Capitalism and Socialism: Case Study: Uber

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Prepare:
Your initial post in this discussion must be informed by the required material for this discussion. The required material for this discussion will introduce you to what is new about Uber as a business model, the profit incentive in business, and how laws can make or break innovation in business. Your preparation should focus on the characteristics of capitalism and socialism, as well as other business concepts presented in the required material. Since your initial post in this discussion will examine the relation between running a business such as Uber and the laws and economic system of the nation(s) in which it operates, make sure to comb the material on Uber for laws, regulations, and the economic setting that affect its operations. You are encouraged to research relevant laws and regulations to make sure that you have current information.
Reflect:
Keep in mind that Uber has presented itself into the market not as a transportation service but as a service that pairs consumers with ride sharing services by means of a unique phone app. But some sources—including the taxi industry and one California court finding (details in the required material), as well as the characterization of Uber presented in Section 3.4 of the textbook—seem to challenge this branding. According to these sources, Uber is avoiding laws that apply to the transportation industry and, thereby, usurping a rightful place that the taxi industry has carved for itself. Consumers, on the other hand, have shown their preference for Uber by a high demand for its services in the USA and abroad, including those countries in which Uber has been banned. Compared to taxis, Uber offers consumers an efficient system for procuring a ride even in remote areas where taxis do not frequent, a convenient payment method (no need for cash, and fares can be split among different users on the same ride), and significantly cheaper fares compared to taxis. In many instances, Uber cars come equipped with water, candy, and magazines, all for free. Uber drivers are also better off because they keep the majority of the fares for the rides that they service, which is exactly the opposite case of taxi drivers, and they can choose when they want to work. Clearly, this is a controversial case and thus very apt for the examination for this discussion.
Keep in mind that a nation’s economic system is shaped by the laws that are in place. Accordingly, laws (including state regulations and local ordinances) will give you a clue for the kind of economic system that exists. Keep in mind also that most nations have mixed economies and there is probably no economic system that purely represents socialism or capitalism. So you will find a different combination of both socialism and capitalism in any nation that you are examining.
Write:
You have four tasks for your initial post. In order to present an organized post, address each one of these tasks in a separate paragraph and in the following order. Your first task is to articulate the economic system (or combination of characteristics of both socialism and capitalism) that such laws depict. Your second task is to examine the laws that either support or limit the operations by Uber. Your third task is to analyze how your findings from your first and second tasks affect Uber. And your fourth task is to present your moral position with regard to Uber. For this latter task, you will need to identify one of the three ethical theories covered in the Week 1 (utilitarianism, deontology, or virtue ethics) as support for the moral position that you are taking. For example, you may hold the moral position that Uber is morally justifiable because it provides a good for consumers that fills in a gap that had not been met by the taxi industry. Or you may take the position that Uber’s positioning in the market is
3 Corporations
iStock/Thinkstock
Learning Objectives
After reading this chapter, you should be able to:
• Explain the nature and main features of corporations.
• Discuss the principal ways of punishing corporations.
• Assess the merits of various efforts to create an ethical corporate culture.
• Discuss the main threats to ethical corporate culture and how to combat them.
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Chapter Outline
Introduction
3.1 The Nature of Corporations
Corporate Structure
Four Features of Corporations
Shell Corporations
Moral Agency of Corporations
3.2 Punishing Corporations
Six Types of Corporate Punishment
Federal Sentencing Guidelines
Consumer Retaliation
3.3 Ethical Corporate Culture
Stakeholders and Corporate Social Responsibility
Mission Statements and Codes of Ethics
3.4 Threats to Ethical Corporate Culture
The Profit Motive
Strategic Misrepresentation
Groupthink and Organizational Schizophrenia
Conclusion
Introduction
When you think of the word “corporation,” you most likely think of a concept that is relatively
young. But corporations have actually existed for around 2,000 years. By medieval times,
corporations had already been used for establishing churches, universities, and monasteries.
They were also used for creating trade guilds, which were associations of craftspeople, somewhat
like modern-day trade unions.
By the 15th century, corporations had become an important tool for funding colonial ventures
as well. Establishing colonies in distant lands was a vastly expensive undertaking, but
through the mechanism of incorporation, the investment costs could be covered by a number
of people, not just a single investor. Thus, in 1606, the King of England granted a corporate
charter to the Virginia Company to establish settlements along the Atlantic coast in
North America, and investors held stock in that company. Unfortunately, its first settlement,
Jamestown, was a disaster, with all but 61 of its first 500 settlers dying from disease and starvation.
Thus, after 18 years of struggle, the king revoked the Virginia Company’s corporate
charter and took governmental control of its colonies.
Introduction
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The Nature of Corporations Section 3.1
Many early colonial corporate ventures like the Virginia Company were affiliated with governments
and were intended to establish territorial monopolies for imports and exports. But
with the movement toward free-market economics in the late 18th century, newer corporations
became less affiliated with guilds and governments and more with private businesses.
This is the model of the corporation that we have today.
Whether large or small, conducting business today typically means running a corporation—
so much so that the terms business and corporation are almost synonymous. In this chapter,
we will look at the defining characteristics of a corporation, methods of punishing those
that break the law, the ethical character of corporate culture, and threats to ethical corporate
culture.
3.1 The Nature of Corporations
The first issue to consider is the nature of the corporation itself. In this section, we discuss
corporate structure, the four main features that define a corporation, shell corporations, and
whether corporations can have moral responsibility in the way that people do.
Corporate Structure
Although the focus of this chapter is on corporations, a corporation is just one of five business
structures recognized by the U.S. Internal Revenue Service, as shown in Table 3.1. Corporations
are defined as legally recognized independent entities owned by shareholders. What
separates corporations from other forms of business is that in corporations, the corporation
itself, not its shareholders, holds legal liability for the company. This means that should the
corporation go bankrupt or be sued, for example, the individual shareholders are not responsible
for the corporation’s losses beyond the extent of their own personal investment. Note
that many of the issues we discuss in this chapter apply not just to corporations but to other
forms of business as well.
Table 3.1: Business structures recognized by the U.S. Internal Revenue Service
Business structure Definition
Corporation A legally recognized independent entity owned by shareholders in
which the corporation, and not the shareholders, holds legal liability
S Corporation A legally incorporated business with no more than
100 shareholder owners
Sole Proprietorship An unincorporated business owned by a sole proprietor himself or
herself who holds legal liability
Partnership A relationship existing between two or more persons who join to carry
on a trade or business who jointly or separately hold legal liability
Limited Liability Company (LLC) A form of a company that provides limited liability to its owners but is
not incorporated and does not need to be organized for profit
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The Nature of Corporations Section 3.1
The basic structure of a corporation consists of three main levels of authority:
1. Shareholders (stockholders) own the corporation by obtaining shares of stock
in it.
2. The shareholders, in turn, elect a board of directors to manage the corporation.
3. The board then designates officers to operate the business, with the chief executive
officer (CEO) at the top and various levels of managers beneath.
The board and officers of a corporation have a fiduciary duty to the shareholders: They are
under a legal obligation to manage the company in a way that protects the shareholders’
investment. Thus, the shareholders’ drive to make a profit on an investment transfers down
through the whole corporate hierarchy. In his book The Corporation, legal scholar Joel Bakan
argued that corporations are so driven by self-interest and financial greed that they fit the
personality profile of a psychopathic individual. He wrote:
The corporation’s legally defined mandate is to pursue, relentlessly and
without exception, its own self-interest, regardless of the often harmful consequences
it might cause to others. As a result, . . . the corporation is a pathological
institution, a dangerous possessor of the great power it wields over
people and societies. (Bakan, 2005, p. 1)
Undoubtedly, some corporations are as pathologically dangerous as Bakan maintained; the
Enron Corporation is a poster child for that. Enron was a major energy company with natural
gas pipelines stretching across the country, and ultimately became the largest energy trader
in the world. At its peak it was seventh on the list of Fortune 500 companies, and for 6 years
running, it was hailed as America’s most innovative company by Fortune magazine. However,
under the leadership of CEO Kenneth L. Lay, the company borrowed too much money for its
projects and fraudulently hid billions of dollars of debt from its investors, all the while fooling
everyone into thinking that it was a robust business. In California, it secretly restricted the
supply of natural gas, which created blackouts and caused an 800% increase in natural gas
prices. When Enron executives became aware that the company was about to collapse, they
sold their personal shares of company stock while encouraging investors to buy more. News
of Enron’s problems soon became public, its stock prices fell to a fraction of their original
value, and its subsequent bankruptcy became the largest up to that point in U.S. history. But
although Enron may have brought corporate corruption to a new level, it is not clear that
the nature of the corporation itself forces companies to systematically engage in unethical
behavior.
Four Features of Corporations
There are four main features of a corporation:
1. creation by statute,
2. perpetual existence,
3. recognition as legal persons, and
4. limited liability.
All of these features have important implications. Let us look at each one in more detail.
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The Nature of Corporations Section 3.1
Creation by Statute
The first feature of a corporation is its creation by statute. Corporations come into existence
through the creation of a legal document called a charter, which in the United States is
granted by an individual state. The person seeking the corporation draws up a charter and
submits it to a state commission for approval.
The fact that corporations
come into existence through
government action suggests
that their very character
and range of freedoms are
shaped by what the government
thinks is best, and
that has changed over time.
An early landmark U.S.
Supreme Court case, Dartmouth
College v. Woodward
(1819), was responsible for
giving greater independence
to corporations outside of
government control. The issue in that case had to do with Dartmouth College’s right to appoint
its own presidents and trustees, independent of influence by the state of New Hampshire. Dartmouth
was granted a corporate charter prior to the American Revolution, when New Hampshire
was a British colony. After U.S. independence, the New Hampshire legislature attempted to take
administrative control of the college and appoint its president and trustees. The college challenged
the state, and the Supreme Court sided with Dartmouth, allowing it to continue as a private
institution.
Perpetual Existence
Second, corporations have perpetual existence, which means that, unlike mortal human
beings, they can continue indefinitely and thus independently of the temporary lives of their
managers and shareholders. Some corporations may be created to exist for only a limited
period of time, but most are granted perpetual existence. The oldest currently existing corporation
is the Stora Kopparberg Mining Company in Sweden, which obtained its charter in 1347.
In Dartmouth College v. Woodward, the Supreme Court argued that the fundamental justification
for creating a corporation is perpetual existence—a kind of legal immortality—which prevents
the “intricacies, the hazardous and endless necessity of perpetual conveyances for the purpose
of transmitting it from hand to hand” (1819). The point is that a corporation has a life independent
of the people who formed it, and can continue to exist perpetually even as the various
members of the corporation come and go. Note that although their existence is perpetual, corporations
may be dissolved at the direction of the state, a court, or the shareholders themselves.
Recognition as Legal Persons
Third, corporations are legal persons in the sense that they are nonhuman entities regarded
by law as having the status of a person. They have what is called legal standing, which means
Visions of America/Superstock
The U.S. Supreme Court case, Dartmouth College v. Woodward
(1819), gave corporations greater independence from government
control.
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The Nature of Corporations Section 3.1
that they can sue others and be sued by others, own property, and make contracts with others.
It is legal personhood that also makes corporations legally accountable for wrongdoing,
and thus capable of being punished for crimes. Without legal personhood, corporations could
not be legally punished for wrongdoing any more than an unruly mob could be punished as
a collective entity, beyond the actions of the individuals within that mob. Thus, corporations
can be criminally convicted of fraud, manslaughter, and even human rights violations.
In the words of one Supreme Court justice, the corporation is “capable of being treated as a
citizen of [the state which created it] as much as a natural person” (Louisville, Cincinnati &
Charleston R. Co. v. Letson, 1844). Determining exactly how corporations can lay claim to their
rights as persons and citizens is an ongoing challenge. A controversial Supreme Court case,
Citizens United v. Federal Election Commission (2009), established that corporations’ rights to
free speech entitled them to spend unlimited amounts of money in campaign contributions.
In essence, it said that for corporations, money is speech.
The question this raises is whether there is an essential difference between corporate
persons and natural persons that prevents them from having exactly the same rights in
a meaningful way. Corporations cannot marry, vote, or hold public office in the way that
natural persons can. And for critics of the court’s decision, money simply is not the same
thing as speech, especially considering the vast wealth of corporations and the corrupting
influence that money has in political campaigns. The harshest critics argue further that
the very idea of corporate personhood is a horrible mistake, and corporations simply are
not people.
Limited Liability
The fourth attribute of corporations is limited liability, which, as we discussed earlier,
means that a stockholder cannot lose more than the amount that he or she invested. In normal
circumstances, the corporation as a legal entity, not the shareholders themselves, is
liable for payment of debts. In
the event that the corporation
fails, the shareholders can lose
their investments, but they are
not responsible for paying any
remaining debts that the corporation
owes to its creditors. The
purpose of limited liability is that
it encourages investment: People
are more likely to invest in something
when they know that their
risk is limited.
In unusual circumstances, however,
shareholders may become
liable for corporate debts if the
corporation is used to commit
fraud on people that it deals
with, such as creditors. This may
also occur if the shareholder
Gerald Herbert/Associated Press
Stockholders in companies like BP, which was involved
in the recent Gulf oil spill, are not liable for payment of
debts of the corporations they invest in.
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The Nature of Corporations Section 3.1
runs the business as though the corporation did not exist, for example, by not holding meetings
or not keeping corporate records. In these cases, to use a legal expression, the “corporate
veil” is pierced, and the owners behind that veil are exposed.
Shell Corporations
One particularly odd issue surrounding the incorporation process involves what are called
shell corporations—that is, corporations that exist on paper but have no active business
operations or significant assets. Often these are used for legitimate purposes. For example,
sometimes one company might set up a series of shell corporations and then sell them off the
shelf to someone else as a way of simplifying the process of creating a corporation. The new
owner can then change the corporate name and officers at any time.
However, shell companies can be abused. Enron made heavy use of shell companies: By transferring
its accumulating debt to them, the company was able to hide its financial failures from
investors and the public, thus creating the illusion that it was a healthy and vibrant company.
More often, though, shell companies are created for purposes of tax avoidance. For example,
a company based in California might conduct its international business through a shell
company that is incorporated in a tax-haven country like Belize. The principal corporation in
California can then avoid reporting the shell company’s income to the U.S. government, and
thereby avoid paying taxes on that income.
This practice is technically legal, and it is one that U.S. lawmakers hate but have difficulty
combating. In fact, even within the United States, some states have themselves become tax
havens because of their lax incorporation laws, and shell companies are flourishing there. For
example, a small house in Cheyenne, Wyoming, is the official address of 2,000 shell companies
(NPR Staff, 2011). All of these examples show how the laws that enable the creation of corporations
can be manipulated for a wide range of potentially unethical business practices. In
the worst cases, a shell corporation is created solely as a vehicle for wrongdoing and has no
further redeeming value whatsoever as a business entity.
Moral Agency of Corporations
The status of corporations as legal persons makes them legally responsible for misdeeds,
such as bribery, discrimination, unsafe working conditions, and false advertising. They can
be charged with crimes and face penalties. However, it is common to hear people attack a
company for being immoral, and the implication is that the business is morally responsible
for its misconduct, not just legally responsible. That is, businesses are not merely legal
persons but are also moral persons, or moral agents, who are morally responsible for their
actions.
Take this next example, which appeared on a blog. A customer signed a contract with a homesecurity
company and was told by the sales agent that it was for the duration of 2 years. At the
close of the second year, the customer contacted the company saying that she did not want to
renew the contract; the company said that the contract was for 3 years, not 2. The customer
waited a year and repeated her request. The company responded that they require a 60-day
notice for nonrenewal, and if they do not receive it, the customer is automatically renewed
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The Nature of Corporations Section 3.1
for another 3 years. The customer believed that the business was scamming her and, consequently,
maintained that the company acted immorally (Samantha, 2009).
If this were a small, family-operated business, we could easily say that the business was
immoral, since the fault would trace directly back to the family owners themselves: It is the
owners who acted immorally through their business operations. Suppose, however, that the
security company was a national chain with thousands of employees, each of whom was playing
only a small and limited role in the operation of the business. Could we still say that this
security company as a whole acted immorally in the same way that we commonly say that an
individual human acted immorally?
The issue here is that of corporate moral agency, which concerns whether businesses are
morally responsible for their actions, similar to how individual people are morally responsible
for theirs. There are two main positions on this issue.
Position 1: Corporations Can Be Genuine Moral Agents
The first position is that corporations can be genuine moral agents. In the words of Peter
French, the leading proponent of this view, “corporations can be full-fledged moral persons
and have whatever privileges, rights and duties as are, in the normal course of affairs,
accorded to moral persons” (1979). Corporations have what French has called a “corporate
internal decision structure”—that is, a procedure for carrying out decisions—and this procedure
has all the necessary elements to qualify as a “moral” decision-making process. It has
two main components:
• It has a responsibility flowchart—similar to a corporate organizational chart—that
shows the various management levels within the corporation’s hierarchy, and who is
responsible for what.
• The corporation has rules (usually within its bylaws) to determine whether a manager
is making a decision on behalf of the corporation itself or merely making a personal
decision. For example, if the unscrupulous home-security company described
earlier were a large corporation, we would be able to identify which manager in the
corporate hierarchy was responsible for the renewal scam, and whether that decision
was a personal one or a corporate one.
With French’s model of corporate moral agency, human beings are still the ones making the
decisions, but those people are making choices for the corporation, not for themselves. Thus,
the intention behind that decision is the intention of the corporation, not of the individual
person.
Position 2: Corporations Cannot Be Moral Agents
The second and opposing position is that corporations cannot be moral agents. According
to this view, the immoral actions of a corporation are attributable to the decisions of the
individual actors within the corporation, not to the corporation as a whole. The leading
proponent of this view, Manuel Velasquez, has argued that “corporate organization lacks
the kind of causal powers and intentionality that an entity must possess to be morally
responsible for what it does” (2003). According to Velasquez, to speak of a corporation
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Punishing Corporations Section 3.2
as having intentions is only a metaphor, and nothing in the corporate internal decisionmaking
structure can “transform a metaphorical intention into a real one,” nor can it “create
group mental states nor group minds in any literal sense.” Human intentions, he has
argued, are mental in character and can only occur within a conscious human mind. To talk
about corporate “intentions” in a literal sense would mean that a corporation has a unified
conscious mind, which is absurd, he argues. At best, Velasquez says, a corporation consists
