Ethics & Corporation 1

Corporate Social Responsibility

Chapter 4

Corporate
Social
Responsibility

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 Corporation and Society

Small
stakeholder Investor
Managing
Investor
stakeholder

principal shareholder
Gov’t
Community
Investment Return
agent Board of Directors
Civil So-
Corpo- CEO
Media ciety
ration
Managers
Employees

Outside Supplier
Consumer
Labor
3
 Corporate Social Responsibility

• Actions of an organization that are targeted towards the

achievement of a social benefit over and above maximizing
profits for its shareholders and meeting all its legal obligations

• Instrumental approach: Perspective that the only obligation of a corpora-

tion is to maximize profits for its shareholders in providing goods and ser-
vices that meet the needs of their customers

• Social contract approach: Perspective that a corporation has an obliga-

tion to society over and above the expectations of its shareholders
 Owner View Vs Shareholder View Vs Stakeholder View

“Profitis just a means

to the bigger pur-
pose.”
“The one and only one social
responsibility of business is Charles Handy
to increase its profits.”

“I am the company.”

The company exists for my family.

Shareholders are my hostages. “Shareholders own
Membership,
not Ownership.”

Lynn Stout
5
Conventional Wisdom

Shareholder View
Milton Friedman (July 31, 1912 – No-
vember 16, 2006) American
economist who received the 1976 Nobel
Memorial Prize in Economic Sciences.
 With George Stigler and others, Fried-
man was among the intellectual leaders
of the second generation of Chicago
price theory, a methodological move-
ment at the University of Chicago's De-
partment of Economics, Law School, and
Graduate School of Business from the
1940s onward.

"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, en-
gages in open and free competition without deception or fraud.“)
6

<Capitalism and Freedom>

6
 The Friedman Doctrine

• Milton Friedman takes a shareholder approach to social responsibility. This

approach views shareholders as the economic engine of the organization
and the only group to which the firm must be socially responsible. As such,
the goal of the firm is to maximize profits and return a portion of those
profits to shareholders as a reward for the risk they took in investing in the
firm. He advocates that the shareholders can then decide for themselves
what social initiatives to take part in rather than having their appointed ex-
ecutive, whom they appointed for business reasons, decide for them.

• Friedman argued that a company should have no “social responsibility” to

the public or society.
7

(from Wikipedia)
7
 Corporation vs Stakeholders
Corporate Citizenship
stakeholder stakeholder

- Tax
- Prompt Payment
Creditor Gov’t
- Compliance
- Acceptable Profit Margin
Ethical issues include the
rights and duties between a
company and its stakeholders
and its fiduciary responsibility- Default Creditor
- Employment
Community to its shareholders - Misleading financial statements
- Environment

Fair Treat- - Prompt Payment

- Acceptable Profit Margin
- Fair Exchange ment
Consumer - Safe and Reli- Supplier
Outside
able Products
Labor
8
 Shareholders vs Stakeholders
Corporate Citizenship
Real Owner of a Corporation?
Shadow Owner of a Corporation: Society
Stockholders or shareholders
An investor who holds preferred or common shares of a corporation.

Stakeholders

The individuals or organizations with an interest in the actions and impacts of an organiza-
tions, They may be customers, suppliers, shareholders, employees, communities, mem-
9
bers of special interest groups, non-governmental organizations, or regulators.

Numerous articles and books written on stakeholder theory generally credit R. Edward
Freeman as the "father of stakeholder theory."
Figure 2.2 - Stakeholder Impact from Unethical Behavior
Sustainablity is especially emphasized in the globalized economy
"All for ourselves, and nothing for other people, seems,
in every age of the world, to have been the vile maxim
of the masters of mankind.

