The Corporate Environment

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17 Νοε 2013 (πριν από 4 χρόνια και 7 μήνες)

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The Corporate Environment

William J. Frey

College of Business Administration

University of Puerto Rico at Mayaguez

Some sources

Stone, C. D. (1975) Where the Law Ends: The Social
Control of Corporate Behavior. Prospect Heights, IL:
Waveland Press, INC: 1
30. (History of Corporation)

French, P.A. (1984) Collective and Corporate
Responsibility. New York: Columbia University Press.
(Corporate Responsibility based on CIDS)

, B. and French, P.A., eds. (1985) Corrigible
Corporations and Unruly Law. San Antonio, TX: Trinity
University Press. (Corporate Punishment)

. (2009). The Invisible Hook: The Hidden
Economics of Pirates. Princeton: Princeton University
Press: 44
81. (Pirate Articles of Agreement)

Ritz, Dean. (2007) "Can Corporate Personhood Be
Socially Responsible?" in eds. May, S., Cheney, G., and
Roper, J., Oxford, UK: Oxford University Press: 194

Tentative Schedule

October and November


Introduce Corporate responsibility


Groups prepare for town meeting


Burger Man town meeting



Debrief Burger Man and Pirate
Corporate Analogy (Corporate Internal
Decision Structures)


Prisoner’s Dilemma (Cooperation versus Competition)


Milgram and

(How organizational environments constrain
human action and identity)


Review for Exam


Third Exam (Codes and Organizations)


Hughes Case


Group Preparation for Dramatic Rehearsals


Dramatic Rehearsals (Acting, Storyboards, Reflections)


Responsible Dissent (Exit, Voice, Loyalty)



Class Evaluations/Group Self Evaluations/Hughes Storyboard & Reflections


Class Evaluations/Group Self
Evaluations/Hughes Reflections & Reflections

Terms from History of Corporation



(a business ethicist) characterizes property, not as a single right,
but as a “bundle of associated rights.” These include the right to “possess,
control, use, benefit from, dispose of, and exclude others” from one’s property


Literally “beyond the power”. If a corporate charter designates something as
” in relation to the corporation, it literally means that this action
goes beyond the legitimate powers of the corporation.

Implied Powers

If a company knows of an activity (or should know of it) and still permits the
activity to continue, then its consent is implied and the power to perform the
action implied.

Joint stock company


and 18

centuries in Great Britain. Companies were formed to carry out
complex business activities. Investors put their money into the venture and
managers oversaw the activities. Joint Stock Companies produced problems
because of unlimited liability

Corporate shield

The corporate shield protects investors by distributing financial risk. Investor
liability limited to amount of investment.

Agency and Charters

Law of Agency

Responsibility of agents to remain faithful to the interests of principals


Originate action and determine its goal. Delegate executive authority
to agent if unable to execute action working alone


Carries out or completes action originated by another. Responsible to
principal to remain faithful to the principal’s goals and interests

Corporate Charter

Founding document of corporation

Originally the charter was a device of corporate control because it
outlined what the corporation could and could not do. If not
permitted by charter it was ultra

(=beyond the power).

Charter Mongering

Charters allow incorporation for all legal activities. Charter no longer
defines boundaries for legitimate and illegitimate corporate activities

Corporate legal and moral responsibility

Corporation Internal Decision Structure or CIDS

Corporate goals, decision recognition rules, roles, and organizational flow chart

Licenses re
describing individual actions as corporate actions.

Corporate Responsibility

Holding corporations legally and morally responsible for actions performed in their
name. Creates philosophical problems concerning the meaning of “personhood”
and “agency.”

Legal Person

Created in and through the law. A legal person has legal standing: it can sue and be
sued. Legal persons also have legal rights and duties.

Natural Person

Primarily human beings. Natural persons act through the medium of their bodies.
Natural persons also have minds which form intentions (goals, purposes). Criminal
law applies to natural persons who have minds (that form intentions), bodies (that
act to realize intentions) and a connection between the two such that minds direct
the activities of bodies.

Principle of Responsive Adjustment

Moral agents have an obligation to adjust their actions and habits to respond to
lessons learned from the past.