only of people with conscious minds who are disconnected from each other. Workers, not
the abstract corporate group, are the ones that carry moral responsibility for their on-thejob
decisions (Velasquez, 2003).
Issues at Stake
There are two issues at stake in this debate:
• Whether corporations can themselves be accused of being “immoral.” If I rob a bank,
I can justly be called an immoral person. But if a corporation intentionally defrauds
consumers, can it also be called “immoral” in the same way? French says yes;
Velasquez says no.
• Whether workers in corporations should be punished individually for their immoral
decisions, beyond the punishment that the corporation receives. French says they
should not; Velasquez says they should.
We should emphasize, though, that regardless of whether there is a moral justification for
punishing corporations, from a purely legal standpoint corporations are in fact liable for punishment
by the state. They are legal persons and, as such, have legal liability in the way that
you and I do.
3.2 Punishing Corporations
The next issue concerns the types of punishments that governments can impose on corporations,
and what society hopes to accomplish through those punishments. The issue of punishment
in general is a complex one. Therefore, it will help if we start by looking at the methods
and justifications for punishing individual people, and turn to corporations after that.
The ways in which society can punish individuals for crimes are varied. Suppose, for example,
that you are caught shoplifting from a local store. A possible punishment would be paying
a fine or serving a few weeks of community service. With some crimes, like drunk driving,
judges can get creative and make you put an embarrassing sign on your car that says “I’m a
convicted drunk driver.” If your crime is even more severe, you might spend years in prison,
or even be executed.
There is a wide range of punishments available for criminals in part because there are a variety
of objectives society has for punishing them in the first place:
• There is deterrence, in which an offender is punished to set an example that might
discourage others from committing similar crimes.
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Punishing Corporations Section 3.2
• There is incapacitation, in which, by being removed from society, an offender is
prevented from committing further similar crimes.
• There is rehabilitation, in which, through reform techniques, changes are made to
an offender’s future behavior.
• There is retribution, in which punishment balances the scales of justice. An
offender committed a crime, and this requires that the person be punished
accordingly.
• Finally, there is reparation, in which an offender must repay a victim for the injury
that the offense caused.
Six Types of Corporate Punishment
Let us now turn to the issue of punishing corporations. An immediate way of approaching
the task is to hunt down the people within the corporate hierarchy who are responsible for
a crime and punish them individually. This, in fact, occurs regularly. For example, former
Enron president Jeff Skilling received a 24-year prison sentence for fraud and insider trading.
In 2015, Eric Bloom, former CEO of Sentinel Management, was sentenced to 14 years for
defrauding hundreds of investors of $665 million.
However, merely going after the
key players within a company
is often not enough. In many
cases, the causes of corporate
misconduct are dispersed so
widely within the company
that there may be no one individual
who intentionally committed
an illegal act. Rather, it
may only be the accumulated
efforts of many blameless individuals
that ultimately give
rise to a corporate misdeed.
More importantly, the status of
corporations as legal persons
makes a company itself liable
to prosecution, in addition to
any corrupt corporate executive
who might be involved. But
although a corporation is considered
a legal person, it is not
a giant human being. Thus, at
least some of the penalties that
we impose on individual people
would not be appropriate for corporations. We cannot, for example, literally imprison a
corporation. There are six basic types of punishment for corporations:
• fines,
• equity fines,
Louis Lanzano/Associated Press
Former WorldCom CEO Bernie Ebbers is seen leaving a
New York Federal court. Ebbers is currently serving a
25-year prison sentence based on his involvement in and
cover-up of an $11 billion accounting scandal that led the
company to file for bankruptcy. Time magazine recently
named Ebbers one of its “Top 10 Crooked CEOs.”
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Punishing Corporations Section 3.2
• corporate incapacitation,
• the corporate death penalty,
• corporate shaming, and
• community service orders.
We will examine each of these here.
Fines
Perhaps the most common way of punishing a corporation is through a fine, a payment
of money imposed as a penalty for an offense. For example, the pharmaceutical company
Johnson & Johnson was fined $2.2 billion for promoting psychiatric drugs for unapproved
uses in children, seniors, and disabled patients—one of the largest settlements with a drug
manufacturer in U.S. history. Although fines may be the usual way of punishing a corporation,
there are several problems associated with this approach:
• If the company is large and the fine is small, it will be ineffective in rehabilitating an
unethical company. The company may see the fine as just another cost of doing business.
This leaves the public with the impression that corporate crime is permissible
as long as the company merely pays the going price.
• If the company is small and the fine is large, the company may not be able to afford
to pay it. And if the fine is lowered for that company, the cost will not serve as an
effective deterrent for other companies.
• Corporate fines can harm innocent people associated with the company. A hefty fine
can financially harm a company to the point that it must decrease employees’ salaries
or even lay employees off. In addition, fines might result in reduced dividends
and stock value for shareholders. The company might also pass the costs of the fines
on to consumers. A case in point is a sewer company in California that was fined
$1.6 million when millions of gallons of raw sewage spilled from its treatment plant.
According to the plant manager, one option for covering the fines was to increase
fees to consumers. (Staats, 2008)
Equity Fines
Another type of corporate punishment is a variation on the fine. With an equity fine, the
payment is made in shares of the company, not in money. The effect is that the value of the
company is diluted in the market, which may serve as a greater deterrent to companies than
monetary fines. The key advantage of equity fines is that they avoid forcing financially weak
companies out of business, and thus protect innocent employees and creditors. This form of
corporate punishment is not yet practiced in the United States or any other country, but the
Scottish parliament has debated legislation allowing equity fines, and it remains a possible
model for corporate punishment.
Corporate Incapacitation
Another form of punishment is corporate incapacitation. For this punishment, a court
issues an order to restrain the activities of a corporation in some area of business. The court
may temporarily restrict a company’s commercial activity for some line of business, in some
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Punishing Corporations Section 3.2
geographical area, or with some client. The court may temporarily revoke a company’s operational
license, or disqualify the company from obtaining specific contracts. It may also freeze
the company’s profits. The United States has these kinds of provisions for corporate incapacitation,
the aim of which is to stop businesses from engaging in a practice that consistently
operates outside the law (Walt & Laufer, 1992).
Corporate Death Penalty
Occasionally, a company commits a crime that is so egregious that, for punishment, it receives
what is called a corporate death penalty. The company is forced to go out of business, such
as by revocation of its corporate charter. This is what happened with the accounting firm
Arthur Andersen. In 2002 it was convicted of obstruction of justice for shredding documents
connected to its auditing of Enron. Because of the conviction—and the fact that convicted
felons are not permitted to audit public companies—the company was forced to surrender
its CPA license, thus forcing it to close its doors for good. Its conviction was overturned a few
years later by the Supreme Court, but not before most of its employees lost their jobs.
The downside to the corporate death penalty is that it harms the vast majority of the workers
who are innocent of wrongdoing—thousands of them, in the case of Arthur Andersen. The
families of these workers suffer as well. The corporate death penalty can also be misused in
political battles. For example, an Arizona law called the “Legal Arizona Workers Act” allows
for the revocation of business licenses for companies that are discovered to have knowingly
employed illegal immigrants. Although it is reasonable to punish a company when it breaks
the law by hiring illegal immigrants, critics of the law argue that is excessive to impose upon
that company the punishment of corporate death. The issue of illegal immigration is a controversial
one that generates extreme opinions, and in this case, the Arizona law has used
the corporate death penalty to achieve an ideological goal. Controversial as it is, the Constitutionality
of Arizona’s law was nevertheless upheld by the U.S. Supreme Court (Chamber of
Commerce v. Whiting, 2011).
Corporate Shaming
Another option for punishment is corporate shaming, in which the government requires a
guilty company to make a public announcement that threatens its reputation and social standing.
For example, a Massachusetts ferryboat company was required to place an ad in the Boston Herald
that stated, “Our company has discharged human waste directly into coastal Massachusetts
waters.” The Federal prosecutor in this case argued that the goal was to deter others, but a punishment
such as this has the added benefit of satisfying the public “when it doesn’t appear that
the company has been punished sufficiently enough, by simply writing a check” (Tovia, 2010).
The problem with corporate shaming is that the humiliation and embarrassment are projected
onto innocent workers, not just the guilty ones. Further, the loss of prestige might contribute to
the financial failure of the corporation and thus adversely affect innocent workers.
Community Service Order
A final type of punishment is a community service order, where, similar to community service
punishments for individuals, a company must participate in some project that benefits
the community in some way. For example, six New York bakeries were convicted of price
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Punishing Corporations Section 3.2
fixing. As punishment, they were ordered to donate baked goods to charitable organizations
for one year (United States v. Danilow Pastry Co., 1983). One advantage to this approach is
that, when a large number of unidentifiable people have been harmed by misconduct, community
service is a way to distribute some benefit back to the wider community rather than
to an individual victim. Also, community service orders do not put companies at risk that are
in financial difficulty in the way that fines do, and thus they insulate innocent parties such as
creditors and workers. This was one of the motivations for the order in the bakery pricefixing
case. Community service punishment is sometimes criticized for being potentially
image enhancing: The company might publicize its service activity in a way that increases its
reputation as a socially responsible organization. Defenders, however, argue that the fact that
the service is done under court order makes it less likely that the company will draw that kind
of attention to itself.
Federal Sentencing Guidelines
The U.S. government punishes a wide range of corporate offenses. In 1991, it established
guidelines for sentences imposed by Federal judges, known as the Federal Sentencing
Guidelines for Organizations (FSGO). The types of punishments imposed are wide-ranging,
and individuals can serve jail terms and pay large fines, the costs of which the corporations
themselves are not permitted to cover. The guidelines make use of a point system for determining
the severity of an offense as well as increasing levels of fines that correspond to severity.
Severity increases when the company has a history of such misconduct, when it obstructs
justice during the investigation, and when “an individual within high-level personnel of the
organization participated in, condoned, or was willfully ignorant of the offense” (U.S. Sentencing
Commission, 2014). The guidelines encourage organizations to create compliance and
ethics programs to prevent and detect illegal conduct, recommending that these programs
include seven specific steps that are summarized in Figure 3.1.
What Would You Do?
You are a judge and before you is a case in which an auto dealership with 50 employees has
been found guilty of false advertising. The dealership routinely advertises vehicles at low
prices, but once customers are on the lot, it sells them at much higher ones. Your concern is
that a hefty fine might force the dealership out of business and thus adversely affect the lives
of the innocent employees.
1. Would you impose the fine or consider alternative forms of punishment, such as
incapacitation, shaming, or a community service order? Be sure to state the rationale
for your decision.
2. Suppose the dealership only switched prices for its customers who had aboveaverage
incomes. Would that make a difference in your decision? Why or why not?
3. What if dealership only switched prices for its customers who had below-average
incomes? Would that make a difference in your decision? Why or why not?
4. What if all of the employees in the dealership knew about the scam, and they all
received bonuses based on the higher selling prices? Would that make a difference in
your decision? Why or why not?
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1.
2.
3.
4.
5.
6.
7.
Standards and Procedures: Organizational implementation of compliance standards
and procedures that are reasonably capable of reducing the prospect of criminal conduct.
Oversight: Assignment of high-level personnel to oversee compliance with such
standards and procedures.
Ethical Supervisors: Due care in avoiding delegation to individuals whom the
organization knows, or should know, have a propensity to engage in illegal activities.
Training: Communication of standards and procedures by requiring participation in
training programs or by disseminating publications that explain in a practical manner
what is required.
Monitoring: Establishment of monitoring, auditing, and reporting systems by creating
and publicizing a reporting system whereby employees and other agents can report
criminal conduct without fear of retribution.
Punishment: Enforcement of standards through appropriate mechanisms, including,
as appropriate, discipline of individuals responsible for the failure to detect an offense.
Corrective Action: Development of appropriate responses to offenses by taking all
reasonable steps to respond appropriately and to prevent further similar offenses,
including any necessary modification of programs (Federal Sentencing Guidelines, 2014).
Punishing Corporations Section 3.2
Corporations have a special incentive for creating compliance and ethics programs that
include these seven steps: If in the future they are ever prosecuted for a crime, they will
receive a reduced punishment. In this way, the government aims to build into corporations a
procedure that will reduce the likelihood of their engaging in illegal conduct.
Consumer Retaliation
Another mechanism for punishing companies is initiated by the public rather than by the government.
Just as the government keeps a watchful eye on businesses, so, too, do consumers.
Consumer retaliation is when individual consumers or consumer groups express dissatisfaction
with a company through some effort that harms it financially. Consumers can write
letters of complaint to government agencies, file civil lawsuits against offending companies,
and use every possible form of media, especially the Internet, to bring public attention to
issues of corporate misconduct. We will examine many of these efforts in a Chapter 4, but
one mechanism for consumer retaliation we can note here. This is the consumer boycott,
when a group of people act together to abstain from buying from or dealing with a business.
The word boycott is derived from a British land agent in Ireland, Charles Boycott, who himself
Figure 3.1: Seven steps recommended by the U.S. Sentencing Commission
for organizations to prevent and detect violations of the law
Organizations that create compliance and ethics programs will receive a reduced punishment if
prosecuted for a crime in the future.
Source: U.S. Sentencing Commission. (2014). 2014 Guidelines manual (Chapter eight – Sentencing of organizations). Retrieved from
http://www.ussc.gov/guidelines-manual/2014/2014-chapter-8#8b21
1.
2.
3.
4.
5.
6.
7.
Standards and Procedures: Organizational implementation of compliance standards
and procedures that are reasonably capable of reducing the prospect of criminal conduct.
Oversight: Assignment of high-level personnel to oversee compliance with such
standards and procedures.
Ethical Supervisors: Due care in avoiding delegation to individuals whom the
organization knows, or should know, have a propensity to engage in illegal activities.
Training: Communication of standards and procedures by requiring participation in
training programs or by disseminating publications that explain in a practical manner
what is required.
Monitoring: Establishment of monitoring, auditing, and reporting systems by creating
and publicizing a reporting system whereby employees and other agents can report
criminal conduct without fear of retribution.
Punishment: Enforcement of standards through appropriate mechanisms, including,
as appropriate, discipline of individuals responsible for the failure to detect an offense.
Corrective Action: Development of appropriate responses to offenses by taking all
reasonable steps to respond appropriately and to prevent further similar offenses,
including any necessary modification of programs (Federal Sentencing Guidelines, 2014).
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Ethical Corporate Culture Section 3.3
was the target of a systematic boycott when, during a particularly bad growing season, he
refused to lower the rent for farmers who leased land from him. The farmers moved off his
property to other locations, and he had trouble finding people who would harvest his fields.
There are two important advantages to consumer boycotts as supplemental ways of punishing
companies:
• Companies are often directly involved in shaping the laws that apply to their industry,
and thus government-sanctioned punishments are not possible when the laws
are lax to begin with. Boycotts fill that void by holding companies accountable when
governments fail to do so.
• Even when the government does get involved by making tough laws, it often takes
several years before the laws are passed and take effect. In the meantime, the company
can continue with its practice. Boycotts—or even the threat of them—can hold
companies accountable during this period of legislative limbo while keeping up
public support for the proposed legislation.
A recent effective use of boycott was the
efforts of the animal rights group Viva to
get athletic sportswear company Adidas
to stop using kangaroo leather in the
manufacturing of its soccer shoes. In 1979,
Adidas began using kangaroo skin, which
has a tensile strength that is 10 times that
of cowhide. The shoes were lighter and
stronger than alternatives, and Adidas
quickly dominated the market. In 1997,
Viva launched its “Save the Kangaroo”
boycott against Adidas, and its impact
was soon felt, with Adidas receiving thousands
of emails complaining about its use
of kangaroo leather. Viva then began lobbying
soccer superstar David Beckham,
who had signed a $160 million lifetime
endorsement deal with Adidas. After
learning details of the controversial slaughter methods of kangaroos, Beckham switched to
synthetic shoes in 2006. In 2012, Adidas announced that it cut back on its use of kangaroo
leather in its shoes by 98% (Poulter, 2012). While not a complete elimination of kangaroo
leather, it is a substantial reduction, and thus serves as a good example of the leverage that a
well-organized boycott can have over a company.
3.3 Ethical Corporate Culture
From what we’ve seen so far, there are several motivations for corporations to abide by the
law and avoid immoral behavior. There is the looming threat of criminal punishment, and all
the bad publicity that goes along with it. There is the possibility of consumer retaliation, such
as consumer boycotts. In this section we will look at mechanisms within the corporate structure
itself that create an ethical corporate culture.
imageBROKER/Superstock
Adidas stopped using Kangaroo leather in its
soccer shoes after a boycott by the animal rights
group Viva.
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Ethical Corporate Culture Section 3.3
Stakeholders and Corporate Social Responsibility
An important concept in the creation of an ethical corporate culture is that of the stakeholder,
which is any party who is affected by, or has a stake in, a business practice. This
includes employees, suppliers, customers, creditors, competitors, governments, and communities,
as well as shareholders. The stakeholder approach to responsible corporate conduct
is that businesses should consider all stakeholders’ interests, not just those of the shareholders.
By considering the interests of the full range of stakeholders, companies will be less
likely to exploit these groups for financial gain.
The challenge of the stakeholder theory is to prioritize the interests of the various stakeholders.
Every stakeholder wants to carve into the financial pie, and there is not enough to
go around for everyone. Shareholders seek to maximize their investments, employees want
higher wages, governments want more taxes, and environmentalists want to see more ecofriendly
policies. The stakeholders and their claims must be prioritized and, at a minimum,
categorized into two groups: primary stakeholders and secondary stakeholders. Of necessity,
the shareholders will be primary stakeholders—perhaps the only ones—since they are the
ones who own the company and ultimately call the shots regarding corporate policy. While
shareholders may be willing to give in to reasonable demands of secondary stakeholders,
they are still investing in the company to make money, and are certainly not willing to hand
it all away.
The stakeholder theory does not come with a built-in formula for prioritizing the competing
interests of primary and secondary stakeholders. However, its greatest significance may be
the growing popularity of the word stakeholder itself and its use throughout the business
world today. Through its heavy use, the idea of social responsibility has become an integral
part of normal business vocabulary. It is more than a faddish buzzword; the identification of
stakeholders is often part of a company’s strategic planning process.
What Would You Do?
You are the CEO of a coal company that uses the controversial technique of mountaintop
removal. This involves bulldozing away the top of a mountain to get at the coal, then filling
in surrounding valleys with the removed soil. Technically you are not breaking the law, but
this method is both environmentally damaging and visually ugly. You could use underground
mining, which is less harmful, but it would cut into your profits.
1. Who are the various stakeholders in this situation?
2. Which ones are primary, and which are secondary?
3. At what point might you find the profit loss from underground mining acceptable: a
loss of 20%, 10%, 5%? Explain your answer.
4. Suppose that local residents set up picket lines daily at the entrance to the jobsite,
and these are regularly featured in the news. How might that affect your assessment
of how much profit loss would be acceptable for switching to an underground
mining method?
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2
3
4
5
6
7
8
9
10
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Google
BMW
The Walt Disney Company
Microsoft
Daimler
Lego
Apple
Intel
Rolls-Royce
Rolex
Ethical Corporate Culture Section 3.3
Although stakeholder theory is a popular way of articulating the social mission of companies,
