GOOD GOVERNANCE

AND SOCIAL
RESPONSIBILITY
MODULE 1
I. FUNDAMENTAL PRINCIPLES OF
BUSINESS ETHICS
BUSINESS ETHICS IS APPLIED ETHICS.

IT IS THE APPLICATION OF OUR UNDERSTANDING OF

WHAT IS GOOD AND RIGHT TO THAT ASSORTMENT
OF INSTITUTIONS, TECHNOLOGIES, TRANSACTION,
ACTIVITIES, AND PURSUITS THAT WE CALL
BUSINESS.
1.THE ROLE OF BUSINESS ETHICS
 
BUSINESS ETHICS AND ITS ISSUES
 
ETHICS – the principles of conduct governing an
individual or a group.
 
- the study of morality.
 
1.THE ROLE OF BUSINESS ETHICS
 
BUSINESS ETHICS AND ITS ISSUES
 

  MORALITY – the standards set by an individual or a

group about what is right and wrong or good and
evil.

MORAL STANDARDS – the norms about the kinds

of actions believed to be morally right and wrong as
well as the values placed on the kinds of objects
believed to be morally good and morally bad.
 
 
FIVE CHARACTERISTICS OF MORAL
STANDARDS:

1. Involved with serious injuries or benefits.

2. Not established by law or legislature.
3. Should be preferred to other values including
self-interest.
4. Based on impartial consideration.
5. Associated with special emotions and
vocabulary.
MORAL NORMS CAN BE EXPRESSED AS
GENERAL RULES OR STATEMENTS:

1. Always tell the truth.

2. It is wrong to kill innocent people.
3. Actions are right to the extent that they produce
happiness.
4. Honesty is the best policy.
5. Injustice is bad.
ORIGINS OF MORAL STANDARDS:

As a child – from family, friends, and various societal

influences: church, school, television, magazines, music,
and associations.
As the person grows – experience, learning, and
intellectual development.

NONMORAL STANDARDS – the standards by which we

judge what is good or bad and right and wrong in a nonmoral
way.

 
NONMORAL STANDARDS:

1. Standards of etiquette by which we judge manners as

good or bad.

2. Standards we call the law by which we judge legal right

and wrong.
3. Standards of language by which we judge what
is grammatically right and wrong.

 4. Standards of aesthetics by which we judge good

and bad art.

5. Standards of Athletic by which we judge how well

a game is being played.
 
NORMATIVE STUDY – An investigation that
attempts to reach conclusions about what things are
good or bad or about what actions are right or
wrong.
 
DESCRIPTIVE STUDY – An investigation that
attempts to describe or explain the world without
reaching any conclusions about whether the world is
as should be.
 
SOCIOLOGY: Do Americans believe that bribery is
wrong?
 
ETHICS: Is bribery wrong?
 
INSTITUTIONS:

1. Familial
2. Economic
3. Legal
4. Political
5. Educational
 
 MOST INFLUENTIAL INSTITUTION: Economic
1. Production of the goods and services the
members of society want and need.

2. Distribution of these goods and services to the

various members of society.
BUSINESS ETHICS STUDIES:

1. Moral standards
2. How moral standards apply to social systems and
organizations that produce and distribute goods and
services.
 
KINDS OF ETHICAL ISSUES:
1. Systemic – social systems or institutions within which
businesses operate.
2. Corporate – an individual company taken as a whole.
3. Individual – a particular individual or individuals
within a company and their behaviors and decisions.
 
APPLYING ETHICS TO CORPORATE
ORGANIZATIONS: two views
 
1. Corporate organizations are morally responsible
for their actions and that their actions are moral
or immoral in exactly the same sense that
human beings are.
APPLYING ETHICS TO CORPORATE
ORGANIZATIONS: two views
 

2. Corporate organizations are the same as

machines whose members must blindly and
undeviatingly conform to formal rules that have
nothing to do with morality.
WORK OF PHILOSOPHER JOHN SEARLE:

1. A corporate organization exists only if there exists

certain human individuals who are in certain
circumstances and relationships; and our linguistic
and social conventions lay down that when those
kinds of individuals exist in those kinds of
circumstances and relationships, they shall count as
a corporation.
 
2. A corporate organization acts only if certain human
individuals in the organization performed certain
actions in certain circumstances; and our linguistic
and social conventions lay down that when those
kinds of individuals perform those kinds of actions in
those kinds of circumstances, this shall count as an
act of their corporate organization.
GLOBALIZATION, MULTINATIONALS, AND BUSINESS
ETHICS
 
GLOBALIZATION – The worldwide process by which the
economic and social systems of nations have become
connected.
 
MULTINATIONAL CORPORATIONS – A company that
maintains manufacturing, marketing, services, or
administrative operations in many different countries.
 
Example: General Electric

Founded by Thomas Edison

Headquartered in New York
Operates in over 100 countries
Derives almost half of its income from outside the
United States
Metallurgy plants in Prague
Software operations in India
Product design offices in Budapest, Tokyo, and
Paris
Assembly operations in Mexico
SIGNIFICANT HARMS OF GLOBALIZATION ON THE
WORLD

- Many poorer nations were left behind due to cheap

primary commodities to trade.
- Gives Multinationals too free a hand.
- Result is a “race to the bottom”: a global decline in
labor, environmental and wage standards.
- Transfer of technologies or products into developing
nations that are not ready to assimilate them.
- Multinationals covertly engage in practices that violate
the norms and standards that we should respect.
BUSINESS ETHICS AND CULTURAL DIFFERENCES
 
ETHICAL RELATIVISM – A theory that there are no
ethical standards that are absolutely true and that
apply or should be applied to the companies and
people of all societies.
 
There are numerous practices that are judged immoral by
some societies that other societies have deemed morally
acceptable:

- Polygamy
- Abortion
- Infanticide
- Slavery
- Homosexuality
- Racial and sexual discrimination
- Genocide - the deliberate killing of a large group of
people, especially those of a particular ethnic group or
nation.
- Patricide - the killing of one's father.
- Torture of animals
ALL SOCIETIES HAVE NORMS AGAINST INJURING OR KILLING OTHER
MEMBERS OF SOCIETY, NORMS ABOUT USING LANGUAGE
TRUTHFULLY WHEN COMMUNICATING WITH MEMBERS OF ONE’S
SOCIETY, NORMS AGAINST TAKING THE PERSONAL GOODS OF OTHER
MEMBERS OF ONE’S SOCIETY.
 
TECHNOLOGY AND BUSINESS ETHICS
 
TECHNOLOGY – consists of all those methods, processes, and tools
that humans invent to manipulate their environment.
THE AGRICULTURAL REVOLUTION
THE INDUSTRIAL REVOLUTION
THE REVOLUTIONS IN BIOTECHNOLOGY

THE INFORMATION TECHNOLOGY – The use of

extremely powerful and compact computers, the
internet, wireless communications, digitalization,
and numerous other technologies that have
enabled us to capture, manipulate, and move
information in new and creative ways.
CYBERSPACE – A term used to denote the
existence of information on an electronic network of
linked computer systems.
 
VIOLATION OF THE RIGHT TO PRIVACY: the
right to prohibit others from knowing things about
us that are private.
- Use of computers: tracking users in the
internet, gathering information on customers at
cash registers, collecting information on credit
card purchases, retrieving information from
applications for licenses, bank accounts, credit
cards, e-mail, monitoring employees working at
computers.
- Financial information, purchase histories,
addresses, phone numbers, driving record,
arrest records, credit history, medical and
academic records, membership.

- Can quickly sift, sort, or retrieve part of

information for anyone with access to the
computer.
NANOTECHNOLOGY – A new field that
encompasses the development of tiny artificial
structures only nanometers (billionths of a meter) in
size.
 
GENETIC ENGINEERING – A large variety of new
techniques that allows change in the genes of the
cells of humans, animals, and plants.
1.1 MORAL DEVELOPMENT AND REASONING

KOHLBERG’S THREE LEVELS OF MORAL

DEVELOPMENT:
 
LEVEL ONE: PRECONVENTIONAL STAGES
 
- The child can see situation only from his own
point of view.

STAGE ONE: Punishment and Obedience

Orientation
STAGE TWO: Instrumental and Relative
Orientation
LEVEL TWO: CONVENTIONAL STAGES

- Maintaining the expectations of one’s own family,

peer group, or nation is now seen as valuable in
its own right, regardless of the consequences.

STAGE THREE: Interpersonal

Concordance Orientation

STAGE FOUR: Law and Order Orientation

LEVEL THREE: POSTCONVENTIONAL,
AUTONOMOUS, OR PRINCIPLED STAGES

The person now tries to see situations from a point

of view that impartially takes everyone’s interests
into account. Fair to everyone, or in terms of justice,
human rights, or society’s overall welfare.

STAGE FIVE: Social Contract Orientation

STAGE SIX: Universal Ethical Principles Orientation
MORAL REASONING – The reasoning process by which
human behaviors, institutions, or policies are judged
to be in accordance with or in violation of moral
standards.
 
1.2 THE PROS AND CONS OF BUSINESS ETHICS
 
THREE OBJECTIONS TO BRINGING ETHICS INTO
BUSINESS:

- To be profitable, each firm has to produce only

what the members of society want and has to do
this by the most efficient means available.
- That any steps taken to increase profits will
necessarily be socially beneficial.
- That by producing whatever the buying public
wants, firms are producing what all the members
of society want, when in fact the wants of large
segments are not necessarily met because they
cannot participate fully in the marketplace.
LAW OF AGENCY – A law that specifies the duties
of persons who agree to act on behalf of another
party and who are authorized by an agreement so to
act.
 
PRISONER’S DILEMMA – A situation where two
parties must choose to cooperate or not, and where
both gain, when both cooperate, but if only one
cooperates the other one gains even more, while if
both do not cooperate both lose.  
ARGUMENTS SUPPORTING BUSINESS ETHICS

- Ethics applies to all human activities

- Business cannot survive without ethics
- Ethics is consistent with profit seeking
- Prisoner’s dilemma argument
- Customers and employees care about ethics
 
 1.3 MORAL RESPONSIBILITY AND BLAME

ELEMENTS OF MORAL RESPONSIBILITY

A person is morally responsible for an injury or a wrong if:
- The person caused or helped cause it, or failed to prevent it
when he could and should have; and
- The person did so knowing what he or she was doing; and
- The person did so of his own free will.
 
CORPORATE RESPONSIBILITY – Within the modern corporation,
responsibility for a corporate act is often distributed among a
number of cooperating parties.
Depending on the seriousness of the act, the
mitigating factors of uncertainty, difficulty, and
minimal involvement can also diminish a
person’s responsibility for a corporate act.
 
SUBORDINATES’ RESPONSIBILITY - In a
corporation, employees often act on the basis of
their superiors’ orders.
 
When a superior orders an employee to carry
out an act that both of them know is wrong, the
employee is morally responsible for that act if
the employee carries it out.
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 2
For Module 2, the students are expected to achieve the following
Learning Outcomes:
1. Ability to describe the Ethical and current Social
Responsibility issues and the influence of these issues on
society, management decision making, behavior, policies,
and practices.
2. Internalize in themselves that ethical behavior is the best
long-term business strategy for a company amidst the
growing global business changes.
3. Ability to resolve problems through initiative, creativity,
and critical reasoning, as well as the ability to communicate and
transmit knowledge in preparation for their respective fields of
endeavor.
 The foregoing Learning Outcomes shall be realized
through lecture and interactive discussion of the following
Topics: Week 3 and Week 4
 
I. Ethic of Care and Ethic of Virtue

II. Utilitarianism

III. Kant’s Categorical Imperative

IV. The Libertarian Objection

V. Understanding Rights and Duties; Justice and Fairness

VI. Moral Right and Wrong

 Learning Methods will be, as follows:
1. Lecture / Discussion / Group Presentations - for the
Synchronous sessions
2. Seatwork: Reflections on learning in class; Reflections and
Insights on videos relative to Ethics, Morality, Good
Governance, and Social Responsibility; and Case Analyses -
for the Asynchronous Sessions
3. Readings on relevant papers, journals, Laws / Acts and
Issuances of the Philippine Government on Corporate
Governance – for the Asynchronous Sessions
 
Assessment of the Reflections and Insights; and of the
Case Analyses will be guided by the Five-point Rubric,
which has been published in the Files Link / Index Page.
Reflections and Insights on the following videos:

1. Blood Diamonds in Africa/ The truth Behind Africa’s Conflict

Diamonds
2. Unocal in Burma
Analysis of the Case Study: Unocal in Burma

The videos and Case Study are published in the Files Link /
Index Page.

Reference Materials have been specified in the course syllabus,

which has been published in the FILES Link / Index Page.
II. UNDERSTANDING ETHICAL PRINCIPLES
 
ETHIC OF CARE – An ethic that emphasizes
caring for the concrete well being of those near to
us.
 
While the apartheid regime was in power, Caltex, an American oil company located in South Africa,
operated a chain of gas stations and several oil refineries that it supplied with oil it imported from
other countries.

Jointly owned by Texaco and Standard Oil, Caltex had repeatedly expanded its operations in South
Africa, giving the South African government greater access to the oil it needed. The South African
economy relied on oil for 25 percent of its energy needs, and South African law required refineries to
set aside some of their oil for the government.

In addition, stiff corporate taxes channeled a high percentage of Caltex annual revenues into the
hands of the apartheid government.

Many stockholders of Texaco and Standard Oil bitterly opposed Caltex’s operations in South Africa. In
1983, 1984, and 1985, they introduced shareholder resolutions requiring Caltex to either break off
relations with the South African government or leave South Africa altogether.

A leader of the dissident stockholders had earlier stated why Caltex and other U.S. companies should
leave South Africa:
Nonwhites in South Africa are rightless persons in the land of their birth . . . [The black
South African] has no rights in “white areas.”

He cannot vote, cannot own land, and may not have his family with him unless he has
government permission. . . . The two major political parties have been banned and
hundreds of persons detained for political offenses . . . strikes by Africans are illegal and
meaningful collective bargaining is outlawed. . . .

By investing in South Africa, American companies inevitably strengthen the status quo of
white supremacy. . . . The leasing of a computer, the establishment of a new plant, the
selling of supplies to the military all have political overtones. . . .

And among the country’s white community, the overriding goal of politics is maintenance
of white control. In the words of Prime Minister John Vorster . . .“We are building a nation
for whites only.”
The management of Caltex, however, did not feel that it should stop selling petroleum products to
the South African government or leave South Africa. The company acknowledged that its
operations provided a strategic resource for South Africa’s government and that the government
was racist.

Nevertheless, the company claimed that its operations ultimately helped black South Africans,
particularly the company’s black workers toward whom the company had special responsibilities.
In a statement opposing one of the many stockholders’ resolutions, Caltex managers made their
position clear: Texaco believes that continuation of Caltex’s operations in South Africa is in the
best interests of Caltex’s employees of all races in South Africa. . . .

In management’s opinion, if Caltex were to withdraw from South Africa in an attempt to achieve
political changes in that country, as the proposal directs, . . . such withdrawal would endanger
prospects for the future of all Caltex employees in South Africa regardless of race. We are
convinced that the resulting dislocation and hardship would fall most heavily on the nonwhite
communities. In this regard, and contrary to the implications of the stockholders’ statement,
Caltex employment policies include equal pay for equal work and the same level of benefit plans
for all employees as well as a continuing and successful program to advance employees to
positions of responsibility on the basis of ability, not race.
Caltex managers argued that foreign corporations in South
Africa had helped black incomes rise by more than 150 percent
during the 1970s.

Moreover, they claimed that U.S. corporations with internal

policies of “equal pay for equal work,” had narrowed the gap
between black and white incomes by a significant amount.
II. UNDERSTANDING ETHICAL PRINCIPLES
 
 
ETHIC OF VIRTUE – An ethic based on
evaluations of the moral character of persons or
groups.
COMPARING SOCIAL COSTS AND BENEFITS IN
UTILITARIANISM
 
UTILITARIANISM – A general term for any view
that holds that actions and policies should be
evaluated on the basis of the benefits and costs
they will impose on society.
 
UTILITY – The inclusive term used to refer to
any net benefits produced by an action.
 
UTILITARIAN PRINCIPLE:
An action is right from an ethical point of view, if and
only if, the sum total of utilities produced by that act
is greater than the sum total of utilities produced by
any other act, the agent should have performed in its
place.
UTILITARIANISM:
- Advocates maximizing utility
- Matches well with moral evaluations of public
policies
- Appears intuitive to many people
- Helps explain why some actions are generally
wrong and others are generally right
- Influenced economics
COST-BENEFIT ANALYSIS - A type of analysis
used to determine the desirability of investing in
a project by figuring whether its present and
future economic benefits outweigh its present
and future economic costs.
 
EFFICIENCY – Operating in such a way that one
produces a desired output with the lowest
resource input.
MEASUREMENT PROBLEMS

- How can the utilities different action have for

different people be measured and compared as
utilitarianism requires?

- Some benefits and costs seem intractable to

measurement.

- Many of the benefits and costs of an action

cannot be reliably predicted, they also cannot be
adequately measured.
- It is unclear exactly what is to count as a benefit
and what is to count as cost.

- The utilitarian assumption that all goods are

measurable implies that all goods can be traded
for equivalents of each other.
 
1. NONECONOMIC GOODS – Goods, such as life,
love, freedom, equality, health, beauty, whose
value is such that no quantity of any economic
good is equal in value to the value of the
noneconomic good.

2. INSTRUMENTAL GOODS – Things that are

considered valuable because they lead to other
good things.

3. INTRINSIC GOODS – Things that are desirable

independent of any other benefits they may
produce.
 
Utilitarianism: Weighing Social Costs and Benefits

This is best began by looking at an approach to moral decision-

making the Caltex managers took.

They claimed that one of the reasons that Caltex should remain
in South Africa was because that course of action would have
the most beneficial consequences and the fewest harms, at least
in comparison to the results of abandoning South Africa.

This approach is sometimes referred to as a consequentialist

approach to ethics and, more specifically, as a utilitarian
approach.
During the last decades of the twentieth century, Ford Motor Company began losing market
share to Japanese companies who were making compact, fuel-efficient cars.

Lee Iaccoca, Ford’s president at the time, determined to regain its share of the market by quickly
developing a small car called the Pinto. The Pinto would weigh less than 2,000 pounds, cost less
than $2,000, and be on market within 2 years instead of the normal 4 years. Because the Pinto
was a rush project, styling considerations dictated engineering design to a greater degree than
usual. In particular, Pinto’s styling required that the gas tank be placed behind the rear axle that
had protruding bolts. In that position, the tank could be punctured by the rear-axle bolts if a rear-
end collision pushed it against the axle.

When an early model of the Pinto was crash-tested, it was found that, when struck from behind
at 20 miles per hour or more, the gas tank would sometimes break open. Gas would then spray
out and enter the passenger compartment as well as under and around the car. In a real accident,
stray sparks could explosively ignite the spraying gasoline and fire might engulf and burn the
occupants, particularly if, as often happened in accidents, the doors jammed, trapping the
victims.
Ford managers decided, nonetheless, to go ahead and manufacture the Pinto without
changing the gas-tank design. There had several reasons for their decision.

First, the design met all the legal and government standards then in effect. At the time,
government regulations required that a gas tank only remain intact in a rear-end collision
of less than 20 miles per hour.

Second, Ford managers felt that the car was comparable in safety to several of the cars
other companies were making and putting on the market.

