the corporation and external stakeholders

8/10/2019 the corporation and external stakeholders

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CHAPTER FOUR

The Corporation

And

External Stakeho lders


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Corporate Social Responsibility

Corporate social responsibility (CSR) involves anorganizations duty and obligation to respond to itsstakeholders and the stockholders economic,legal, ethical, and philanthropic concerns and

issues Social concerns of stakeholders

Corporate interests

What is the philosophical and ethical contextfrom which corporate social responsibilityand ethical decisions are made? What role

does the free market play?


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Free Market Constraints

Minimal moral restraints

Full competitiveness with entry and exit

Relevant information available to everyone

Accurate reflection of all production costs inprices

(assumes an equal balance of power,knowledge, and sophistication)

Problems: Resource-rich firms create unequal information

Advertising is used questionably

Invisible hand does not exist for all situations

(imperfect markets)


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Social Contract

A set of rules and assumptions about behaviorpatterns among the parties to the contract

Changing

Used to be: stable, reliable, predictable Now: disregard for safety, equity, responsibilities

toward customers and society as a whole

Uneasiness with corporate power and influence

(violates the quid pro quo norm) Covenantal Ethicsconcerned with both social

and economic relationships


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Figure 4.1: External Stakeholders, Moral

Stakes, and Corporate Responsibilities


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Moral Bases for Social Responsibility

Trustee for societys resources

Two-way open system, open disclosure

Social costs and benefits

Consumer pays for consumption and effects

on society

Social involvement in core competency areas


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Competitive Advantages for Socially

Responsible Firms

1. Reputation

2. Successful social investment portfolios3. Ability to attract quality employees

Expectation of public that organizations willengage in philanthropy


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Corporate Social Responsibility

and Stakeholder Management

Balancing Carrot and Stick approaches

Carrotvoluntary self-regulation

Vision/Mission/Values

Ethics programs Best Practices/Risk Management

Philanthropy

Stickexternal regulatory compliance

Laws; court cases

Regulation

Congressional oversight


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Summary of Sarbanes-Oxley 2002

Establishes an independent public company

accounting board to oversee audits of public

companies

Requires one member of the audit committee to bean expert in finance

Requires full disclosure to stockholders of complex

financial transactions

Requires CEOs and CFOs to certify in writing thevalidity of their companies financial statements

Prohibits accounting firms from offering other

services, like consulting, while also performing audits


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Best Practices for

Corporate Boards of Governance

1. Separating the role of chairman of the board when theCEO is also a board member

2. Setting tenure rules for board members

3. Regularly evaluating itself and the CEOs performance4. Prohibiting directors from serving as consultants to the

companies which they serve

5. Compensating directors with both cash and stock

6. Prohibiting retired CEOs from continuing boardmembership

7. Assigning independent directors to the majority ofmembers who meet periodically without the CEO


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Cons and Pros of Sarbanes-Oxley

Pros The costs of implementing is

minimal compared to the costs ofnot having it

The changes required to enact this

law are difficult, but more than 70%of directors viewed the law aspositive

The data does not support theargument that this law presents acompetitive disadvantage to globalfirms

Financial officers may in fact besuffering from the lack of internalcontrols they had before

If a company uses the Sarbanes-Oxley Act as a reason to not gopublic, the firm should not go publicor use investors funds

Cons It is too costly

Government costs also increase

to regulate the law

It impacts negatively on a firmsglobal competitiveness

CFOs are overburdened andpressured by having to enforceand assume accountability

An exodus will occur of publiccompanies returning to privateownership


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Revised 1991 Federal Sentencing

Guidelines: Compliance Incentive

1. Established standards and procedures capable ofreducing the chances of criminal conduct

2. Appointment of compliance officer(s) to oversee plans

3. Took due care not to delegate substantial

discretionary authority to individuals who are likely toengage in criminal conduct

4. Established steps to effectively communicate theorganizations standards and procedures to allemployees

5. Took steps to ensure compliance through monitoringand auditing

6. Employed consistent disciplinary mechanisms

7. When an offense was detected, took steps to preventfuture offenses, including modifying the compliance

plan, if appropriate


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The Role of Laws and the Regulatory

System in Corporate Governance

Regulate competition

Protect consumers

Promote equity and safety

Protect the natural environment

Ethics and compliance programs to deter and

provide for enforcement against misconduct


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Five Goals of Government Policy Makers

toward Consumers

1. Providing consumers with reliable information

about purchases

2. Providing legislation to protect consumers

against hazardous products3. Providing laws to encourage competitive

pricing

4. Providing laws to promote consumer choice5. Protecting consumers privacy


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Examples of Laws Promoting and

Prohibiting Corporate Competition

Sherman Antitrust Act, 1890: Prohibits monopolies

Clayton Act, 1914: Prohibits price discrimination, exclusivity,activities restricting competition.

Federal Trade Commission Act, 1914: Enforces antitrust laws

and activities. Consumer Good Pricing Act, 1975: Prohibits price

agreements in interstate commerce between manufacturersand resellers.

FTC Improvement Act: Empowers the FTC to prohibit unfairindustry activities.

Antitrust Improvements Act, 1976: Supports existing antitrustlaws and empowers Justice Department investigativeauthority.

Trademark Counterfeiting Act, 1980: Gives penalties forpersons violating counterfeit laws and regulations.

Digital Millennium Copyright Act, 1998: Protects digital


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Responsibility toward Consumers

Duty to inform fully and truthfully

Duty to not misrepresent or withhold

information

Duty to not force or take undue advantage of

through fear or stress

Duty to take due care to prevent foreseeable

injuries


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Examples of Laws

Protecting Consumers

Pure Food and Drug Act, 1906: Prohibits mislabels on food anddrugs in interstate commerce.

Federal Hazardous Substances Act, 1960: Controls labels onhazardous substances of products used in houses.

Truth and Lending Act, 1960: Requires full disclosure of credit terms

to buyers. Consumer Product Safety Act, 1972: Establishes safety standards

and regulations of consumer products (created the ConsumerProduct Safety Commission (CPSC)).

Fair Credit Billing Act, 1974: Requires accurate, current consumercredit reports.

Telephone Consumer Protection Act, 1991: Issues procedures toavert undesired telephone solicitations.

Childrens Online Privacy Protection Act, 1998: Requires the FTC tomake rules to collect online information from children under 13years old

Do Not Call Implementation, 2003: Coordinates the FTC and FCCto provide consistence rules on telemarketing practices.


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Examples of Laws

Protecting the Environment

Clean Air Act, 1970: Designated air-quality standards; stateimplementation plans required for approval.

National Environmental Act, 1970: Established policy goals forfederal agencies; enacted the Council on Environmental Quality tomonitor policies.

Federal Water Pollution Control Act, 1972: Prevents, reduces, andeliminates water pollution.

Endangered Species Act, 1973: Provides a conservation programfor threatened and endangered plants and animals and theirhabitats.

Noise Pollution Act, 1972: Controls noise emission of manufactured

products. Safe Drinking Water Act, 1974: Protects the quality of drinking water

in the U.S; sets safety standards for water purity and requiresowners and operators of public water to comply with standards.

Toxic Substances Act, 1976: Requires testing of certain chemicalsubstances; restricts use of certain substances.

Food Quality Protection Act, 1996: Requires a new safety standardth t t b li d t ll ti id d f d bl

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the corporation and external stakeholders