it is not the only one. Another concept is the triple bottom line (3BL), which is that successful
companies must pursue three distinct values:
• people,
• the planet, and
• profit.
That is, there should be social benefit to workers and the community, environmental benefit
through the implementation of sustainable ecological practices, and economic benefit only
after all hidden environmental costs have been factored in.
Yet another similar concept is that of corporate social responsibility (CSR)—also called
corporate conscience or corporate citizenship. This generally refers to a corporation’s efforts
to take responsibility for its effects on the environment and its impact on social welfare. It
typically applies to efforts of companies that go beyond what is required by governmental
regulations.
Since 1997, a consulting firm called the
Reputation Institute has specialized in
assessing public perceptions of corporate
social responsibility among major
companies worldwide. Figure 3.2 lists
the recent top 10 spots. As you can see,
some very recognizable companies hold
these positions.
The rankings were based on more than
60,000 interviews, and they only reflect
the general public’s perception of the
companies, not what those companies’
citizenship policies or actions are. The
odds are slim that the people interviewed
had any detailed knowledge
about the companies’ actual activities.
Their perceptions were likely guided
by product-name recognition, company
advertising, news stories, and personal
experience with the product.
Nevertheless, the Reputation Institute
maintains that corporate reputation is
“an emotional bond that ensures who
uses your products, who recommends you” (Reputation Institute, 2015). Therein lies the
problem: If the goal is to increase public perception, a company can often achieve this more
inexpensively through a sophisticated marketing strategy than through engaging in costly
social projects. This is particularly common with claims about environmental responsibility:
Virtually every company attempts to project itself as eco-friendly, regardless of how environmentally
harmful its business operations are. The term greenwashing refers to pretended
Figure 3.2: Reputation Institute’s top
10 ranked companies for Corporate
Social Responsibility
Organizations are ranked based upon public
perceptions of their citizenship, governance, and
workplace.
Source: 2015 Global CSR RepTrak® 100 by Reputation Institute.
RepTrak® is a registered trademark of Reputation Institute. Copyright
© 2015 Reputation Institute. All rights reserved.
1
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4
5
6
7
8
9
10
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Google
BMW
The Walt Disney Company
Microsoft
Daimler
Lego
Apple
Intel
Rolls-Royce
Rolex
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Ethical Corporate Culture Section 3.3
efforts at environmental responsibility and, more broadly, at corporate responsibility. CocaCola,
for example, has been accused of greenwashing with the introduction and promotion
of its “plantbottle,” which it says contains up to 30% plant material. Although the company
uses this to project itself as environmentally friendly, there is no evidence that the plantbottle
reduces CO2
emissions.
In a sense, the Corporate Social Responsibility Index exacerbates this problem, since it tells
companies how successfully they are competing in the battle for public perception. A better
index is one that ranks the actual performance of companies in key areas of social responsibility,
rather than simply public perceptions of their performance.
One such effort is an index provided
by Corporate Responsibility
Magazine. However, this
index has a built-in bias because
much of its data comes directly
from the websites of the companies
that it is evaluating, and
such corporate websites are at
bottom public relations tools
that help shape their image.
Thus, even this index encourages
companies to publically exaggerate
or misrepresent their social
responsibility.
There is yet a deeper problem
with corporate social responsibility
in that the very concept
of it may be an illusion. Robert
Reich argues that corporate
social responsibility “is
founded on a false notion of
how much discretion a modern public corporation has to sacrifice profits for the sake of
certain social goods”; this misleads people to think that businesses are doing more for
the public good than they actually are (Reich, 2008). The reality, according to Reich, is
that the international business environment today is “super-competitive,” and this makes
companies resist doing anything that hurts the bottom line. For Reich, the solution to the
ethical problems of companies must come from laws enacted through the democratic process
that will constrain business conduct. Talk of corporate responsibility makes for good
press and reassures the public, but it delays governmental regulation that will make the
real change.
Although companies may sometimes overstate or fake commitment to social responsibility,
consumers take it seriously; one poll indicated that 79% of Americans take corporate
social responsibility into account when making purchasing decisions. It was an important
factor for 36%. The same study showed that 71% consider corporate social responsibility
with investment decisions. And 12% went so far as to say that they would purchase
Akira Suemori/Associated Press
This group, called the “Greenwash Guerrillas,” took part
in a mock cleaning job at the National Portrait Gallery in
London. The group was criticizing the gallery for its hosting
of the BP Portrait Award ceremony, claiming that doing
so helped the oil company “greenwash” its public image.
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Ethical Corporate Culture Section 3.3
stock in socially responsible companies even if it meant accepting lower financial returns
(Verschoor, 2001).
Mission Statements and Codes of Ethics
There are concrete ways within the corporate structure to mark out ethical boundaries for
employees. The most common ways are through mission statements and codes of ethics.
Mission Statements
A mission statement is a short account of the company’s fundamental purpose, and many
companies use them as a way of broadcasting their commitment to ethical standards. Here,
for example, is one of PepsiCo’s recent mission statements:
Our mission is to be the world’s premier consumer products company
focused on convenient foods and beverages. We seek to produce financial
rewards to investors as we provide opportunities for growth and enrichment
to our employees, our business partners and the communities in
which we operate. And in everything we do, we strive for honesty, fairness
and integrity. (2015)
In the first sentence, PepsiCo indicates its main product line and how it sees itself in the world
market. The second sentence describes its financial success. In the third sentence we see the
ethical component: All company conduct aims for honesty, fairness, and integrity. Here is the
ethical part of a few company mission statements:
• Microsoft: “Microsoft is committed to deepening the trust of customers, partners,
governments, and communities. We strive to meet or exceed legal, regulatory, and
ethical responsibilities worldwide and to hire and reward employees who share
our values, work with integrity, and adhere to our Standards of Business Conduct.”
(2015)
• Starbucks Corporation: “With our partners, our coffee and our customers at our
core, we live these values: Creating a culture of warmth and belonging, where everyone
is welcome. Acting with courage, challenging the status quo and finding new
ways to grow our company and each other. Being present, connecting with transparency,
dignity and respect. Delivering our very best in all we do, holding ourselves
accountable for results. We are performance driven, through the lens of humanity.”
(2015)
• Target Brands, Inc.: “We believe in being an active citizen and good neighbor in our
communities. We give our time, talent and business strengths to make our communities
strong, healthy and safe. We invest in career development and well-being of our
team. And from the start, we’ve given 5 percent of our income, a commitment that
does not waver based on the economic climate.” (2015)
Socially progressive companies often have even more aggressive ethical agendas in their mission
statements. For example, Just Us Coffee Roasters Co-op’s mission statement includes the
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Ethical Corporate Culture Section 3.3
slogan “people and the planet before profits” (n.d.). This suggests that, among the various
stakeholders in that business, the shareholders are secondary to society and the environment.
Although this is not typical of corporate stakeholder priorities, it does show that corporations
do not always need to place profits above all else. It is a question of how a company
defines its mission.
Codes of Ethics
While mission statements are designed to be short, businesses commonly have more detailed
corporate codes of ethics that express principles of conduct within the organization to
guide decision making and behavior. Codes of ethics vary in length and detail, but the more
meticulous ones typically have five parts:
1. A letter from the CEO endorsing the code and explaining why it is important. Heads of
companies know that they must lead by example and that hopes of creating a moral
climate must begin with them. One way to do this is for the CEO to publicly stand
behind the company’s ethical code. Here are key passages from four CEO letters of
endorsement:
• Nike: “This Code of Ethics is vitally important. It contains the rules of the game for
Nike, the rules we live by and what we stand for. Please read it. And if you’ve read
it before, read it again.” (2011)
• General Dynamics: “Please read the Blue Book [on ethics policy] carefully. It
reminds each of us of our shared responsibilities to our shareholders, our customers,
our business partners, and to each other. It calls on us to do the right thing
and to seek guidance if needed.” (2013)
• The Coca-Cola Company: “The Code of Business Conduct is our guide to appropriate
conduct. Together with other Company guidelines, such as our Workplace
Rights Policy, we have set standards to ensure that we all do the right thing. Keep
the Code with you and refer to it often.” (2009)
In each of these cases, the CEO stresses the need for employees to take the company’s
ethical code seriously.
2. A general statement of values. The values listed are often varied but may include
honesty, quality, integrity, respect for all people, building strong relationships, taking
care of employees, giving back to the community, excellence in customer service,
strong shareholder returns, wise use of assets, environmental responsibility, respect
for human rights, and keeping promises.
3. A statement of commitment towards the company’s different stakeholders. This
usually includes employees, customers, suppliers, shareholders, and society at
large.
4. Company policies on a range of ethical issues that arise on the job. These include drug
and alcohol use, safe working conditions, employee privacy, discrimination, sexual
harassment, workplace violence, conflicts of interest, accepting gifts, insider trading,
bribery, and price fixing.
5. A discussion on how the code is carried out within the organization, and punishments
for code violation. The administrative implementation of the code sometimes is
assigned to an ethics officer within the company; this person holds workers accountable
to the company’s ethical standards. Punishments for code violations may include
letters of warning, counseling, loss of employment, and, in extreme cases, legal
charges.
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Threats to Ethical Corporate Culture Section 3.4
In addition to these five points, many codes include an intuitive guide for employees to test
their decisions, such as the following from Allstate:
Ask yourself the following questions when you face a decision that
involves ethics:
• Is it legal?
• Does it comply with this Code and with policies that apply to the situation?
• How will it affect others—consumers, competitors, shareholders, other
employees, agencies, the community, and you?
• How will it look to others? Innocent actions sometimes can give the
appearance of wrongdoing.
• How would you feel if this decision was made public?
• Should you ask for advice before acting?
If you are still uncertain, ask your manager or contact another resource listed
in this Code. (Allstate, n.d.)
Codes of ethics are not a perfect solution to the problems of immoral business conduct. Many
of the principles advanced are too general to be of much guidance, such as the values of honesty,
quality, and integrity, which are listed in many such codes. And sometimes they seem to
be mere public relations tools to make an unscrupulous company appear to be committed to
ethical principles. Before its collapse in 2001, for example, Enron’s published statement of
corporate values included the following:
• Respect: We treat others as we would like to be treated ourselves. We do not tolerate
abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t
belong here.
• Integrity: We work with customers and prospects openly, honestly, and sincerely.
When we say we will do something, we will do it; when we say we cannot or will not
do something, then we won’t do it. (Enron, n.d.)
From what we now know of Enron’s activities, the claims of respect and integrity are laughable.
There are certainly other companies today that, like Enron, behave shamefully while at
the same time making grandiose claims about their ethical standards. Nevertheless, many
companies do take their codes seriously, and look to them to safeguard against criminal
charges by the government, lawsuits by customers, and bad publicity by the media, all of
which can financially cripple a company.
3.4 Threats to Ethical Corporate Culture
We turn finally to an examination of aspects of corporate culture that can undermine a company’s
commitment to moral integrity and social responsibility. We will consider four such
factors:
• the profit motive,
• strategic misrepresentation,
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Threats to Ethical Corporate Culture Section 3.4
• groupthink, and
• organizational schizophrenia.
None of these is immoral in and of itself, and to some degree all of them are even facts of life
when running a business. But if left unchecked, they can create moral and legal problems.
The Profit Motive
Several times so far we have seen that a company’s motive to make profits can conflict with its
sense of social responsibility. Shareholders expect to see a return on their investments, and
the corporate officers have a fiduciary duty to oblige them, to the point that the officers might
neglect the interests of all other stakeholders.
Not only is this a possible outcome, but economist Milton Friedman famously argued that
this is exactly how it should be: Businesses should stay away from social responsibility
and keep focused on making profits. He did not advocate that businesses violate the law
when pursuing profits, but only that they avoid taking positive steps toward social causes
beyond what the law requires. “Few trends,” he argued, “could so thoroughly undermine
the very foundation of our free society as the acceptance by corporate officials of a social
responsibility other than to make as much money for their shareholders as possible”
(Friedman, 1970, SM17).
According to Friedman, it is contrary to the nature of a well-run corporation to advocate social
responsibility, since it amounts to a hidden social tax. That is, it places an extra financial cost
on consumers for some social benefit that has no direct connection with the product that
they are purchasing. Suppose that a corporate executive refrains from increasing the price
of a product, to help prevent inflation; spends vast amounts of money on reducing pollution
beyond what the law requires, to help improve the environment; or hires an underqualified
unemployed person, to help reduce poverty. “In each of these cases, the corporate executive
would be spending someone else’s money for a general social interest” (Friedman, 1970,
SM17). It would also mean reduced returns for shareholders, higher prices for customers, or
lower wages for employees. This, argues Friedman, makes the socially minded executive an
unelected civil servant who, in many cases, will not be properly educated about which actions
will indeed promote social benefit. In this way, Friedman believes, it is subversive to a free
society. The only responsibility of a business, then, is to increase its profits, so long as it stays
within the bounds of the law by engaging in “open and free competition without deception or
fraud” (1970).
Friedman’s argument against corporate social responsibility is a rather extreme one that is
hard to defend. Here are just two problems with it:
• Business money spent on social causes is unlike a tax in at least one important way.
Taxes imposed by governments are mandatory, but no one’s association with a
socially responsible corporation is mandatory. Consumers can choose to spend their
money elsewhere; workers can choose to be employed elsewhere; shareholders can
choose to invest elsewhere. Since these are free associations, it is difficult to see how
such corporate social responsibility is subversive to a free society. On the contrary, it
is part of a free society to experiment with company policies, and find creative ways
to attract customers, employees, and investors.
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Threats to Ethical Corporate Culture Section 3.4
• Many consumers will be attracted to corporations
with strong social agendas, which
will increase company profits. For example,
Ben & Jerry’s is a case in point. When the
company first began manufacturing ice
cream, it adopted a unique social mission:
to operate the company in a way that
actively recognizes the central role that
business plays in the structure of society
by initiating innovative ways to improve
the quality of life locally, nationally, and
internationally. (Ben & Jerry’s, n.d.)
The company professes to have a “progressive,
nonpartisan social mission” that aims to eliminate
injustices locally and globally, and supports
nonviolent ways to achieve peace and justice
(Ben & Jerry’s, n.d.). At one point in its history,
the company donated an unusually high percentage
of its profits to philanthropic causes—7.5%,
as compared with the norm of 1%. In 2001,
Ben & Jerry’s was purchased by Unilever, the
world’s third largest consumer goods company,
and from the start its new parent company said
it was “determined to nurture its commitment
to community values” (Press Office Unilever
London, 2000).
Ben and Jerry’s and its parent company do not see eye to eye on all issues, and a case in point
is their respective views on legal requirements for labeling foods made with GMO ingredients.
Ben and Jerry’s supports such laws while Unilever is against them. Unilever nevertheless permits
Ben and Jerry’s to voice its view, and, in fact, in 2014 Ben and Jerry’s CEO stood publically
alongside Vermont’s governor as the governor signed U.S.’s first law requiring labeling
of foods made with GMO ingredients. (Boyle, 2014)
Strategic Misrepresentation
Another component of corporate culture that can lead to flawed decisions is strategic
misrepresentation, which is the intentional and systematic distortion or misstatement of
facts for the purpose of gaining a financial advantage. A simple example is with automobile
dealers: Suppose that a dealer knows very well what the weaknesses are with the vehicles
being sold but intentionally conceals those problems from customers. If the dealer were
completely truthful, customers would simply go elsewhere. Businesses routinely exaggerate
the value of their products, the quality of their customer service and satisfaction, and
their overall financial health.
Although strategic misrepresentation is undoubtedly common in business negotiations, some
have argued that it is simply part of the nature of doing business, and it cannot be eliminated.
Gareth Davies/Getty Images Entertainment/Getty
Images
Ben Cohen and Jerry Greenfield of
Ben & Jerry’s have a social mission that
seeks to rid society of injustices. Here
they are at the announcement that
their ice cream has gone 100% fair
trade.
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Threats to Ethical Corporate Culture Section 3.4
Nor should we try to eliminate it. Albert Carr championed this view in an influential essay
titled “Is Business Bluffing Ethical?” In some situations, he argued, bluffing one’s opponents is
a normal part of the game. In poker, for example, a player strategically tries to get opponents
to think that his or her hand of cards is either stronger or weaker than it actually is. So, too, in
business. In fact, Carr argued, if a businessperson feels obligated to always tell the truth, he or
she “is ignoring opportunities permitted under the rules and is at a heavy disadvantage in his
[or her] business dealings” (1968).
Most executives are compelled from time to time to be deceptive when negotiating with dealers,
labor unions, government officials, and even other departments within their own companies.
According to Carr, “Falsehood ceases to be falsehood when it is understood on all sides
that the truth is not expected to be spoken” (1968). For example, a criminal does not lie when
he or she pleads “not guilty,” even when he or she committed the crime, since this is just a part
of the judicial process. In the workplace, similar kinds of acceptable deception can occur from
the moment we fill out our job applications and exaggerate our strengths while downplaying
our weaknesses. When our bosses ask for our opinion, we often say “yes” when we really
believe “no.” There is no place for the Golden Rule in business, and “a good part of the time the
businessman is trying to do unto others as he hopes others will not do unto him” (Carr, 1968).
A famous case illustrates Carr’s position. Some years ago, the founder of the computer software
company Borland wanted to place an advertisement in Byte magazine to help launch its
products. He needed good credit terms with Byte to pay for the ads, but his company was not
established enough to qualify for them. He then plotted to trick Byte into believing that Borland
was larger than it was and had venture capital financing, which it really did not. When
the sales representative for Byte visited the new company to inspect it, Borland’s founder had
paid actors on hand to look like employees, had office phones ring continuously, and had a
pretend advertising plan in plain view for the sales representative to see (Bhide & Stevenson,
1990). Borland got the credit to place the ad, and shortly after, the company became a major
player in the software industry. In short, Carr and others have reasoned that deception is
part of the rules of the business game. Since we do not morally condemn poker players for
attempting to deceive opponents with their poker faces, by analogy we should not condemn
businesses for doing what is necessary, even when it involves going contrary to our common
moral intuitions.
The problem with this line of reasoning is that strategic misrepresentation is acceptable only
when the rules are clearly known to everyone involved. Poker players know the rules of the
game beforehand, and join the game in full knowledge of those rules. And in many instances
the rules are very clear in business. Consumers know that advertisers will remain silent about
the drawbacks of their products and exaggerate their qualities. In labor negotiations, businesses
and labor unions both bluff about how far they are willing to bend the rules.
However, in other situations, the rules of business require complete honesty, and when businesses
strategically misrepresent themselves, they are on the side of wrong and can be held
legally responsible for their conduct. For example, to enhance its financial image, General
Motors claimed in a national advertisement that it had repaid a bailout loan it received from
the U.S. government “in full, with interest, five years ahead of schedule” (Tapscott, 2010). This
claim conveyed the impression that GM had paid off all its government loans, and with its
own money. In point of fact, however, neither of these statements was true. It paid off its loan
with money it had received from a second government bailout loan. Thus, it still owed the
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Threats to Ethical Corporate Culture Section 3.4
government money, and it did not use its own money to pay back the loan. As a consequence,
GM was sued for deceptive advertising. This was a case of strategic misrepresentation that