Stock Dilution

A corporate punishment (a fine) that goes beyond the deterrence trap by tapping
into the future earnings of a corporation. The stock of a company is divided (or
diluted) and the additional shares are distributed to the victims of corporate
wrongdoing or to the state. These shares are, then, liquidated at some future date.

1. Proto
Corporation is a Passive
Device to hold property

A monastery is not just the private property of
the abbot

The Church emerges as an abstract legal entity
that holds property

No problem of succession when abbot dies; abbot
doesn’t own it

the Church does

What’s the Church? Something that “owns” property

Passive: it doesn’t do anything but own property

2. Proto Corporations called Trade Guilds
regulate the practice of a trade

Proto Corporations created called Trade Guilds to self
regulate the practice of a trade

Example: Shoe Makers

A skilled craft or trade

Learn through apprenticeship


Purpose: to regulate a practice or trade. Why…?

Members make more money

guild becomes monopoly
(controls who can practice) and dictates prices for services

More social responsibility exercised: sets standards and
punishes individuals who fail to meet standards

3. Proto
Corporations called Joint Stock Companies
pool capital to oversee complex ventures

Problem: How to organize and fund complex trading

Solution: Joint Stock Companies

Device to “pool” or raise capital/money

Example: Outfitting a ship to travel to Orient and collect spices

Also distributed benefits and burdens of enterprise

Investors pay into venture. If successful they get a share of the profits

New Problem: Unlimited liability

Venture fails. Investor liability to creditors is unlimited

Key Innovation in Joint Stock Companies: Managers

distinguished from

Owners become
Principals and originate venture

Managers become
Agents and execute venture

4. Chartered Corporations

Innovation: Limit Investor liability

Financial risk is necessary for the growth of business

Unlimited liability discourages potential investors

Investors back off due to fear of going to debtor’s prison

Liability limited to original investment to distribute
risk and encourages investment

Innovation: Control Corporations by charter

Legal device that sets boundaries by specifying a
corporation’s legitimate activities

Anything beyond the charter is “
” or beyond
the power of the corporation

New Problem: Charter Mongering

Competition between States for incorporation
privileges leads to watering down of effectiveness
of charter

Charters now licenses all legally activities

Illegal actions or activities are literally beyond the
power of the corporation.

Corporation can do no wrong.

Period of unprecedented growth in corporate
scope and power

5. Corporations become legal persons

Solution: Control corporations through law

corporation becomes a legal person

Legal Standing: Right to sue and be sued

Commercial Free Speech (Advertising)

commercial Speech (Political Speech)

First National Bank of Boston v.

Majority Opinion:

Regulating speech by speaker sets a dangerous

Minority Dissenting Opinion:

Corporate non
commercial speech can
drown out
speech of natural/individual persons

The corporation can be understood as a series of interrelated
solutions to different, successive historical problems



Organizational Form

Successfully transferring
stewardship over church
holdings to new abbot

Create a “passive

hold property”


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潦⁡ 灲慣aice


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灡牴pc畬慲u瑲慤aH ⡢(
敳W慢汩獨⁲畬敳 慮a

慮a ⡣⤠桯汤猠c潵牴猠o漠
among members

Medieval guilds that evolve
into regulated companies

Pooling capital and
resources and directing
complex ventures

Create a device (a) to hold
privileges of trade (b) where
investors provide capital and
(c) that delegates operations
to managers

Unchartered joint stock

As modern corporation emerges, limiting
but fixing liability becomes central concern



Organizational Form

Limiting investor liability,
limiting manager liability,
and balancing the two


evolves into a
legal person with (a) legal
rights and duties, (b)
owned by shareholders, (c)
run by managers, (d)
regulated through state

Limited corporation whose
operations are defined in
and limited by the charter


prevents growth) and
Charter Mongering

Granted broad powers
through more broadly defined

Corporation as an essential
business tool

Finding agent

for wrongdoing

(a) Due Process, equal
protection, and free speech
rights, (b) legal duties, (c) legal
standing, (d) Federal
Sentencing Guidelines, and
Oxley Act

Corporation as a legal

Sample Corporate Rights

Conferred by common law precedent

Right for judicial review on state legislation

Right for judicial review for rights infringement by federal

Protection against “unreasonable searches and seizures”

Right to trial by jury

Right to compensation for government takings

Right to freedom from double jeopardy

Right to trial by jury in civil case

Right to free commercial speech

Right to corporate political speech

Right against coerced speech

Right to form Political Action Committees and fund them

A Problem From Theory of Agency

Managers (agents) must remain faithful to owner
(=principal) interests

But managers are rational, self
, so…

their interests do not coincide with those of owners

nothing prevents them setting aside owner interests
and pursuing their own.