Third, according to an internal cost–benefit study by Ford, modifying the Pinto would be
more costly than leaving its design unchanged. The study stated that approximately 12.5
million of the autos would eventually be built. Modifying the gas tank of each Pinto
would cost about $11 a unit. The total costs of modifying all the Pintos the company
planned to build, then, were simple to calculate:

Costs: $11 X 12.5 million autos = $137 million

What benefits would customers derive from the $137 million they would have to pay if the
Pinto’s gas tank was modified?

Statistical data showed that modifying the gas tank could prevent the future loss of about 180
burn deaths, 180 serious burn injuries, and 2,100 burned vehicles.

At the time (1970), the government valued a human life at $200,000, a figure it needed to use
to decide whether to spend money on a project that might save several lives or spend it on
some other project that might save several million tax dollars.;

Insurance companies valued a serious burn injury at $67,000 when they paid for losses due to
burns (including the losses of pain and suffering); and the average residual value on
subcompacts was estimated at $700. Therefore, in monetary terms, modifying the gas tank
would have the benefit of preventing losses that added up to a total value of only $49.15
million.:

Benefits: (180 deaths X $200,000) (180 injuries X $67,000) (2,100 vehicles  X $700) =
$49.15 million
Thus, if the car’s gas tank was modified, customers would have to pay $137 million for a
benefit worth $49.15 million, for a net loss of $87.85 million.

It was not right, the Ford study argued, to have society invest in a “fix” of the Pinto’s gas
tank that would result in a greater loss than leaving things as they were.

That is, although making no changes to the Pinto’s design would result in losses of
about $49.15 million, this was less than the net loss of $87.85 million that would be the
consequence of changing the design.

Ford managers went ahead and produced the Pinto without modifying its gas tank. It is
estimated that in the decade that followed about 60 persons died in fiery accidents
involving Pintos and that at least twice that many suffered severe burns over large areas
of their bodies, many requiring years of painful skin grafts.

Ford, however, kept the Pinto on the market until 1980.

The kind of analysis that Ford managers used in their cost-benefit study is a version of what
has traditionally been called utilitarianism.

Utilitarianism is a general term for the view that actions and policies should be evaluated on
the basis of the benefits and costs they produce for everyone in society. Specifically,
utilitarianism holds that the morally right course of action in any situation is the one that,
when compared to all other possible actions, will produce the greatest balance of benefits
over costs for everyone affected.

Ford managers reduced costs and benefits primarily to economic costs and benefits (such as
medical costs, loss of income, and damage to buildings) and these were measured in
monetary terms. But the benefits of an action may include any desirable goods (pleasures,
health, lives, satisfactions, knowledge, happiness) produced by the action, and costs may
include any of its undesirable evils or harms (such as pain, which the Ford study took into
account, as well as sickness, death, dissatisfaction, ignorance, unhappiness). The inclusive
term used to refer to the net benefits of any sort produced by an action is utility. Hence, the
term utilitarianism is used for any theory that advocates selection of that action or policy
that maximizes utility.
It is important to understand that Ford’s managers were not saying that making no changes to
the Pinto’s gas tank would save them money.

That is, their claim was not that leaving the design unchanged was in Ford’s best interests
(recall that the buyers of the Pinto would ultimately pay all costs).

If that had been their claim, then it would have been based on self-interest and not on
utilitarian ethics. Their claim, instead, was that leaving the car’s design unchanged was best for
society as a whole.

From society’s point of view, and considering everyone’s best interests, it was better to keep
the design.

Utilitarianism is not a theory of calculated selfishness: it is a theory that says that we should
strive to do what is best for everyone in society, and that we do what is best for everyone when
we take into account all the benefits and harms that everyone will bear as the result of our
actions.
Many business analysts hold that the best way to evaluate the
ethical propriety of a business decision—or any other decision—
is by relying on utilitarian cost-benefit analysis.

The socially responsible course for a business to take is the one

that will produce the greatest net benefits for society or impose
the lowest net costs.

Several government agencies, many legal theorists, numerous

moralists, and a variety of business analysts advocate
utilitarianism.
The major difficulty with utilitarianism, according to some
critics, is that it is unable to deal with two kinds of moral issues:
those relating to rights and those relating to justice.

That is, the utilitarian principle implies that certain actions are
morally right when in fact, they are unjust or they violate
people’s rights. The following examples may serve to indicate
the sort of difficult counterexamples critics pose for
utilitarianism.

First, suppose that your uncle has an incurable and painful

disease, so that he is quite unhappy but does not choose to
die. Although he is hospitalized and will die within a year, he
continues to run his chemical plant.
Because of his misery, he deliberately makes life miserable for his workers and has insisted on not
installing safety devices in his chemical plant, although he knows that as a result, one life will
certainly be lost over the next year.

You, his only living relative, know that upon your uncle’s death you will inherit his business and not
only will you be wealthy and immensely happy, but you also intend to prevent any future loss of life
by installing the needed safety devices. You are cold-blooded and correctly judge that you could
secretly murder your uncle without being caught and without your happiness being at all affected
by it afterward.

If it is possible for you to murder your uncle without in any way diminishing anyone else’s
happiness, then according to utilitarianism, you have a moral obligation to do so. By murdering your
uncle, you are trading his life for the life of the worker, and you are gaining your happiness while
doing away with his unhappiness and pain—the gain is obviously on the side of utility.

However, the critics of utilitarianism claim, it seems quite clear that the murder of your uncle would
be a gross violation of his right to life. Utilitarianism has led us to approve an act of murder that is
an obvious.
For example, suppose that subsistence wages force a small group of migrant workers to
continue doing the most undesirable agricultural jobs in an economy, but produce immense
amounts of satisfaction for the vast majority of society’s members, because they enjoy cheap
vegetables and savings that allow them to indulge other wants.

Suppose also that the amounts of satisfaction thereby produced, when balanced against the
unhappiness and pain imposed on the small group of farm workers, results in a greater net
utility than would exist if everyone had to share the burdens of farm work.

Then, according to the utilitarian criterion, it would be morally right to continue this system
of subsistence wages for farm workers. However, to the critics of utilitarianism, a social
system that imposes such unequal sharing of burdens is clearly immoral and offends against
justice.

The great benefits the system may have for the majority does not justify the extreme
burdens that it imposes on a small group.
The rich uncle and the murderous heir, for example, is a situation that deals with killing a
sick person. In such situations, the rule-utilitarian might argue, it is clear that a moral rule
that forbids killing without the due process of law will, in the long run, produce greater
utility for society than other kinds of rules.

Therefore, such a rule is the correct one to apply to the case. It would be wrong for the heir
to kill his uncle because doing so would violate a correct moral rule, and the fact that
murder would, on this particular occasion, maximize utility is irrelevant.

The case dealing with subsistence wages, the rule-utilitarian would argue, should be treated
similarly. It is clear that a rule that forbade unnecessary subsistence wages in societies
would in the long run result in more utility than a rule that allowed them. Such a rule would
be the correct rule to invoke when asking whether paying subsistence wages is morally
permissible. In terms of this rule, the practice of paying subsistence wages would be
ethically wrong even if the practice would maximize utility on a particular occasion.
 
8. JUSTICE – Distributing benefits and burdens
fairly among people.
 
RIGHTS - Individual entitlements to freedom of
choice and well-being.

 
PROBLEMS OF RIGHTS AND JUSTICE:
  
- Utilitarianism is unable to deal with two kinds of
moral issues: those relating to rights and those
relating to justice.
- Utilitarianism can go wrong when applied to
social justice.
 2.2 UNDERSTANDING RIGHTS AND DUTIES
 
THE DECLARATION OF INDEPENDENCE
was based on the idea that “all men are
endowed by their creator with certain
unalienable rights … among these are life,
liberty, and the pursuit of happiness.”
 
THE UNITED NATIONS adopted a
“UNIVERSAL DECLARATION OF HUMAN
RIGHTS”, 1948, which claimed that “all human
beings”, are entitled, among others, to:
 
 - The right to work, to free choice of
employment, to just and favorable
conditions of work, and to protection
against unemployment…-The right to own
property alone or in association with
others…
- The right to just and favorable
remuneration ensuring for the worker and
his family an existence worthy of human
dignity…-The right to form and to join
trade unions…
- The right to rest and leisure, including
reasonable limitation of working hours
and periodic holidays with pay…
 
NEGATIVE AND POSITIVE RIGHTS
 
3. NEGATIVE RIGHTS – Duties others have to not
interfere in certain activities of the person who holds
the right.
 
4. POSITIVE RIGHTS – Duties of other agents to
provide the holder of the right with whatever he
needs to freely pursue his interests.
 
NEGATIVE AND POSITIVE RIGHTS
 
3. NEGATIVE RIGHTS – Duties others have to not
interfere in certain activities of the person who holds
the right.
 
4. POSITIVE RIGHTS – Duties of other agents to
provide the holder of the right with whatever he
needs to freely pursue his interests.
 
CONTRACTUAL RIGHTS AND DUTIES –

Requires others to keep agreements.

- they attach to the specific individuals and the
correlative duties are imposed only on other
specific individuals.

- arise out of a specific transaction between

particular individuals.

- depend on a publicly accepted system of rules

that define the transactions that give rise to
those rights and duties.

- provide a basis for the special duties or

obligations that people acquire when they
accept a position or role within a legitimate
social institution or an organization.
ETHICAL RULES GOVERNING CONTRACTS:

1. Both parties must have full knowledge of the

nature of the agreement.
2. Neither party must intentionally misrepresent the
facts of the contractual situation to the other
party.
3. Neither party to the contract must be forced to
enter the contract under duress or coercion.
4. The contract must not bind the parties to
immoral acts.
 
CATEGORICAL IMPERATIVE – The requirement that everyone
should be treated as a free person equal to everyone else.
 
MAXIM – The reason a person in a certain situation has for doing
what he plans to do.
 
CRITERIA FOR DETERMINING MORAL RIGHT AND WRONG:

1. UNIVERSALIZABILITY – The person’s reasons for acting must

be reasons that everyone could act on at least in principle.

2. REVERSIBILITY – The person’s reasons for acting must be

reasons that he would be willing to have all others use, even as
a basis of how they treat him.
KANT’S CATEGORICAL IMPERATIVE
FORMULA:
- Never do something unless you are willing to
have everyone do it.
- Never use people merely as means, but always
respect and develop their ability to choose for
themselves.
 
CRITICISMS OF KANT:
 
-Categorical imperatives are unclear.
-Kant’s rights can conflict.
-Kant’s theory implies some mistaken moral
conclusions.
THE LIBERTARIAN OBJECTION: NOZICK
 
Libertarian philosophers believe that freedom from
human constraint is necessarily good and that all
constraints imposed by others are necessarily evil
except when needed to prevent the imposition of
greater human constraints.
 
 
2.3. UNDERSTANDING JUSTICE AND FAIRNESS

GREATER BENEFITS FOR SOME CANNOT JUSTIFY

INJUSTICES FOR OTHERS.
 
TYPES OF JUSTICE:

DISTRIBUTIVE JUSTICE – Just distribution of

benefits and burdens.

RETRIBUTIVE JUSTICE – Just imposition of

punishments and penalties.

COMPENSATORY JUSTICE – Just compensation

for wrongs or injuries.
WORK ETHIC –

The view that values individual effort and

believes that hard work does and should lead
to success.
 
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 2B
Lawrence Summers, Director of the White House National Economic Council for
President Barack Obama, once wrote a memo claiming that the world’s welfare would
improve if the wastes of rich countries were sent to poor countries. He gave four
arguments for this claim which we can summarize as follows:

1. Clearly, it will be best for everyone if pollution is shipped to the country where its
health effects will have the lowest costs. The costs of “health impairing pollution”
depend on the wages lost when pollution makes people sick or kills them. So the country
with the lowest wages will be the country where the health effects of pollution will be
lowest. So with “impeccable” “economic logic” we can infer that it will be best for
everyone if we dump our toxic wastes in the lowest wage countries.
2. Adding more pollution to an environment that is already
highly polluted has worse health effects, than putting that
same pollution into a clean environment where it can disperse.

So we can reduce the harm pollution causes by transferring it

out of highly polluted cities like Los Angeles, and dumping it
into countries in Africa that “are vastly under-polluted”. This
will make better use of those countries’ clean air quality which
we now are using “vastly inefficiently”, and it will improve
“world welfare”.
3. The same pollution will cause more harm in a country where
people have “long life-spans,” than in a country where people
die young.

When people have “long life-spans,” they survive long enough

to get diseases, like prostate cancer, that people who die young
do not get.

So pollution will cause more diseases like prostate cancer in

countries where people have long lives than countries where
people die young.

It follows that we can reduce the diseases pollution causes by

moving it out of rich countries where people have long lives,
and dumping it into poor countries where people die young.
4. Pollution can cause “aesthetic” damage, such as dirty-looking
air, that “may have very little direct health impact.”

Since the wealthy are willing to pay more for clean-looking air
than the poor, clean-looking air is worth more to the wealthy
than to the poor.

So it should be possible for people in wealthy countries to find

people in poor countries who are willing to trade their clean air
for the money the wealthy are willing to offer.

This kind of trade will be “welfare enhancing” for both parties.

Rights and Duties

On May 17, 2009 a 17-year-old boy, Yiu Wah, who had been hired at the age of 15, was crushed
and killed while trying to clear a jammed machine in the factory of a Chinese supplier that was
making products for the Walt Disney Company, the world’s second-largest media conglomerate.

Witnesses claimed that the use of child labor was a human rights violation that was common at
the factory of Disney’s supplier. This was not the first time that Walt Disney Company had been
accused of having human rights violations in its supply chain.

On March 3, 2004, executives of Walt Disney were confronted by a group of stockholders

concerned about the company’s human rights record in China. In addition to owning several
theme parks, television and radio networks (ABC, the Disney Channel, ESPN), and film studios,
Walt Disney markets merchandise based on its characters and films, including toys, apparel,
watches, consumer electronics, and accessories. Much of this merchandise is manufactured in
China in factories that contract with Disney to produce the merchandise according to Disney’s
specifications.
The Congressional-Executive Commission on China, a group established by the U.S. Congress in
2001, reported in 2003, however, that: China’s poor record of protecting the internationally
recognized rights of its workers hasn’t changed significantly in the past year.

Chinese workers can’t form or join independent trade unions, and workers who seek redress for
wrongs committed by their employers often face harassment and criminal charges.

Moreover, child labor continues to be a problem in some sectors of the economy, and forced labor
by prisoners is common.

In its March, 2003 Country Reports on Human Rights Practices, the U.S. State Department said
China’s economy also made massive use of forced prison labor. China’s prisons contained large
numbers of political dissidents who were forced to engage in unpaid, exhausting, and dangerous
labor to “reform” or “reeducate” them.

Factories often purchased materials made in these prisons and then incorporated them into their
own products.
Concerned by these reports on conditions in Chinese factories and that the factories might be using
materials made by forced labor, a group of stockholders urged all Disney stockholders to vote in
favor of having the company adopt 11 “principles.” These principles “were designed to commit a
company to a widely accepted and thorough set of human and labor rights standards for China.” The
six most important principles were:

(1) No goods or products produced within our company’s facilities or those of suppliers shall be
manufactured by bonded labor, forced labor, within prison camps or as part of reform-through-labor
or reeducation through-labor programs.

(2) Our facilities and suppliers shall adhere to wages that meet workers’ basic needs, fair and
decent working hours, and at a minimum, to the wage and hour guidelines provided by China’s
national labor laws.

(3) Our facilities and suppliers shall prohibit the use of corporal punishment, any physical, sexual or
verbal abuse or harassment of workers.
(4) Our facilities and suppliers shall use production methods that do not
negatively affect the worker’s occupational safety and health.

(5) Our facilities and suppliers shall not call on police or military to enter their
premises to prevent workers from exercising their rights.

(6) We shall undertake to promote the following freedoms among our

employees and the employees of our suppliers: freedom of association and
assembly, including the rights to form unions and bargain collectively; freedom of
expression, and freedom from arbitrary arrest or detention. .
Your friend, Joe, owns a large diamond worth hundreds of thousands of dollars that he keeps in
his house in a safe with a combination lock. You discover the combination to the safe and take
the diamond without Joe’s knowledge.

You use the diamond as collateral to borrow ten thousand dollars which you invest in the stock
market and which you manage to turn into one hundred thousand dollars. With this money you
redeem the diamond and replace it in Joe’s safe completely unchanged in any way. You never
tell Joe and he never finds out; moreover, what you did never affects him in any way
whatsoever, nor does it ever affect your interactions or friendship with him.

It is clear again, that here you have violated your friend’s rights yet he has suffered no injury. A
person’s rights can be violated, then, even when the person is not injured or hurt in any obvious
way. From a rights’ perspective, a person can be wronged without being hurt. Notice, also, that
this implies that when rights violations are concerned, it is a mistake for a person to say that he
or she did nothing wrong because “no one was hurt.” The absence of “hurt” does not by itself
show that no one’s rights were violated.
The Libertarian Objection: Nozick

Nozick goes on to argue that the negative right to freedom from the coercion of others
implies that people must be left free to do what they want with their own labor and with
whatever products they manufacture by their labor.

This, in turn, implies that people must be left free to acquire property, to use it in whatever
way they wish, and to exchange it with others in free markets (so long as the situation of
others is not thereby harmed or “worsened”).

Thus, the libertarian view that coercive restrictions on freedom are immoral (except when
needed to restrain coercion) is also supposed to justify the free use of property, freedom of
contract, a free market system, and the elimination of taxes to pay for social welfare
programs. However, there is no basis for any positive rights nor for the social programs they
might require.
Nozick and other libertarians, however, pass over the fact that the freedom of one
person necessarily imposes constraints on others.

Such constraints are inevitable because when one person is granted freedom, other
persons must be constrained from interfering with that person. If I am to be free to do
what I want with my property, for example, other people must be constrained from
trespassing on it and from taking it from me.

Even the “free market system” advocated by Nozick depends on an underlying system
of coercion: I can sell something only if I first own it, and ownership depends
essentially on an enforced (coercive) system of property laws. Consequently, because
granting a freedom to one person necessarily imposes constraints on others, it follows
that if constraints require justification, freedom will also always require justification.
The freedom one group of agents is given to pursue some of its interests will usually restrict
the freedom other agents have to pursue other, conflicting interests.

For example, the freedom of corporations to use their property to pollute the environment
as they want can restrict the freedom of individuals to breathe clean air whenever they
want.

The freedom of employees to unionize as they want can conflict with the freedom of
employers to hire whatever nonunion workers they want. Consequently, allowing one kind of
freedom to one group requires restricting some other kind of freedom for some other group:

A decision in favor of the freedom to pursue one interest implies a decision against the
freedom to pursue another kind of interest. This means that we cannot argue in favor of a
certain kind of freedom by simply claiming that constraints are always evil and must always
be replaced by freedom.
Justice and Fairness

Several years ago, a Senate subcommittee heard the testimony of several

workers who had contracted “brown lung” disease by breathing cotton
dust while working in cotton mills in the South.

Brown lung is a chronic disabling respiratory disease with symptoms

similar to asthma and emphysema and is a cause of premature death.

The disabled workers were seeking a federal law that would facilitate
the process of getting disability compensation from the cotton mills,
similar to federal laws covering “black lung” disease contracted in coal
mines.
Senator Strom Thurmond:
A number of people have talked to me about this and they feel
that if the federal government enters the field of black lung, it
should enter the field of brown lung; and if those who have
suffered from black lung are to receive federal consideration,
then it seems fair that those who have suffered from brown
lung receive federal consideration. . . .