violated the rules of the game.
What is fundamentally wrong about Carr’s position is that, just because strategic misrepresentation
is a socially accepted practice in some business situations, it is not necessarily
acceptable in every case. A businessperson who rushes into strategic misrepresentation
could easily make misleading claims that cross the line of legality. It is all a matter of knowing
what the rules of the game are—and when they do not allow for misrepresentation.
Groupthink and Organizational Schizophrenia
Within the field of industrial-organizational psychology, there are a few concepts that describe
how decisions are made in group environments and how these can sometimes lead to bad
choices. We’ll look at two in this section: groupthink and organizational schizophrenia.
Groupthink
Groupthink refers to the practice of thinking or making decisions as a group in a way that
discourages creativity or individual responsibility. Group members become so focused on
arriving at a decision as a cohesive unit that they set aside their private ethical concerns.
In criminal courts of law, juries by their very nature face this problem. Twelve people are
instructed by a judge to reach a unanimous decision, and they must do so to assure the success
of the judicial process. To reach a unanimous decision, though, some jury members must
give in to the views of the whole; it is only the most stubborn members who resist to the end
and thereby create a hung jury.
The same thing happens within businesses. Suppose, for example, that an appliance company
manufactures a new microwave oven, and in research and development there is some indication
that the unit might overheat
and catch fire. The evidence isn’t
conclusive, and it only happens
with one test model operating in
an extreme situation. Members of
the research team have to decide
whether the product is ready to
move forward into production.
Suppose further that there is
pressure within the company to
bring out new products within
specified time frames. When the
research team makes its final
judgment, the group as a whole,
influenced by that pressure, may
decide that the unit falls within
the limits of acceptable risk and
is thus ready to go. Individually,
Moodboard/Thinkstock
Did groupthink contribute to the recent housing collapse
and economic crisis in the United States?
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Threats to Ethical Corporate Culture Section 3.4
some of the members might feel that production of the unit should be delayed until more testing
can be done. But they agree anyway, since the consensus of the group is to move forward.
It is only later, when customers are injured and the product is recalled for being a fire hazard,
that the flawed nature of the group’s decision-making process becomes evident.
The groupthink phenomenon is helpful for understanding how it is that many unethical business
decisions can be made, whether with regard to product safety, discriminatory hiring
practices, or shady bookkeeping. Each member of the group may personally have a high level
of moral integrity. But when making tough decisions in a competitive business market, they
may set their personal moral convictions aside in favor of a group consensus. Perhaps the
group as a whole feels that the action falls into a moral gray area that is within the limits of
acceptable risk. Perhaps the group as a whole is more interested in the benefits of the proposed
course of action than an impartial analysis of its costs. In any event, members of the
group end up making unethical choices that they would not in their private lives.
One analysis of the groupthink phenomenon describes four symptoms of it:
• The group feels that it is invulnerable to harm. It is in a position to make an authoritative
decision and, perhaps influenced by a track record of previous successes, it
ignores the possible negative consequences of its decision.
• The group members are unanimous in their beliefs—or at least in the expressed
views of each member—and thus have the confidence to move forward with their
decision.
• If there are dissenters, pressure is put on them to accept the views of the group.
• Someone in the group functions as a kind of “mind guard” who filters out information
that is inconsistent with the group’s view. (Levy, 2010)
One way to combat the groupthink phenomenon is to watch out for these four symptoms
when making group decisions, and, if they do appear, actively seek out unspoken or minority
viewpoints.
Organizational Schizophrenia
Another component of industrial-organizational psychology is organizational schizophrenia,
in which tension exists between competing goals or values within a corporation. The
organization presents mixed messages to its employees about what is important, and the
employees are left to work out a course of action on their own. The term schizophrenia is
borrowed from the field of psychology and refers to a psychological disorder in which a person
is motivated by contradictory or conflicting principles. The use of the term in industrialorganizational
psychology applies more generally to any set of competing agendas in an organization
when there is no clear resolution between the two.
Some organizations are by their very nature schizophrenic. For example, pharmaceutical
companies have an important social mission to improve people’s health, on the one hand, yet
at the same time have an obligation to shareholders to make a profit. For this reason, pharmaceutical
companies are regularly called out in the media for allowing profits to overtake their
social responsibility. For example, in 2011 Pfizer ended its research on antibiotic resistant
bacteria, an area that, while of critical concern in world health, is financially unprofitable. In
a more general way, this same tension is present in virtually all businesses: Employees are
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Summary & Resources
instructed to behave ethically, yet at the same time their jobs require them to maximize profits.
When the pressure to maximize profits is too great, it may obscure ethical responsibilities,
such as the duty to manufacture microwave ovens that do not catch on fire.
But the two goals of ethics and profit do not have to be in a schizophrenic relationship. They
can be compatible when the boundaries of ethical behavior are clearly indicated to employees.
It is much like playing a sport: There is the playing field where the principal activity
occurs (analogous to maximizing profits) and there are boundaries beyond which players
cannot stray (analogous to ethical boundaries). When employees have clear knowledge of
where those ethical boundaries are, such as through corporate codes of ethics, they can safely
do their part to maximize profits.
Conclusion
Corporations have come a long way since the founding of Jamestown by the Virginia Company.
In the 400 or so years since that time, they have become independent of governmental
affiliation, have gained the status of legal persons, and have greatly proliferated in number.
It is precisely these changes that led Bakan to depict corporations as psychopaths with personality
traits of irresponsibility, manipulation, grandiosity, superficiality, lack of empathy,
and the inability to feel remorse. But even Bakan has recognized that a corporation’s psychopathic
behavior will ultimately lead to its own destruction, as happened with Enron. Thus, for
a corporation to avoid a self-created downfall, at some point it must stop short of Enron-like
behavior and take into account the wider interests of its various stakeholders.
We have seen that within corporate culture, there are mechanisms already in place for reinforcing
socially responsible behavior, such as through codes of ethics and the seven steps of
ethical compliance included in the Federal Sentencing Guidelines for Organizations. There are
also warning signs for when companies become ethically at risk. The issue becomes whether
a corporation is willing to take seriously these aspects of ethical corporate culture. There will
always be companies like Enron, but the goal is to make their occurrences few and far between.
Summary & Resources
Chapter Summary
We began this chapter looking at the nature of corporations, and their four main features. That
is, corporations are created by the states in which they are chartered, they can continue to exist
indefinitely, they are regarded by the law as having the status of a person, and shareholders’
liability is limited to the amount of money that they invest. Shell corporations, which exist on
paper but have no active business operations, can manipulate the laws that create corporations
and exist solely for unethical or illegal purposes, such as tax havens. A critical issue with
the nature of corporations is whether they are moral agents, which are morally responsible
for their actions beyond the responsibility individual corporate employees have. Peter French
argued that they are moral agents, but Manuel Velasquez argued that they are not.
This chapter also explored how corporations are punished. Punishment in general is
typically justified on five grounds, all of which apply to corporations as well as individual
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Summary & Resources
people: deterrence, incapacitation, rehabilitation, retribution, and reparation. Just as there are
different forms of punishment for individual people, there are also different ways of punishing
corporations. Six of these are monetary fines, equity fines, corporate incapacitation, the corporate
death penalty, corporate shaming, and community service orders. The selection of an appropriate
corporate punishment often hinges on whether it will harm innocent people, such as
employees, customers, and creditors, and also whether the punishment is severe enough to have
a real impact on the corporation’s conduct. The U.S. government established the Federal Sentencing
Guidelines for Organizations (FSGO), which guide Federal judges in imposing punishments
on corporations. These guidelines also recommend steps for corporations to follow to maintain
high standards of ethics and thus avoid illegal conduct. In addition to governmentally imposed
punishments, consumers can also retaliate against unethical companies through boycotts and
civil lawsuits.
The creation of an ethical culture within corporations often focuses on three notions: the
stakeholder, the triple bottom line, and corporate social responsibility. Many corporations
express their commitment to ethical standards within their mission statements and, in a
more detailed way, through a corporate code of ethics.
A common criticism of these public statements is that they can be insincere efforts to make a
company appear to be more ethical than it really is. Even in sincere efforts to create an ethical
corporate climate, four things can hamper those efforts. First is the profit motive itself, which
can incline companies to minimize their social responsibility in their efforts to increase profits.
Second is strategic misrepresentation, in which a corporation intentionally misstates facts
to gain a financial advantage. Third is groupthink, which occurs when employees set aside
their ethical convictions in the process of building group consensus. Fourth is organizational
schizophrenia, which occurs when management sends conflicting messages to employees
about the corporation’s ethical priorities.
Discussion Questions
1. The Supreme Court argued that perpetual existence is one of the main benefits
of creating corporations. As tragic as death is for natural persons, it nevertheless
makes way for younger generations of people to put their mark on the world. Might
there be a similar benefit if corporations were required to die after, say, 100 years of
existence? What might the disadvantages be if such a policy were enacted?
2. One issue of corporate moral agency involves whether corporations can be accused
of being immoral—beyond the immoral conduct of their employees. Peter French
and Manuel Velasquez have taken opposing views on this. Explain their views and
discuss which of the two you believe is correct.
3. Some codes of ethics include an intuitive guide for employees to assess their decisions.
Look at the guide presented from Allstate in the chapter. Are all of the questions
that are asked helpful for guiding ethical choices (such as “Is it legal?”)? Are
there other questions that you think should be on the list?
4. Milton Friedman argued that businesses’ only responsibility is to make profits, and
they should avoid all efforts at social responsibility. Explain the rationale for his position,
and discuss whether you agree.
5. Albert Carr defended strategic misrepresentation as a normal part of the business
game. Think of an example in which you believe Carr is correct and another example
in which you believe that strategic misrepresentation is wrong.
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Summary & Resources
board of directors Group of individuals
elected by corporation shareholders to
manage the corporation.
community service order A corporate
punishment in which a company must
participate in some project that benefits the
community in some way.
consumer boycott When a group of people
act together to abstain from buying from or
dealing with a business.
consumer retaliation When individual
consumers or consumer groups express dissatisfaction
with a company through some
effort that harms it financially, e.g., boycotts,
complaints to government agencies, or civil
lawsuits.
corporate codes of ethics Detailed
accounts of the principles of conduct within
organizations that guide decision making
and behavior.
corporate death penalty A corporate punishment
in which a company is forced to go
out of business, such as by the revocation of
its corporate charter.
corporate incapacitation A corporate
punishment in which a court issues an order
to restrain the activities of a corporation in
some area of business.
corporate moral agency The concept that
businesses are morally responsible for their
actions, similar to how individual people are
morally responsible for theirs.
corporate shaming A corporate punishment
in which the government requires a
guilty company to make a public announcement
that threatens its reputation and social
standing.
corporate social responsibility (CSR) A
corporation’s efforts to take responsibility
for its effects on the environment and its
impact on social welfare.
corporation A legally recognized independent
entity owned by shareholders in which
the corporation, and not the shareholders,
holds legal liability.
creation by statute The legal concept that
corporations come into existence through the
creation of a legal document called a charter.
deterrence A justification of punishment
in which an offender is punished to set an
example that might discourage others from
committing similar crimes.
equity fine A corporate punishment in
which a fine payment is made in shares of
the company, not in money.
ethics officer An administrator within a
company who holds workers accountable to
the company’s ethical standards.
Federal Sentencing Guidelines for Organizations
(FSGO) U.S. government guidelines
for sentences imposed by Federal judges,
which include restitution, remedial orders,
community service, fines, and jail terms.
fiduciary duty A legal duty to act solely in
another party’s interests.
fine A payment of money imposed as a penalty
for an offense.
greenwashing A term referring to pretended
efforts at environmental responsibility
and, more broadly, at corporate
responsibility.
groupthink The practice of thinking or making
decisions as a group in a way that discourages
creativity or individual responsibility.
Key Terms
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Summary & Resources
incapacitation A justification of punishment
in which removing an offender from
society prevents the offender from committing
similar crimes.
legal person A nonhuman entity regarded
by law as having the status of a person.
legal standing The legal concept that a
person can sue others and be sued by others,
own property, and make contracts with
others.
limited liability The legal concept that
a stockholder cannot lose more than the
amount that he or she invested.
mission statement A short account of a
company’s fundamental purpose, which may
include a statement of ethical standards.
officers Individuals designated by a corporation’s
board of directors to operate the
business, with the chief executive officer
(CEO) at the top and various levels of managers
below.
organizational schizophrenia Tension
between competing goals or values within a
corporation.
perpetual existence The legal concept that
corporations can continue indefinitely and
independently of the temporary lives of their
managers and shareholders.
rehabilitation A justification of punishment
in which, through reform techniques,
changes are made to an offender’s future
behavior.
reparation A justification of punishment in
which an offender must repay the victim for
the injury that the offense caused.
retribution A justification of punishment
in which punishment balances the scales of
justice; a crime requires a punishment.
shareholders (stockholders) Those who
own a corporation by obtaining shares of
stock in it.
shell corporations Corporations that exist
on paper but have no active business operations
or significant assets.
stakeholder Any party who is affected by,
or who has a stake in, a business practice,
including employees, suppliers, customers,
creditors, competitors, governments, communities,
and shareholders.
strategic misrepresentation The intentional
and systematic distortion or misstatement
of facts for the purpose of gaining a
financial advantage.
triple bottom line (3BL) The view that
successful companies must pursue three distinct
values: people, the planet, and profit.
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Summary & Resources
Business Ethics Case Study 3.1: The Chick-fil-A Same-Sex
Marriage Controversy
In 2012, Dan Cathy—CEO of fast-food chain Chick-fil-A—ignited a firestorm of protest when
he made comments critical of same-sex marriage. In a news story for Baptist Press, he was
quoted as saying that his company was “guilty as charged” in its “support of the traditional
family,” and in a radio interview he said that “we are inviting God’s judgment on our nation
when we shake our fist at him and say, ‘We know better than you as to what constitutes
a marriage.’” The company’s founder also started a charitable organization called the
WinShape Foundation, which had donated over $5 million to anti-gay groups since 2003.
What followed was a clash over the issue between liberal and conservative politicians,
journalists and activists. LGBT advocacy groups organized a boycott of the restaurant chain.
Former governor and presidential candidate Mike Huckabee responded by organizing a
Chick-fil-A Appreciation Day, where supporters flooded into restaurant locations creating
record-breaking sales. Gay rights activists retaliated by holding a same-sex “Kiss Day,” where
gay couples would kiss each other at outlets across the country.
Chick-fil-A is one of many major companies whose owners attempt to integrate their
religious beliefs into their business practice. Other such companies include Tyson Foods,
which has 115 chaplains on hand to counsel employees and their families. The clothing
retailer Forever 21 sells religious-themed T-shirts, while Mary Kay cosmetics pushes the
theme that God is their business partner. Interstate Batteries indicates that one of their
purposes is to glorify God and that their employees may participate in biblically based
opportunities that are woven throughout their work experience, while In-N-Out Burger
prints biblical chapter and verse references on its paper containers.
Chick-fil-A’s integration of religion into their corporate culture is at least as unreserved
as these. The first Chick-fil-A was opened in 1967 by founder Truett Cathy—father of the
current CEO—who from the start integrated his Southern Baptist religious convictions into
his business model. The company’s corporate purpose is “To glorify God by being a faithful
steward of all that is entrusted to us and to have a positive influence on all who come into
contact with Chick-fil-A.” All franchises must be closed on Sundays so that employees can
attend church. The franchise owners are carefully selected in a lengthy interview process;
they look for operators that share the same Christian values and prefer ones who are
involved in church. During the interviews, they ask personal questions about religion and
marital status; while these questions are not technically against Federal guidelines, most
employers shy away from them to avoid discrimination lawsuits. During training and
organizational retreats, employees are expected to join in group prayers. According to a
Forbes magazine story titled “The Cult of Chick-fil-A,” a prospective franchise owner who is
Muslim stated that he was fired after refusing to participate in one such group prayer to Jesus
Christ; he sued the company, and they settled out of court. A third of the franchise owners
have participated in Christian relationship-building retreats sponsored by the company.
Considering how boldly the Cathy family infused their Southern Baptist value system into
their corporate culture, it is not surprising that their views on family values became a matter
of public controversy. But the company backpedaled quickly, and almost immediately issued
the following statement: “The Chick-fil-A culture and service tradition in our restaurants is
to treat every person with honor, dignity and respect—regardless of their belief, race, creed,
sexual orientation or gender. . . . Going forward, our intent is to leave the policy debate over
same-sex marriage to the government and political arena.”
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Summary & Resources
The company stopped contributing to organizations that their critics have called anti-gay,
and, in a recent interview, Dan Cathy said that he regrets making his company a symbol in
the same-sex marriage debate and that Chick-fil-A has no place in the culture wars. “Every
leader goes through different phases of maturity, growth and development and it helps by
(recognizing) the mistakes that you make,” he said. “And you learn from those mistakes. If
not, you’re just a fool. I’m thankful that I lived through it and I learned a lot from it.”
There is an important lesson to be learned from the Chick-fil-A controversy. It was not the
purely religious component of their corporate culture that got them into trouble. Holding
group prayers, glorifying God, and advocating church attendance are not normal corporate
practices, but they are understandable in a country where 45% of the population identify
themselves as born-again Christians.
We could imagine and appreciate how companies in predominately Buddhist countries
might embrace their own religious expressions in a way that parallels Chick-fil-A’s religious
commitment. What got Chick-fil-A into trouble, though, was advocating a controversial moral
position that, while perhaps common among Southern Baptists today, is not the central
message of that denomination’s theology. The lesson is this: Stay on topic and you’ll be fine;
stray into divisive secondary issues and you’ll invite trouble.
Discussion Questions
1. Conservative churches often say behaviors such as tobacco use, drinking alcoholic
beverages, recreational drug use, premarital sex, and adultery are sinful. Suppose
that Dan Cathy said that, as a Christian company, Chick-fil-A was against these
behaviors and God’s judgment would be on our nation if we did not stop them.
Would this have provoked the same kind of controversy as his comments about
same-sex marriage? Explain.
2. Consider the Muslim franchise operator who was fired for refusing to join in a group
prayer to Jesus. Presumably, the company knew in advance that he was Muslim and
hired him anyway. How could the company have better handled that situation?
3. With all the personal restrictions imposed by the home office, would you personally
want to be a Chick-fil-A franchise owner? Explain.
4. Do you believe it is ever appropriate for businesses to require their employees to
participate in religious activities? Why or why not?
Sources: Associated Press (2014), The Barna Group (2006), Bhasin & Hicken (2012), Chick-fil-A (2012), O’Connor
(2012), Schmall (2007), “What Dan Cathy Said” (2012).
Business Ethics Case Study 3.1: The Chick-fil-A Same-Sex
Marriage Controversy (continued)
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Required Resources
Text
Fieser, J. (2015). Introduction to business ethics [Electronic version]. Retrieved from https://content.ashford.edu/