The Wealth of Nations, Adam Smith

• Globalization: Expansion of international trade to a point where national markets

have been overtaken by regional trade blocs

• Multinational Corporation (MNC): Company that provides and sells products

and services across multiple national borders

In the pursuit of profit and continued expansion, MNCs have been found guilty of:
• Bribery
• Pollution
• False advertising
• Questionable product quality
• Abuse of human rights in the utilization of sweatshop production facilities
 Two Faces of Globalization

Advantages of globalization Disadvantages of globalization

• Bringing unprecedented • Developing countries are destroyed for

improvements in the standards their raw materials with no
concern for the longer-term
of living of citizens in developing
nations economic viability of their national

• Enables lower production costs economies

• Workers are exploited
that equate to lower prices and
• Corporations are free to take full
higher income standards for
businesses advantage of less restrictive legal
environments
 Reasons why MNCs choose to ignore ethical standards

• In less developed nations, the ideal black and white world of ethics must give way to a
gray area of ethical relativism

• Policies and procedures can be hard to follow when ones’ customers don’t have
comparable policies in their own organizations

• Policies that have been outlawed in developed nations may be standard operating
procedure in less-developed nations

• Social and political chaos can generate a bureaucracy that bears no relation to a
logical reality

• Less-developed nation: Lacks the economic, social, and technological infrastructure

of a developed nation
 Attitudes of MNC on ethical issues
in the past

• We are different!
We are living in a different cultural, societal, economic and legal environments.

• We didn’t know that!

Local corp. is an independent entity with a local CEO.

• We don’t have power!

We are neither missionaries nor teachers, nor civil movement group.

• They are hosts and we are guests!

We are supposed to respect host governments and
our intervention can cause a serious sovereignty infringement.
14
 Enforcing Global Ethics

• Enforcing a global ethical standard would require all parties involved to

agree on:
• Acceptable standards of behavior
• Appropriate consequences for failing to abide by those standards

• United Nations (UN) and the Organization for Economic Cooperation

and Development (OECD) promote behavior guidelines that MNCs can
publicly support and endorse
• Strong message to their stakeholders that they are committed to
ethical corporate conduct wherever they do business in the world
 Ethical Guidelines for Organizations

• Do no intentional harm
• Produce more good than harm for the host country
• Contribute to the host country’s development
• Respect the human rights of their employees
• Respect the local culture
• Pay their fair share of taxes
• Cooperate with the local government to enforce just background
institutions
 The UN Global Compact
• Voluntary corporate citizenship initiative endorsing 10 key
principles that focus on:
• Environment
• Anticorruption
• Welfare of workers around the world
• Global human rights
• Not a regulatory instrument
• Does not police, enforce, or measure the behavior or actions of companies

• Relies on:
• Public accountability
• Transparency
• Enlightened self-interest of companies, labor, and civil society
• To initiate and share substantive action in pursuing the principles on which the global compact
is based
The UN Global Compact
Human rights

• Businesses should support and respect the protection of internationally proclaimed

human rights
• Businesses should make sure that they are not complicit in human rights abuses

Labor standards

• Businesses should uphold the freedom of association and the effective recognition
of the right to collective bargaining
• Businesses should uphold the elimination of all forms of forced and compulsory
labor
• Businesses should uphold the elimination of discrimination in respect of
employment and occupation
• Businesses should uphold the effective abolition of child labor
The UN Global Compact

Environment

• Businesses should support a precautionary approach to environmental

challenges
• Businesses should undertake initiatives to promote greater
environmental responsibility
• Businesses should encourage the development and diffusion of
environmentally friendly technologies

Anti-corruption

• Businesses should work against all forms of corruption, including

extortion and bribery
Organization for Economic Cooperation and Development
(OECD)

• OECD guidelines for multinational enterprises

• Promote principles and standards of behavior in:

• Human rights, information disclosure, anticorruption, taxation, labor relations,
environment, competition, and consumer protection
• Governmental initiative endorsed by 30 members of the Organization for Eco-
nomic Cooperation and Development and 9 nonmembers
OECD Guidelines

• Carry no criminal or civil enforcement

• Offer standards of behavior across a series of issues covered
in ten chapters
• Concepts and principles
• General policies
• Disclosure
• Employment and industrial relations
• Environment
• Combating bribery
• Consumer interests
 CSR(Corporate Social Responsibility) Analysis
= Sustainability Analysis
=ESG Analysis