If our [state’s cotton mill] workers have been injured and

haven’t been properly compensated, then steps should be
taken to see that it is done. We want to see them treated fairly
and squarely and properly, and so we look forward to . . . the
testimony here today.
Mrs. Beatrice Norton:

I started in the mill when I was fourteen years old and I had to
get out in 1968. . . . I worked in the dust year after year, just
like my mother. I got sicker and sicker . . . I suddenly had no
job, no money, and I was sick, too sick to ever work in my life
again. . . .

State legislators have proven in two successive sessions that

they are not going to do anything to help the brown lung
victims, so now we come to you in Washington and ask for
help. We’ve waited a long time, and many of us have died
waiting. I don’t want to die of injustice.
Mrs. Vinnie Ellison:

My husband worked for twenty-one years [in the mill] in Spartanburg, and he worked in
the dustiest parts of the mill, the opening room, the cardroom, and cleaning the air-
conditioning ducts. . . .

In the early sixties he started having trouble keeping up his job because of his
breathing. His bossman told him that he had been a good worker, but wasn’t worth a
damn anymore, and fired him. . . . He had no pension and nothing to live on and we had
to go on welfare to live. . . .

My husband worked long and hard and lost his health and many years of pay because of
the dust. It isn’t fair that [the mill] threw him away like so much human garbage after he
couldn’t keep up his job because he was sick from the dust. We are not asking for
handouts; we want what is owed to my husband for twenty-five years of hard work.
Ethic of Care

An ethic of care does not obligate us to maintain, remain in, or nurture such
relationships. However, relationships that exhibit the virtues of compassion,
concern, love, friendship, and loyalty do have the kind of value that an ethic of
care requires, and an ethic of care implies that such relationships should be
maintained and nurtured.

It is important to recognize that the demands of caring are sometimes in conflict

with the demands of justice. Consider two examples. First, suppose that one of the
employees whom a female manager supervises is a friend of hers. Suppose that
one day she catches her friend stealing from the company. Should she turn in her
friend, as company policy requires, or should she say nothing, to protect her
friend?
Suppose that she must recommend one of these subordinates for promotion to
a particularly desirable position. Should she recommend her friend simply
because she is her friend, or should she be impartial and follow company policy
by recommending the subordinate who is most qualified even if this means
passing over her friend?

Clearly, in each of these cases, justice would require that the manager not favor
her friend. However, the demands of an ethic of care would seem to require that
the manager favor her friend for the sake of their friendship.

How should conflicts of this sort be resolved? First, notice that there is no fixed
rule that can resolve all such conflicts. One can imagine situations in which the
manager’s obligations of justice toward her company would clearly override the
obligations she has toward her friend.
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 3
For Module 3, the students are expected to achieve the following Learning Outcomes:
1. Ability to discuss the functional and critical role of the different key players of
Governance.

2. Realize the essence of Good Governance and internalize its importance in the
development process.

3. Internalize in themselves that ethical behavior is the best long-term business strategy
for a company amidst the growing global business changes.

4. Ability to describe, classify, structure, and combine the concepts, theories, and
methods involved with Good Governance and Social Responsibility.

5. Distinguish the various expectations and demands that emanate from stakeholders on
business.
 The foregoing Learning Outcomes shall be realized
through lecture and interactive discussion of the following
Topics: Week 5, Week 6, and Week 7
 
I. Corporate Governance

II. Corporate Accountability

III. Corporate Compliance

IV. Corporate Codes of Conduct and Ethics

 Learning Methods will be, as follows:
1. Lecture / Discussion / Group Presentations - for the
Synchronous sessions
2. Seatwork: Reflections on learning in class; Reflections and
Insights on videos relative to Ethics, Morality, Good
Governance, and Social Responsibility; and Case Analyses -
for the Asynchronous Sessions
3. Readings on relevant papers, journals, Laws / Acts and
Issuances of the Philippine Government on Corporate
Governance – for the Asynchronous Sessions
 
Assessment of the Reflections and Insights; and of the
Case Analyses will be guided by the Five-point Rubric;
while the Ten-point Rubric will be used for the Group
Presentations, both of which have been published in the
Files Link / Index Page.
Reflections and Insights on the following videos:

1. EL SIDA en Africa
2. Jason Loucas for OK Tedi
3. Ford Pinto
4. Nike Sweatshops – Never Say Never
5. World Com – What went Wrong
Analyses of the Case Studies: a. Sears Auto Centers, and b. Shareholders Rights at
Cracker Barrel
The videos and Case Studies are published in the Files Link / Index Page.

Reference Materials have been specified in the course syllabus, which has been
published in the FILES Link / Index Page.
1. CORPORATE GOVERNANCE

Identify the moral arguments and legal rules for shareholders’ control of publicly held
corporations, and the additional considerations for protecting the interests of other
stakeholders.

In its broadest sense, corporate governance includes all the factors that determine how
decisions are made in business organizations that are organized as corporations.

The shareholders of publicly held corporations and the directors, whom shareholders
elect, are commonly recognized as having de jure or legal control, but these shareholders
and directors, as well as the managers, who typically exercise de facto control or control
in fact of day-to-day business operations, are subject to the power of many groups that,
acting within their legal rights, strongly influence, and often determine, corporate
decisions.
Most notable among these groups that affect corporate
decisions are:

• governments at all levels, which have the legal power to

regulate and tax;

• auditors and accounting standard setters;

• securities exchanges, which set many rules for listed

companies;

• rating agencies, which rate a company’s securities;

• banks, which provide loans and exercise close monitoring;

• the media, which inform the public of a company’s activities;

and

• all the markets in which corporations operate—capital

markets, labor markets, commodity markets, and consumers
markets.
In addition, many decisions in business firms are made by employees at all levels as
part of their role responsibilities.

These diverse groups provide a multitude of forces that bear on corporate decision
making.

Viewed in this broad sense, corporate decision making is very highly dispersed
among many groups, and the most recognized corporate governance actors—
namely shareholders, directors, and senior executives—make comparatively few
decisions.

However, these decisions are among the most important ones for the operation of
a company, and it is these major decisions that are identified with questions about
the ultimate de jure control of business organizations that are answered by
corporate governance.
Corporate governance in this more common, narrower sense of the term is the set of
legal rules that confer rights to make the most important decisions that constitute
corporate control, as well as the legal rules that specify the processes and procedures
by which this decision-making power or control is exercised.

However, the assignment of control rights, as well as the processes and procedures for
exercising these rights, is of little importance in a corporation that is owned and
managed by a single individual or a small group—which is to say a corporation without
a separation of ownership and de facto control.
The legal rules that comprise corporate governance become
critical mainly when there are a large number of diverse
shareholders and a separation of ownership and de facto
control.

Under such conditions, conflicts over control arise among the

different parties, and legal rules become necessary to protect
the rights and interests of each group and ensure that decisions
serve the proper corporate objective.
In a capitalist economy, most large business organizations or firms are legally
structured as publicly held for-profit corporations, in which shares are bought
and sold by the public in a stock market.

In privately held corporations, by contrast, shares are owned by the founders

or else traded in private transactions.

Start-up companies are typically held privately by the founders, who

eventually sell the company to investors in an initial public offering (IPO). By
selling the company in an IPO, founders are able to “cash out” and realize the
value of the firm they have created.
Businesses may also be organized as sole proprietorships,
partnerships, cooperatives, and the like, and many
organizations are not-for-profit.

Although these other forms of organization are subject to

governance rules, they do not commonly involve the significant
conflicts over control that characterize publicly held
corporations, and, consequently, they raise fewer concerns
about their governance.
1.a. Justifying Control

Shareholders’ control of publicly held corporations means that

they have the right to make the major decisions about their
operations, including the objective or ultimate goal to be sought.

For-profit corporations are commonly said to have the single

objective of maximizing profits and, in so doing, maximizing
shareholder value or shareholder wealth, which is the result of
maximizing profits since shareholders are the recipients of a
firm’s profits.
It is important to understand, however, that the objective of shareholder wealth
maximization is not inherent in the for-profit corporate form but arises from the exercise
of the shareholders’ right of control.

Using this right of control, shareholders typically make the maximization of shareholder
wealth the objective of the firm, but this objective is a choice made by shareholders and
is not a legal requirement.

Given the importance of control in the operations of corporations, the main moral
question about corporate governance is why shareholders, morally, ought to have this
right of control and why, morally, their interests ought to be the objective of the firm.

This right of control with its corresponding role for shareholders in a firm’s objective is
often expressed as the doctrine of shareholder primacy. So the main moral question
about corporate governance is the justification of shareholder primacy.
In addition to the right to control, shareholders possess another defining right, namely, a
claim on the residual revenues or profits of a corporation.

Many groups have a claim on a corporation’s revenues. These include bondholders, who
have claims for interest and principal payments; employees, who have claims on revenues
for payment of wages; suppliers, who have claims for the payment of materials;
government, which has a claim for payment of fees and taxes; and so on.

Most of the income that a corporation generates from customers and other sources is paid
out to a variety of groups that have fixed claims on a firm’s revenue.

Fixed claims are debts that a corporation is legally obligated to satisfy as long as the firm is
solvent. A firm that cannot satisfy all fixed claims or debts is, by definition, insolvent.
Whatever income remains after all fixed claims are satisfied—that is, all bills are paid
—constitutes residual revenue, and the shareholders’ right to residual revenues
constitutes residual claims.

Every claim on a corporation’s revenues is a return for some resource that is

contributed for production.

Employees contribute labor, suppliers contribute materials, and bank lenders and
bondholders contribute debt capital. (Customers do not contribute to production,
but they provide the necessary element of revenue when they purchase product.)

So shareholders, who typically finance a corporation with equity capital—as

opposed to the debt capital provided by bank lenders and bondholders—contribute
a necessary and distinctive resource, and they accept, in return, the residual
revenues or profits of the firm. Shareholders may be defined, then, as the group that
has both the right of control and a claim on profits.
Shareholders may be defined, then, as the group that has both
the right of control and a claim on profits.

The justification of the shareholders’ right of control, or

shareholder primacy, has two sources, which reach the same
conclusion by different routes.

• One source is public policy, which asks, in this case, what

form of governance best serves the well-being of society.

• The other source is the market, which reveals the form of

governance that would result from voluntary market
transactions.
More specifically, corporations must contract in a market with
shareholders for the provision of equity capital. The question
then becomes:

What terms would corporations and investors find mutually

agreeable, consistent with all the other contracts that a
corporation must form?

Any system of corporate governance that emerges from the

market for equity capital is a reflection of how shareholders’
property rights are exercised and protected.
What is the significance of these two sources of support for shareholder primacy?

Public policy’s support of shareholder primacy reflects the fact that much of corporate
governance is established in law by government through legislation, regulation, and
adjudication, and public policy is a major factor guiding these processes.

Public policy is also reflected in public attitudes toward business generally and in each
company’s reputation.

In creating the body of law for corporate governance, one of government’s main
concerns is to ensure that business organizations serve the public good.

Shareholder primacy conduces to the public good mainly by providing the legal
protection necessary for investors to fund business ventures. Government action may
also aim to protect property rights, thus leading to the market as the second source of
justification for shareholder primacy.
1.b. Public Policy

Traditionally, the law on corporate governance has been guided by two conceptions of
the corporation:

one conception as the private property of the owners of the enterprise and the other as
a right granted or conceded by the state.

However, the idea that shareholders are the owners of the modern publicly held
corporation whose claims are based on property rights ended with the separation of
ownership and control that was observed by Adolf A. Berle, Jr., and Gardiner C. Means in
their famous 1932 book The Modern Corporation and Private Property. There they argued
that shareholders had forfeited any claim to control based on ownership because, with
the separation of ownership and control, they had ceased to exercise the responsibility
traditionally associated with having ownership.
Traditionally, control is a feature of property ownership, but
ownership with control over a thing involves an assumption of
responsibility for the use of that thing.

With the separation of ownership and control, shareholders

relinquish de facto day-to-day control to professional managers
and, at the same time, relieve themselves of any legal
responsibility for corporate actions.

As a result, shareholders of large, publicly held corporations

cease to be owners in the full sense and become merely a
provider of one kind of resource needed by a corporation,
namely, equity capital.
According to Berle and Means, “The property owner who invests in a modern corporation
so far surrenders his wealth to those in control of the corporation that he has exchanged
the position of independent owner for one in which he may become merely recipient of
the wages of capital.

Without property rights as a basis for shareholder primacy, what else could justify the
claim that shareholders ought to have control of a corporation? Berle’s answer to this
question was that without strong shareholder control, corporate management would be
effectively unconstrained and that such power would be dangerous to the economic order.

It would be unwise, in Berle’s judgment, for the law to release managers from a strict
accountability to shareholders, not out of respect for their property rights (for they have
none) but as a matter of sound public policy.

Shareholder primacy is justified, in Berle’s view, for its efficacy in constraining and guiding
management, which is in the public’s interest.
A more powerful public policy justification for the shareholders’ role in corporate
governance can be constructed by determining which group can operate a firm most
efficiently for maximum value or wealth creation.

Efficiency is both an economic and a moral value because operating a business

organization efficiently— which means producing the greatest amount of output for the
least input—creates greater prosperity or material wellbeing than operating inefficiently.

Other things being equal, we should prefer more rather than fewer material goods from
any given resources, and corporations ought to be governed so as to achieve this end.

Therefore, if one group can exercise ultimate decision-making power with greater
efficiency and wealth creation than any other group, then, on the basis of public policy,
that group ought to have control.

Although this group may receive some benefit from having control, its members also
provide a service that makes everyone in society better off.
1.c. Incentives

This public policy justification of shareholder primacy is completed by arguing that,

under most conditions, the financiers of a corporation—which is to say the investors of
equity capital who receive the profits— have the strongest incentives to achieve the
greatest efficiency and hence to create the greatest amount of value or wealth, which
benefits the whole of society.

Under some conditions the greatest efficiency and wealth can be obtained from
control by employees or by customers or suppliers, and, as a result, some corporations
are employee-owned, customer-owned, or supplier-owned. (These latter are called
cooperatives, and Henry Hansmann has suggested that the shareholder-owned firm
can be viewed as a “capital cooperative.”

However, corporations are most commonly controlled by financiers or investors.

The main reason for this greater efficiency and wealth creating power stems from the
shareholders’ role as residual risk bearers.

Given that the shareholders’ return on their contribution to production, namely equity
capital, is a claim on residual revenues or profits, only they have an incentive that a firm
be maximally profitable as opposed to merely solvent.

Any group with fixed claims, such as employees, customers, or suppliers, has an
interest only in a firm being solvent and thus able to satisfy this group’s fixed claims.

Groups with less incentive for risk:

• If employees, for instance, had control with only fixed claims for wages, they would
tend to operate the firm with a low level of risk so as to assure their wages, even though
greater risk might lead to greater wealth creation. Because the greater wealth creation
would accrue disproportionately to other groups, especially shareholders in the form of
profits, employees would be disinclined to take risks that might be socially desirable.
• Similarly, bondholders would prefer that a firm be operated at a low level of risk to
avoid jeopardizing their fixed claims for principal and interest payments, since they, like
employees, would derive little benefit from maximal wealth creation.

• Executives, too, would be sub-optimally risk averse unless they were given incentives
tied to profits, which is the rationale for compensating executives with performance-
based bonuses and stock options.

Even if these other groups owned the corporation and thus received the profits, their
incentives to achieve maximum profitability might conflict with their other interests as
employees, customers, bondholders, and so on.

Furthermore, if more than one group owned a corporation, conflict among these groups,
each with different interests, might impede efficient decision making. From the point of
view of public policy, decisions in a business organization ought to be made by the party
or group with two features: • the greatest amount of relevant knowledge and • the
strongest incentives to operate the firm for maximum efficiency and, consequently,
maximum wealth creation.
Although shareholders lack much of the knowledge necessary
to operate a firm and, consequently, must rely on board
directors to exercise general oversight and managers to
exercise day-to-day control, they alone have the right
incentives to operate a firm for maximum wealth creation.

Moreover, the decisions that shareholders make about

selecting a board of directors and approving major structural
changes, such as mergers and acquisitions, are matters about
which shareholders are or can become knowledgeable.
The Market In their role as financiers or investors, shareholders
provide a critical resource needed by a business organization,
namely capital.

In return, they receive a payment or claim on revenues,

specifically the residual revenues or profits of the firm. In this
respect, shareholders are little different from other input
providers, which include bank lenders, bondholders,
employees, suppliers, and so on.

They provide some resource and receive a payment in return.

All these groups contract with a firm, and so the firm itself may
be viewed as a nexus of all the contracts thus formed. To the
extent that the return for the provision of any input is insecure,
a contract is necessary to safeguard the return.
On this nexus-of-contracts view, a firm “buys” capital in the same way it buys
labor or materials, and such a purchase is an economic transaction that takes
place in a market, namely a capital market, in the same way that a firm buys
labor in a labor market and materials in commodities markets.

Corporate governance may be understood as the contract that a firm forms

with its shareholders, who finance the firm by providing equity capital.

And the terms of this contract are determined mainly in a market through a
process of negotiation by firms seeking capital and by investors seeking to
deploy their savings, with each party bargaining to obtain the best deal for
itself.
From a moral point of view, any agreement or contract that is
formed by mutual consent between firms and investors is
justified in the same way that the outcome of any market
exchange is justified.

The crucial task in justifying the role of shareholders in

corporate governance is to understand why shareholder primacy
would result from contracting between a firm and its financiers
or investors.

In particular, Why would investors providing equity capital insist

on obtaining control, in addition to residual revenues or profits?
Alternatively, why would a firm seeking capital offer control
rights in addition to a claim on residual revenues?
The answer to both of these questions lies in the role of
shareholders as residual risk bearer. Equity capital is different
from debt capital, which is obtained in loans from banks or in
bonds sold to bondholders.

• First, equity capital is provided for the life of a firm with no

provision for its return, unlike the fixed term of a loan or a
bond, during which time the whole principal must be repaid
with interest
• Second, equity capital has no fixed return, such as the
specified interest on a loan or bond; the return is, rather, the
profits of a firm, which are variable and may even be negative.

By accepting a return in the form of a claim on residual

revenues, shareholders become residual risk bearers.

That is, they bear the risk of not obtaining an expected return
because of the variability of residual revenues, including the
possibility that a firm may fail completely.
Being a residual risk bearer is not only a benefit—a claim on the
profits of a firm—but also a service that protects the fixed
claims of other groups.

Because shareholders do not need to be paid if there are no

residual revenues, a firm can suffer a loss without becoming
insolvent and being forced into bankruptcy and possible
liquidation.

By serving as residual risk bearers, shareholders thus make the

fixed claims of other groups more secure. Shareholders are
compensated for this service by the prospect of higher returns
when a firm is exceptionally profitable.
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 3B
1.d. The Shareholders’ Contract

The role of residual risk bearer creates special contracting problems for
shareholders.

The fixed claims of other groups—employees for wages, for example, or suppliers
for payments—are relatively easy to assure in legally enforceable contracts.

By contrast, the profitability of a firm, upon which the return to shareholders

depends, cannot be mandated in a contract. In a firm without a separation of
ownership and control—that is, in a firm in which shareholders operate the business
—there is no problem protecting the shareholders’ return since they control the
operation. Profitability is in their hands.