  • Chapter 2: Capitalism
  • Chapter 3: Corporations

Articles
Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits (Links to an external site.)Links to an external site.New York Times Magazine. Retrieved from https://philosophia.uncg.edu/media/phi361-metivier/readings/Friedman-Increase%20Profits.pdf

  • Friedman presents a two-part clarification of what we may understand as social responsibility. The first part states that the responsibility of business is to its shareholders by using its resources to increase profits. Most stop here and assume that Friedman is advocating an ethics of egoism. But the important second part is that Friedman argues that business must be bound by the law and rules of honesty and decency toward others.
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Smith, J. W. (2015). The Uber-all economy. Market News, 49(6), 26. Retrieved from http://www.ama.org/

  • The full-text version of this article can be accessed through the EBSCOhost database in the Ashford University Library. This article outlines the characteristics of the Uber business model.

Steinmetz, K. (2015, June 17). Why the California ruling on Uber should frighten the sharing economy (Links to an external site.)Links to an external site.Time. Retrieved from http://time.com/3924941/uber-california-labor-commission-ruling/

  • This article examines the effects of the ruling on the growing independent contractor sector.
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Multimedia
IJ Sales. (2014, February 4). What is Uber? (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/pZBMo59iwPo

Learn Liberty. (2011, August 22). Top three common myths of capitalism | Learn Liberty (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://www.youtube.com/watch?v=KGPa5Ob-5Ps

LibertyPen. (2009, November 13). Milton Friedman–Lesson of the pencil (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/4ERbC7JyCfU

Macat Education. (2015, August 10). An introduction to Friedrich Hayek’s The road to serfdom–A Macat economics analysis (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/ONATaFzi82I?list=PLRXstY5OaIwfFdYTwRlwB-gnNCg8oH9sw

Mashable. (2014, October 9). What is Uber? | Mashable explains (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/tQlgavP5cmo

PragerU. (2015, April 6). Profits are progressive (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/tdHwewUuXBg?list=PLIBtb_NuIJ1w_5qAEs5cSUJ5Bk0R8QLaY

TechCrunch. (2015, June 17). Uber driver ruled employee, not contractor, in CA | Crunch report (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/n3QJWPg5TLA

Recommended Resources
Articles
Formaini, R. L. (2001). The engine of capitalist process: Entrepreneurs in economic theory (Links to an external site.)Links to an external site.Federal Reserve Bank of Dallas Economic and Financial Review, 4(2-11). Retrieved from https://www.dallasfed.org/assets/documents/research/efr/2001/efr0104a.pdf

  • This article surveys the history of economic thought in order to present the emergence of the notion of entrepreneurship and the role it plays in the capitalist process.

Marx, K. (1959). Estranged labour (Links to an external site.)Links to an external site.. In, Economic and philosophic manuscripts of 1844 (M. Mulligan Trans.). Moscow: Progress Publishers. Retrieved from http://www.marxists.org/archive/marx/works/1844/manuscripts/labour.htm (Original work published 1932)

  • In this manuscript, Marx develops his theory of worker alienation.

Multimedia
Fernandes, S. [Sujatha Fernandes]. (2014, May 21). Marx’s theory of alienation (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/xx3PBBuHfY4

  • This video explains Marx’s framework for psychological significance of how a worker perceives the appreciation of his labor investment in the products that result from it.

Macat Education. (2015, September 2). An introduction to Milton Friedman’s The role of monetary policy–A Macat economic analysis (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/kcqdKv7dbG4?list=PLRXstY5OaIwfFdYTwRlwB-gnNCg8oH9sw

  • This video presents Milton Friedman’s examination of the effects that a government’s monetary policy can have on the economy and for how long.

Website
Smith, A. (2013). An inquiry into the nature and causes of the wealth of nations (Links to an external site.)Links to an external site.. Retrieved from http://www.gutenberg.org/files/3300/3300-h/3300-h.htm#link2HCH0001

  • This contribution by Adam Smith marks the emergence of economics proper from its roots in philosophy. The scope is quite broad but the three emerging concepts are: division of labor, productivity, and free markets.

 

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Capitalism and Socialism: Case Study: Uber