We need a strong Board of Directors where

set corporate policies and goals

monitor management compliance

punish non
compliance (
Business Judgment Rule

How do we punish corporations?

Corporations have no soul to damn or body to

Corporations have no


or guilty state of

Corporations cannot commit an


action) because corporations do not have bodies

If there is no



, then there
can be no causal relation between the two

Therefore, corporations cannot be tried under
criminal law

Governance depends on theory of
Human Nature


compliance approach

Humans are rational self

Human nature is complete
apart from any relation to
nature or society

Agent relation
requires external sanctions
to keep agents aligned with
principal interest

Humans are political/social
animals (Requires stewardship

Animal spirits deflect from
rational self interest

Humans are related
essentially to social and
natural surroundings

Agents, because not self
, can
exercise stewardship over
principal interests

Burger Man

Stakeholder: Animal Rights/Welfare Group and
Agriculture Suppliers (Cattle People)

Issue: Burger Man is responsible for humane
treatment of animals and is culpable if suppliers
mistreat animals

Argument: Burger Man can exercise control
through supplier choice. If they can exercise this
control, then they ought to do so. Also, this does
not go beyond their responsibility as a business
corporation since they are responsible for what
they can causally influence.

Burger Man

Stakeholders: Burger Man shareholders (
) and
Consumer Health Advocacy Group

Issue: Burger Man is responsible for the bad dietary habits
of its customers

Dietary habits are not entirely within the control of
individuals, neither in their acquisition nor in changing
them when they are found unhealthy. Restaurants can
influence the formation of dietary habits both in the menu
options they provide and the way in which they prepare
food (brain awards foods with salt, sugar, and fat).
Consequently, because they can form and change dietary
habits, food servers are responsible for producing good
habits and changing bad ones.

Burger Man

Stakeholders: Local Government (representing local
community in which Burger Man operates) and Burger
Man management

Issue: Burger Man has special responsibilities for the
welfare and wellbeing of the local communities in
which it operates

Corporations and the communities in which they
operate are mutually dependent. They have a self
interest stake in working toward mutual benefit.
Because companies have a huge impact on community
wellbeing, they have a moral responsibility to choose
their actions responsibly. This includes developing
community development projects beyond business
scope as a part of their corporate social responsibility.

Your task

Assess and/or outline Burger Man’s social
responsibilities as a corporation

Make arguments with premises (evidence) and conclusions
(Take a position and state it at the beginning and end of

Your arguments must support a position on corporate

Your arguments must have ethical content (tests, values,

Address responsibility specifically in the context of your
issue from the point of view of your stakeholder

Be civil and make a special effort to listen carefully and
respond thoughtfully to the arguments of other groups

Pirate Inc.

The analogy between the modern
corporation and the pirate ship

CID Structures

Corporate Goals

Decision Recognition Rules and Procedures

Corporate Roles

Corporate Organizational or Managerial System
(Flow Chart)

In business corporations

In Pirate Inc.

In your work groups

Corporate Internal Decision Structures

Corporate Goals
: Principle objective of the


Informal charter

Core Values and Mission Statement

Decision Recognition Structures

Rules and procedures that help us to recognize
individual actions as a corporate actions

Example: liquidating travel budget after a trip (Not a
private vacation but a corporate activity)

Corporate Internal Decision Structures


An individual’s station and its associated duties within the
corporate hierarch itself

Organizational management structure embodied in the
organization’s flow chart

How the roles are coordinated with one another within the
corporation’s managerial system.

Reporting relations. The corporate ombudsperson reports
to the CEO.

All four components of the CIDS work together to
synthesize, coordinate and subordinate individuals
and their actions in the performance of the
corporations activities.

Ethics of Teamwork


What are your value goals for the semester?

Recognition rules and procedures

What rules and procedures that signal when you are
acting for your group? (When are you subordinating
individual interest to group interest?)