However, once shareholders leave the task of operating a firm to professional

managers and hence separate ownership and control, a problem arises as to how
shareholders can be assured that these managers will operate the firm for
maximum profitability.
The solution to this problem is for shareholders to accept the role of residual risk
bearer only on the condition that they also have control. The roles of residual risk
bearer and holder of control rights are conceptually distinct.

In theory, different groups could hold these roles, and sometimes they do. In practice,
however, few investors would be willing to become residual risk bearers without
obtaining control.

Without control rights, investors would generally insist on significantly higher returns
to compensate for the greater risk, with the result that the cost of capital for firms
would be much higher.

Alternatively, firms can lower their capital costs by offering control rights as well as
claims on profits when they seek capital from investors.

Thus, control rights can be viewed not only as a demand by investors to secure the
return on their contribution of capital but also as an offer from firms to obtain
investors’ capital on favorable terms.
Combining risk bearing and the right to control in the shareholders’ role is not a
complete solution to the contracting problem, however.

Shareholders cannot merely order managers to operate a firm for maximum

profit, because what managers need to do to make a firm maximally profitable is
complex and uncertain.

The best shareholders can do is ask managers to exert their best effort to be
profitable.

This is commonly done not only by aligning managers’ interests with those of
shareholders by means of bonuses and stock options, but also by imposing a
fiduciary duty on managers to act in all matters in the shareholders’ interest.
The fiduciary duty of directors and officers is a major feature of the law of corporate
governance, which is designed to overcome the fact that shareholders cannot bind
persons by explicit contracts that fully specify the conduct to be performed.

That the fiduciary duty of management flows mainly to shareholders is often thought
to privilege shareholders in some way, but it should be understood that making
shareholders the sole beneficiary of managers’ fiduciary duty is a solution to the
distinctive contracting problem that equity investors have with a firm.

This solution reflects the vulnerability of shareholders and the relative invulnerability
of all other groups, which, in any event, are better protected by, and thus prefer, other
contractual means for securing their due return.
To summarize, corporate governance is the contract between shareholders and a firm
that confers control rights on the shareholders, along with the benefit of managers’
fiduciary duty, in order to protect the shareholders’ claim to residual revenues or
profits.

Unlike the contracts that other groups enter into with a firm, this contract is unusually
complex due to special contracting problems in the relationship between shareholders
and the firm.

Although the terms of this contract are, to some extent, specified by law, corporations
still have great flexibility to negotiate with investors in a market, and the law itself
largely reflects the terms that would result from market negotiations.
Thus, the tendency of corporate governance laws to recognize
the primacy of shareholders is determined by both public policy
and the market and is justified on both grounds.

That is, shareholder primacy serves to promote the welfare of

society and is the result of voluntary, efficiency-promoting
market transactions.
Corporate governance, with its doctrine of shareholder primacy
and the objective of shareholder wealth maximization, appears
to privilege shareholders and elevate their interests above
those of other groups, most notably employees, customers,
suppliers, and non-shareholder investors, as well as community
members.

These groups, along with shareholders or stockholders, are

commonly identified as stakeholders. Sample definitions of a
stakeholder are “those groups who are vital to the survival and
success of the corporation” and “any group or individual who
can affect or is affected by the achievement of the
organization’s objectives.”
The concept of a stakeholder highlights the fact that a corporation interacts
continually with its stakeholder groups and that much of the success of any
business organization depends on how well all of these stakeholder relationships
are managed.

The concept of a stakeholder is of undeniable importance: Corporations have

stakeholders, and their effective management is essential for achieving corporate
success.

More problematic is the use to be made of this concept. How should managers of
a firm think about stakeholders?

In particular, how does the important task of managing stakeholder relationships

fit with the doctrine of shareholder primacy and the objective of shareholder
wealth maximization?
No less a corporate titan than Jack Welch, the former CEO of General Electric,
who was hailed by Financial Times as the “the father of the ‘shareholder
value’ movement,” declared, “On the face of it, shareholder value is the
dumbest idea in the world. Shareholder value is a result, not a strategy. . . .

Your main constituencies are your employees, your customers and your
products.” For Welch, there is no necessary conflict between shareholder
value and stakeholder focus: The latter is essential for achieving the former.

Stakeholder Theory

The concept of stakeholders has been developed in recent thinking about

firms into a theory, called stakeholder theory. Thomas Donaldson and Lee E.
Preston distinguish three uses of stakeholder theory: descriptive,
instrumental, and normative.
First, the theory can be used as a description of the corporation
that enables us to understand the corporation better.

Thus, a researcher who believes that the stakeholder theory

accurately describes corporations can use it to answer
questions about how corporations are organized and managed.

The claim that stakeholder theory provides an accurate

description can be confirmed to the extent that the answers to
these research questions are put to a test and empirically
verified.
Second, the stakeholder thing can be used instrumentally as a
tool for managers. Even if making a profit for shareholders is the
ultimate goal of corporate activity, this point does not provide
much help in the daily conduct of business.

By contrast, telling managers to handle stakeholder relationships

well is a more practical action guide that may actually lead to
greater profit.

In addition, companies faced with social and political challenges

may find that relationships with stakeholder groups are valuable
resources.
Third, the stakeholder theory can be used as a normative
account of how corporations ought to treat their various
stakeholder groups.

Normative stakeholder theory would have managers

recognize the interests of employees, customers, and others as
worth furthering for their own sake.

As Donaldson and Preston explain, “The interests of all

stakeholders are of ‘intrinsic value.’”

The central claim of a normative stakeholder theory is that

corporations ought to be operated for the benefit of all those
who have a stake in the enterprise, including employees,
customers, suppliers, and the local community.
1.e. Protecting Stakeholders

As a normative account of corporate governance, stakeholder theory is

sometimes presented as an alternative to the standard shareholder- or
stockholder-centered model, and a contrast is made between the stockholder
and stakeholder theories of corporate governance as incompatible systems.

If this is done, the two theories agree on at least one point:

The purpose of the firm is to enable each corporate constituency or stakeholder

group to obtain the maximum benefit from its involvement in the productive
activities of a business organization.

By providing inputs or resources to a firm, each group contributes to the creation

of wealth, and this wealth is then distributed among all participants.
The answers of the stockholder theory to the two questions about protecting
stakeholders and determining their just return are straightforward:

• The best means for protecting each group’s rightful return are contracts and legal rules,
and

• the return that each group has a right to receive is the market value of its contribution.

For example, employees typically work under legally enforceable contracts that specify
their wages and other conditions of employment, and any disputes arising from a
contract can be litigated in court.

In addition, legal rules, mainly those of labor law, supplement employees’ contracts to
provide further protection.

Similarly, suppliers and consumers are protected by sales contracts, as well as the body
of commercial law, and securities law and the law of corporate governance protect the
interest of investors in the operation of a firm.
2. Corporate Accountability

The recent scandals at Enron, WorldCom, and other companies

were not the result of misconduct by a few individuals.

They revealed major weaknesses in the systems of corporate

control by which corporations are held accountable.

The collapse of Enron, as well as WorldCom, involved

fraudulent conduct by employees that evaded the controls
ordinarily imposed on corporations by financial reporting
requirements and oversight by executives and the board of
directors.
The Sarbanes-Oxley Act of 2002 (SOX), which was passed in the
wake of Enron’s collapse, reflected the belief of Congress that
there were deep flaws in the American system of corporate
accountability.

The various provisions of SOX thus address the three major

components of the American system for holding corporations
accountable:

• financial reporting,

• corporate management, and

• criminal law.
Enron’s filing for bankruptcy on December 2, 2002, followed
more than two months of revelations about the company’s
declining financial situation.

When third-quarter earnings were reported on October 16,

2001, Enron announced that it was writing down the value of
certain investments by $ 1.01 billion and that investor equity
had shrunk by $1.2 billion.
More bad news followed on November 8 when the company
revealed that its net income dating back to 1997 was $586
million less than had been previously reported, due to
improper accounting practices.

When investors realized that Enron’s reported income had

been greatly exaggerated and that large amounts of debt had
been hidden in dubious off-balance-sheet partnerships, all trust
was eroded and the company’s stock lost almost all value.

Enron’s collapse was due not merely to bad business decisions

that had been hidden from investors but also to a plundering of
the company by insiders.
What does this case illustrate about a company’s financial reports?

The first line of defense against incompetence and outright criminality by corporate
executives is a company’s financial reports.

The law requires that public companies prepare financial statements that present a
fair and accurate picture of their financial condition, and these statements must be
audited and attested to by a certified public accounting firm.

Although audited financial statements are intended primarily to aid investors in

making sound investment decisions and to increase the efficiency of financial
markets, they also serve as an important check on management by making
corporate operations more transparent.
The ability of the market to react swiftly to changes in a
company’s situation makes it an effective monitor of managers’
performance.

Because investors rely so heavily on financial reports, they are

also tempting vehicles for committing fraud.

By presenting a false picture of a company’s financial condition,

executives can cover up poor performance and continue to
receive lavish compensation.

In many of the recent scandals, fraudulent accounting also

enabled executives to dump much of their stock before bad
news became public.
2.a. Accounting and Auditing

Accounting is the recording and presentation of the financial transactions of an

organization.

Any organization, whether it is a business corporation, a not-for-profit organization, or

a government unit, must keep track of its revenues and expenditures and compile this
information in ways that provide managers with an understanding of the organization’s
financial condition.

Accountants also compile an organization’s financial information in reports that are

presented to outside parties, such as creditors from whom the organization is seeking
loans or the government, which requires that certain information be disclosed. All
public companies are required by law to issue an annual report that details all assets,
liabilities, revenues, and earnings in a consolidated balance sheet and income
statement.
Auditing is an inspection of an organization’s accounting records to
determine their accuracy, completeness, and reliability.

This inspection may be conducted inside the organization by managerial

accountants or internal auditors, who are employees of the organization,
or by outside, independent public auditors, who are certified public
accountants (CPAs).

In addition to inspecting an organization’s financial accounting records, a

CPA conducting an independent audit also examines the organization’s
financial accounting system and offers a report or opinion about both the
accounting records and the accounting system.
The independent auditor’s report or opinion may be unqualified, which means that the
organization’s financial records fairly represent its financial condition and have been prepared
according to GAAP, or qualified, which indicates either that the audit was not complete in scope
or that GAAP was not followed completely.

An independent public audit should be conducted in accord with Generally Accepted Auditing
Standards (GAAS). If corporate accounting and auditing were properly done, then fraud and
other kinds of financial wrongdoing would be difficult to commit, and detection would be easy.

Individual accountants and auditors, being human, are subject to ethical lapses; but, more
importantly, there are certain structural problems with the practices of accounting and auditing
that impair their effectiveness as a first line of defense against financial scandals.
2.b. Job Pressure

Managerial accountants and internal auditors, who are

employees of a company, and the outside CPAs, who are
engaged by the client company, are subject to intense pressure
to achieve the financial picture that top executives want to
convey.

Often the pressure comes to meet earnings expectations in

order to maintain a company’s stock price or allow executives
to make bonus or stock option targets.

Such “earnings management” is possible because accounting

rules allow great flexibility in their application. This flexibility is
permitted so that companies can choose the accounting
treatments that provide the fairest representation of their
financial condition.
Arthur Levitt, a former chairman of the SEC, addressed the
abuse of the flexibility in the accounting system with a call for
higher ethical standards:

Our accounting principles weren’t meant to be a straitjacket.

Accountants are wise enough to know they cannot anticipate
every business structure, or every new and innovative
transaction, so they develop principles that allow for flexibility
to adapt to changing circumstances. That’s why the highest
standards of objectivity, integrity and judgment can’t be the
exception. They must be the rule.
Accountants may also be pressured to approve accounting
treatments that are not in accord with GAAP, as when
WorldCom personnel were ordered to record accruals as
revenue and line charges as capital expenses.

Such cases require accountants to have the moral courage to

resist. CPAs are not employees who can be fired for failing to
please management; but CPA firms are still selected by
management, and they have a strong incentive to please the
client in order to be retained.

Enron, for example, was one of Arthur Andersen’s most valued

clients, and the company succeeded in having accountants who
objected to Enron’s accounting removed from the Enron team.
2.c. Conflict of Interest

CPA firms have many interests besides serving clients, which put them in conflict-of
interest situations.

In addition to a desire by a firm to retain clients, individual CPAs may have a financial
relationship with the company being audited by, for example, owning stock in that
company or a company doing business with it.

The CPA firm may also have other clients who have business relationships with or
who are competitors of the company being audited. Any such relationships might
impair the objectivity and independence of the CPAs engaged in an audit.

For this reason, “The Code of Professional Conduct of the American Institute of
Certified Public Accountants” requires CPAs to maintain objectivity and
independence and be free of conflicts of interest.
The AICPA code specifically prohibits having “any direct or
material indirect financial interest” in an audit client and any
loan from the company or anyone related to it.

This prohibition does not address the conflict that results

when auditors take positions with a company that he or she
formerly audited.

The prospect of an attractive job with an audit client might

influence an auditor’s judgment.

A number of top executives at Enron had previously been with

the Houston office of Arthur Andersen on the Enron account.
In 1984, the U.S. Supreme Court declared the public interest
paramount:

By certifying the public reports that collectively depict a

corporation’s financial status, the independent auditor assumes
a public responsibility transcending any employment
relationship with the client. The independent public accountant
performing this special function owes allegiance to the
corporation’s creditors and stockholders as well as to the
investing public. This “public watchdog” function demands that
the accountant maintain total independence from the client at
all times and requires complete fidelity to the public trust.
The ideal of total independence from the client and complete
fidelity to the public is very difficult to achieve in practice, in
view of the competition for clients and the high fees they
generate.

These two sources of conflict of interest have led to proposals

—so far unimplemented—that auditing and consulting services
be provided by separate firms and that audits be publicly
funded.
2.d. Confidentiality

Accountants have a strict duty of confidentiality that prevents them from disclosing
information about a client without that client’s consent, except when required to do so by
law.

One such legal requirement is that an accounting firm that withdraws from an auditing
engagement because of suspected wrongdoing by the client must file a report with the SEC
detailing the reasons for the withdrawal.

However, any other information about suspected wrongdoing should not be disclosed to
other parties, including any companies that are harmed by the wrongdoing or another
accounting firm that takes over the engagement.

An example of the difficulties that a duty of confidentiality creates is provided by the

experience of Arthur Andersen in the late 1960s.
Example:

After an Arthur Andersen team audited Fund of Funds and found no problems,
the same team began an audit of King Resources, which had business dealings
with Fund of Funds.

The auditors discovered that King Resources had sold properties to Fund of
Funds at inflated prices.

If Andersen informed Fund of Funds of the fraud, then King Resources might
sue for breach of confidentiality.

However, if Andersen said nothing, then Fund of Funds might sue Andersen for
concealing the information. Andersen chose the latter course and was
successfully sued by Fund of Funds for failing to disclose the inflated prices.
2.e. The Expectations Gap

The ability of auditors to detect fraud and other wrongdoing is limited by what
auditors are expected to do and what they can reasonably accomplish. An audit
conducted according to GAAS is not intended to be a forensic audit to uncover
fraud; rather, it is designed to provide reasonable assurances that a company’s
records are accurate representations.

Auditors examine the records prepared by the company’s own accountants,

and they test only selected transactions. If a company’s accounting system is
judged to be adequate, then less effort is expended in testing.

A “clean” or unqualified opinion attests only the accuracy of the company’s

books and not to the company’s solvency or future prospects.
2.f. Executives and Directors

The main locus of decision making in corporations is in director

boardrooms and executive suites.

Accordingly, directors and executives, especially the chief

executive officer (CEO), play a critical role in ensuring corporate
accountability.
Example:

Although the Enron board of directors included many distinguished, competent,

and diligent individuals and exemplified many good corporate governance
practices, its members twice voted to rescind the company’s conflict-of-interest
policy so that the chief financial officer (CFO), Andrew Fastow, could serve as the
managing partner of several special purpose entities.

These off-balance-sheet partnerships not only allowed Fastow to enrich himself at

the expense of Enron shareholders but also created enormous risks of which the
board was apparently unaware.

The twin failures of the board of directors to exercise its proper oversight role and
of the CFO to avoid flagrant conflicts of interest were major causes of Enron’s
collapse.
Another cause of the massive fraud at Enron lay with its other
top executives, including the CEO, Jeffery Skilling, and the chair
of the board, Kenneth Lay.

Skilling was convicted in 2006 of 19 counts of conspiracy,

insider trading, obstruction of justice, and securities fraud and
was sentenced to more than 24 years in prison, later reduced to
14.

Lay was convicted in a joint trial with Skilling of 10 criminal

charges, with a likely prison sentence of 20 or 30 years, but he
died before his scheduled sentencing.
The example of Enron illustrates that top executives may be not
only weak points in ensuring accountability in a corporation but
also important subjects of accountability systems.

Systems must be in place to ensure the accountability of both

boards and executives as well as the effectiveness of
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 3C
2.g. Role of the CEO

The CEO of a company makes the most important decisions and

thus effectively manages it.

CEOs typically have the greatest amount of knowledge of any

participant in decision making and so are in the best position to
ensure accountability.

In addition, CEOs have considerable influence in the selection

and retention of board members, so that, to some extent, they
are responsible only to themselves and hence in the greatest
need to be held accountable.
The key to holding CEOs and other top executives to account is creating the right
incentives. This is achieved by four main means.

• First, both officers and directors of a corporation have a legally imposed fiduciary
duty to act in all matters in the shareholders’ interest.

Although this duty is legally enforceable in that officers and directors can be sued for
breaches, both are protected by the business judgment rule that exempts them from
suits for good faith business decisions.

Moreover, successful suits for breach of fiduciary duty are generally limited to
egregious acts of incompetence or self-dealing, so that fiduciary duty provides a
relatively weak incentive for being accountable.
• Second, executives’ interests can be effectively aligned with
those of shareholders by a substantial ownership interest or
performance-based compensation through bonuses and/or
stock options.

In this way, CEOs act more like shareholders because they, in

fact, become significant shareholders themselves and not
merely hired professional managers.

Indeed, managers with an ownership stake may have a greater

incentive than shareholders to operate a firm profitably since
their investment is less diversified than that of shareholders.
Third, a competitive labor market for CEOs and other executive
positions places a premium on manager’s success in his or her
current job.

Even if it is relatively rare for an executive to hold multiple CEO

positions, a CEO has a strong incentive to avoid dismissal, and
new CEOs are drawn from the ranks of aspiring executives who
have incentives to excel.

Thus, the market for CEO talent perhaps works best at lower
levels among potential CEO.
Fourth, an active market for corporate control serves to
discipline underperforming or self-serving management by the
threat of a takeover.

Although hostile takeovers are relatively rare in Europe and

Japan and increasingly more difficult to wage in the United
States, greater pressure by institutional investors has been
successful, in many instances, in producing the same kind of
change that a hostile takeover would achieve.
2.h. Role of Directors

Corporate directors are elected by the shareholders to exercise their right of

control in the operation of a corporation. In this role, directors select and
monitor the CEO of the corporation, approve the company’s overall strategic
plan, and ensure that adequate control systems are in place.

The board also exercises control through an audit committee that reviews
financial reports, a nominating committee that recruits new board members,
and a compensation committee that sets the compensation package for the CEO.

In addition to its control responsibilities, the members of the board, who have
wide experience and extensive connections, also provide advice to the top
management team and offer outside resources.
Board members are characterized as inside or outside directors
depending on whether they are currently executives of the
corporation, and outside directors are designated as
independent if they have no relationship with the corporation
other than service on the board.