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Prepare:
Your initial post in this discussion must be informed by the required material for this discussion. The required material for this discussion will introduce you to what is new about Uber as a business model, the profit incentive in business, and how laws can make or break innovation in business. Your preparation should focus on the characteristics of capitalism and socialism, as well as other business concepts presented in the required material. Since your initial post in this discussion will examine the relation between running a business such as Uber and the laws and economic system of the nation(s) in which it operates, make sure to comb the material on Uber for laws, regulations, and the economic setting that affect its operations. You are encouraged to research relevant laws and regulations to make sure that you have current information.
Reflect:
Keep in mind that Uber has presented itself into the market not as a transportation service but as a service that pairs consumers with ride sharing services by means of a unique phone app. But some sources—including the taxi industry and one California court finding (details in the required material), as well as the characterization of Uber presented in Section 3.4 of the textbook—seem to challenge this branding. According to these sources, Uber is avoiding laws that apply to the transportation industry and, thereby, usurping a rightful place that the taxi industry has carved for itself. Consumers, on the other hand, have shown their preference for Uber by a high demand for its services in the USA and abroad, including those countries in which Uber has been banned. Compared to taxis, Uber offers consumers an efficient system for procuring a ride even in remote areas where taxis do not frequent, a convenient payment method (no need for cash, and fares can be split among different users on the same ride), and significantly cheaper fares compared to taxis. In many instances, Uber cars come equipped with water, candy, and magazines, all for free. Uber drivers are also better off because they keep the majority of the fares for the rides that they service, which is exactly the opposite case of taxi drivers, and they can choose when they want to work. Clearly, this is a controversial case and thus very apt for the examination for this discussion.
Keep in mind that a nation’s economic system is shaped by the laws that are in place. Accordingly, laws (including state regulations and local ordinances) will give you a clue for the kind of economic system that exists. Keep in mind also that most nations have mixed economies and there is probably no economic system that purely represents socialism or capitalism. So you will find a different combination of both socialism and capitalism in any nation that you are examining.
Write:
You have four tasks for your initial post. In order to present an organized post, address each one of these tasks in a separate paragraph and in the following order. Your first task is to articulate the economic system (or combination of characteristics of both socialism and capitalism) that such laws depict. Your second task is to examine the laws that either support or limit the operations by Uber. Your third task is to analyze how your findings from your first and second tasks affect Uber. And your fourth task is to present your moral position with regard to Uber. For this latter task, you will need to identify one of the three ethical theories covered in the Week 1 (utilitarianism, deontology, or virtue ethics) as support for the moral position that you are taking. For example, you may hold the moral position that Uber is morally justifiable because it provides a good for consumers that fills in a gap that had not been met by the taxi industry. Or you may take the position that Uber’s positioning in the market is
3 Corporations
iStock/Thinkstock
Learning Objectives
After reading this chapter, you should be able to:
• Explain the nature and main features of corporations.
• Discuss the principal ways of punishing corporations.
• Assess the merits of various efforts to create an ethical corporate culture.
• Discuss the main threats to ethical corporate culture and how to combat them.
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Chapter Outline
Introduction
3.1 The Nature of Corporations
Corporate Structure
Four Features of Corporations
Shell Corporations
Moral Agency of Corporations
3.2 Punishing Corporations
Six Types of Corporate Punishment
Federal Sentencing Guidelines
Consumer Retaliation
3.3 Ethical Corporate Culture
Stakeholders and Corporate Social Responsibility
Mission Statements and Codes of Ethics
3.4 Threats to Ethical Corporate Culture
The Profit Motive
Strategic Misrepresentation
Groupthink and Organizational Schizophrenia
Conclusion
Introduction
When you think of the word “corporation,” you most likely think of a concept that is relatively
young. But corporations have actually existed for around 2,000 years. By medieval times,
corporations had already been used for establishing churches, universities, and monasteries.
They were also used for creating trade guilds, which were associations of craftspeople, somewhat
like modern-day trade unions.
By the 15th century, corporations had become an important tool for funding colonial ventures
as well. Establishing colonies in distant lands was a vastly expensive undertaking, but
through the mechanism of incorporation, the investment costs could be covered by a number
of people, not just a single investor. Thus, in 1606, the King of England granted a corporate
charter to the Virginia Company to establish settlements along the Atlantic coast in
North America, and investors held stock in that company. Unfortunately, its first settlement,
Jamestown, was a disaster, with all but 61 of its first 500 settlers dying from disease and starvation.
Thus, after 18 years of struggle, the king revoked the Virginia Company’s corporate
charter and took governmental control of its colonies.
Introduction
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The Nature of Corporations Section 3.1
Many early colonial corporate ventures like the Virginia Company were affiliated with governments
and were intended to establish territorial monopolies for imports and exports. But
with the movement toward free-market economics in the late 18th century, newer corporations
became less affiliated with guilds and governments and more with private businesses.
This is the model of the corporation that we have today.
Whether large or small, conducting business today typically means running a corporation—
so much so that the terms business and corporation are almost synonymous. In this chapter,
we will look at the defining characteristics of a corporation, methods of punishing those
that break the law, the ethical character of corporate culture, and threats to ethical corporate
culture.
3.1 The Nature of Corporations
The first issue to consider is the nature of the corporation itself. In this section, we discuss
corporate structure, the four main features that define a corporation, shell corporations, and
whether corporations can have moral responsibility in the way that people do.
Corporate Structure
Although the focus of this chapter is on corporations, a corporation is just one of five business
structures recognized by the U.S. Internal Revenue Service, as shown in Table 3.1. Corporations
are defined as legally recognized independent entities owned by shareholders. What
separates corporations from other forms of business is that in corporations, the corporation
itself, not its shareholders, holds legal liability for the company. This means that should the
corporation go bankrupt or be sued, for example, the individual shareholders are not responsible
for the corporation’s losses beyond the extent of their own personal investment. Note
that many of the issues we discuss in this chapter apply not just to corporations but to other
forms of business as well.
Table 3.1: Business structures recognized by the U.S. Internal Revenue Service
Business structure Definition
Corporation A legally recognized independent entity owned by shareholders in
which the corporation, and not the shareholders, holds legal liability
S Corporation A legally incorporated business with no more than
100 shareholder owners
Sole Proprietorship An unincorporated business owned by a sole proprietor himself or
herself who holds legal liability
Partnership A relationship existing between two or more persons who join to carry
on a trade or business who jointly or separately hold legal liability
Limited Liability Company (LLC) A form of a company that provides limited liability to its owners but is
not incorporated and does not need to be organized for profit
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The Nature of Corporations Section 3.1
The basic structure of a corporation consists of three main levels of authority:
1. Shareholders (stockholders) own the corporation by obtaining shares of stock
in it.
2. The shareholders, in turn, elect a board of directors to manage the corporation.
3. The board then designates officers to operate the business, with the chief executive
officer (CEO) at the top and various levels of managers beneath.
The board and officers of a corporation have a fiduciary duty to the shareholders: They are
under a legal obligation to manage the company in a way that protects the shareholders’
investment. Thus, the shareholders’ drive to make a profit on an investment transfers down
through the whole corporate hierarchy. In his book The Corporation, legal scholar Joel Bakan
argued that corporations are so driven by self-interest and financial greed that they fit the
personality profile of a psychopathic individual. He wrote:
The corporation’s legally defined mandate is to pursue, relentlessly and
without exception, its own self-interest, regardless of the often harmful consequences
it might cause to others. As a result, . . . the corporation is a pathological
institution, a dangerous possessor of the great power it wields over
people and societies. (Bakan, 2005, p. 1)
Undoubtedly, some corporations are as pathologically dangerous as Bakan maintained; the
Enron Corporation is a poster child for that. Enron was a major energy company with natural
gas pipelines stretching across the country, and ultimately became the largest energy trader
in the world. At its peak it was seventh on the list of Fortune 500 companies, and for 6 years
running, it was hailed as America’s most innovative company by Fortune magazine. However,
under the leadership of CEO Kenneth L. Lay, the company borrowed too much money for its
projects and fraudulently hid billions of dollars of debt from its investors, all the while fooling
everyone into thinking that it was a robust business. In California, it secretly restricted the
supply of natural gas, which created blackouts and caused an 800% increase in natural gas
prices. When Enron executives became aware that the company was about to collapse, they
sold their personal shares of company stock while encouraging investors to buy more. News
of Enron’s problems soon became public, its stock prices fell to a fraction of their original
value, and its subsequent bankruptcy became the largest up to that point in U.S. history. But
although Enron may have brought corporate corruption to a new level, it is not clear that
the nature of the corporation itself forces companies to systematically engage in unethical
behavior.
Four Features of Corporations
There are four main features of a corporation:
1. creation by statute,
2. perpetual existence,
3. recognition as legal persons, and
4. limited liability.
All of these features have important implications. Let us look at each one in more detail.
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The Nature of Corporations Section 3.1
Creation by Statute
The first feature of a corporation is its creation by statute. Corporations come into existence
through the creation of a legal document called a charter, which in the United States is
granted by an individual state. The person seeking the corporation draws up a charter and
submits it to a state commission for approval.
The fact that corporations
come into existence through
government action suggests
that their very character
and range of freedoms are
shaped by what the government
thinks is best, and
that has changed over time.
An early landmark U.S.
Supreme Court case, Dartmouth
College v. Woodward
(1819), was responsible for
giving greater independence
to corporations outside of
government control. The issue in that case had to do with Dartmouth College’s right to appoint
its own presidents and trustees, independent of influence by the state of New Hampshire. Dartmouth
was granted a corporate charter prior to the American Revolution, when New Hampshire
was a British colony. After U.S. independence, the New Hampshire legislature attempted to take
administrative control of the college and appoint its president and trustees. The college challenged
the state, and the Supreme Court sided with Dartmouth, allowing it to continue as a private
institution.
Perpetual Existence
Second, corporations have perpetual existence, which means that, unlike mortal human
beings, they can continue indefinitely and thus independently of the temporary lives of their
managers and shareholders. Some corporations may be created to exist for only a limited
period of time, but most are granted perpetual existence. The oldest currently existing corporation
is the Stora Kopparberg Mining Company in Sweden, which obtained its charter in 1347.
In Dartmouth College v. Woodward, the Supreme Court argued that the fundamental justification
for creating a corporation is perpetual existence—a kind of legal immortality—which prevents
the “intricacies, the hazardous and endless necessity of perpetual conveyances for the purpose
of transmitting it from hand to hand” (1819). The point is that a corporation has a life independent
of the people who formed it, and can continue to exist perpetually even as the various
members of the corporation come and go. Note that although their existence is perpetual, corporations
may be dissolved at the direction of the state, a court, or the shareholders themselves.
Recognition as Legal Persons
Third, corporations are legal persons in the sense that they are nonhuman entities regarded
by law as having the status of a person. They have what is called legal standing, which means
Visions of America/Superstock
The U.S. Supreme Court case, Dartmouth College v. Woodward
(1819), gave corporations greater independence from government
control.
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The Nature of Corporations Section 3.1
that they can sue others and be sued by others, own property, and make contracts with others.
It is legal personhood that also makes corporations legally accountable for wrongdoing,
and thus capable of being punished for crimes. Without legal personhood, corporations could
not be legally punished for wrongdoing any more than an unruly mob could be punished as
a collective entity, beyond the actions of the individuals within that mob. Thus, corporations
can be criminally convicted of fraud, manslaughter, and even human rights violations.
In the words of one Supreme Court justice, the corporation is “capable of being treated as a
citizen of [the state which created it] as much as a natural person” (Louisville, Cincinnati &
Charleston R. Co. v. Letson, 1844). Determining exactly how corporations can lay claim to their
rights as persons and citizens is an ongoing challenge. A controversial Supreme Court case,
Citizens United v. Federal Election Commission (2009), established that corporations’ rights to
free speech entitled them to spend unlimited amounts of money in campaign contributions.
In essence, it said that for corporations, money is speech.
The question this raises is whether there is an essential difference between corporate
persons and natural persons that prevents them from having exactly the same rights in
a meaningful way. Corporations cannot marry, vote, or hold public office in the way that
natural persons can. And for critics of the court’s decision, money simply is not the same
thing as speech, especially considering the vast wealth of corporations and the corrupting
influence that money has in political campaigns. The harshest critics argue further that
the very idea of corporate personhood is a horrible mistake, and corporations simply are
not people.
Limited Liability
The fourth attribute of corporations is limited liability, which, as we discussed earlier,
means that a stockholder cannot lose more than the amount that he or she invested. In normal
circumstances, the corporation as a legal entity, not the shareholders themselves, is
liable for payment of debts. In
the event that the corporation
fails, the shareholders can lose
their investments, but they are
not responsible for paying any
remaining debts that the corporation
owes to its creditors. The
purpose of limited liability is that
it encourages investment: People
are more likely to invest in something
when they know that their
risk is limited.
In unusual circumstances, however,
shareholders may become
liable for corporate debts if the
corporation is used to commit
fraud on people that it deals
with, such as creditors. This may
also occur if the shareholder
Gerald Herbert/Associated Press
Stockholders in companies like BP, which was involved
in the recent Gulf oil spill, are not liable for payment of
debts of the corporations they invest in.
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The Nature of Corporations Section 3.1
runs the business as though the corporation did not exist, for example, by not holding meetings
or not keeping corporate records. In these cases, to use a legal expression, the “corporate
veil” is pierced, and the owners behind that veil are exposed.
Shell Corporations
One particularly odd issue surrounding the incorporation process involves what are called
shell corporations—that is, corporations that exist on paper but have no active business
operations or significant assets. Often these are used for legitimate purposes. For example,
sometimes one company might set up a series of shell corporations and then sell them off the
shelf to someone else as a way of simplifying the process of creating a corporation. The new
owner can then change the corporate name and officers at any time.
However, shell companies can be abused. Enron made heavy use of shell companies: By transferring
its accumulating debt to them, the company was able to hide its financial failures from
investors and the public, thus creating the illusion that it was a healthy and vibrant company.
More often, though, shell companies are created for purposes of tax avoidance. For example,
a company based in California might conduct its international business through a shell
company that is incorporated in a tax-haven country like Belize. The principal corporation in
California can then avoid reporting the shell company’s income to the U.S. government, and
thereby avoid paying taxes on that income.
This practice is technically legal, and it is one that U.S. lawmakers hate but have difficulty
combating. In fact, even within the United States, some states have themselves become tax
havens because of their lax incorporation laws, and shell companies are flourishing there. For
example, a small house in Cheyenne, Wyoming, is the official address of 2,000 shell companies
(NPR Staff, 2011). All of these examples show how the laws that enable the creation of corporations
can be manipulated for a wide range of potentially unethical business practices. In
the worst cases, a shell corporation is created solely as a vehicle for wrongdoing and has no
further redeeming value whatsoever as a business entity.
Moral Agency of Corporations
The status of corporations as legal persons makes them legally responsible for misdeeds,
such as bribery, discrimination, unsafe working conditions, and false advertising. They can
be charged with crimes and face penalties. However, it is common to hear people attack a
company for being immoral, and the implication is that the business is morally responsible
for its misconduct, not just legally responsible. That is, businesses are not merely legal
persons but are also moral persons, or moral agents, who are morally responsible for their
actions.
Take this next example, which appeared on a blog. A customer signed a contract with a homesecurity
company and was told by the sales agent that it was for the duration of 2 years. At the
close of the second year, the customer contacted the company saying that she did not want to
renew the contract; the company said that the contract was for 3 years, not 2. The customer
waited a year and repeated her request. The company responded that they require a 60-day
notice for nonrenewal, and if they do not receive it, the customer is automatically renewed
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The Nature of Corporations Section 3.1
for another 3 years. The customer believed that the business was scamming her and, consequently,
maintained that the company acted immorally (Samantha, 2009).
If this were a small, family-operated business, we could easily say that the business was
immoral, since the fault would trace directly back to the family owners themselves: It is the
owners who acted immorally through their business operations. Suppose, however, that the
security company was a national chain with thousands of employees, each of whom was playing
only a small and limited role in the operation of the business. Could we still say that this
security company as a whole acted immorally in the same way that we commonly say that an
individual human acted immorally?
The issue here is that of corporate moral agency, which concerns whether businesses are
morally responsible for their actions, similar to how individual people are morally responsible
for theirs. There are two main positions on this issue.
Position 1: Corporations Can Be Genuine Moral Agents
The first position is that corporations can be genuine moral agents. In the words of Peter
French, the leading proponent of this view, “corporations can be full-fledged moral persons
and have whatever privileges, rights and duties as are, in the normal course of affairs,
accorded to moral persons” (1979). Corporations have what French has called a “corporate
internal decision structure”—that is, a procedure for carrying out decisions—and this procedure
has all the necessary elements to qualify as a “moral” decision-making process. It has
two main components:
• It has a responsibility flowchart—similar to a corporate organizational chart—that
shows the various management levels within the corporation’s hierarchy, and who is
responsible for what.
• The corporation has rules (usually within its bylaws) to determine whether a manager
is making a decision on behalf of the corporation itself or merely making a personal
decision. For example, if the unscrupulous home-security company described
earlier were a large corporation, we would be able to identify which manager in the
corporate hierarchy was responsible for the renewal scam, and whether that decision
was a personal one or a corporate one.
With French’s model of corporate moral agency, human beings are still the ones making the
decisions, but those people are making choices for the corporation, not for themselves. Thus,
the intention behind that decision is the intention of the corporation, not of the individual
person.
Position 2: Corporations Cannot Be Moral Agents
The second and opposing position is that corporations cannot be moral agents. According
to this view, the immoral actions of a corporation are attributable to the decisions of the
individual actors within the corporation, not to the corporation as a whole. The leading
proponent of this view, Manuel Velasquez, has argued that “corporate organization lacks
the kind of causal powers and intentionality that an entity must possess to be morally
responsible for what it does” (2003). According to Velasquez, to speak of a corporation
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Punishing Corporations Section 3.2
as having intentions is only a metaphor, and nothing in the corporate internal decisionmaking
structure can “transform a metaphorical intention into a real one,” nor can it “create
group mental states nor group minds in any literal sense.” Human intentions, he has
argued, are mental in character and can only occur within a conscious human mind. To talk
about corporate “intentions” in a literal sense would mean that a corporation has a unified
conscious mind, which is absurd, he argues. At best, Velasquez says, a corporation consists
only of people with conscious minds who are disconnected from each other. Workers, not
the abstract corporate group, are the ones that carry moral responsibility for their on-thejob
decisions (Velasquez, 2003).
Issues at Stake
There are two issues at stake in this debate:
• Whether corporations can themselves be accused of being “immoral.” If I rob a bank,
I can justly be called an immoral person. But if a corporation intentionally defrauds
consumers, can it also be called “immoral” in the same way? French says yes;
Velasquez says no.
• Whether workers in corporations should be punished individually for their immoral
decisions, beyond the punishment that the corporation receives. French says they
should not; Velasquez says they should.
We should emphasize, though, that regardless of whether there is a moral justification for
punishing corporations, from a purely legal standpoint corporations are in fact liable for punishment
by the state. They are legal persons and, as such, have legal liability in the way that
you and I do.
3.2 Punishing Corporations
The next issue concerns the types of punishments that governments can impose on corporations,
and what society hopes to accomplish through those punishments. The issue of punishment
in general is a complex one. Therefore, it will help if we start by looking at the methods
and justifications for punishing individual people, and turn to corporations after that.
The ways in which society can punish individuals for crimes are varied. Suppose, for example,
that you are caught shoplifting from a local store. A possible punishment would be paying
a fine or serving a few weeks of community service. With some crimes, like drunk driving,
judges can get creative and make you put an embarrassing sign on your car that says “I’m a
convicted drunk driver.” If your crime is even more severe, you might spend years in prison,
or even be executed.
There is a wide range of punishments available for criminals in part because there are a variety
of objectives society has for punishing them in the first place:
• There is deterrence, in which an offender is punished to set an example that might
discourage others from committing similar crimes.
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Punishing Corporations Section 3.2
• There is incapacitation, in which, by being removed from society, an offender is
prevented from committing further similar crimes.
• There is rehabilitation, in which, through reform techniques, changes are made to
an offender’s future behavior.
• There is retribution, in which punishment balances the scales of justice. An
offender committed a crime, and this requires that the person be punished
accordingly.
• Finally, there is reparation, in which an offender must repay a victim for the injury
that the offense caused.
Six Types of Corporate Punishment
Let us now turn to the issue of punishing corporations. An immediate way of approaching
the task is to hunt down the people within the corporate hierarchy who are responsible for
a crime and punish them individually. This, in fact, occurs regularly. For example, former
Enron president Jeff Skilling received a 24-year prison sentence for fraud and insider trading.
In 2015, Eric Bloom, former CEO of Sentinel Management, was sentenced to 14 years for
defrauding hundreds of investors of $665 million.
However, merely going after the
key players within a company
is often not enough. In many
cases, the causes of corporate
misconduct are dispersed so
widely within the company
that there may be no one individual
who intentionally committed
an illegal act. Rather, it
may only be the accumulated
efforts of many blameless individuals
that ultimately give
rise to a corporate misdeed.
More importantly, the status of
corporations as legal persons
makes a company itself liable
to prosecution, in addition to
any corrupt corporate executive
who might be involved. But
although a corporation is considered
a legal person, it is not
a giant human being. Thus, at
least some of the penalties that
we impose on individual people
would not be appropriate for corporations. We cannot, for example, literally imprison a
corporation. There are six basic types of punishment for corporations:
• fines,
• equity fines,
Louis Lanzano/Associated Press
Former WorldCom CEO Bernie Ebbers is seen leaving a
New York Federal court. Ebbers is currently serving a
25-year prison sentence based on his involvement in and
cover-up of an $11 billion accounting scandal that led the
company to file for bankruptcy. Time magazine recently
named Ebbers one of its “Top 10 Crooked CEOs.”
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Punishing Corporations Section 3.2
• corporate incapacitation,
• the corporate death penalty,
• corporate shaming, and
• community service orders.
We will examine each of these here.
Fines
Perhaps the most common way of punishing a corporation is through a fine, a payment
of money imposed as a penalty for an offense. For example, the pharmaceutical company
Johnson & Johnson was fined $2.2 billion for promoting psychiatric drugs for unapproved
uses in children, seniors, and disabled patients—one of the largest settlements with a drug
manufacturer in U.S. history. Although fines may be the usual way of punishing a corporation,
there are several problems associated with this approach:
• If the company is large and the fine is small, it will be ineffective in rehabilitating an
unethical company. The company may see the fine as just another cost of doing business.
This leaves the public with the impression that corporate crime is permissible
as long as the company merely pays the going price.
• If the company is small and the fine is large, the company may not be able to afford
to pay it. And if the fine is lowered for that company, the cost will not serve as an
effective deterrent for other companies.
• Corporate fines can harm innocent people associated with the company. A hefty fine
can financially harm a company to the point that it must decrease employees’ salaries
or even lay employees off. In addition, fines might result in reduced dividends
and stock value for shareholders. The company might also pass the costs of the fines
on to consumers. A case in point is a sewer company in California that was fined
$1.6 million when millions of gallons of raw sewage spilled from its treatment plant.
According to the plant manager, one option for covering the fines was to increase
fees to consumers. (Staats, 2008)
Equity Fines
Another type of corporate punishment is a variation on the fine. With an equity fine, the
payment is made in shares of the company, not in money. The effect is that the value of the
company is diluted in the market, which may serve as a greater deterrent to companies than
monetary fines. The key advantage of equity fines is that they avoid forcing financially weak
companies out of business, and thus protect innocent employees and creditors. This form of
corporate punishment is not yet practiced in the United States or any other country, but the
Scottish parliament has debated legislation allowing equity fines, and it remains a possible
model for corporate punishment.
Corporate Incapacitation
Another form of punishment is corporate incapacitation. For this punishment, a court
issues an order to restrain the activities of a corporation in some area of business. The court
may temporarily restrict a company’s commercial activity for some line of business, in some
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Punishing Corporations Section 3.2
geographical area, or with some client. The court may temporarily revoke a company’s operational
license, or disqualify the company from obtaining specific contracts. It may also freeze
the company’s profits. The United States has these kinds of provisions for corporate incapacitation,
the aim of which is to stop businesses from engaging in a practice that consistently
operates outside the law (Walt & Laufer, 1992).
Corporate Death Penalty
Occasionally, a company commits a crime that is so egregious that, for punishment, it receives
