and resolution of these issues and problems are shaped by
certain characteristics of corporate governance
STAKEHOLDERS
• Stakeholders are those who are vital to the
survival of an organisation
• Groups or individuals who can affect and
are affected by the achievements of the
organisation’s objectives
SHAREHOLDERS AS
STAKEHOLDERS
• At the beginning of modern capitalism, and throughout the nineteenth
century, industrial revolution, the common pattern of governing
companies was
– Both owned and managed their companies directly
• Owner-managers today, except in small firms, are rare
• The common practice in large corporations is a separation of
ownership and management functions
• The primary consideration for shareholders is the protection of their
right to property, which amounts to certain specific rights
– Right to sell their stock
– Right to vote in general meetings
– Right to certain information about the company
– Right to sue the managers for (alleged) misconduct
– Certain residual rights in case of the corporation’s liquidation
• These rights do not include the right to a certain amount of
profit or dividend
• It is only subject to the effort and skill of the management
• Managers are entrusted with the duty to run the company in
the interest of the shareholders
• The relationship between shareholders and the company, is
therefore, defined by
– The relatively narrow, but well-defined rights for the shareholder
– Far-reaching but rather ill defined duties of the managers
• This situation has always been a delicate one and that
conflicts continue to plague the relationship between
managers and shareholders
• Such conflicts focus on the key phrase of “corporate
governance”
CORPORATE
GOVERNANCE

• Corporate governance describes the process by

which
– shareholders seek to ensure that their corporation is run
according to their intentions.
– It includes
• Processes of goal definition
• Supervision
• Control and sanctioning
ETHICAL ISSUES IN
CORPORATE GOVERNANCE
• Corporate governance has been a topic high on the
agenda of all major western economies in the
recent years
• Partly due to the various scandals that have hit the
headlines during the last decade
• What are the main issues of corporate
governance?
– Executive accountability and control
– Executive remuneration
– Ethical aspects of mergers and acquisitions
EXECUTIVE
ACCOUNTABILITY AND
CONTROL
• There are certain core elements that need to be
present in order for the principal-agent relationship to
be managed effectively
• The most important element is a separate body of
people that supervises and controls management on
behalf of principals, eg. A board of directors
• The ethical issue is the independence of the
supervisory, non-executive board members
• They will only be able to reasonably act in the
principal’s interest if they have no directly conflicting
interests
• In order to achieve this
– Non-executive directors should be drawn from outside the
corporation
– They should not have a personal financial interest in the
corporation other than the interest of the shareholders
– They should be appointed for a limited period
– They should be competent to judge the business of the company
– can include a limited number of insiders – eg. Former
executives, etc.
– They should have sufficient resources to get information
– They should be appointed independently –
• either by the shareholders in AGM
• Through appointment by the Supervisory Board
– A further element of supervision comes from an independent
auditor who audits the work of the executive/non-executive
board
EXECUTIVE
REMUNERATION
• Rewarding senior managers with massive stock
option deals – started in US
• A lot of criticism on the fat pays of senior executives
• The ethical problems with executive pay in firm-
shareholder relations
– Issue of designing appropriate performance-related pay –
share option
– These shifts in remuneration show the influence of
globalisation
– Often fails to reflect shareholder interest
• The issue of executive remuneration touches an
ethical chord.
• The pay difference between those at the top and
those at the bottom appear to be inequitable
ETHICAL ASPECTS OF
MERGERS & ACQUISITIONS
• Mergers and acquisitions might be encouraged if
they involve the transfer of assets to an owner
who will use them more productively and
thereby create wealth
• A matter of concern is that managers may pursue
interests that are not congruent with the
shareholder’s interests
• The conflict is around
– executive prestige on the one hand, and
– Profit & Share price interests of shareholders on the
other
• “hostile” takeovers – intention of an individual or a
group of investors to purchase a majority stake in a
corporation (often secretly) against the wishes of its
boards
• Ethical concern arises with the shareholders who do not
want to sell
• If the company is taken over by someone who has
different ideas
• Two main options for the management:
– Sometimes the shareholders are offered “golden parachutes” –
a large sum of money that they would be paid if they agree to
the merger
– Managers in order not to lose their jobs after the takeover could
send “greenmail” to the potential hostile party and offer to buy
back the shares for the company at a price higher than the
present market price
THE ROLE OF FINANCIAL
MARKETS
• Financial markets, especially the stock market are based
on shareholders expecting a future dividend or rise in
share prices as a basis for their decision to buy or sell
• Speculative “faith stocks”- built on little else but blind
faith
• The dubious role of “investment banks” and their
analysts
• The ethical issue lies in the fact that while stock prices
always contain an element of speculation, stock markets
do not always fully reveal the amount of uncertainty
• Slightly, the opposite problem exists with the
phenomenon of insider trading
INSIDER TRADING
INSIDER TRADING
• Insider trading occurs when securities are bought or sold
on the basis of material non-public information
• The executives of a corporation and other insiders know
the company well, and so might easily know about
events that are likely to have a significant impact on the
company’s share price well in advance of other potential
traders
• In the long run, insider trading can undermine investors’
trust in the market