Leader, spokesperson, mediator, secretary/
documenter, devil’s advocate, motivator, conscience

Flow chart or management system

How do you coordinate different individuals and their

Your job this semester as you
“incorporate your group”

Build a Corporate (group) Internal Decision Structure

Finalize your goals

Identify and test procedures that help to recognize actions of your
group’s members as group actions

Identify and distribute the roles that individuals are playing in your

How is your group organized? How do you synthesize and subordinate
individual actions and decisions into group actions and decisions?

Draw a picture of your group’s CID Structure

Organize it as a flow chart from a class assignment to final group

How does your group collect disseminated knowledge and skill from
your individual members?

What is the greatest challenge you have faced so far?

What is your response?

Have you kept your goals and procedures “in tact” as you have faced

Pirate Charter

Articles of Agreement

Signed by each member of the pirate crew

Outline the ship’s hierarchical structure

Detail the different roles of the pirate community

Recruitment and Public Relations

Democratic election of captain offered alternative to
authoritarian captains of military and merchant marine

Attempted to overcome anti
pirate propaganda and
portray pirates more as responders to injustice than
parasitic thieves.

Pirate crew, itself, plays the
role of directors
of the
pirate corporation when it holds an election of captain
and quartermaster

Pirate Decision Recognition Rules

Majority vote by crew to elect captain and

Captain Roberts: “Every Man has a Vote in the
Affairs of Moment; has equal Title to the fresh
Provisions, or strong Liquors, at any Time seized,
and may use them at Pleasure, unless a Scarcity
make it necessary, for the Good of all, to vote a
Retrenchment.” From
, 62

Pirate Roles


By charter, members of crew become directors when they elect
by vote the captain and quartermaster


Captain and Quartermaster: Crew has to follow orders of
captain when the ship is engaged in battle; otherwise, they can
remove “managers” by vote (Something like the Business
Judgment rule which allows stakeholders to sue managers)

Professional Crew
(individuals with highly valued
knowledge and skill)

Surgeon, carpenter, caulker,
, musician

“Ye ship’s surgeon shall have two hundred crowns for the
maintenance of his medicine chest and he shall receive one part
of the spoil.” (Custom of the Brothers of the Coast)

Unskilled Crew

Draftees (Kidnapped)

Pirate Flow Chart

Directors (Voting
members of crew)

Skilled Crew: surgeon,
carpenter, caulker,
, musician

Unskilled Crew

Unskilled crew:
Draftees (Shanghaied)

Elect a Captain &

These appoint…

Creating Corporate Responsibility and
Agency by Re
Description from CIDS

CID Structure licenses (permits) a re
of a human action as a corporate action if it can
be directly related to all elements of the
corporation’s Internal Decision Structure.

Thus X (an action performed by an individual) can
be re
described as Y (a corporate action) if…

It carries out a corporate policy as outlined in the
charter, mission statement, or values statement

Takes place in accordance with a decision recognition

Is performed as a part of carrying out a corporate

And this role has a clear and designated location in
the corporate flow chart

Example from Pirate World

Setting aside 200 crowns for the maintenance of the
surgeon’s medicine chest…

Contributes to the pirate ship’s overall objective of
maintaining a healthy crew

Conforms to a decision recognition rule spelled out in the
pirate ship “Articles of Agreement”

Carries out a role responsibility (It’s the quartermaster’s
job who has the overall responsibility of distributing spoils)

And the quartermaster role has a clearly designated place
in the overall pirate ship hierarchy (Quartermaster is
selected by the crew serving as directors, reports to the
captain, etc.)

Example from Business

Arthur Andersen (consulting, not
accounting) shred documents to

accounting irregularities with Enron

AA charter (any corporate charter)
stipulates that illegal activities are ultra

(beyond the power of the

So blame our employees who were acting
alone without corporate sanction or

Arthur Andersen continued

Nevertheless the U.S. prosecutor decided
to prosecute AA to the fullest extent of
the law

Their actions, for a time, benefitted the

Supervisors did not stop them (=implied

AA no longer exists

Corporate death sentence

The Organizational Environment


Distributes risk

Carries out complex ventures

Pools capital, expertise, and human resources


Roles become a part of our identity

No long act for self but for organization

Roles set boundaries for what we can do from within
role (Teacher can’t sell insurance to students)