In the United States, the chairman of the board is often the

CEO—called “CEO duality”—although the two roles may be
separated, and they often are in other countries.
In most of the recent scandals, boards of directors have not been complicit in
any wrongdoing but have been unaware of what was occurring in the
companies they supposedly controlled.

For some directors, this ignorance was due to a lack of attention, a lack of
competence, a lack of independence, conflicts of interest, or some
combination of these four factors.

Board members are often chosen by the CEO, and probably too many of
them were close associates of the CEO, celebrities who brought little but
their name to the board or else CEOs themselves who did not have the time
to devote their full attention.

However, much of the failure of corporate boards to prevent wrongdoing,

like the failure of accountants and auditors, was due to structural features,
many of which were addressed by SOX.
Board members cannot be expected to know about
misconduct in the organization, but they are responsible for
having control systems and accounting procedures capable of
detecting it.

Some boards had failed to evaluate the adequacy of the

systems and procedures in place.

Although board members must have the confidence to leave

a CEO free to operate a company, they should also exercise
greater independence by, for example, conducting some
executive sessions without the CEO and other chief officers
present.
Good board practice also calls for the audit committee to meet
with the independent auditors in an executive session to satisfy
themselves that there are no financial irregularities.

Some of the other proposals for reform include reducing the

number of boards on which directors sit, reducing the number
of members on a board, increasing the number of meetings
held annually, and increasing the amount of work done by
committees.

Increasing the compensation of board members and including

stock grants and stock options have been proposed as ways of
providing greater incentives for them to focus on protecting
shareholder interests.
2.i. Criminal Prosecution

The law, both criminal and civil, is a major means of holding not only individuals
but also corporations accountable.

The successful criminal prosecutions of Jeffrey Skilling of Enron and Bernie

Ebbers, the CEO of WorldCom, illustrate the power of the law to achieve
accountability.

Criminal and civil law is applied not only to individuals but also to corporations.

Arthur Andersen, the accounting firm that had signed off on Enron’s faulty
financial reports, was indicted on March 14, 2002, for obstruction of justice in
shredding documents; and when the firm was found guilty three months later, it,
too, collapsed like Enron before it.
Fraud and conspiracy to commit fraud are criminal offenses for
which both individuals and corporations can be prosecuted.

Other misdeeds for which corporations have been prosecuted

criminally include unsafe products and working conditions,
bribery and corruption, and willful pollution.

Criminal prosecution, along with financial reporting and the

roles of executives and directors, serves as a means for holding
corporations accountable.

Individuals and corporations may also be prosecuted for civil

rather than criminal offenses.
Generally, a criminal offense involves some harm to the state,
whereas a civil offense arises from the violation of some
regulation or a private right.

Crimes are generally more serious than civil offenses and

usually result in a more severe sanction or penalty.

Prosecutors often have the choice of bringing a criminal or a

civil indictment against an individual or a corporation.

Criminal prosecutions are state actions, but civil suits may be

brought by either the state or private individuals.
3. Corporate Compliance

Corporations are increasingly paying attention to ethics in the conduct

of employees at all levels of the organization.

Unlike the emphasis on corporate social responsibility, which focuses

on the impact of business activity on society at large, the corporate
ethics movement addresses the need to guide individual decision
making and to develop an ethical workplace environment.

Much of the impetus in the United States has come from recognition
of the dangers posed by individual misconduct.

However, unethical business practices are seldom due to a lone rogue

employee but usually result from factors in the organization.
Ethics programs are designed, therefore, to create an
organization that fosters ethical conduct.

No program can prevent momentary lapses of judgment, much

less intentional wrongdoing, and ethical misconduct has
occurred in companies with exemplary ethics programs.

Corporate ethics programs are examined in regard to two

questions:

• What are the standard components of an ethics program?

• What leads corporations to adopt a program, and what do

they expect to achieve?
Some companies have adopted ethics programs in response to serious scandals,
whereas others seek to prevent scandals before they occur.

In particular, the corporate ethics movement has been spurred by the Federal
Sentencing Guidelines, which offer lenient treatment for convicted organizations
with an effective ethics program.

These are primarily defensive strategies aimed at legal compliance. However,

many corporations strive for a higher level of conduct in the belief that a
reputation for integrity provides a strategic advantage.

Like all other corporate initiatives, though, ethics programs represent an

investment that must be justified, and so we need to take a critical look at their
benefits and also at possible objections to them.
3.a. Program Components

Every organization has an ethics program of some kind,

although it may not be recognized as such.

In the broadest sense, an ethics program consists of the rules

and policies of an organization and the procedures and systems
for motivating and monitoring ethical performance.

Rules and policies include the culture and values of an

organization and formal documents, such as mission
statements, codes of ethics, policy and personnel manuals,
training materials, and management directives.

Compliance with rules and policies is secured by various

procedures and systems for orientation, training, compensation,
promotion, auditing, and investigation.
The components of a corporate ethics program generally
include:

• a code of ethics,
• ethics training for employees,
• means for communicating with employees about matters of
ethics,
• a reporting mechanism for enabling employees to report
alleged wrongdoing,
• an audit system for detecting wrongdoing, and
• a system for conducting investigations and taking corrective
action
The goals are to prevent criminal conduct and violation of
government regulations on one hand, and to protect the
company from self-interested action by employees on the other.

Compliance of this kind is essential in any organization, but

some corporations take a broader view of ethics.

At the other end of the spectrum are ethics programs that

communicate the values and vision of the organization, seek to
build relations of trust with all stakeholder groups, and
emphasize the responsibility of each employee for ethical
conduct.
3.b. Program Benefits

The main benefit of an ethics program is to prevent ethical misconduct by employees.

Employee misconduct is costly to companies not only in direct losses but also in those sustained
from a tarnished reputation.

The total cost to Sears, Roebuck, and Company for settling suits nationwide over allegations that
its Sears Auto Centers made unnecessary repairs has been estimated to be $60 million.

In addition, the trust of consumers that enabled the company to enter the competitive auto
repair market was seriously damaged.

The financial services industry has produced some examples of very costly misconduct.

• A bond-trading scandal at Salomon Brothers in 1991 cost the firm almost $1 billion.
• In 1994 Prudential Securities agreed to pay fines and
penalties in excess of $700 million for crimes committed in the
sale of limited partnerships in the 1980s.

• A Japanese copper trader hid losses estimated at $2.6 billion

from his employer, Sumitomo Corporation.

• Nicholas Leeson, a 29-year-old, Singapore-based trader for

Barings Bank, destroyed this venerable British firm by losing
more than $1 billion in unauthorized trading.

• In 2008, a rogue trader at Société Générale lost more than $7

billion for the French bank.
A second benefit of ethics programs is that they provide a
managerial tool for adapting the organization to rapid change.

Among the factors that have led corporations to adopt ethics

programs are increased competition, the development of new
technologies, increased regulation, recent mergers and
acquisitions, and the globalization of business.
Third, ethics programs help organizations manage relations
with external constituencies.

An ethics program serves to reassure customers, suppliers,

investors, and the general public of the serious intent of a
corporation to adhere to high ethical standards.
Example:

The shareholders of Caremark International, Inc., a health care

provider, sued the individual members of the board of directors
for failing to prevent criminal violations that cost the company
$260 million.

In deciding this case, the Delaware Chancery Court held in

1996 that directors have a fiduciary duty to the shareholders to
ensure that the corporation’s reporting systems are reasonably
well designed to provide management with sufficient
information to detect violations of law.

The Caremark decision has been described as a “wake-up call”

to directors that they may be personally liable for their failure
to ensure that a corporation has an adequate compliance
system in place.
3.c. Effective Ethics Programs

The Federal Sentencing Guidelines defines an effective ethics program as one “that
has been reasonably designed, implemented, and enforced so that it generally will
be effective in preventing and detecting criminal conduct.”

The program need not prevent or detect every instance of wrongdoing, but the
organization must have practiced “due diligence,” which involves the following steps.

1. The organization must have established compliance standards and procedures

that are reasonably capable of reducing misconduct.

2. Specific high-level personnel must have been assigned responsibility for

overseeing compliance with the standards and procedures.

3. The organization must take due care not to assign substantial discretionary
authority to individuals with a propensity to engage in illegal behavior.
4. Standards and procedures must have been communicated to
all employees and agents through such means as publications
and training programs.

5. The organization must have taken reasonable steps to

ensure compliance by using monitoring and auditing systems
and a reporting system that employees may use without fear of
retaliation.

6. The standards must have been consistently enforced through

appropriate disciplinary measures, including, as appropriate,
the punishment of employees who fail to detect an offense by
others.

7. After an offense has been detected, the organization must

have taken all reasonable steps to respond appropriately and to
prevent further similar offenses.
3.d. Codes of Ethics

The first step in developing an ethics program, and the only step
that some companies take, is a code of ethics.

The development of ethics codes for corporations is a relatively

recent phenomenon, with most having been written since 1970.

In many instances, these codes replaced other kinds of

documents, such as policy manuals, executive directives, and
customary practices.

An early prominent code of ethics was “The Penney Idea,” a set

of seven principles set forth by the merchandizing pioneer J.C.
Penney in 1913.
Types of Codes

Codes of ethics vary widely, falling into three main types.

• The most common is a statement of specific rules or

standards for a variety of situations. These are most often
called codes of conduct or statements of business standards or
practices.

• A second type is a statement of core values or the vision of

an organization, sometimes called a credo or mission
statement. These statements frequently include affirmations of
the commitments of a company to key stakeholders, such as
customers, employees, and the community.
• Third are corporate philosophies that describe the beliefs
guiding a particular company.

Perhaps the best known of these is Hewlett-Packard’s “The HP

Way.”

Corporate philosophy statements are generally written by the

founders of businesses in emerging industries, such as
computers, where new ways of doing business are needed.

Most codes of ethics combine elements of the first two types,

but at least one firm, Levi Strauss & Company, has adopted all
three kinds of statements.
Levi Strauss’s Ethical Guidelines

An Aspiration Statement describes what kind of company its members want it to

be.

A Code of Ethics explains the values and ethical principles that guide action. And
finally, Levi Strauss has adopted a document entitled “Global Sourcing and
Operating Guidelines,” which contains very specific rules on working with business
partners and choosing countries for operations.

A few weeks before the guidelines were officially adopted, Levi Strauss canceled a
contract with a supplier in Saipan (a U.S. territory) after reports of human rights
violations.

Subsequently, the U.S. Department of Labor charged that the contractor worked
the employees, mostly Chinese women, up to 11 hours a day in guarded
compounds and paid them well below the Saipan minimum wage. The contractor
settled the charges for $9 million. One Levi Strauss manager observed, “If anyone
doubted the need for guidelines, this convinced them.”
In addition to company codes of ethics, there are many industry
codes, generally adopted by a trade organization.

These include organizations for the advertising, banking, direct

marketing, franchising, insurance, and real estate industries.

Because a commitment to high ethical standards and self-

regulation is integral to a profession, most professional groups
have also developed ethics codes to which their members are
generally required to subscribe.

Among professions with codes of ethics are physicians, lawyers,

accountants and auditors, architects, engineers, financial
planners, public administrators, consultants, and journalists.
3.e. Reasons for the Adoption of a Code of Ethics

• A written document enables an organization to clarify

standards that may otherwise be vague expectations left to
individual interpretation. Where there is disagreement on the
appropriate standards, codes can achieve a measure of
consensus, and where standards are lacking or in need of
revision, codes enable an organization to create new ones.
• Codes of ethics are an effective means for disseminating
standards to all employees in an easily understood form.

• Finally, an effective code of ethics that is enforced in an

organization provides employees with a tool for resisting
pressure to perform unethical or illegal actions.

A code of ethics may enable employees to do what they believe

to be right.
There is no blueprint for writing a code of ethics.

Both the procedure and content must arise from specific

features of the company in question.

However, some values, such as respect of the individual, fair

treatment, honesty, integrity, responsibility, trust, teamwork,
and quality, are included in typical codes.
Likewise included are: conflict of interest, use of company
resources, gifts and entertainment, confidentiality of
information, and workplace behavior.

There is one common trait of all successful codes of ethics,

however: They have the clear support of top – level
management.

A code is unlikely to be successful, though, if it is imposed from

the top down.

Ideally, everyone in a company should have “ownership” of the

code.
Conclusion:

The modern corporation is a remarkable form of economic

organization that enables everyone in society to interact for
mutual gain.

Ideally, everyone should benefit from the wealth-creating

power of business corporations. In order for corporations to
function and provide their benefits, several problems must be
solved.

First, corporations must be legally structured so that investors,

employees, customers, suppliers, and other groups that
participate in productive activity are protected. This is part of
the task for corporate governance.
Second, corporations must be held accountable so that
corporate executives do not engage in fraud or other
wrongdoing.

In addition to corporate governance, this task is addressed by

accounting and auditing, a corporation’s board of directors,
and criminal law.

Third, there must be a control environment within the

corporation to detect and deter employee misconduct. This is
the task of the corporate compliance function, of which an
effective ethics program is a major component.
When an economic system combines all of these elements
together—corporate governance, corporate accountability, and
corporate compliance—the results can be a prosperous society.

Where one or more of the elements are absent, the corporation

cannot achieve its full potential.
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 4
For Module 4, the students are expected to achieve the following Learning
Outcomes:
1. Ability to describe the Ethical and current Social Responsibility issues and
the influence of these issues on society, management decision making,
behavior, policies, and practices.
2. Internalize in themselves that ethical behavior is the best long-term
business strategy for a company amidst the growing global business
changes.
3. Manifest higher order thinking skills such as mental inquisitiveness, critical
thinking, when given situations or issues related to governance.
4. Ability to resolve problems through initiative, creativity, and ethical
reasoning, as well as the ability to communicate and transmit knowledge in
preparation for their respective fields of endeavor in the near future.
 The foregoing Learning Outcomes shall be realized
through lecture and interactive discussion of the following
Topics: Week 8, Week 9, and Week 11
 
I. The CSR Debate

II. Business Case for CSR

III. Implementing CSR

IV. Business with a Mission

 Learning Methods will be, as follows:
1. Lecture / Discussion / Group Presentations - for the
Synchronous sessions
2. Seatwork: Reflections on learning in class; Reflections and
Insights on videos relative to Ethics, Morality, Good
Governance, and Social Responsibility; and Case Analyses -
for the Asynchronous Sessions
3. Readings on relevant papers, journals, Laws / Acts and
Issuances of the Philippine Government on Corporate
Governance – for the Asynchronous Sessions
 
Assessment of the Reflections and Insights; and of the
Case Analyses will be guided by the Five-point Rubric,
which has been published in the Files Link / Index Page.
Reflections and Insights on the following videos:

1. Chinese Workers in Disney’s World, Parts I and II

2. Ford and Firestone What Went Wrong
3. Mabey Bridge “Think Safe” Campaign”
4. Waste Watch ODNR Officer Accused of Misusing Position
Analysis of the Case Study: Starbucks and Fair Trade Coffee
The videos and Case Study are published in the Files Link /
Index Page.

Reference Materials have been specified in the course syllabus,

which has been published in the FILES Link / Index Page.
1. Social Responsibility

Competing Visions at Malden Mills

The tragic fire that struck Malden Mills in 1995 and made its
owner, Aaron Feuerstein, an American folk hero, was the
beginning of a struggle that eventually pitted Mr. Feuerstein
against the might of GE Capital over competing visions of how
to run the company.
Response to the Fire, After three of the Malden Mills’ eight buildings in Lawrence,
Massachusetts, burned to the ground on the night of December 11, Aaron Feuerstein,
the patriarch of this family-owned firm, announced that wages and benefits for the
3,100 affected workers would be continued and that the facilities would be rebuilt on
the same site.

This heartfelt concern for the company’s workers and the community won Mr.
Feuerstein widespread acclaim as an exemplar of corporate social responsibility.

Many business people wondered why he would not use the $300 million in insurance to
move overseas to a low-wage country as his competitors were doing—or simply take the
money and retire. Instead, the rebuilding of the plants required an additional $100
million investment.
For his compassionate response, Mr. Feurestein received numerous awards, invitations to
speak, and honorary degrees at a time when Americans were disturbed by massive layoffs
ordered by highly paid CEOs.

President Bill Clinton invited him to a conference on corporate social responsibility and
mentioned him in his 1996 State of the Union address.

However, heavy debt from the rebuilding forced Malden Mills into bankruptcy in
November 2001, and when the company emerged from bankruptcy in October 2003, it
was owned and operated by its former creditors, led by investment giant GE Capital.

Aaron Feuerstein held the largely ceremonial posts of president and nonexecutive
chairman and retained a 5 percent stake, but majority ownership and operational control
of the company was in the hands of the investors who had come to the company’s aid.
Now, Mr. Feuerstein wanted to repurchase the company that
his grandfather founded in 1906 in order to keep the much-
needed jobs in Lawrence. The plan of the current owners,
though, was to keep control and cut costs by sending
operations to Asia.

The company’s CFO wrote, in August 2003, that management

would probably move “a substantial part of Malden’s
operations overseas in the next few years.”
Aaron Feuerstein’s response to the fire – which also included generous support for
the injured workers and their families – was motivated by his religion (he is an
observant Jew), by a sense of responsibility, as head of a family – owned business,
and by a certain pride in his ability to overcome obstacles.

As he watched the blaze, he was heard to say, “This is not the end.”

According to a Boston Globe reporter, he told himself with “incredible confidence,” “I

know I can find a way.”

He later explained his decision as a matter of responsibility. “I have a responsibility to

the worker. . . . I have an equal responsibility to the community. It would have been
unconscionable to put 3,000 people on the streets and deliver a death blow to [the
city of Lawrence].”
He described his view of corporate social responsibility as follows:

Corporate responsibility to me means yes, you must . . . take care of the shareholder,
but that is not your exclusive responsibility.

The CEO has responsibility to his workers, both white collar and blue collar, as well,
and he has responsibility to his community and city.

And he has to be wise enough to balance out these various responsibilities and . . . to
act justly for the shareholder, as well as the worker.

Although Mr. Feuerstein’s decision to rebuild and even expand in Lawrence has been
criticized from a business point of view, some observers see in his decision an astute
business logic—that he is “crazy like a fox.”
Furthermore, he explained:

[W]e concentrate less on . . . the cuttable expense of the labor

and more on research and development to make better quality
products . . . and to differentiate ourselves from our competitors
in the market place.

We pay more than the average mill does, and so that’s fine,
because we don’t concentrate on pay, we concentrate on where
the real profit is in making the product better.
1.a. Points to Consider:

Although corporations are business organizations run primarily for the benefit of
shareholders, they have a wide ranging set of responsibilities—to their own employees, to
customers and suppliers, to the communities in which they are located, and to society at
large.

Most corporations recognize these responsibilities and make a serious effort to fulfill them.
Often, these responsibilities are set out in formal statements of a company’s principles or
beliefs.

Many companies have institutionalized corporate social responsibility (CSR) as an integral

part of their operations. In addition, there are many outside groups, including
nongovernmental organizations (NGOs), socially responsible investors, and consultancy firms,
that monitor companies’ CSR activities and provide their services.
Today, CSR is a worldwide movement that is gaining increasing
acceptance and visibility. At issue in the discussion of CSR are
three questions:

1. Why do corporations have a social responsibility? That is,

what is the basis for such a responsibility?

2. What is the extent of this responsibility, or what exactly do

corporations have a responsibility to do?

3. Perhaps most important, how should corporations decide

what CSR activities to undertake, and what is required to
implement CSR programs effectively?
As companies have come to accept a social responsibility, they
have also recognized the benefits of CSR activities for
themselves as well as society.