(1) Environment :
AS one of the lives in the Earth
Consideration for our descendants, neighbors, other species
and the Earth
(2) Society :
As a member of society
Consideration for other members of society
(3) Governance :
As a Fiduciary of a corporation
Consideration for the beneficiaries

24 24
(1) Environment

Environment
(2) Society

Social
(3) Governance

27
Corporate Governance
= The system by which business corporations are directed
and controlled

• Good corporate governance - Plays a vital role in underpinning the

integrity and efficiency of financial markets

• Poor corporate governance - Weakens a company’s potential and leads

to financial difficulties
 Corporate Governance

• Owners: major shareholders

• Board of directors: Group of individuals who oversee

governance of an organization

• Audit committee: Operating committee staffed by

members of the board of directors
plus independent or outside directors

• Corporate governance committee:

- monitors the ethical performance of the corporation and
- oversees compliance with the company’s internal code of ethics as
well as
- any federal and state regulations on corporate conduct
Figure 5.1 - Governance of the Modern Corporation

Source: Adapted from Fred R. Kaen, A Blueprint for Corporate Governance (New York: AMACOM, 2003).
 Effective Corporate Governance
• European business school INSEAD emphasizes corporate
governance as an organizational culture issue through
CRAFTED principles
• Consistency
• Responsibility
• Accountability
• Fairness
• Transparency
• Effectiveness
• Deployed through the organization
Two Governance Methodologies

• Comply or explain 
• Set of guidelines that require companies to abide by a set of
operating standards or explain why they choose not to

• Comply or else
• Set of guidelines that require companies to abide by a set of
operating standards or face stiff financial penalties
 EIRIS Methodology
weights
E D C B A
inadequate weak moderate good exceptional

Bottom Bottom Middle Top Top

15% 30~15% 40% 30~15% 15%
Environment … … … … …
- Proxy
Variables
Social … … … … …
- Proxy
Variables
Governance … … … … …
- Proxy
Variables
ESG Bottom Bottom Middle Top Top
Total 15% 30~15% 40% 30~15% 15%
33
Sustainability = Environment + Social + Governance
Score Score Score Score
Homework for the Course
Read ‘Conscious Capitalism’ and Find one case for presentation of your choice.
 Principal–Agent Problem
(agency dilemma)

- one person or entity (the "agent") is able to make decisions on behalf of, or that impact,
another person or entity: the "principal".
- Shareholder vs Corporate Manager , Electorate vs Politician
- moral hazard - conflict of interests - agency costs
“ We would expect to see specialization in the use of the low agency cost financing arrangement. In
industies where it is relatively easy for managers to lower the mean value of the outcomes of the en-
terprise by outrnght theft, special treatment of favored customers, case of consumption of leisure on
the job, etc. (for example, the bar and restaurant industry), we would expect to see the ownership
structure of fims characterized by relatively little outside equity (i.e., l00 percent Ownership of the eq-
uity by the manager) with almost all outside capital obtained through the use of debt.

The theory predicts the opposite would be true where the incentive effects of debt are large relative
to the incentive effects of cquity. Fims like conglomerates, in which it would be easy to shift outcome
distributions adversely for bondholders (by changing the acquisition or divestiture policy) should be
characterized by relatively lower utilization of debt Conversely, in industries where the freedom of
management to take rskier projects is severely constrained (for example, regulated industries such as
public utilities), we should find more intensive use of debt financing.” (pp69)”
Corporate Citizenship

shareholder
Small Manag-
Investor ing
Investor

stakeholder Creditability
Partnership

Responsibility Trust Stewardship

Creditor
Board of Directors
Community Corpo-
ration CEO
Managers Fairness
Employees
Protection

Fair Treatment
Co-existence
38
Supplier
Consumer
Outside
Labor
1. Shareholders vs Shareholders
Partnership problems
Treating partners fairly

Small Managing
Investor Investor
Partnership
shareholder

Trust Stewardship

Board of Directors
Corpo- CEO
ration
Managers
Employees

39
 Shareholders: Major vs. Minor

- Owners of major Korean conglomerates own just minor portion of

shares and exert full ownership power as 100% owner.