• The ethical assessment of insider trading is still
controversial
• Four main ethical arguments against insider trading
• Fairness
– Inequalities in the access to relevant information
• Weakest, but most common argument
• Misappropriation of property
– Use valuable information that is essentially the property of the firm
involved
• Has become a common basis for legal cases
• Harm to investors and the market
– Might benefit at the cost of ‘ordinary’ investors
– Making the market riskier
– Threatening market confidence
• Undermining of fiduciary relationship
– The relationships of trust and dependence among shareholders and
corporate managers (& employees) are based on managers acting in
the interests of the shareholders
– Insider trading is fuelled by self-interest on the part of the insiders
• This is the strongest argument against insider trading
THE ROLE OF
ACCOUNTANTS
• The task of accountants is to provide a ‘true and fair view’ of the
company’s financial situation
• Their role varies from country to country
– US – involved heavily in the actual accounting process
– Europe – they have more of a supervisory role and just check and testify
the company’s financial standing
• Today’s audits target the actual or potential shareholder, and
therefore focus a great deal not only on statements of past periods but
on the future potential of the corporation
• This process is known as ‘creative accounting’
• However, the risks inherent in this is
– The discretionary element of auditing existing figures is already quite
significant
– This is even more the case for projections based on these figures
• The ethical challenge for audit firms lies in the fine line between
presenting a share as a ‘faith stock’ or using this term for repackaging
PROBLEMATIC ASPECTS OF
AN AUDITOR’S JOB
• Ballwieser and Clemm identified 5 main
problematic aspects of an auditor’s job:
– Auditing companies that then go bust
– Cross selling of consulting services to audit
clients
– Long-term relationships with clients
– Size of the accounting firm
– Increase in competition between audit firms
• Auditing of Companies that then go bust
– Auditors do not necessarily make a judgement of the
economic viability of a corporation
– They simply make a judgement whether the accounts of the
corporation provide a realistic picture of the real situation
– Even though there are well defined rules, regulations, or
codes of practice for the auditing process, there remains
discretion in valuing assets, foreign currency transactions,
goodwill assets, etc.
• Cross selling of consulting services to audit clients
– Gets a very close insight into the corporation
– The big global firms, also have a large pool of expertise –
hence are into consultancy and other business service
– This involvement with a corporation puts to an end the
neutrality of the auditor – due to conflicts of interest
• Long term relationship with the clients
– Accounting firms and their individual representatives enter a
confidentiality with their clients
– Having such a confidential position of trust with clients often
creates long term personal relationships that can threaten
independence
• Size of the accounting firm
– The bigger the accounting firm, the more economies of scales it
can realise in terms of staff training, standardisation of
procedures and tools
– Standardised procedures of auditing may also diminish the
diligence of the individual auditor who might lose the personal
sense of responsibility
• Increase in competition
– There is inherent danger that corners will be cut to reduce costs,
– Raising the prospect of less diligence and
– Scrutiny of the auditing firms
WHISTLE BLOWING
• An attempt by a member or a former member of
an organisation to disclose a wrongdoing in or by
the organisation
• Can be internal
– If reported to those higher in the organisation
• or external
– If reported to external individuals or bodies such as
government agencies, newspapers, public interest
groups, etc
• It is often a brave act of conscience that can carry
heavy personal costs
WHISTLE BLOWING – RIGHT
OR WRONG?
• It is often argued that whistle blowing is wrong because employees have a
contractual duty to be loyal to their employer and to keep all aspects of the
business confidential
• The whistle blower violates the rights of the employer
• No agreement can impose on an employee unlimited obligations toward
the employer
• Agreements and contracts are void if they require a person to do something
immoral
• If an employee has a moral obligation to prevent other people from being
harmed and the only way to prevent the harm is by blowing the whistle on
one’s employer, an employment agreement would be void
• It is also argued that external whistle blowing is morally justified on the
grounds that all persons, including employees have a right to freedom of
speech
• However, this argument ignores the fact that the right to freedom of
speech, is limited by the rights of other persons
• Moreover, other parties – stockholders or fellow employees – who can be
injured by external whistle blowing also have a right not to be subjected to
such injuries without a proportionately serious reason
JUSTIFICATIONS
• External whistle blowing is morally justified, if:
– There is clear, substantiated, and reasonably
comprehensive evidence of the wrong doing
– Reasonably serious attempts the wrong through internal
whistle blowing have tried and failed
– It is reasonably certain that external whistle blowing
will prevent the wrong
– The wrong is serious enough to justify the injuries that
would be inflicted, on oneself, one’s family & other
parties
WHEN IS IT AN
OBLIGATION?
• That specific person has a moral duty to prevent the
wrong, either because it is part of the person’s specific
professional responsibilities
– Accountant
– Environmental officer
– Professional engineer
– Lawyer, etc.
• Or, when the wrong involves
– serious harm to society’s overall welfare
– serious injustice against a person or a group
– serious violation of the basic moral rights of one or more people
• External whistle blowing indicates a failure in
an organisation’s internal communication
system
• It is a symptom of structural problem
• Many companies have implemented programs
that provide channels and procedures that
facilitate internal whistle blowing
– Ethics hotlines