The most progressive companies effectively use CSR to protect

their reputations and to develop and implement corporate
strategy.

These companies are viewing CSR less as philanthropy and

more as savvy corporate–community involvement or as
profitable corporate social initiatives.
Although some elements of CSR can be traced back to the mid-
nineteenth century, the concept of corporate social
responsibility originated in the 1950s when American
corporations rapidly increased in size and power, thus creating a
concern for their legitimacy in a democracy.

The concept continued to figure prominently in public debate

during the 1960s and 1970s as the nation confronted pressing
social problems, such as poverty, unemployment, race relations,
urban blight, and pollution.

Corporate social responsibility became a rallying cry for diverse

groups demanding change in American business during a time
of great social unrest.
CSR did not receive much attention in Europe until the 1980s,
but the concern for the subject and organized activity
surrounding it are more prominent there today than in the
United States.

Among the factors at work in Europe are the integration of

countries into the European Union, the deregulation of the
economy, and the decline of the welfare state.

Many governments in Europe have promoted CSR as a way of

replacing the traditional role of the state in regulating business.
Some contend that corporate social responsibility is altogether
a pernicious idea.

The well-known conservative economist Milton Friedman

wrote, in Capitalism and Freedom, “Few trends could so
thoroughly undermine the very foundations of our free society
as the acceptance by corporate officials of a social
responsibility other than making as much money for their
stockholders as possible.

He continued, The view has been gaining widespread

acceptance that corporate officials . . . have a “social
responsibility” that goes beyond serving the interest of their
stockholders.
This view shows a fundamental misconception of the character
and nature of a free economy.

In such an economy, there is one and only one social

responsibility of business—to use its resources and engage in
activities designed to increase its profits so long as it stays
within the rules of the game, which is to say, engages in open
and free competition, without deception or fraud.

It is the responsibility of the rest of us to establish a framework

of law such that an individual pursuing his own interest is, to
quote Adam Smith . . . , “led by an invisible hand to promote an
end which was no part of his intention.”
All accounts of corporate social responsibility recognize that
business firms have not one but many different kinds of
responsibilities, including economic and legal responsibilities.

Corporations have an economic responsibility to produce goods

and services and to provide jobs and good wages to the
workforce while earning a profit.

Economic responsibility also includes the obligation to seek out

supplies of raw materials, to discover new resources and
technological improvements, and to develop new products.
In addition, business firms have certain legal responsibilities.
One of these is to act as a fiduciary, managing the assets of a
corporation in the interests of shareholders, but corporations
also have numerous legal responsibilities to employees,
customers, suppliers, and other parties.

The vast body of business law is constantly increasing as

legislatures, regulatory agencies, and the courts respond to
greater societal expectations and impose new legal obligations
on business.
The concept of corporate social responsibility is often expressed as the voluntary
assumption of responsibilities that go beyond the purely economic and legal
responsibilities of business firms.

More specifically, social responsibility, according to some accounts, is the selection of

corporate goals and the evaluation of outcomes not solely by the criteria of
profitability and organizational well-being but by ethical standards or judgments of
social desirability.

The exercise of social responsibility, in this view, must be consistent with the
corporate objective of earning a satisfactory level of profit, but it implies a willingness
to forgo a certain measure of profit in order to achieve noneconomic ends.
1.b. Archie B. Carroll views social responsibility as a four stage continuum.

Beyond economic and legal responsibilities lie ethical responsibilities, which

are “additional behaviors and activities that are not necessarily codified into
law but nevertheless are expected of business by society’s members.”

At the far end of the continuum are discretionary responsibilities that involve
philanthropy and other voluntary contributions to community organizations,
often involving the arts, education, and public welfare.

These responsibilities are not legally required or even demanded by ethics,

but corporations accept them in order to meet society’s expectations.
Figure 12.1 The Expanding Dimensions of CSR

1. Economic Responsibilities
Basic responsibilities to create employment, produce goods and services and improve the
efficient operation of business to earn a profit.

2. Legal Responsibilities
Meeting the fiduciary duty to manage corporate assets in the interests of shareholders and
compliance with existing laws and regulations protecting employees, customers, communities and
other parties.

3. Ethical Responsibilities
An awareness of the changing ethical priorities that are not expressed in the law: for example,
environmental conservation; fairer relationships with employees; and improved treatment of
customers.

4. Societal Responsibilities
Actively addressing societal challenges through philanthropy and collaboration with other
organizations. Society is beginning to turn to corporations for help with major social problems
such as poverty, education and urban blight.
Although there are some disagreements about the meaning of corporate social
responsibility, there is general agreement on the types of corporate activities that show
social responsibility. Among these are the following:

1. Choosing to operate on an ethical level that is higher than what the law requires.

Examples • Motorola’s code of ethics prohibits payments of any kind to government

officials, even when the payments are permitted by U.S. and local laws.

• Mattel closely monitors its factories in China to ensure that its high labor standards are
observed.

2. Making contributions to civic and charitable organizations and nonprofit institutions.

Examples • American companies contribute, on average, 1 percent of pre-tax net revenues

to worthy causes.

• Many large corporations operate nonprofit foundations that fund grant applications from
worthy philanthropic organizations.
3. Providing benefits for employees and improving the quality of life in the workplace
beyond economic and legal requirements.

Examples • Family-friendly programs such as flexible work and childcare • Paid leave for
volunteer work.

4. Taking advantage of an economic opportunity that is judged to be less profitable but

more socially desirable than some alternatives.

Examples • Starbucks pays an above-market rate for fair-trade coffee that benefits
growers in poor countries.

• Home Depot ensures that none of the wood it sells comes from old-growth or
endangered forests.
5. Using Corporate resources to operate a program that
addresses some major social problems.

Examples • AT&T devotes substantial resources to promoting

diversity among its employees, suppliers, and local communities.

• Major pharmaceutical firms donate drugs for public health

programs in less-developed countries.

For example, Merck developed and now gives away in Africa a

drug for the treatment of the disease river blindness.
Although these activities are all beyond the economic and legal responsibilities of
corporations and may involve some sacrifice of profit, they are not necessarily
antithetical to corporate interests.

For example, corporate philanthropy that makes the community in which a

company is located a better place to live and work results in direct benefits.

The “goodwill” that socially responsible activities create makes it easier for
corporations to conduct their business.

High standards and socially responsible products also serve to protect and even
enhance a company’s reputation and to attract and retain loyal employee
In 2015, a list of the 10 companies with the best CSR reputation,
as reported by the global advisory firm Reputation Institute, was
headed by BMW and Google and included Disney, Apple, and
Intel.

These companies are led by executives who see that even the
narrow economic and legal responsibilities of corporations
cannot be fulfilled without the articulation of noneconomic
values to guide corporate decision making and the adoption of
nontraditional business activities that satisfy the demands of
diverse constituencies.
1.c. Normative Case for CSR

The initial debate over CSR in the 1950s and 1960s was largely
about the rationale for and the extent of corporations’ social
responsibility.

Was CSR something that corporations were morally obligated

or, at least, morally permitted to do?

What was the moral basis for such responsibility, and what
specifically were corporations responsible for doing
Opponents of the idea of CSR, such as Milton Friedman, argued
on moral grounds that corporations ought not to engage in CSR
at all unless doing so benefited shareholders, while proponents
offered arguments for the position that corporations were
morally permitted to engage in some voluntary socially
responsible activity and, in some situations, could be morally
faulted for not doing so.

The starting point for most of the arguments for and against
corporate social responsibility is what has been called “classical
view” of the corporation, which is the dominant conception, at
least in the United States.
1.d. Expression of the Classical View

The classical view is expressed by James W. McKie in three basic propositions.

1. Economic behavior is separate and distinct from other types of behavior, and business
organizations are distinct from other organizations, even though the same individuals
may be involved in business and nonbusiness affairs. Business organizations do not
serve the same goals as other organizations in a pluralistic society.

2. The primary criteria of business performance are economic efficiency and growth in
production of goods and services, including improvements in technology and innovations
in goods and services.

3. The primary goal and motivating force for business organizations is profit. The firm
attempts to make as large a profit as it can, thereby maintaining its efficiency and taking
advantage of available opportunities to innovate and contribute to growth.
1.e. Friedman on CSR

The best-known critic of corporate social responsibility is

perhaps Milton Friedman.

Friedman’s main argument against CSR is that corporate

executives, when they are acting in their official capacity and
not as private persons, are agents of the shareholders of the
corporation.

As such, executives of a corporation have an obligation, indeed

a fiduciary duty, to make decisions in the interests of the
shareholders, who are ultimately their employers.
Fiduciary Argument

Friedman’s formulation of this fiduciary argument begins with

a question about the meaning of social responsibility. He asked,
What does it mean to say that the corporate executive has a
“social responsibility” in his capacity as businessman?

If this statement is not pure rhetoric, it must mean that he is

to act in some way that is not in the interest of his employers.
For example,

• that he is to refrain from increasing the price of the product

in order to contribute to the social objective of preventing
inflation, even though a price increase would be in the best
interests of the corporation.
• Or that he is to make expenditures on reducing pollution
beyond the amount that is in the best interests of the
corporation or that is required by law in order to contribute to
the social objective of improving the environment.

• Or that, at the expense of corporate profits, he is to hire

“hardcore” unemployed instead of better-qualified available
workmen to contribute to the social objective of reducing
poverty.
In each of these cases, the corporate executive would be
spending someone else’s money for a general social interest.

Insofar as his actions in accord with his “social responsibility”

reduce returns to stockholders, he is spending their money.

Insofar as his actions raise the price to customers, he is

spending the customers’ money.

Insofar as his actions lower the wages of some employees, he

is spending their money.
Taxation Argument

In addition to the fiduciary argument, Friedman offers what

might be called the taxation argument.

Investors, according to the taxation argument, entrust their

money to the managers of corporations in order to make
profits for the shareholders.

When corporate executives spend money to pursue social ends

in the way Friedman describes—such as by hiring “hardcore”
unemployed people over others who may be better qualified—
they take on a role of imposing taxes and spending the
proceeds that properly belongs only to elected officials.
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 4B
1.d. Business Case for CSR

Present-day discussions about CSR have gone beyond normative questions

about the meaning and justification of CSR and focused, instead, on practical
questions of implementation.

The Economist, which has been critical of CSR in the past, now admits, “Clearly,
CSR has arrived.”

A 2008 special report in the magazine concluded that CSR is a source of

competitive advantage by enabling companies to meet society’s heightened
expectations and protect their reputations in ways that are more focused and
vigorous than those in the past.

The business case for CSR, in contrast to the moral or ethical case, does not
claim that it is the right thing to do but only that it is to a company’s advantage
to adopt CSR.
The Market for Virtue

David Vogel calls the power of market forces to produce CSR

activities “the market for virtue.”

In his view there is a limited market in support of CSR, but it

“is not sufficiently important to make it in the interest of all
firms to behave more responsibly.”

The existence and potential of a market for virtue can be

ascertained by identifying the specific market demand and
societal forces that induce managers to undertake CSR
activities.
Market Demand

In economic terms, if CSR is the supply in a market for virtue,

then there must be some demand for it.

The demand, if it exists, comes from customers, employees,

investors, and other groups that are willing to express their
desire for CSR in the marketplace.

A number of studies show that many consumers in the United

States and Europe say that they would pay more for products
that meet some social test, such as being made without
sweatshop labor or environmental pollution.

Some companies have responded by certifying their products.

Examples

• The GoodWeave (formerly Rugmark) label informs

consumers that a handmade carpet was not produced with
child labor.

• The FSC label, issued by the Forest Stewardship Council,

attests that lumber was harvested from sustainable forests.

• Certified conflict-free diamonds can be purchased by

consumers who want to avoid supporting wars in Africa that
are financed by the diamond trade.
Similarly, some employees seek jobs that are socially
constructive.

Many college students upon graduation have taken the

Graduation Pledge of Social and Environmental Responsibility,
which reads, “I pledge to explore and take into account the
social and environmental consequences of any job I consider
and will try to improve these aspects of any organization for
which I work.”

Companies that are known for social responsibility may be

more attractive to the job candidates that they seek.
Societal Forces

The market for virtue responds not only to purely market demand but also to broader
societal forces.

Perhaps the most significant societal force pushing companies toward greater CSR is the
explosive growth of nongovernmental organizations or NGOs.

These advocacy groups, which range in size from such giant international organizations as
Greenpeace and Oxfam to very small local operations, are generally focused on specific
issues, mainly human rights, the environment, and public health.

Some NGOs monitor particular industries or companies.

NGO example: Walmart’s activities are closely followed by Walmart Watch, which is a
project of the Center for Community and Corporate Ethics.
Governments themselves may also promote CSR in lieu of more costly or
less effective direct regulation.

Government examples:

• The Fair Labor Association grew out of the Apparel Industry Partnership,
which was convened by President Bill Clinton to address public concerns
about conditions in contract factories overseas without resorting to
increased government regulation.

• In 2002, the government of Great Britain, under Prime Minister Tony

Blair, established the post of Minister for Corporate Responsibility in an
effort to make the promotion of CSR a major governmental objective.
Power of Virtue

All of these forces in support of CSR— consumers, employees,

investors, NGOs, peer companies, and government—are
present in the marketplace, as well as in the social and political
environment in which corporations operate.

However, the power of these forces on corporate behavior

remains to be determined.

Hence, the question: How effective is the market for virtue in

promoting CSR?
1.e. Competitive Advantage

In mature efficient markets, it is very difficult for companies, especially those

producing basic commodities, to gain a significant, long-term competitive
advantage.

Any difference that will enhance a company’s products in a crowded, noisy market
is a valuable corporate asset.

Although competitive advantage has many sources, a strategy that incorporates

social responsibility is one.

Even for companies that are responding to outside pressures in the market for
virtue, competitive advantage can be gained if a CSR program is also integrated into
the company’s strategy so as to confer a competitive advantage.
1.f. Strategic CSR

Corporations have to be strategic about CSR and to find ways

to gain a corporate benefit along with a public good.

CSR can provide a win-win opportunity, in which a company

and society can create shared value.

This can be done, Porter and Kramer claim, if companies bring

to CSR the same analytical tools they bring to the rest of their
operations. They write,
The fact is, the prevailing approaches to CSR are so fragmented
and so disconnected from business and strategy as to obscure
many of the greatest opportunities for companies to benefit
society.

If, instead, corporations were to analyze their prospects for

social responsibility using the same frameworks that guide their
core business choices, they would discover that CSR can be
much more than a cost, a constraint, or a charitable deed—it
can be a source of opportunity, innovation, and competitive
advantage.
Examples of Success

Companies may be able to gain a competitive advantage from

engaging in CSR activities either by locating opportunities in
their standard business operations or by transforming the
competitive environment to create new opportunities.

As an example of the former, Porter and Kramer cite the

experience of Nestlé in India, where the company built a dairy
in an area of severe poverty.
Nestlé’s dairy operations:

Finding that the supply of milk from local farmers was of low
quality and uneven quantity, Nestlé sent specialists to help the
farmers produce better milk in higher quantities by improving
their cow’s health and diet.

The company also provided financing and technical assistance

to dig wells for irrigation and to increase crop yields.
The result was not only to provide the dairy with an abundant,
stable supply of high-quality milk but also to improve the
standard of living in the area’s villages significantly.

A program that enabled Nestlé to operate successfully also had

a collateral benefit for the communities on which the company
depended.

Nestlé has applied the lessons it learned from its dairy in India
to the sourcing of other commodities, such as coffee and cocoa,
in other parts of the world.
1.g. Implementing CSR

Every socially responsible company faces two key questions: What CSR
activities should be undertaken, and how can these activities be
undertaken effectively?

Although a few exemplary companies provide inspiring stories and attest to

the potential benefits of CSR, their programs may offer little guidance to
managers who are trying to decide what their own company should do
about CSR.

Once companies have developed a significant CSR program, they are

further challenged by outside groups about the reporting of their CSR
performance.

Activists are urging companies to report their CSR performance in much

the same way that they report their financial performance.
Program Selection and Design

The guiding principles of strategic CSR are that there is an interdependence

between business and society and that, as a result, there are opportunities for
mutual benefit.

As Porter and Kramer express the point, “To put these broad principles into
practice, a company must integrate a social perspective into the core frameworks
it already uses to understand competition and guide its business strategy.”

A survey of corporations with successful CSR programs that produce genuine

social benefits while serving corporate interests yields some valuable guidance
about the selection and implementation process.
First, one important aspect of CSR is the management of
reputation risk.

Companies, especially those with strong brand names, need to

identify the activities that could be the target of moral criticism.

An analysis of these reputation risks should focus specifically on

business activities that have impacts on such ethically sensitive
matters as human rights, the environment, and public health.
Second, CSR activities that are closely linked to a company’s
employment needs or product sales yield easily identifiable and
measurable benefits.

For example, both McDonald’s and Marriott, which have a

great need for large numbers of entry-level workers, conduct
extensive training programs that help workers who have never
held a job to learn valuable work skills and attitudes.

Many companies in the computer industry, including Microsoft,

IBM, and Intel, have supported projects in computer literacy
and science education among students throughout the world.
Third, the most successful CSR programs make use of a company’s mission and
core competencies.

United Parcel Service, with its extensive expertise in logistics, is committed to

transporting relief supplies to war-torn and disaster-stricken areas. This valuable
service not only fits with the company’s core competency in shipping goods but
also improves the company’s capabilities.

Coca-Cola, which is Africa’s largest employer, announced in 2001 that it would

help combat AIDS on that continent by using its expertise in advertising and
distribution to educate people about the disease and deliver literature, condoms,
and testing kits where needed.
Fourth, truly strategic CSR identifies opportunities that fit with
a company’s strategy.

Only a few companies can develop a comprehensive strategy

around social values in the way that Whole Foods Market has
done.

However, McDonald’s support for Ronald McDonald House

Charities, which provides accommodations near hospitals for
the families of seriously ill children undergoing treatment,
advances the company’s strategy of promoting a family-friendly
atmosphere in its restaurants.
Case: BP and “Beyond Petroleum”

Although many companies have responded to environmental concerns by

reducing emissions and energy use, BP, formerly British Petroleum, put the
environment at the core of its strategy of reinventing the energy business.

Instead of seeking merely to produce oil and gas more efficiently, BP

reconceived itself, under the leadership of Sir John Browne, as an energy
company, with the motto that BP stood for “Beyond Petroleum,” and committed
the company to the goal of researching new energy sources.

BP’s strategy of reinventing the energy business provided little protection

against damage to the company’s reputation, as well as its pocketbook, when,
on April 20, 2010, a gas explosion occurred at the Deepwater Horizon drilling rig
in the Gulf of Mexico.
In the 87 days it took BP to cap the well, nearly 4 million barrels of oil were
discharged into the gulf waters, washing up along the coastline in four states and
causing extensive damage to the environment and to residents’ businesses.

In a court trial, a judge found BP to be “grossly negligent” in cutting corners in

safety measures in order to reduce costs and declared that these actions “evince
an extreme deviation from the standard of care and a conscious disregard of
known risks.

In addition to payments of $42 billion by BP to cover costs of the cleanup, the

company still faced, in 2015, potential fines of $13 billion.

One lesson to be learned from the BP Deepwater Horizon disaster is that social
responsibility must be manifested in all of a company’s activities and not confined
to a few matters.
Fifth, successful CSR programs incorporate stakeholder engagement or dialogue.