what is called a corporate death penalty. The company is forced to go out of business, such
as by revocation of its corporate charter. This is what happened with the accounting firm
Arthur Andersen. In 2002 it was convicted of obstruction of justice for shredding documents
connected to its auditing of Enron. Because of the conviction—and the fact that convicted
felons are not permitted to audit public companies—the company was forced to surrender
its CPA license, thus forcing it to close its doors for good. Its conviction was overturned a few
years later by the Supreme Court, but not before most of its employees lost their jobs.
The downside to the corporate death penalty is that it harms the vast majority of the workers
who are innocent of wrongdoing—thousands of them, in the case of Arthur Andersen. The
families of these workers suffer as well. The corporate death penalty can also be misused in
political battles. For example, an Arizona law called the “Legal Arizona Workers Act” allows
for the revocation of business licenses for companies that are discovered to have knowingly
employed illegal immigrants. Although it is reasonable to punish a company when it breaks
the law by hiring illegal immigrants, critics of the law argue that is excessive to impose upon
that company the punishment of corporate death. The issue of illegal immigration is a controversial
one that generates extreme opinions, and in this case, the Arizona law has used
the corporate death penalty to achieve an ideological goal. Controversial as it is, the Constitutionality
of Arizona’s law was nevertheless upheld by the U.S. Supreme Court (Chamber of
Commerce v. Whiting, 2011).
Corporate Shaming
Another option for punishment is corporate shaming, in which the government requires a
guilty company to make a public announcement that threatens its reputation and social standing.
For example, a Massachusetts ferryboat company was required to place an ad in the Boston Herald
that stated, “Our company has discharged human waste directly into coastal Massachusetts
waters.” The Federal prosecutor in this case argued that the goal was to deter others, but a punishment
such as this has the added benefit of satisfying the public “when it doesn’t appear that
the company has been punished sufficiently enough, by simply writing a check” (Tovia, 2010).
The problem with corporate shaming is that the humiliation and embarrassment are projected
onto innocent workers, not just the guilty ones. Further, the loss of prestige might contribute to
the financial failure of the corporation and thus adversely affect innocent workers.
Community Service Order
A final type of punishment is a community service order, where, similar to community service
punishments for individuals, a company must participate in some project that benefits
the community in some way. For example, six New York bakeries were convicted of price
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Punishing Corporations Section 3.2
fixing. As punishment, they were ordered to donate baked goods to charitable organizations
for one year (United States v. Danilow Pastry Co., 1983). One advantage to this approach is
that, when a large number of unidentifiable people have been harmed by misconduct, community
service is a way to distribute some benefit back to the wider community rather than
to an individual victim. Also, community service orders do not put companies at risk that are
in financial difficulty in the way that fines do, and thus they insulate innocent parties such as
creditors and workers. This was one of the motivations for the order in the bakery pricefixing
case. Community service punishment is sometimes criticized for being potentially
image enhancing: The company might publicize its service activity in a way that increases its
reputation as a socially responsible organization. Defenders, however, argue that the fact that
the service is done under court order makes it less likely that the company will draw that kind
of attention to itself.
Federal Sentencing Guidelines
The U.S. government punishes a wide range of corporate offenses. In 1991, it established
guidelines for sentences imposed by Federal judges, known as the Federal Sentencing
Guidelines for Organizations (FSGO). The types of punishments imposed are wide-ranging,
and individuals can serve jail terms and pay large fines, the costs of which the corporations
themselves are not permitted to cover. The guidelines make use of a point system for determining
the severity of an offense as well as increasing levels of fines that correspond to severity.
Severity increases when the company has a history of such misconduct, when it obstructs
justice during the investigation, and when “an individual within high-level personnel of the
organization participated in, condoned, or was willfully ignorant of the offense” (U.S. Sentencing
Commission, 2014). The guidelines encourage organizations to create compliance and
ethics programs to prevent and detect illegal conduct, recommending that these programs
include seven specific steps that are summarized in Figure 3.1.
What Would You Do?
You are a judge and before you is a case in which an auto dealership with 50 employees has
been found guilty of false advertising. The dealership routinely advertises vehicles at low
prices, but once customers are on the lot, it sells them at much higher ones. Your concern is
that a hefty fine might force the dealership out of business and thus adversely affect the lives
of the innocent employees.
1. Would you impose the fine or consider alternative forms of punishment, such as
incapacitation, shaming, or a community service order? Be sure to state the rationale
for your decision.
2. Suppose the dealership only switched prices for its customers who had aboveaverage
incomes. Would that make a difference in your decision? Why or why not?
3. What if dealership only switched prices for its customers who had below-average
incomes? Would that make a difference in your decision? Why or why not?
4. What if all of the employees in the dealership knew about the scam, and they all
received bonuses based on the higher selling prices? Would that make a difference in
your decision? Why or why not?
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1.
2.
3.
4.
5.
6.
7.
Standards and Procedures: Organizational implementation of compliance standards
and procedures that are reasonably capable of reducing the prospect of criminal conduct.
Oversight: Assignment of high-level personnel to oversee compliance with such
standards and procedures.
Ethical Supervisors: Due care in avoiding delegation to individuals whom the
organization knows, or should know, have a propensity to engage in illegal activities.
Training: Communication of standards and procedures by requiring participation in
training programs or by disseminating publications that explain in a practical manner
what is required.
Monitoring: Establishment of monitoring, auditing, and reporting systems by creating
and publicizing a reporting system whereby employees and other agents can report
criminal conduct without fear of retribution.
Punishment: Enforcement of standards through appropriate mechanisms, including,
as appropriate, discipline of individuals responsible for the failure to detect an offense.
Corrective Action: Development of appropriate responses to offenses by taking all
reasonable steps to respond appropriately and to prevent further similar offenses,
including any necessary modification of programs (Federal Sentencing Guidelines, 2014).
Punishing Corporations Section 3.2
Corporations have a special incentive for creating compliance and ethics programs that
include these seven steps: If in the future they are ever prosecuted for a crime, they will
receive a reduced punishment. In this way, the government aims to build into corporations a
procedure that will reduce the likelihood of their engaging in illegal conduct.
Consumer Retaliation
Another mechanism for punishing companies is initiated by the public rather than by the government.
Just as the government keeps a watchful eye on businesses, so, too, do consumers.
Consumer retaliation is when individual consumers or consumer groups express dissatisfaction
with a company through some effort that harms it financially. Consumers can write
letters of complaint to government agencies, file civil lawsuits against offending companies,
and use every possible form of media, especially the Internet, to bring public attention to
issues of corporate misconduct. We will examine many of these efforts in a Chapter 4, but
one mechanism for consumer retaliation we can note here. This is the consumer boycott,
when a group of people act together to abstain from buying from or dealing with a business.
The word boycott is derived from a British land agent in Ireland, Charles Boycott, who himself
Figure 3.1: Seven steps recommended by the U.S. Sentencing Commission
for organizations to prevent and detect violations of the law
Organizations that create compliance and ethics programs will receive a reduced punishment if
prosecuted for a crime in the future.
Source: U.S. Sentencing Commission. (2014). 2014 Guidelines manual (Chapter eight – Sentencing of organizations). Retrieved from
http://www.ussc.gov/guidelines-manual/2014/2014-chapter-8#8b21
1.
2.
3.
4.
5.
6.
7.
Standards and Procedures: Organizational implementation of compliance standards
and procedures that are reasonably capable of reducing the prospect of criminal conduct.
Oversight: Assignment of high-level personnel to oversee compliance with such
standards and procedures.
Ethical Supervisors: Due care in avoiding delegation to individuals whom the
organization knows, or should know, have a propensity to engage in illegal activities.
Training: Communication of standards and procedures by requiring participation in
training programs or by disseminating publications that explain in a practical manner
what is required.
Monitoring: Establishment of monitoring, auditing, and reporting systems by creating
and publicizing a reporting system whereby employees and other agents can report
criminal conduct without fear of retribution.
Punishment: Enforcement of standards through appropriate mechanisms, including,
as appropriate, discipline of individuals responsible for the failure to detect an offense.
Corrective Action: Development of appropriate responses to offenses by taking all
reasonable steps to respond appropriately and to prevent further similar offenses,
including any necessary modification of programs (Federal Sentencing Guidelines, 2014).
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Ethical Corporate Culture Section 3.3
was the target of a systematic boycott when, during a particularly bad growing season, he
refused to lower the rent for farmers who leased land from him. The farmers moved off his
property to other locations, and he had trouble finding people who would harvest his fields.
There are two important advantages to consumer boycotts as supplemental ways of punishing
companies:
• Companies are often directly involved in shaping the laws that apply to their industry,
and thus government-sanctioned punishments are not possible when the laws
are lax to begin with. Boycotts fill that void by holding companies accountable when
governments fail to do so.
• Even when the government does get involved by making tough laws, it often takes
several years before the laws are passed and take effect. In the meantime, the company
can continue with its practice. Boycotts—or even the threat of them—can hold
companies accountable during this period of legislative limbo while keeping up
public support for the proposed legislation.
A recent effective use of boycott was the
efforts of the animal rights group Viva to
get athletic sportswear company Adidas
to stop using kangaroo leather in the
manufacturing of its soccer shoes. In 1979,
Adidas began using kangaroo skin, which
has a tensile strength that is 10 times that
of cowhide. The shoes were lighter and
stronger than alternatives, and Adidas
quickly dominated the market. In 1997,
Viva launched its “Save the Kangaroo”
boycott against Adidas, and its impact
was soon felt, with Adidas receiving thousands
of emails complaining about its use
of kangaroo leather. Viva then began lobbying
soccer superstar David Beckham,
who had signed a $160 million lifetime
endorsement deal with Adidas. After
learning details of the controversial slaughter methods of kangaroos, Beckham switched to
synthetic shoes in 2006. In 2012, Adidas announced that it cut back on its use of kangaroo
leather in its shoes by 98% (Poulter, 2012). While not a complete elimination of kangaroo
leather, it is a substantial reduction, and thus serves as a good example of the leverage that a
well-organized boycott can have over a company.
3.3 Ethical Corporate Culture
From what we’ve seen so far, there are several motivations for corporations to abide by the
law and avoid immoral behavior. There is the looming threat of criminal punishment, and all
the bad publicity that goes along with it. There is the possibility of consumer retaliation, such
as consumer boycotts. In this section we will look at mechanisms within the corporate structure
itself that create an ethical corporate culture.
imageBROKER/Superstock
Adidas stopped using Kangaroo leather in its
soccer shoes after a boycott by the animal rights
group Viva.
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Ethical Corporate Culture Section 3.3
Stakeholders and Corporate Social Responsibility
An important concept in the creation of an ethical corporate culture is that of the stakeholder,
which is any party who is affected by, or has a stake in, a business practice. This
includes employees, suppliers, customers, creditors, competitors, governments, and communities,
as well as shareholders. The stakeholder approach to responsible corporate conduct
is that businesses should consider all stakeholders’ interests, not just those of the shareholders.
By considering the interests of the full range of stakeholders, companies will be less
likely to exploit these groups for financial gain.
The challenge of the stakeholder theory is to prioritize the interests of the various stakeholders.
Every stakeholder wants to carve into the financial pie, and there is not enough to
go around for everyone. Shareholders seek to maximize their investments, employees want
higher wages, governments want more taxes, and environmentalists want to see more ecofriendly
policies. The stakeholders and their claims must be prioritized and, at a minimum,
categorized into two groups: primary stakeholders and secondary stakeholders. Of necessity,
the shareholders will be primary stakeholders—perhaps the only ones—since they are the
ones who own the company and ultimately call the shots regarding corporate policy. While
shareholders may be willing to give in to reasonable demands of secondary stakeholders,
they are still investing in the company to make money, and are certainly not willing to hand
it all away.
The stakeholder theory does not come with a built-in formula for prioritizing the competing
interests of primary and secondary stakeholders. However, its greatest significance may be
the growing popularity of the word stakeholder itself and its use throughout the business
world today. Through its heavy use, the idea of social responsibility has become an integral
part of normal business vocabulary. It is more than a faddish buzzword; the identification of
stakeholders is often part of a company’s strategic planning process.
What Would You Do?
You are the CEO of a coal company that uses the controversial technique of mountaintop
removal. This involves bulldozing away the top of a mountain to get at the coal, then filling
in surrounding valleys with the removed soil. Technically you are not breaking the law, but
this method is both environmentally damaging and visually ugly. You could use underground
mining, which is less harmful, but it would cut into your profits.
1. Who are the various stakeholders in this situation?
2. Which ones are primary, and which are secondary?
3. At what point might you find the profit loss from underground mining acceptable: a
loss of 20%, 10%, 5%? Explain your answer.
4. Suppose that local residents set up picket lines daily at the entrance to the jobsite,
and these are regularly featured in the news. How might that affect your assessment
of how much profit loss would be acceptable for switching to an underground
mining method?
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2
3
4
5
6
7
8
9
10
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Google
BMW
The Walt Disney Company
Microsoft
Daimler
Lego
Apple
Intel
Rolls-Royce
Rolex
Ethical Corporate Culture Section 3.3
Although stakeholder theory is a popular way of articulating the social mission of companies,
it is not the only one. Another concept is the triple bottom line (3BL), which is that successful
companies must pursue three distinct values:
• people,
• the planet, and
• profit.
That is, there should be social benefit to workers and the community, environmental benefit
through the implementation of sustainable ecological practices, and economic benefit only
after all hidden environmental costs have been factored in.
Yet another similar concept is that of corporate social responsibility (CSR)—also called
corporate conscience or corporate citizenship. This generally refers to a corporation’s efforts
to take responsibility for its effects on the environment and its impact on social welfare. It
typically applies to efforts of companies that go beyond what is required by governmental
regulations.
Since 1997, a consulting firm called the
Reputation Institute has specialized in
assessing public perceptions of corporate
social responsibility among major
companies worldwide. Figure 3.2 lists
the recent top 10 spots. As you can see,
some very recognizable companies hold
these positions.
The rankings were based on more than
60,000 interviews, and they only reflect
the general public’s perception of the
companies, not what those companies’
citizenship policies or actions are. The
odds are slim that the people interviewed
had any detailed knowledge
about the companies’ actual activities.
Their perceptions were likely guided
by product-name recognition, company
advertising, news stories, and personal
experience with the product.
Nevertheless, the Reputation Institute
maintains that corporate reputation is
“an emotional bond that ensures who
uses your products, who recommends you” (Reputation Institute, 2015). Therein lies the
problem: If the goal is to increase public perception, a company can often achieve this more
inexpensively through a sophisticated marketing strategy than through engaging in costly
social projects. This is particularly common with claims about environmental responsibility:
Virtually every company attempts to project itself as eco-friendly, regardless of how environmentally
harmful its business operations are. The term greenwashing refers to pretended
Figure 3.2: Reputation Institute’s top
10 ranked companies for Corporate
Social Responsibility
Organizations are ranked based upon public
perceptions of their citizenship, governance, and
workplace.
Source: 2015 Global CSR RepTrak® 100 by Reputation Institute.
RepTrak® is a registered trademark of Reputation Institute. Copyright
© 2015 Reputation Institute. All rights reserved.
1
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5
6
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8
9
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Google
BMW
The Walt Disney Company
Microsoft
Daimler
Lego
Apple
Intel
Rolls-Royce
Rolex
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Ethical Corporate Culture Section 3.3
efforts at environmental responsibility and, more broadly, at corporate responsibility. CocaCola,
for example, has been accused of greenwashing with the introduction and promotion
of its “plantbottle,” which it says contains up to 30% plant material. Although the company
uses this to project itself as environmentally friendly, there is no evidence that the plantbottle
reduces CO2
emissions.
In a sense, the Corporate Social Responsibility Index exacerbates this problem, since it tells
companies how successfully they are competing in the battle for public perception. A better
index is one that ranks the actual performance of companies in key areas of social responsibility,
rather than simply public perceptions of their performance.
One such effort is an index provided
by Corporate Responsibility
Magazine. However, this
index has a built-in bias because
much of its data comes directly
from the websites of the companies
that it is evaluating, and
such corporate websites are at
bottom public relations tools
that help shape their image.
Thus, even this index encourages
companies to publically exaggerate
or misrepresent their social
responsibility.
There is yet a deeper problem
with corporate social responsibility
in that the very concept
of it may be an illusion. Robert
Reich argues that corporate
social responsibility “is
founded on a false notion of
how much discretion a modern public corporation has to sacrifice profits for the sake of
certain social goods”; this misleads people to think that businesses are doing more for
the public good than they actually are (Reich, 2008). The reality, according to Reich, is
that the international business environment today is “super-competitive,” and this makes
companies resist doing anything that hurts the bottom line. For Reich, the solution to the
ethical problems of companies must come from laws enacted through the democratic process
that will constrain business conduct. Talk of corporate responsibility makes for good
press and reassures the public, but it delays governmental regulation that will make the
real change.
Although companies may sometimes overstate or fake commitment to social responsibility,
consumers take it seriously; one poll indicated that 79% of Americans take corporate
social responsibility into account when making purchasing decisions. It was an important
factor for 36%. The same study showed that 71% consider corporate social responsibility
with investment decisions. And 12% went so far as to say that they would purchase
Akira Suemori/Associated Press
This group, called the “Greenwash Guerrillas,” took part
in a mock cleaning job at the National Portrait Gallery in
London. The group was criticizing the gallery for its hosting
of the BP Portrait Award ceremony, claiming that doing
so helped the oil company “greenwash” its public image.
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Ethical Corporate Culture Section 3.3
stock in socially responsible companies even if it meant accepting lower financial returns
(Verschoor, 2001).
Mission Statements and Codes of Ethics
There are concrete ways within the corporate structure to mark out ethical boundaries for
employees. The most common ways are through mission statements and codes of ethics.
Mission Statements
A mission statement is a short account of the company’s fundamental purpose, and many
companies use them as a way of broadcasting their commitment to ethical standards. Here,
for example, is one of PepsiCo’s recent mission statements:
Our mission is to be the world’s premier consumer products company
focused on convenient foods and beverages. We seek to produce financial
rewards to investors as we provide opportunities for growth and enrichment
to our employees, our business partners and the communities in
which we operate. And in everything we do, we strive for honesty, fairness
and integrity. (2015)
In the first sentence, PepsiCo indicates its main product line and how it sees itself in the world
market. The second sentence describes its financial success. In the third sentence we see the
ethical component: All company conduct aims for honesty, fairness, and integrity. Here is the
ethical part of a few company mission statements:
• Microsoft: “Microsoft is committed to deepening the trust of customers, partners,
governments, and communities. We strive to meet or exceed legal, regulatory, and
ethical responsibilities worldwide and to hire and reward employees who share
our values, work with integrity, and adhere to our Standards of Business Conduct.”
(2015)
• Starbucks Corporation: “With our partners, our coffee and our customers at our
core, we live these values: Creating a culture of warmth and belonging, where everyone
is welcome. Acting with courage, challenging the status quo and finding new
ways to grow our company and each other. Being present, connecting with transparency,
dignity and respect. Delivering our very best in all we do, holding ourselves
accountable for results. We are performance driven, through the lens of humanity.”
(2015)
• Target Brands, Inc.: “We believe in being an active citizen and good neighbor in our
communities. We give our time, talent and business strengths to make our communities
strong, healthy and safe. We invest in career development and well-being of our
team. And from the start, we’ve given 5 percent of our income, a commitment that
does not waver based on the economic climate.” (2015)
Socially progressive companies often have even more aggressive ethical agendas in their mission
statements. For example, Just Us Coffee Roasters Co-op’s mission statement includes the
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Ethical Corporate Culture Section 3.3
slogan “people and the planet before profits” (n.d.). This suggests that, among the various
stakeholders in that business, the shareholders are secondary to society and the environment.
Although this is not typical of corporate stakeholder priorities, it does show that corporations
do not always need to place profits above all else. It is a question of how a company
defines its mission.
Codes of Ethics
While mission statements are designed to be short, businesses commonly have more detailed
corporate codes of ethics that express principles of conduct within the organization to
guide decision making and behavior. Codes of ethics vary in length and detail, but the more
meticulous ones typically have five parts:
1. A letter from the CEO endorsing the code and explaining why it is important. Heads of
companies know that they must lead by example and that hopes of creating a moral
climate must begin with them. One way to do this is for the CEO to publicly stand
behind the company’s ethical code. Here are key passages from four CEO letters of
endorsement:
• Nike: “This Code of Ethics is vitally important. It contains the rules of the game for
Nike, the rules we live by and what we stand for. Please read it. And if you’ve read
it before, read it again.” (2011)
• General Dynamics: “Please read the Blue Book [on ethics policy] carefully. It
reminds each of us of our shared responsibilities to our shareholders, our customers,
our business partners, and to each other. It calls on us to do the right thing
and to seek guidance if needed.” (2013)
• The Coca-Cola Company: “The Code of Business Conduct is our guide to appropriate
conduct. Together with other Company guidelines, such as our Workplace
Rights Policy, we have set standards to ensure that we all do the right thing. Keep
the Code with you and refer to it often.” (2009)
In each of these cases, the CEO stresses the need for employees to take the company’s
ethical code seriously.
2. A general statement of values. The values listed are often varied but may include
honesty, quality, integrity, respect for all people, building strong relationships, taking
care of employees, giving back to the community, excellence in customer service,
strong shareholder returns, wise use of assets, environmental responsibility, respect
for human rights, and keeping promises.
3. A statement of commitment towards the company’s different stakeholders. This
usually includes employees, customers, suppliers, shareholders, and society at
large.
4. Company policies on a range of ethical issues that arise on the job. These include drug
and alcohol use, safe working conditions, employee privacy, discrimination, sexual
harassment, workplace violence, conflicts of interest, accepting gifts, insider trading,
bribery, and price fixing.
5. A discussion on how the code is carried out within the organization, and punishments
for code violation. The administrative implementation of the code sometimes is
assigned to an ethics officer within the company; this person holds workers accountable
to the company’s ethical standards. Punishments for code violations may include
letters of warning, counseling, loss of employment, and, in extreme cases, legal
charges.
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Threats to Ethical Corporate Culture Section 3.4
In addition to these five points, many codes include an intuitive guide for employees to test
their decisions, such as the following from Allstate:
Ask yourself the following questions when you face a decision that
involves ethics:
• Is it legal?
• Does it comply with this Code and with policies that apply to the situation?
• How will it affect others—consumers, competitors, shareholders, other
employees, agencies, the community, and you?
• How will it look to others? Innocent actions sometimes can give the
appearance of wrongdoing.
• How would you feel if this decision was made public?
• Should you ask for advice before acting?
If you are still uncertain, ask your manager or contact another resource listed
in this Code. (Allstate, n.d.)
Codes of ethics are not a perfect solution to the problems of immoral business conduct. Many
of the principles advanced are too general to be of much guidance, such as the values of honesty,
quality, and integrity, which are listed in many such codes. And sometimes they seem to
be mere public relations tools to make an unscrupulous company appear to be committed to
ethical principles. Before its collapse in 2001, for example, Enron’s published statement of
corporate values included the following:
• Respect: We treat others as we would like to be treated ourselves. We do not tolerate
abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t
belong here.
• Integrity: We work with customers and prospects openly, honestly, and sincerely.
When we say we will do something, we will do it; when we say we cannot or will not
do something, then we won’t do it. (Enron, n.d.)
From what we now know of Enron’s activities, the claims of respect and integrity are laughable.
There are certainly other companies today that, like Enron, behave shamefully while at
the same time making grandiose claims about their ethical standards. Nevertheless, many
companies do take their codes seriously, and look to them to safeguard against criminal
charges by the government, lawsuits by customers, and bad publicity by the media, all of
which can financially cripple a company.
3.4 Threats to Ethical Corporate Culture
We turn finally to an examination of aspects of corporate culture that can undermine a company’s
commitment to moral integrity and social responsibility. We will consider four such
factors:
• the profit motive,
• strategic misrepresentation,
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• groupthink, and
• organizational schizophrenia.
None of these is immoral in and of itself, and to some degree all of them are even facts of life
when running a business. But if left unchecked, they can create moral and legal problems.
The Profit Motive
Several times so far we have seen that a company’s motive to make profits can conflict with its
sense of social responsibility. Shareholders expect to see a return on their investments, and
the corporate officers have a fiduciary duty to oblige them, to the point that the officers might
neglect the interests of all other stakeholders.
Not only is this a possible outcome, but economist Milton Friedman famously argued that
this is exactly how it should be: Businesses should stay away from social responsibility
and keep focused on making profits. He did not advocate that businesses violate the law
when pursuing profits, but only that they avoid taking positive steps toward social causes
beyond what the law requires. “Few trends,” he argued, “could so thoroughly undermine
the very foundation of our free society as the acceptance by corporate officials of a social
responsibility other than to make as much money for their shareholders as possible”
(Friedman, 1970, SM17).
According to Friedman, it is contrary to the nature of a well-run corporation to advocate social
responsibility, since it amounts to a hidden social tax. That is, it places an extra financial cost
on consumers for some social benefit that has no direct connection with the product that
they are purchasing. Suppose that a corporate executive refrains from increasing the price
of a product, to help prevent inflation; spends vast amounts of money on reducing pollution
beyond what the law requires, to help improve the environment; or hires an underqualified