- Out of 1,753 listed companies with fiscal year ending Dec.31, 1,278
companies hold General Share Holders’ Meeting on one special
day(Friday) and 965 companies among them start GSM at early morn-
ing to discourage attendance of the minor shareholders.

40
Major shareholder: Agency Problems
“We do not choose as captain of a ship the
passenger who is of the best family.”
Descendant Successor
Pascal<Pensees>

• The Children of Korea’s major conglomerates receive special treatments from the
company. Without any performances or specialties they are promoted fast and
rise the corporate hierarchy in a very short time period.

- The 3rd or 4th generation of conglomerates owners start their career as

Executive Officers in their 20s.

- The rookies from the Family can climb the corporate ladder to the Executive
level in average 3 years, which is shorter than average starters’ promotion to
the lowest officer’s position(average 4 years).

41
Major shareholder: Agency Problems
Almost zero dividend to Shareholders

42
Major shareholder: Agency Problems
Over payment to CEOs
Importance of Dividend

Dividend Growth Stock

Year 1977 ------------------------------------ Year 1997

Exxon Mobil
Stock Price $6.02 $61.19
Dividend 37.5cents $1.63
Dividend Yield 6% 2.67%
dividend yield of Year 1997 calculated with
the Year 1977 investment amount is 27%.
(Treasury Bond Yield 7.5%)
Total Dividend Amount for 30 years: $3,585
Total Coupon Interests Received from 30 yr Treasury Bond: $1,500
44
2. Corporate Managers vs Shareholders

Fiduciary Duty Problem

Small Managing
Investor Investor
Partnership
shareholder

Trust Stewardship

Board of Directors
Corpo- CEO
ration
Managers
Employees

45
 Fiduciary Duty
Between Fiduciaries and Beneficiaries

Loyalty: Fiduciary should act in good faith in the interests of their beneficiaries
and should not act for the benefit of themselves or a third party.

Prudence: Fiduciaries should act with due care, skill and diligence, investing as
an ordinary prudent person’ will do.

Corporate Shareholders
Managers

National
Pension Pensioners
Service
 A Fiduciary Responsibility
• Corporate governance is about managers fulfilling a fiduciary responsibility
to the owners of their companies
• Fiduciary responsibility is based on trust

• Key safeguards
• Properly constituted boards
• Separation of the functions of chairperson and CEO
• Audit committees
• Vigilant shareholders
• Financial reporting and auditing systems
• Business ethics, as an area of study, is separate from the general subject
of ethics because: Stakeholders have a vested interest in the ethical performance
of an organization

▪ Profit and Loss Statement One Bottom Line

(black-and-white TV profit/loss)
Revenue
- Cost of Goods Sold ( raw materials, direct labor, ...)
= Gross margin
- Selling, General and Administrative expense (management operation, manager pay, …)
= Operating Income
+ Gains
- Losses
= Earnings Before Tax
- Income Tax
= Net Income Bottom Line
 Homework
1. Extract one Moral Issues from each story and Discuss.

春香傳
Chunhyangjeon
https://youtu.be/Fp8ykpHFu7U

忠臣藏
Chūshingura
https://youtu.be/BmVdD74SPkI
 忠臣藏 Chūshingura 春香傳 Chunhyangjeon

Loyalty and Revenge Chastity and Love above Classes

Issues in 忠臣藏 Chūshingura Issues in 春香傳 Chun-

hyangjeon

1 Power Harassment Premarital Sex

2 Bribery Chastity and Woman’s Character
3 Loyalty to Lord, Institution or Na- Chastity or Death?
tion?
4 Revenge as a Virtue? Power Abuse by Byun?
5 Japanese
Honorable Suicide?Society in Korean
Power Abuse Society in
by Lee?
忠臣藏 Chūshingura 春香傳 Chunhyangjeon

1 Organization and Discipline Family and Humanity

2 Martial Elite and Rule Literary Elite and Rule
3 Trust outside of a Family Trust outside of a Family?