Roles conflict with one another

Roles can be wrong or evil (The “morality of the role”)

Driven Companies

Managers (line role) make decisions while
professionals (staff role) provide information

Ethical values are side constraints to the
pursuit of financial value

Praise goes up while blame goes down the
corporate hierarchy

Employees generally withhold bad news from

DPOs are considered to be breaches of loyalty

Customer Driven Companies

Managers make final decisions but professional
employees are expected to advocate for ethical
and professional standards

Customer satisfaction trumps ethical
considerations when the two conflict; ethical
values are still side constraints but closer to

Professional employees can be blamed for failing
to raise ethical and technical issues

Bad news is no longer withheld

Dissent (Bad News) is a part of role responsibility
rather than disloyalty

Quality Driven Companies

Decisions made in interdisciplinary teams
where all have equal participation (emphasis
on reaching consensus)

Ethical values are central

Ethical advocacy no longer necessary; rather
professionals provide effective means to
realize ethical ends

Bad news not withheld

Dissent dissolves into lack of consensus which
is met by more discussion

How the organization constrains
the individual


and authority


Prison Experiments



How much of an electric shock would
experimental subjects give on the basis of

Many gave what they thought was a lethal shock
on the basis of the authority of the “scientist”

But they evidenced conflict

Acting on their own, they wouldn’t have done it

But they were playing the role of “teacher” in the


Prison Experiments

Stanford University students role play as
prisoners and prison guards in experiment
carried out in 1970s

Prisoners lose their personal identities and
become “prisoners” and numbers

Guards become sadistic and become
psychologically and physically abusive

The roles we play can take over our identities

Counter Activities

Step Program advocated by

in the
Lucifer Effect


I am responsible

I will assert my unique identity

I respect just authority but rebel against unjust

I will not sacrifice personal or civic freedoms for the
illusion of security


said, “You have no choice but to
continue with the experiment…”

: “I came here on my own free will”

Gretchen Brandt: “I think we are here on our own free

“Perhaps we have seen too much pain”

Corporate Control through

Fining doesn’t work

Deterrence is a function of risk of getting caught times the
gain of breaking the law

Frequently, to deter the fine must be more than the worth
of the corporation

Stock dilution gets beyond the deterrence trap by
tapping into the future earnings of the corporation

But corporations do wrong not just in pursuit of
financial values

group power plays

Individuals who go maverick

Punishment criteria (Table in Module)

Go after the CEO

But the corporation functions as a shield (See, hear, speak no evil

Target of the Punishment

Financial and Non
financial values (like reputation)

Does the punishment deter (i.e., get around the “Deterrence

Deterrence is a function of risk times gain

Deterrence could require setting find beyond worth of corporation

Stock Dilution does because it taps into future earnings of the

Does the punishment address non
financial values?

group conflicts may lead to corporate wrongdoing

Does punish lead corporation to change itself or is change imposed
from the outside?

Court ordered adverse publicity or “shaming” the corporation

Probationary Orders

Punishment criteria (Table in Module)

Does the punishment encourage a responsive

Federal Sentencing guidelines require proof of the
corporation’s having taken preventive measures
(social and legal audits)

Does the punishment encourage a company to
“change its ways” to avoid repeating the wrongdoing?

Does the punishment interfere with corporate
autonomy (=corporate black box)

Stone argues that probationary orders that mandate
changes in CIDS are necessary for habitual offenders

Tentative Schedule

October and November


Introduce Corporate responsibility


Groups prepare for town meeting


Burger Man town meeting



Debrief Burger Man and Pirate
Corporate Analogy (Corporate Internal
Decision Structures)


Prisoner’s Dilemma (Cooperation versus Competition)


Milgram and

(How organizational environments constrain
human action and identity)


Review for Exam


Third Exam (Codes and Organizations)


Hughes Case


Group Preparation for Dramatic Rehearsals


Dramatic Rehearsals (Acting, Storyboards, Reflections)


Responsible Dissent (Exit, Voice, Loyalty)



Class Evaluations/Group Self Evaluations/Hughes Storyboard & Reflections


Class Evaluations/Group Self
Evaluations/Hughes Reflections & Reflections