Outside groups can be a resource not only in expanding a company’s capabilities—

as witness Coca-Cola’s decision to partner with other organizations in Africa to fight
AIDS—but also in understanding the needs and outlooks of others and engaging
them in the pursuit of mutual benefit.

According to the World Business Council for Sustainable Development, which was
formed in 1995 by the CEOs of 200 global companies to address environmental
issues.
The essence of corporate social responsibility is to recognize
the value of external stakeholder dialogue.

Because of this, we place stakeholder engagement at the

center of CSR activity.

CSR means more than promulgating a company’s own values

and principles. It also depends on understanding the values
and principles of those who have a stake in its operations.
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 5
For Module 5, the students are expected to achieve the
following Learning Outcomes:
1. Ability to describe the Ethical and current Social
Responsibility issues and the influence of these issues on
society, management decision making, behavior, policies,
and practices.
2. Internalize in themselves that ethical behavior is the best
long-term business strategy for a company amidst the
growing global business changes.
3. Manifest higher order thinking skills such as mental
inquisitiveness, critical thinking, when given situations or
issues related to governance.
4. Realize the essence of Good Governance and internalize its
importance in the development process.
 The foregoing Learning Outcomes shall be realized
through lecture and interactive discussion of the following
Topics: Week 12, Week 13, and Week 14
 
I. Free Markets and Rights

II. Ethical Practices in the Market

III. The Impact of Ethics in the Environment

IV. Governance in the Philippine Government

 Learning Methods will be, as follows:
1. Lecture / Discussion / Group Presentations - for the
Synchronous sessions
2. Seatwork: Reflections on learning in class; Reflections and
Insights on videos relative to Ethics, Morality, Good
Governance, and Social Responsibility; and Case Analyses -
for the Asynchronous Sessions
3. Readings on relevant papers, journals, Laws / Acts and
Issuances of the Philippine Government on Corporate
Governance – for the Asynchronous Sessions
 
Assessment of the Reflections and Insights; and of the
Case Analyses will be guided by the Five-point Rubric,
which has been published in the Files Link / Index Page.
Reflections and Insights on the following video:

1. Business Culture in Saudi Arabia

Analysis of the Case Studies: Home Depot and An Auditor’s

Dilemma
The video and Case Studies are published in the Files Link /
Index Page.

Reference Materials have been specified in the course syllabus,

which has been published in the FILES Link / Index Page.
 THE MARKET, BUSINESS AND ETHICS

III. GOVERNMENT, MARKETS, AND INTERNATIONAL TRADE

IN THE BUSINESS SYSTEM

GLOBALIZATION - The process by which the economic

and social systems of nations are connected together so
that goods, services, capital, and knowledge move freely
between nations.
Challenges:
1. Nations found themselves with numerous
challenges.
2. Businesses and entire industries have been wiped
out as globalization forced them to compete with
more efficient companies in other parts of the
world.
3. Workers were laid off and jobless, as former
employers relocated factories to other nations
with cheaper labor.
4. Many governments lowered their environmental
standards leading to higher pollution levels, lower
conservation efforts, and greater environmental
devastation.
5. The rapid movement of money and capital left
nations and entire regions moneyless virtually
overnight, as money traders moved out funds.
Supporters:
 
1. Reject calls for government intervention in economic
affairs.
2. Free markets and free trade are key to expanding
economic prosperity.
3. Free trade may inflict temporary pain but in the long
run, free markets and free trade will benefit
everyone.
4. Everyone will be hurt by interventionist or
protectionist government policies.
5. In the long run, free market competition will create
stronger industries and government intervention will
inevitably make everyone worse off.
Supporters:
 
1. Reject calls for government intervention in economic
affairs.
2. Free markets and free trade are key to expanding
economic prosperity.
3. Free trade may inflict temporary pain but in the long
run, free markets and free trade will benefit
everyone.
4. Everyone will be hurt by interventionist or
protectionist government policies.
5. In the long run, free market competition will create
stronger industries and government intervention will
inevitably make everyone worse off.
Economic Systems:

The system a society uses to provide the goods and

services it needs to survive and flourish.

Two basic economic tasks:

1. Task of actually producing goods and services, which
requires determining what will be produced, how it
will be produced, and who will produce it.

2. Task of distributing these goods and services among

its members, which requires determining who will
get what and how much will each get.
Tradition based societies – Societies that rely on
traditional communal roles and customs to carry out
basic economic tasks.
Command economy – An economic system based
primarily on a government authority (a person or a
group) making the economic decisions about what is to
be produced, who will produce it, and who will get it.
Market economy – An economic system based primarily
on private individuals making the main decisions about
what they will produce and who will get it.
Free markets – Markets in which each individual is able
to voluntarily exchange goods with others and to decide
what will be done with what he or she owns without
interference from government.
3.1 Free Markets and Rights: John Locke
 
Lockean rights – The right to life, liberty, and
property.
 
Locke’s State of Nature
- All are free and equal.
- Each person owns his body and labor, and
whatever he mixes his labor into.
- People agree to form a government to protect
their right to freedom and property.
Weaknesses of Lockean Rights
 
• Assumption that individuals have natural rights.
 
- Conflict between positive and negative rights.
- Conflict between Lockean rights and principles of
justice.
- Locke’s individualistic assumptions.
3.2 Free Markets and Utility: Adam Smith
 
Unregulated markets rests on the utilitarian
argument that unregulated markets and private
property will produce greater benefits than any
amount of regulation could.
- Buyers will seek to purchase what they want at
the lowest prices they can find.
- Private businesses will produce and sell what
consumers want and at the lowest prices possible.
- To keep prices down, private businesses will try to
cut back on the costly resources they consume.
- The free market, coupled with private property,
ensures that the economy is producing what
consumers want, that prices are at the lowest
level possible, and that resources are efficiently
used.
- The economic utility of society’s members is
thereby maximized.
Adam Smith, the “father of modern economics”, is the originator
of this utilitarian argument for the free market.
 
When private individuals are left free to seek their own interests in
free markets, they will inevitably be led to further the public
welfare by an invisible hand:
 
By directing [his] industry in such a manner as its produce may be
of the greatest value, [the individual] intends only his own gain,
and he is in this, as in many other cases, led by an invisible hand to
promote an end that was no part of his intention….By pursuing his
own interest he frequently promotes that of society more
effectively than when he really intends to promote it.
Invisible hand – the market competition that drives self-
interested individuals to act in ways that serve society.
 
It is not from the benevolence of the butcher, the baker,
and the brewer that we expect dinner, but from their
regard for their own self-interest. We address ourselves
not to their humanity, but to their self-love, and never
talk to them of our own necessities, but of their
advantages.
Criticisms of Smith’s Argument

- Rests on unrealistic assumptions.

- False assumption that all relevant costs are paid by
manufacturer.
- False assumption that human beings are solely
motivated by self-interested desire for profit.
- Some degree of economic planning is possible and
desirable.
- Keynes’s claim that government can affect
unemployment.
Marx’s Principle Claims of Injustice in Capitalism

- Exploitation of workers whose “surplus” is taken by

owners as “profit”.
- Alienation of workers from product, work, self, and
others.
- Subordination of government to interests of ruling
economic class.
- Immiseration of workers.
Alienation – In Marx’s view, not allowing the lower
working classes to develop their productive potential,
satisfy their real human needs, or form satisfying human
relationships.
 
Immiseration – the combined effects of increased
concentration, cyclic crises, rising unemployment, and
declining relative compensation.
 
IV. Ethical Practices in the Market
 
1. Perfect Competition – A free market in which no
buyer or seller has the power to significantly affect
the prices at which goods are being exchanged.

2. Pure Monopoly – A market in which a single firm is

the only seller in the market and which new sellers
are barred from entering.

3. Oligopoly – A market shared by a relatively small

number of large firms that together can exercise
some influence on prices.
Market – Any forum in which people come together for
the purpose of exchanging ownership of goods or money.
 
Perfectly competitive free markets are characterized by
the following seven features:

1. There are numerous buyers and sellers, none of whom

has a substantial share of the market.
2. All buyers and sellers can freely and immediately
enter or leave the market.
3. Every buyer and seller has full and perfect knowledge
of what every other buyer and seller is doing,
including knowledge of the prices, quantities, and
quality of all goods being bought and sold.
4. The goods being sold in the market are so similar to
each other that no one cares from whom each buys or
sells.
5. The costs and benefits of producing or using the goods
being exchanged are borne entirely by those buying or
selling the goods and not by any other external
parties.
6. All buyers and sellers are utility maximizers: Each tries
to get as much as possible for as little as possible.
7. No external parties (such as the government) regulate
the price, quantity, or quality of any of the goods
being bought and sold in the market.
 
Moral outcomes of Perfectly Competitive Markets
 
1. Lead buyers and sellers to exchange their goods in a
way that is just.

2. Maximize the utility of buyers and sellers by leading

them to allocate, use, and distribute their goods
with perfect efficiency.

3. Bring about these achievements in a way that

respects buyers’ and sellers’ right of free consent.
Monopoly Market Characteristics
 
- One seller
- High entry barriers
- Quantity below equilibrium
- Prices above equilibrium and supply curve

Ethical Weaknesses of Monopolies

 
- Violation of capitalist justice
- Economic inefficiency
- Lack of respect for negative rights
Imperfectly Competitive Markets – Markets that lie somewhere in the
spectrum between the two extremes of the perfectly competitive
market with innumerable sellers and the pure monopoly market with
only one seller.
Highly Concentrated Markets – Oligopoly markets that are dominated
by a few (e.g. three to eight) large firms.
Horizontal Merger – The unification of two or more companies that
were competing in the same line of business.
Explicit Agreements: Unethical Practices in Oligopoly Industries.
1. Price-fixing - An agreement between firms to set their prices at
artificially high levels.
2. Manipulation of supply - When firms in an oligopoly
industry agree to limit their production so that prices rise to
levels higher than those that would result from free competition.
3. Exclusive dealing arrangements - When a firm sells to a
retailer on condition that the retailer will not purchase any
products from other companies and/or will not sell outside of a
certain geographical area.
4. Tying arrangements - When a firm sells to a buyer to a
certain good only on condition that the buyer agrees to purchase
certain other goods from the firm.
5. Retail price maintenance agreements - A manufacturer sells to
retailers only on condition that they agree to charge the same set
retail prices for its goods.
6. Price discrimination - To charge different prices to different
buyers for identical goods or services.
Tacit Agreements:
7. Price Leader - The firm recognized as the industry leader in
oligopoly industries for the purpose of setting prices based on levels
announced by that firm.
8. Bribery - a form of market defect. The product of the briber no
longer competes equally with the product of other sellers, on the
basis of its price or merits. The bribe serves as a barrier to prevent
other sellers from entering the briber’s government market.
EXTERNAL EXCHANGES IN BUSINESS: DEALING WITH
ECOLOGY AND CONSUMERS

TWO MAIN EXTERNAL ENVIRONMENTS:

 
1. NATURAL ENVIRONMENT - PROVIDES THE RAW
MATERIAL INPUT OF BUSINESS
2. CONSUMER ENVIRONMENT – ABSORBS ITS FINISHED
OUTPUT
 
V. THE IMPACT OF ETHICS IN THE ENVIRONMENT
 
ENVIRONMENTAL TRENDS:

1. POPULATION GROWTH
2. RISING TEMPERATURE
3. FALLING WATER TABLES
4. SHRINKING CROPLAND PER PERSON
5. COLLAPSING FISHERIES
6. SHRINKING FORESTS
7. LOSS OF PLANT AND ANIMAL SPECIES
WILLIAM POLLARD, A PHYSICIST: DESPAIRS OF OUR BEING ABLE
TO DEAL ADEQUATELY WITH THESE PROBLEMS.
 
WE STAND ON THE THRESHOLD OF A TIME OF JUDGEMENT
MORE SEVERE, UNDOUBTEDLY, THAN ANY MANKIND HAS EVER
FACED BEFORE.
 
5.1 POLLUTION AND SCARCITY OF RESOURCES
 
POLLUTION - THE UNDESIRABLE AND UNINTENDED
CONTAMINATION OF THE ENVIRONMENT BY THE
MANUFACTURE OR USE OF COMMODITIES.
AIR POLLUTION AFFECTS:
- VEGETATION, DECREASING AGRICULTURAL YIELDS;
- INFLICTING LOSSES ON THE TIMBER INDUSTRY;
- DETERIORATE EXPOSED CONSTRUCTION MATERIALS
THROUGH CORROSION, -DISCOLORATION, AND ROT;
- HAZARDOUS TO HEALTH AND LIFE, RAISING MEDICAL
COSTS AND LESSENING THE ENJOYMENT OF LIVING;
and
- THREATENED CATASTROPHIC GLOBAL DAMAGE IN
THE FORM OF GLOBAL WARMING AND DESTRUCTION
OF THE STRATOSPHERIC OZONE LAYER
 
RESOURCE DEPLETION - THE CONSUMPTION OF FINITE
OR SCARCE RESOURCES.

GLOBAL WARMING - THE INCREASE IN TEMPERATURES

AROUND THE GLOBE DUE TO RISING LEVELS OF
GREENHOUSE GASES.

GREENHOUSES GASES – CARBON DIOXIDE, NITROUS

OXIDE, METHANE, AND CHLOROFLUOROCARBONS -
GASES THAT ABSORB AND HOLD HEAT FROM THE SUN,
PREVENTING IT FROM ESCAPING BACK INTO SPACE,
MUCH LIKE THE GREENHOUSE ABSORBS AND HOLDS THE
SUN’S HEAT.
OZONE DEPLETION - THE GRADUAL BREAKDOWN OF
THE OZONE GAS IN THE STRATOSPHERE ABOVE US
CAUSED BY THE RELEASE OF CHLOROFLUOROCARBONS
( CFCs) INTO THE AIR.

ACID RAIN - OCURRS WHEN SULFUR OXIDES AND

NITROGEN OXIDES ARE COMBINED WITH WATER VAPOR
IN CLOUDS TO FORM NITRIC ACID AND SULFURIC ACID.
THESE ACIDS ARE THEN CARRIED DOWN IN RAINFALL.
PHOTOCHEMICAL SMOG - A COMPLEX MIXTURE OF
GASES AND PARTICLES MANUFACTURED BY SUNLIGHT
OUT OF THE RAW MATERIALS - NITROGENOXIDES AND
HYDROCARBONS - DISCHARGED TO THE ATMOSPHERE
CHIEFLY BY THE AUTOMOBILE.
MAJOR TYPES OF AIR POLLUTION:

1. GLOBAL WARMING GASES

2. OZONE DEPLETING GASES
3. ACID RAIN
4. AIRBORNE TOXICS
5. AIR QUALITY
 
WATER POLLUTION - CONTAMINATION OF WATER
SOURCES, WATER POLLUTANTS:
 
1. ORGANIC WASTES
2. DISSOLVED SALTS, METALS, AND RADIOACTIVE
MATERIALS
3. SUSPENDED MATERIALS SUCH AS BACTERIA,
VIRUSES, AND SEDIMENTS
-IMPAIR OR DESTROY AQUATIC LIFE
-THREATENS HUMAN HEALTH
-FOUL THE WATER
 
ORGANIC WASTES - LARGELY UNTREATED HUMAN WASTES,
SEWAGE, AND INDUSTRIAL WASTES FROM PROCESSING
VARIOUS FOOD PRODUCTS, FROM THE PULP AND PAPER
INDUSTRY, AND FROM ANIMAL FEEDLOTS.
LAND POLLUTION
 
1. TOXIC SUBSTANCES
2. SOLID WASTES
3. NUCLEAR WASTES
 
DEPLETION OF SPECIES AND HABITATS
DEPLETION OF FOSSIL FUELS
DEPLETION OF MINERALS
5.2 CONTROLLING POLLUTION: THE ETHICS
 
ECOLOGICAL ETHICS - THE VIEW THAT NONHUMAN
PARTS OF THE ENVIRONMENT DESERVE TO BE
PRESERVED FOR THEIR OWN SAKE, REGARDLESS OF
WHETHER THIS BENEFITS HUMAN BEINGS.

ENVIRONMENTALISTS SUCESSFULLY PETITIONED THE U.S.

FISH AND WILDLIFE SERVICE TO BAR THE TIMBER
INDUSTRY FROM LOGGING POTENTIALLY LUCRATIVE OLD-
GROWTH FORESTS 0F NORTHERN CALIFORNIA TO SAVE
THE HABITAT OF THE SPOTTED OWL, AN ENDANGERED
SPECIES.
IN ADDITION TO HUMAN BEINGS, OTHER ANIMALS HAVE
INTRINSIC VALUE AND ARE DESERVING OF OUR RESPECT
AND PROTECTION.

THE PAIN OF AN ANIMAL MUST BE CONSIDERED AS

EQUAL TO THE COMPARABLE PAIN OF A HUMAN.
THE MAN WHO HAS BECOME A THINKING BEING FEELS A
COMPULSION TO GIVE EVERY WILL-TO-LIVE THE SAME
REVERENCE FOR LIFE THAT HE GIVES TO HIS OWN. HE
EXPERIENCES THAT OTHER LIFE IN HIS OWN. HE ACCEPTS
AS BEING GOOD: TO PRESERVE LIFE, TO PROMOTE LIFE,
TO RAISE TO ITS HIGHEST VALUE LIFE WHICH IS CAPABLE
OF DEVELOPMENT, AND AS BEING EVIL: TO DESTROY
LIFE, TO INJURE LIFE, TO REPRESS LIFE WHICH IS CAPABLE
OF DEVELOPMENT. THIS IS THE ABSOLUTE,
FUNDAMENTAL PRINCIPLE OF THE MORAL.
ARGUMENTS AGAINST THE EXISTENCE OF THE RIGHTS OF
FUTURE GENERATIONS
 
- FUTURE GENERATIONS DO NOT NOW EXIST AND
MAY NEVER EXIST
- THE POTENTIAL ARGUMENT THAT THE PRESENT
MUST BE SACRIFICED FOR THE FUTURE
- OUR IGNORANCE OF THE INTERESTS OF THE FUTURE
GENERATIONS
 
JUSTICE REQUIRES THAT WE HAND OVER TO OUR
IMMEDIATE SUCCESSORS A WORLD THAT IS NOT IN
WORSE CONDITION THAN THE ONE WE RECEIVED
FROM OUR ANCESTORS.
CONSERVATION BASED ON JUSTICE:
 
- RAWLS: LEAVE THE WORLD NO WORSE THAN WE
FOUND IT.
- CARE: LEAVE OUR CHILDREN A WORLD NO WORSE
THAN WE RECEIVED.
- ATTFIELD: LEAVE THE WORLD AS PRODUCTIVE AS WE
FOUND IT.
 
GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
MODULE 6
For Module 6, the students are expected to achieve the
following Learning Outcomes:
1. Ability to describe the Ethical and current Social
Responsibility issues and the influence of these issues on
society, management decision making, behavior, policies,
and practices.
2. Internalize in themselves that ethical behavior is the best
long-term business strategy for a company amidst the
growing global business changes.
3. Manifest higher order thinking skills such as mental
inquisitiveness, critical thinking, when given situations or
issues related to governance.
4. Realize the essence of Good Governance and internalize its
importance in the development process.
 The foregoing Learning Outcomes shall be realized
through lecture and interactive discussion of the following
Topics: Week 15, Week 16, and Week 17
 
I. The Employee’s Obligations to the Firm

II. The Firm’s Duties to the Employee

III. Blowing the Whistle

IV. Ethics in Job Discrimination

 Learning Methods will be, as follows:
1. Lecture / Discussion / Group Case Role Play in video presentation -
for the Synchronous sessions
2. Seatwork: Reflections on learning in class; Reflections and Insights
on videos relative to Ethics, Morality, Good Governance, and Social
Responsibility; and Case Analyses - for the Asynchronous Sessions
3. Readings on relevant papers, journals, Laws / Acts and Issuances of
the Philippine Government on Corporate Governance – for the
Asynchronous Sessions
 
Assessment of the Reflections and Insights; and of the Case
Analyses will be guided by the Five-point Rubric, which have been
published in the Files Link/Index Page. For the Case Role play, the
Rubric, as presented in the course syllabus will apply.
Reflections and Insights on the following videos:

1. The Inside Job - The Delivery Driver

2. Supreme Court Case Sex Discrimination

Analysis of the Case Studies:

2. Lavish Pay at Harvard
3. A Whistle Blower Accepts a “Deal”
The videos and Case Studies are published in the Files Link /
Index Page.

Reference Materials have been specified in the course syllabus,

which has been published in the FILES Link / Index Page.
BEING AN INDIVIDUAL IN AN
ORGANIZATION

E.H. SCHEIN DEFINITION:

AN ORGANIZATION IS THE RATIONAL

COORDINATION OF THE ACTIVITIES OF A
NUMBER OF PEOPLE FOR THE
ACHIEVEMENT OF SOME COMMON
EXPLICIT PURPOSE OR GOAL, THROUGH A
DIVISION OF LABOR AND FUNCTION AND
THROUGH A HIERARCHY OF AUTHORITY
AND RESPONSIBILITY.
RATIONAL MODEL

1. FORMAL HIERARCHIES OF AUTHORITY

2. OPERATING LAYER
3. MIDDLE MANAGERS
4. TOP MANAGEMENT
THE EMPLOYEE’S OBLIGATIONS TO THE FIRM:

- MAIN MORAL DUTY IS TO WORK TOWARD THE

GOALS OF THE FIRM AND AVOID ANY ACTIVITIES
THAT MIGHT HARM THOSE GOALS.

1. LAW OF AGENCY
2. CONFLICTS OF INTEREST
- OBJECTIVE CONFLICTS OF INTEREST
- SUBJECTIVE CONFLICTS OF INTEREST
- POTENTIAL CONFLICTS OF INTEREST
- ACTUAL CONFLICT OF INTEREST
- APPARENT CONFLICT OF INTEREST
COMMERCIAL BRIBES AND EXTORTION:

COMMERCIAL BRIBE – A CONSIDERATION GIVEN OR OFFERED TO AN

EMPLOYEE BY A PERSON OUTSIDE THE FIRM WITH THE
UNDERSTANDING THAT, WHEN THE EMPLOYEE TRANSACTS BUSINESS
FOR THE FIRM, THE EMPLOYEE WILL DEAL FAVORABLY WITH THAT
PERSON OR THAT PERSON’S FIRM.
COMMERCIAL EXTORTION – OCCCURS WHEN AN EMPLOYEE DEMANDS
A CONSIDERATION FROM PERSONS OUTSIDE THE FIRM AS A CONDITION
FOR DEALING FAVORABLY WITH THOSE PERSONS WHEN THE EMPLOYEE
TRANSACTS BUSINESS FOR THE FIRM.
GIFTS:

- VALUE
- PURPOSE
- CIRCUMSTANCES
- POSITION OF RECIPIENT
- ACCEPTED BUSINESS PRATICE
- COMPANY POLICY
- LAW
EMPLOYEE THEFT AND COMPUTERS:

- THEFT OF SMALL TOOLS, OFFICE SUPPLIES, CLOTHING

- MANIPULATION OR PADDING OF EXPENSE ACCOUNTS
- WHITE COLLAR CRIME: EMBEZZLEMENT, LARCENY.
FRAUD IN HANDLING RECEIVERSHIPS, FORGERY

MODERN KINDS OF THEFT:

- THEFTS INVOLVING VARIOUS FORMS OF

INFORMATION
- USE OF COMPUTERS
TRADE SECRETS – PROPRIETARY INFORMATION,
NONPUBLIC INFORMATION

INSIDER TRADING – THE ACT OF BUYING AND SELLING A

COMPANY’S STOCK ON THE BASIS OF “INSIDE’
INFORMATION
THE FIRM’S DUTIES TO THE EMPLOYEE

1. WAGES
FAIR WAGES DEPEND ON:
-LOCAL WAGES
-FIRM’S ABILITY TO PAY
-BURDENS OF THE JOB
-MINIMUM WAGE LAWS
-FAIR RELATION TO OTHER SALARIES IN THE FIRM
-Local Living Costs
2. WORKING CONDITIONS: HEALTH AND SAFETY

FAIR WORKING CONDITIONS:

- STUDYNG AND ELIMINATING JOB RISKS

- COMPENSATING FOR RISKS
- INFORMING WORKERS OF KNOWN RISKS-
INSURING WORKERS AGAINST KNOWN RISKS
SWEATSHOP - A WORKPLACE THAT HAS
NUMEROUS HJEALTH AND SAFETY HAZARDS
AND POOR WORKING CONDITIONS, LOW WAGES

JOB SPECIALIZATION – THE RESTRICTION OF

AN EMPLOYEES’S JOB TASKS (HORIZONTAL), OR
THE RESTRICTION OF AN EMPLOYEE’S JOB
CONTROL AND DECISION-MAKING POWER
(VERTICAL)
JOB SATISFACTION:

- DEPENDS ON EXPERIENCED MEANINGFULNESS,

EXPERIENCED RESPONSIBILITY, KNOWLEDGE OF
RESULTS
- IS INCREASED BY EXPANDING SKILL VARIETY, TASK
IDENTITY, TASK SIGNIFICANCE, AUTONOMY, FEEDBACK

THE CARING ORGANIZATION:

- CARING IS FOCUSED ENTIRELY ON PERSONS, NOT ON

“PROFIT”, OR “QUALITY”
- CARING IS UNDERTAKEN AS AN END IN ITSELF
- CARING IS GROWTH ENHANCING FOR THE CARED-FOR
THE MORAL PROBLEMS OF NOT CARING ENOUGH

1. PERSONAL BASIS
2. ORGANIZATIONAL LEVEL

- INDISCRIMINATE LAYOFFS
- LARGE IMPERSONALIZED BUREAUCRACIES
- MANAGERIAL STYLES THAT SEE EMPLOYEES AS
DISPOSABLE COSTS
- REWARD SYSTEMS THAT DISCOURAGE CARING
AND REWARD COMPETITIVENESS
 DEALING WITH ETHICS IN JOB DISCRIMINATION
 
THE NATURE OF JOB DISCRIMINATION
 
DISCRIMINATION – THE WRONGFUL ACT OF
DISTINGUISHING ILLICITLY AMONG PEOPLE NOT
ON THE BASIS OF INDIVIDUAL MERIT, BUT ON THE
BASIS OF PREJUDICE OR SOME OTHER
INVIDIOUS OR MORALLY REPREHENSIBLE
ATTITUDE
 
TITLE VII OF THE CIVIL RIGHTS ACT OF 1964
(AMENDED IN 1972 AND 1991)
IT SHALL BE AN UNLAWFUL EMPLOYMENT
PRACTICE FOR AN EMPLOYER (1) TO FAIL OR
REFUSE TO HIRE OR TO DISCHARGE ANY
INDIVIDUAL, OR OTHERWISE DISCRIMINATE
AGAINST ANY INDIVIDUAL WITH RESPECT TO
HIS COMPENSATION, TERMS, CONDITIONS, OR
PRIVILEGES OF EMPLOYMENT BECAUSE OF
SUCH INDIVIDUAL’S RACE, COLOR, RELIGION,
SEX, OR NATIONAL ORIGIN; OR (2) TO LIMIT,
SEGREGATE, OR CLASSIFY HIS EMPLOYEES
OR APPLICANTS FOR EMPLOYMENT IN ANY
WAY THAT WOULD DEPRIVE OR TEND TO
DEPRIVE ANY INDIVIDUAL OF EMPLOYMENT
OPPORTUNITIES OR OTHERWISE ADVERSELY
AFFECT HIS STATUS AS AN EMPLOYEE
BECAUSE OF SUCH INDIVIDUAL’S RACE,
COLOR, SEX, OR NATIONAL ORIGIN.
 
 
AFFIRMATIVE ACTION PROGRAM - A PROGRAM
DESIGNED TO ENSURE THE PROPORTION OF
MINORITIES WITHIN AN ORGANIZATION MATCHES
THEIR PROPORTION IN THE AVAILABLE WORKFORCE.
 EXTENTS OF DISCRIMINATION
LOOK AT STATISTICAL INDICATORS OF HOW
MEMBERS OF THE GROUP ARE
DISTRIBUTED WITHIN THE INSTITUTION:
 
THREE KINDS OF COMPARISONS:
1. COMPARISON OF THE AVERAGE
BENEFITS BETWEEN THE
DISCRIMINATED GROUP AND OTHER
GROUPS
2. COMPARISON OF THE PROPORTION OF
THE DISCRIMINATED GROUP IN THE
LOWEST LEVELS WITH THE
PROPORTIONS OF OTHER GROUPS
3. COMPARISON OF THE PROPORTIONS OF THE
DISCRIMINATED GROUP THAT HOLDS
ADVANTAGEOUS POSITIONS WITH THE
PROPORTIONS OF THE OTHER GROUPS
DISCRIMINATION IN THE UNITED STATES
 
THE INCOME GAP BETWEEN WHITES AND
MINORITIES HAS NOT DECREASED.
LARGE INCOME INEQUALITIES BASED ON SEX
EXISTS.
OVERALL, BLACK UNEMPLOYMENT IS MORE
THAN TWICE AS HIGH AS WHITE
UNEMPLOYMENT.
MINORITY POVERTY RATE IS 2 -3 TIMES WHITE
RATE.
POVERTY RATE OF FAMILIES HEADED BY
WOMEN IS 3 TIMES THAT OF MALE – HEADED
FAMILIES.
MOST HIGHER – PAYING JOBS GO TO WHITE
MALES.
Table 7.1
Average Family Incomes by Race and as Percent of White
(In Current Dollars), Alternate Years
White Family Black Family Hispanic Family Black as % of Hispanic as % of
Year Income Income Income White White
2001 $73,496 $43,938 $45,229 60 62
1999 68,363 42,793 41,890 63 61
1997 62,308 36,504 37,783 59 61
1995 55,971 34,011 32,654 61 58
1993 51,467 30,036 31,109 58 60
1991 46,715 27,571 29,998 59 64
1989 44,672 26,415 29,197 59 65
1987 39,598 23,772 25,850 60 65
1985 35,275 21,359 23,152 61 66
1983 30,766 18,317 20,393 60 66
1981 27,419 16,696 19,370 61 71
1979 23,608 14,508 16,773 61 71
1977 19,319 11,962 13,293 62 69
1975 16,367 10,401 11,096 64 68
Table 7.2
Average Earnings of Men and Women
(In Current Dollars), Alternate Years
Year Male Earnings Female Earnings Female as % of Male

2001 $51,535 $35,370 69

1999 47,532 31,116 65
1997 43,678 29,244 67
1995 40,359 26,531 66
1993 38,027 25,303 67
1991 34,354 22,949 67
1989 33,010 21,039 64
1987 29,918 18,856 63
1985 27,414 17,028 62
1983 24,594 15,157 62
1981 22,196 13,112 59

Source: Census Bureau, Historical Tables, P-39. Full Time, Year-Round Workers (All Races) by Mean Earnings and
Sex: 1967 to 2001, accessed August 6, 2004 at http://www.census.gov/hhes/income/histinc/p39.html.
Table 7.5
Median Weekly Earnings of Men and Women by Major Occupational Group, 2000
Median Weekly Earnings
Women’s as
Occupational Group
Percent of Men’s
Men Women

Executive, administrative, managerial $981 $674 69

Professional specialty 972 725 75
Technicians and related support 747 524 70
Sales occupations 697 410 60
Administrative support, including clerical 588 443 75
Service occupations 418 317 76
Precision production, craft, repair 623 421 68
Machine operators, assembles, inspectors 495 349 71
Transportation and materials moving 548 399 73
Handlers, equipment cleaners, laborers 395 320 81
Farming, forestry, fishing 329 279 85
Source: U.S. Bureau of Labor Statistics, Employment and Earnings, April 2000, Table D-22
Table 7.6
Percent of Whites, Blacks, and Hispanics Living in Poverty, 1987 – 2002, Alternate Years
Year % Whites in Poverty % Blacks in Poverty % Hispanics in Poverty

2002 8 24 22
2000 7 23 22
1998 8 26 26
1996 9 28 29
1994 9 31 31
1992 10 33 30
1990 9 32 28
1988 8 31 27
1986 9 31 27
1984 10 34 28
1982 11 36 30
1980 9 33 26
1978 8 31 22

Source: U.S. Census Bureau, Historical Poverty Tables, Table 2. “Poverty Status of People by Family
Relationship, Race and Hispanic Origin: 1995 to 2002, “ accessed August 5, 2003 at
http://www.census.gov/hhes/poverty/histpov/hstpov2.html
GLASS CEILING – AN INVISIBLE, BUT IMPENETRABLE,
BARRIER TO FURTHER PROMOTION SOMETIMES
ENCOUNTERED BY WOMEN OR MINORITIES.
 
INCREASING PROBLEMS FOR WOMEN AND MINORITIES
 
WOMEN AND MINIORITIES MAKE UP MOST NEW WORKERS
WOMEN ARE STEERED INTO LOW-PAYING JOBS AND FACE
A GLASS CEILING AND SEXUAL HARRASSMENT
MINORITIES NEED SKILLS AND EDUCATION BUT LACK
THESE
 
UNDERSTANDING UTILITY, RIGHTS, AND JUSTICE

UTILITY - TO ENSURE THAT JOBS ARE MAXIMALLY RODUCTIVE,

THEY MUST BE ASSIGNED TO THOSE INDIVIDUALS
WHOSE SKILLS AND PERSONALITY TRAITS QUALIFY THEM AS THE
MOST COMPETENT FOR THE JOB. 

RIGHTS - AT A MINIMUM, THIS PRINCIPLE MEANS THAT EACH

INDIVIDUALS HAS A MORAL RIGHT TO BE TREATED AS A
PERSON AND THAT ALL INDIVIDUALS HAVE A CORRELATIVE MORAL
DUTY TO TREAT EACH INDIVIDUAL AS A FREE AND EQUAL
PERSON.

JUSTICE - SOCIAL AND ECONIMIC INEQUALITIES ARE TO BE

ARRANGED SO THAT THEY ARE ATTACHED TO OFFICES
AND POSITIONS OPEN TO ALL UNDER CONDITIONS OF FAIR
EQUALITY OF OPPORTUNITY.
PRINCIPLE OF EQUALITY – INDIVIDUALS WHO
ARE EQUAL IN ALL RESPECTS RELEVANT TO
THE KIND OF TREATMENT IN QUESTION
SHOULD BE TREATED EQUALLY EVEN IF THEY
ARE DISSIMILAR IN OTHER, NONRELEVANT
RESPECTS.
 
ARGUMENTS AGAINST DISCRIMINATION:
 
- UTILITY: DISCRIMINATION LEADS TO
INEFFICIENT USE OF HUMAN RESOURCES
- RIGHTS: DISCRIMINATION VIOLATES BASIC
HUMAN RIGHTS
- JUSTICE: DISCRIMINATION RESULTS IN
UNJUST DISTRIBUTION OF BENEFITS AND
BURDENS
DISCRIMINATORY PRACTICES:
 
1. RECRUITMENT PROCESS – FIRMS THAT
RELY SOLELY ON THE WORD-OF-MOUTH
REFERRALS AND TEND TO RECRUIT ONLY
FROM THOSE RACIAL AND SEXUAL GROUPS
THAT ARE ALREADY REPRESENTED BY
THEIR LABOR FORCE.
2. SCREENING PRACTICES – JOB
QUALIFICATIONS ARE DISCRIMINATORY
WHEN THEY ARE NOT RELEVANT TO THE
JOB TO BE PERFORMED.
3. PROMOTION PRACTICES – WHEN
PROMOTIONS RELY ON THE SUBJECTIVE
RECOMMENDATIONS OF IMMEDIATE
SUPERVISORS. 
4. CONDITIONS OF EMPLOYMENT - WAGES
AND SALARIES ARE DISCRIMINATORY TO
THE EXTENT THAT EQUAL WAGES AND
SALARIES ARE NOT GIVEN TO PEOPLE WHO
ARE DOING ESSENTIALLY THE SAME
WORK.
 5. DISCHARGE – FIRING AN EMPLOYEE ON THE
BASIS OF RACE OR SEX.
 
SEXUAL HARASSMENT – UNDER CERTAIN
CONDITIONS, UNWELCOME SEXUAL
ADVANCES, REQUESTS FOR SEXUAL
FAVORS, AND OTHER VERBAL OR PHYSICAL
CONTACT OF A SEXUAL NATURE.
BESIDES RACE AND SEX, DISCRIMINATION CAN
BE BASED ON:
 
1. AGE
2. SEXUAL ORIENTATION
3. TRANSEXUAL STATUS
4. DISABILITY
5. OBESITY
 
 
 AFFIRMATIVE ACTION
 
COMPENSATORY JUSTICE IMPLIES THAT
PEOPLE HAVE AN OBLIGATION TO
COMPENSATE THOSE WHOM THEY HAVE
INTENTIONALLY AND UNJUSTLY WRONGED.
 
COMPENSATION ARGUMENT FOR AFFIRMATIVE
ACTIONS:
 
- CLAIMS AFFIRMATIVE ACTION
COMPENSATES GROUPS FOR PAST
DISCRIMINATION
- CRITICIZED AS UNFAIR BECAUSE THOSE
WHO BENEFIT WERE NOT HARMED AND
THOSE WHO PAY DID NOT INJURE
UTILITARIAN ARGUMENT FOR AFFIRMATIVE
ACTION
 
- CLAIMS AFFIRMATIVE ACTION REDUCES
NEED AND SO INCREASES UTILITY
- CRITICIZED ON GROUNDS THAT COSTS
OUTWEIGH BENEFITS AND THAT OTHER
WAYS OF REDUCING NEED WILL PRODUCE
GREATER UTILITY
 
EQUAL JUSTICE ARGUMENT FOR AFFIRMATIVE
ACTION
- CLAIMS AFFIRMATIVE ACTION WILL
SECURE EQUAL OPPORTUNITY
- CLAIMS AFIRMATIVE ACTION IS A MORALLY
LEGITIMATE MEANS
 
ARGUMENTS MADE AGAINST EQUAL JUSTICE
ARGUMENT FOR AFFIRMATIVE ACTION
- AFFIRMATIVE ACTION PROGRAMS
DISCRIMINATE AGAINST WHITE MEN
- PREFERENTIAL TREATMENT VIOLATES THE
PRINCIPLE OF EQUALITY
- AFFIRMATIVE ACTION PROGRAMS HARM
WOMEN AND MINORITIES
 
 
COMPARABLE WORTH PROGRAMS
 
- EQUALIZE PAY FOR JOBS REQUIRING
EQUAL RESPONSIBILITIES AND EQUAL
SKILLS AND OF EQUAL VALUE TO AN
ORGANIZATION
- BASED ON THE IDEA THAT EQUALS SHOULD
BE TREATED AS EQUALS