unemployed person, to help reduce poverty. “In each of these cases, the corporate executive
would be spending someone else’s money for a general social interest” (Friedman, 1970,
SM17). It would also mean reduced returns for shareholders, higher prices for customers, or
lower wages for employees. This, argues Friedman, makes the socially minded executive an
unelected civil servant who, in many cases, will not be properly educated about which actions
will indeed promote social benefit. In this way, Friedman believes, it is subversive to a free
society. The only responsibility of a business, then, is to increase its profits, so long as it stays
within the bounds of the law by engaging in “open and free competition without deception or
fraud” (1970).
Friedman’s argument against corporate social responsibility is a rather extreme one that is
hard to defend. Here are just two problems with it:
• Business money spent on social causes is unlike a tax in at least one important way.
Taxes imposed by governments are mandatory, but no one’s association with a
socially responsible corporation is mandatory. Consumers can choose to spend their
money elsewhere; workers can choose to be employed elsewhere; shareholders can
choose to invest elsewhere. Since these are free associations, it is difficult to see how
such corporate social responsibility is subversive to a free society. On the contrary, it
is part of a free society to experiment with company policies, and find creative ways
to attract customers, employees, and investors.
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• Many consumers will be attracted to corporations
with strong social agendas, which
will increase company profits. For example,
Ben & Jerry’s is a case in point. When the
company first began manufacturing ice
cream, it adopted a unique social mission:
to operate the company in a way that
actively recognizes the central role that
business plays in the structure of society
by initiating innovative ways to improve
the quality of life locally, nationally, and
internationally. (Ben & Jerry’s, n.d.)
The company professes to have a “progressive,
nonpartisan social mission” that aims to eliminate
injustices locally and globally, and supports
nonviolent ways to achieve peace and justice
(Ben & Jerry’s, n.d.). At one point in its history,
the company donated an unusually high percentage
of its profits to philanthropic causes—7.5%,
as compared with the norm of 1%. In 2001,
Ben & Jerry’s was purchased by Unilever, the
world’s third largest consumer goods company,
and from the start its new parent company said
it was “determined to nurture its commitment
to community values” (Press Office Unilever
London, 2000).
Ben and Jerry’s and its parent company do not see eye to eye on all issues, and a case in point
is their respective views on legal requirements for labeling foods made with GMO ingredients.
Ben and Jerry’s supports such laws while Unilever is against them. Unilever nevertheless permits
Ben and Jerry’s to voice its view, and, in fact, in 2014 Ben and Jerry’s CEO stood publically
alongside Vermont’s governor as the governor signed U.S.’s first law requiring labeling
of foods made with GMO ingredients. (Boyle, 2014)
Strategic Misrepresentation
Another component of corporate culture that can lead to flawed decisions is strategic
misrepresentation, which is the intentional and systematic distortion or misstatement of
facts for the purpose of gaining a financial advantage. A simple example is with automobile
dealers: Suppose that a dealer knows very well what the weaknesses are with the vehicles
being sold but intentionally conceals those problems from customers. If the dealer were
completely truthful, customers would simply go elsewhere. Businesses routinely exaggerate
the value of their products, the quality of their customer service and satisfaction, and
their overall financial health.
Although strategic misrepresentation is undoubtedly common in business negotiations, some
have argued that it is simply part of the nature of doing business, and it cannot be eliminated.
Gareth Davies/Getty Images Entertainment/Getty
Images
Ben Cohen and Jerry Greenfield of
Ben & Jerry’s have a social mission that
seeks to rid society of injustices. Here
they are at the announcement that
their ice cream has gone 100% fair
trade.
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Nor should we try to eliminate it. Albert Carr championed this view in an influential essay
titled “Is Business Bluffing Ethical?” In some situations, he argued, bluffing one’s opponents is
a normal part of the game. In poker, for example, a player strategically tries to get opponents
to think that his or her hand of cards is either stronger or weaker than it actually is. So, too, in
business. In fact, Carr argued, if a businessperson feels obligated to always tell the truth, he or
she “is ignoring opportunities permitted under the rules and is at a heavy disadvantage in his
[or her] business dealings” (1968).
Most executives are compelled from time to time to be deceptive when negotiating with dealers,
labor unions, government officials, and even other departments within their own companies.
According to Carr, “Falsehood ceases to be falsehood when it is understood on all sides
that the truth is not expected to be spoken” (1968). For example, a criminal does not lie when
he or she pleads “not guilty,” even when he or she committed the crime, since this is just a part
of the judicial process. In the workplace, similar kinds of acceptable deception can occur from
the moment we fill out our job applications and exaggerate our strengths while downplaying
our weaknesses. When our bosses ask for our opinion, we often say “yes” when we really
believe “no.” There is no place for the Golden Rule in business, and “a good part of the time the
businessman is trying to do unto others as he hopes others will not do unto him” (Carr, 1968).
A famous case illustrates Carr’s position. Some years ago, the founder of the computer software
company Borland wanted to place an advertisement in Byte magazine to help launch its
products. He needed good credit terms with Byte to pay for the ads, but his company was not
established enough to qualify for them. He then plotted to trick Byte into believing that Borland
was larger than it was and had venture capital financing, which it really did not. When
the sales representative for Byte visited the new company to inspect it, Borland’s founder had
paid actors on hand to look like employees, had office phones ring continuously, and had a
pretend advertising plan in plain view for the sales representative to see (Bhide & Stevenson,
1990). Borland got the credit to place the ad, and shortly after, the company became a major
player in the software industry. In short, Carr and others have reasoned that deception is
part of the rules of the business game. Since we do not morally condemn poker players for
attempting to deceive opponents with their poker faces, by analogy we should not condemn
businesses for doing what is necessary, even when it involves going contrary to our common
moral intuitions.
The problem with this line of reasoning is that strategic misrepresentation is acceptable only
when the rules are clearly known to everyone involved. Poker players know the rules of the
game beforehand, and join the game in full knowledge of those rules. And in many instances
the rules are very clear in business. Consumers know that advertisers will remain silent about
the drawbacks of their products and exaggerate their qualities. In labor negotiations, businesses
and labor unions both bluff about how far they are willing to bend the rules.
However, in other situations, the rules of business require complete honesty, and when businesses
strategically misrepresent themselves, they are on the side of wrong and can be held
legally responsible for their conduct. For example, to enhance its financial image, General
Motors claimed in a national advertisement that it had repaid a bailout loan it received from
the U.S. government “in full, with interest, five years ahead of schedule” (Tapscott, 2010). This
claim conveyed the impression that GM had paid off all its government loans, and with its
own money. In point of fact, however, neither of these statements was true. It paid off its loan
with money it had received from a second government bailout loan. Thus, it still owed the
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government money, and it did not use its own money to pay back the loan. As a consequence,
GM was sued for deceptive advertising. This was a case of strategic misrepresentation that
violated the rules of the game.
What is fundamentally wrong about Carr’s position is that, just because strategic misrepresentation
is a socially accepted practice in some business situations, it is not necessarily
acceptable in every case. A businessperson who rushes into strategic misrepresentation
could easily make misleading claims that cross the line of legality. It is all a matter of knowing
what the rules of the game are—and when they do not allow for misrepresentation.
Groupthink and Organizational Schizophrenia
Within the field of industrial-organizational psychology, there are a few concepts that describe
how decisions are made in group environments and how these can sometimes lead to bad
choices. We’ll look at two in this section: groupthink and organizational schizophrenia.
Groupthink
Groupthink refers to the practice of thinking or making decisions as a group in a way that
discourages creativity or individual responsibility. Group members become so focused on
arriving at a decision as a cohesive unit that they set aside their private ethical concerns.
In criminal courts of law, juries by their very nature face this problem. Twelve people are
instructed by a judge to reach a unanimous decision, and they must do so to assure the success
of the judicial process. To reach a unanimous decision, though, some jury members must
give in to the views of the whole; it is only the most stubborn members who resist to the end
and thereby create a hung jury.
The same thing happens within businesses. Suppose, for example, that an appliance company
manufactures a new microwave oven, and in research and development there is some indication
that the unit might overheat
and catch fire. The evidence isn’t
conclusive, and it only happens
with one test model operating in
an extreme situation. Members of
the research team have to decide
whether the product is ready to
move forward into production.
Suppose further that there is
pressure within the company to
bring out new products within
specified time frames. When the
research team makes its final
judgment, the group as a whole,
influenced by that pressure, may
decide that the unit falls within
the limits of acceptable risk and
is thus ready to go. Individually,
Moodboard/Thinkstock
Did groupthink contribute to the recent housing collapse
and economic crisis in the United States?
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some of the members might feel that production of the unit should be delayed until more testing
can be done. But they agree anyway, since the consensus of the group is to move forward.
It is only later, when customers are injured and the product is recalled for being a fire hazard,
that the flawed nature of the group’s decision-making process becomes evident.
The groupthink phenomenon is helpful for understanding how it is that many unethical business
decisions can be made, whether with regard to product safety, discriminatory hiring
practices, or shady bookkeeping. Each member of the group may personally have a high level
of moral integrity. But when making tough decisions in a competitive business market, they
may set their personal moral convictions aside in favor of a group consensus. Perhaps the
group as a whole feels that the action falls into a moral gray area that is within the limits of
acceptable risk. Perhaps the group as a whole is more interested in the benefits of the proposed
course of action than an impartial analysis of its costs. In any event, members of the
group end up making unethical choices that they would not in their private lives.
One analysis of the groupthink phenomenon describes four symptoms of it:
• The group feels that it is invulnerable to harm. It is in a position to make an authoritative
decision and, perhaps influenced by a track record of previous successes, it
ignores the possible negative consequences of its decision.
• The group members are unanimous in their beliefs—or at least in the expressed
views of each member—and thus have the confidence to move forward with their
decision.
• If there are dissenters, pressure is put on them to accept the views of the group.
• Someone in the group functions as a kind of “mind guard” who filters out information
that is inconsistent with the group’s view. (Levy, 2010)
One way to combat the groupthink phenomenon is to watch out for these four symptoms
when making group decisions, and, if they do appear, actively seek out unspoken or minority
viewpoints.
Organizational Schizophrenia
Another component of industrial-organizational psychology is organizational schizophrenia,
in which tension exists between competing goals or values within a corporation. The
organization presents mixed messages to its employees about what is important, and the
employees are left to work out a course of action on their own. The term schizophrenia is
borrowed from the field of psychology and refers to a psychological disorder in which a person
is motivated by contradictory or conflicting principles. The use of the term in industrialorganizational
psychology applies more generally to any set of competing agendas in an organization
when there is no clear resolution between the two.
Some organizations are by their very nature schizophrenic. For example, pharmaceutical
companies have an important social mission to improve people’s health, on the one hand, yet
at the same time have an obligation to shareholders to make a profit. For this reason, pharmaceutical
companies are regularly called out in the media for allowing profits to overtake their
social responsibility. For example, in 2011 Pfizer ended its research on antibiotic resistant
bacteria, an area that, while of critical concern in world health, is financially unprofitable. In
a more general way, this same tension is present in virtually all businesses: Employees are
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Summary & Resources
instructed to behave ethically, yet at the same time their jobs require them to maximize profits.
When the pressure to maximize profits is too great, it may obscure ethical responsibilities,
such as the duty to manufacture microwave ovens that do not catch on fire.
But the two goals of ethics and profit do not have to be in a schizophrenic relationship. They
can be compatible when the boundaries of ethical behavior are clearly indicated to employees.
It is much like playing a sport: There is the playing field where the principal activity
occurs (analogous to maximizing profits) and there are boundaries beyond which players
cannot stray (analogous to ethical boundaries). When employees have clear knowledge of
where those ethical boundaries are, such as through corporate codes of ethics, they can safely
do their part to maximize profits.
Conclusion
Corporations have come a long way since the founding of Jamestown by the Virginia Company.
In the 400 or so years since that time, they have become independent of governmental
affiliation, have gained the status of legal persons, and have greatly proliferated in number.
It is precisely these changes that led Bakan to depict corporations as psychopaths with personality
traits of irresponsibility, manipulation, grandiosity, superficiality, lack of empathy,
and the inability to feel remorse. But even Bakan has recognized that a corporation’s psychopathic
behavior will ultimately lead to its own destruction, as happened with Enron. Thus, for
a corporation to avoid a self-created downfall, at some point it must stop short of Enron-like
behavior and take into account the wider interests of its various stakeholders.
We have seen that within corporate culture, there are mechanisms already in place for reinforcing
socially responsible behavior, such as through codes of ethics and the seven steps of
ethical compliance included in the Federal Sentencing Guidelines for Organizations. There are
also warning signs for when companies become ethically at risk. The issue becomes whether
a corporation is willing to take seriously these aspects of ethical corporate culture. There will
always be companies like Enron, but the goal is to make their occurrences few and far between.
Summary & Resources
Chapter Summary
We began this chapter looking at the nature of corporations, and their four main features. That
is, corporations are created by the states in which they are chartered, they can continue to exist
indefinitely, they are regarded by the law as having the status of a person, and shareholders’
liability is limited to the amount of money that they invest. Shell corporations, which exist on
paper but have no active business operations, can manipulate the laws that create corporations
and exist solely for unethical or illegal purposes, such as tax havens. A critical issue with
the nature of corporations is whether they are moral agents, which are morally responsible
for their actions beyond the responsibility individual corporate employees have. Peter French
argued that they are moral agents, but Manuel Velasquez argued that they are not.
This chapter also explored how corporations are punished. Punishment in general is
typically justified on five grounds, all of which apply to corporations as well as individual
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people: deterrence, incapacitation, rehabilitation, retribution, and reparation. Just as there are
different forms of punishment for individual people, there are also different ways of punishing
corporations. Six of these are monetary fines, equity fines, corporate incapacitation, the corporate
death penalty, corporate shaming, and community service orders. The selection of an appropriate
corporate punishment often hinges on whether it will harm innocent people, such as
employees, customers, and creditors, and also whether the punishment is severe enough to have
a real impact on the corporation’s conduct. The U.S. government established the Federal Sentencing
Guidelines for Organizations (FSGO), which guide Federal judges in imposing punishments
on corporations. These guidelines also recommend steps for corporations to follow to maintain
high standards of ethics and thus avoid illegal conduct. In addition to governmentally imposed
punishments, consumers can also retaliate against unethical companies through boycotts and
civil lawsuits.
The creation of an ethical culture within corporations often focuses on three notions: the
stakeholder, the triple bottom line, and corporate social responsibility. Many corporations
express their commitment to ethical standards within their mission statements and, in a
more detailed way, through a corporate code of ethics.
A common criticism of these public statements is that they can be insincere efforts to make a
company appear to be more ethical than it really is. Even in sincere efforts to create an ethical
corporate climate, four things can hamper those efforts. First is the profit motive itself, which
can incline companies to minimize their social responsibility in their efforts to increase profits.
Second is strategic misrepresentation, in which a corporation intentionally misstates facts
to gain a financial advantage. Third is groupthink, which occurs when employees set aside
their ethical convictions in the process of building group consensus. Fourth is organizational
schizophrenia, which occurs when management sends conflicting messages to employees
about the corporation’s ethical priorities.
Discussion Questions
1. The Supreme Court argued that perpetual existence is one of the main benefits
of creating corporations. As tragic as death is for natural persons, it nevertheless
makes way for younger generations of people to put their mark on the world. Might
there be a similar benefit if corporations were required to die after, say, 100 years of
existence? What might the disadvantages be if such a policy were enacted?
2. One issue of corporate moral agency involves whether corporations can be accused
of being immoral—beyond the immoral conduct of their employees. Peter French
and Manuel Velasquez have taken opposing views on this. Explain their views and
discuss which of the two you believe is correct.
3. Some codes of ethics include an intuitive guide for employees to assess their decisions.
Look at the guide presented from Allstate in the chapter. Are all of the questions
that are asked helpful for guiding ethical choices (such as “Is it legal?”)? Are
there other questions that you think should be on the list?
4. Milton Friedman argued that businesses’ only responsibility is to make profits, and
they should avoid all efforts at social responsibility. Explain the rationale for his position,
and discuss whether you agree.
5. Albert Carr defended strategic misrepresentation as a normal part of the business
game. Think of an example in which you believe Carr is correct and another example
in which you believe that strategic misrepresentation is wrong.
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board of directors Group of individuals
elected by corporation shareholders to
manage the corporation.
community service order A corporate
punishment in which a company must
participate in some project that benefits the
community in some way.
consumer boycott When a group of people
act together to abstain from buying from or
dealing with a business.
consumer retaliation When individual
consumers or consumer groups express dissatisfaction
with a company through some
effort that harms it financially, e.g., boycotts,
complaints to government agencies, or civil
lawsuits.
corporate codes of ethics Detailed
accounts of the principles of conduct within
organizations that guide decision making
and behavior.
corporate death penalty A corporate punishment
in which a company is forced to go
out of business, such as by the revocation of
its corporate charter.
corporate incapacitation A corporate
punishment in which a court issues an order
to restrain the activities of a corporation in
some area of business.
corporate moral agency The concept that
businesses are morally responsible for their
actions, similar to how individual people are
morally responsible for theirs.
corporate shaming A corporate punishment
in which the government requires a
guilty company to make a public announcement
that threatens its reputation and social
standing.
corporate social responsibility (CSR) A
corporation’s efforts to take responsibility
for its effects on the environment and its
impact on social welfare.
corporation A legally recognized independent
entity owned by shareholders in which
the corporation, and not the shareholders,
holds legal liability.
creation by statute The legal concept that
corporations come into existence through the
creation of a legal document called a charter.
deterrence A justification of punishment
in which an offender is punished to set an
example that might discourage others from
committing similar crimes.
equity fine A corporate punishment in
which a fine payment is made in shares of
the company, not in money.
ethics officer An administrator within a
company who holds workers accountable to
the company’s ethical standards.
Federal Sentencing Guidelines for Organizations
(FSGO) U.S. government guidelines
for sentences imposed by Federal judges,
which include restitution, remedial orders,
community service, fines, and jail terms.
fiduciary duty A legal duty to act solely in
another party’s interests.
fine A payment of money imposed as a penalty
for an offense.
greenwashing A term referring to pretended
efforts at environmental responsibility
and, more broadly, at corporate
responsibility.
groupthink The practice of thinking or making
decisions as a group in a way that discourages
creativity or individual responsibility.
Key Terms
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incapacitation A justification of punishment
in which removing an offender from
society prevents the offender from committing
similar crimes.
legal person A nonhuman entity regarded
by law as having the status of a person.
legal standing The legal concept that a
person can sue others and be sued by others,
own property, and make contracts with
others.
limited liability The legal concept that
a stockholder cannot lose more than the
amount that he or she invested.
mission statement A short account of a
company’s fundamental purpose, which may
include a statement of ethical standards.
officers Individuals designated by a corporation’s
board of directors to operate the
business, with the chief executive officer
(CEO) at the top and various levels of managers
below.
organizational schizophrenia Tension
between competing goals or values within a
corporation.
perpetual existence The legal concept that
corporations can continue indefinitely and
independently of the temporary lives of their
managers and shareholders.
rehabilitation A justification of punishment
in which, through reform techniques,
changes are made to an offender’s future
behavior.
reparation A justification of punishment in
which an offender must repay the victim for
the injury that the offense caused.
retribution A justification of punishment
in which punishment balances the scales of
justice; a crime requires a punishment.
shareholders (stockholders) Those who
own a corporation by obtaining shares of
stock in it.
shell corporations Corporations that exist
on paper but have no active business operations
or significant assets.
stakeholder Any party who is affected by,
or who has a stake in, a business practice,
including employees, suppliers, customers,
creditors, competitors, governments, communities,
and shareholders.
strategic misrepresentation The intentional
and systematic distortion or misstatement
of facts for the purpose of gaining a
financial advantage.
triple bottom line (3BL) The view that
successful companies must pursue three distinct
values: people, the planet, and profit.
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Business Ethics Case Study 3.1: The Chick-fil-A Same-Sex
Marriage Controversy
In 2012, Dan Cathy—CEO of fast-food chain Chick-fil-A—ignited a firestorm of protest when
he made comments critical of same-sex marriage. In a news story for Baptist Press, he was
quoted as saying that his company was “guilty as charged” in its “support of the traditional
family,” and in a radio interview he said that “we are inviting God’s judgment on our nation
when we shake our fist at him and say, ‘We know better than you as to what constitutes
a marriage.’” The company’s founder also started a charitable organization called the
WinShape Foundation, which had donated over $5 million to anti-gay groups since 2003.
What followed was a clash over the issue between liberal and conservative politicians,
journalists and activists. LGBT advocacy groups organized a boycott of the restaurant chain.
Former governor and presidential candidate Mike Huckabee responded by organizing a
Chick-fil-A Appreciation Day, where supporters flooded into restaurant locations creating
record-breaking sales. Gay rights activists retaliated by holding a same-sex “Kiss Day,” where
gay couples would kiss each other at outlets across the country.
Chick-fil-A is one of many major companies whose owners attempt to integrate their
religious beliefs into their business practice. Other such companies include Tyson Foods,
which has 115 chaplains on hand to counsel employees and their families. The clothing
retailer Forever 21 sells religious-themed T-shirts, while Mary Kay cosmetics pushes the
theme that God is their business partner. Interstate Batteries indicates that one of their
purposes is to glorify God and that their employees may participate in biblically based
opportunities that are woven throughout their work experience, while In-N-Out Burger
prints biblical chapter and verse references on its paper containers.
Chick-fil-A’s integration of religion into their corporate culture is at least as unreserved
as these. The first Chick-fil-A was opened in 1967 by founder Truett Cathy—father of the
current CEO—who from the start integrated his Southern Baptist religious convictions into
his business model. The company’s corporate purpose is “To glorify God by being a faithful
steward of all that is entrusted to us and to have a positive influence on all who come into
contact with Chick-fil-A.” All franchises must be closed on Sundays so that employees can
attend church. The franchise owners are carefully selected in a lengthy interview process;
they look for operators that share the same Christian values and prefer ones who are
involved in church. During the interviews, they ask personal questions about religion and
marital status; while these questions are not technically against Federal guidelines, most
employers shy away from them to avoid discrimination lawsuits. During training and
organizational retreats, employees are expected to join in group prayers. According to a
Forbes magazine story titled “The Cult of Chick-fil-A,” a prospective franchise owner who is
Muslim stated that he was fired after refusing to participate in one such group prayer to Jesus
Christ; he sued the company, and they settled out of court. A third of the franchise owners
have participated in Christian relationship-building retreats sponsored by the company.
Considering how boldly the Cathy family infused their Southern Baptist value system into
their corporate culture, it is not surprising that their views on family values became a matter
of public controversy. But the company backpedaled quickly, and almost immediately issued
the following statement: “The Chick-fil-A culture and service tradition in our restaurants is
to treat every person with honor, dignity and respect—regardless of their belief, race, creed,
sexual orientation or gender. . . . Going forward, our intent is to leave the policy debate over
same-sex marriage to the government and political arena.”
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The company stopped contributing to organizations that their critics have called anti-gay,
and, in a recent interview, Dan Cathy said that he regrets making his company a symbol in
the same-sex marriage debate and that Chick-fil-A has no place in the culture wars. “Every
leader goes through different phases of maturity, growth and development and it helps by
(recognizing) the mistakes that you make,” he said. “And you learn from those mistakes. If
not, you’re just a fool. I’m thankful that I lived through it and I learned a lot from it.”
There is an important lesson to be learned from the Chick-fil-A controversy. It was not the
purely religious component of their corporate culture that got them into trouble. Holding
group prayers, glorifying God, and advocating church attendance are not normal corporate
practices, but they are understandable in a country where 45% of the population identify
themselves as born-again Christians.
We could imagine and appreciate how companies in predominately Buddhist countries
might embrace their own religious expressions in a way that parallels Chick-fil-A’s religious
commitment. What got Chick-fil-A into trouble, though, was advocating a controversial moral
position that, while perhaps common among Southern Baptists today, is not the central
message of that denomination’s theology. The lesson is this: Stay on topic and you’ll be fine;
stray into divisive secondary issues and you’ll invite trouble.
Discussion Questions
1. Conservative churches often say behaviors such as tobacco use, drinking alcoholic
beverages, recreational drug use, premarital sex, and adultery are sinful. Suppose
that Dan Cathy said that, as a Christian company, Chick-fil-A was against these
behaviors and God’s judgment would be on our nation if we did not stop them.
Would this have provoked the same kind of controversy as his comments about
same-sex marriage? Explain.
2. Consider the Muslim franchise operator who was fired for refusing to join in a group
prayer to Jesus. Presumably, the company knew in advance that he was Muslim and
hired him anyway. How could the company have better handled that situation?
3. With all the personal restrictions imposed by the home office, would you personally
want to be a Chick-fil-A franchise owner? Explain.
4. Do you believe it is ever appropriate for businesses to require their employees to
participate in religious activities? Why or why not?
Sources: Associated Press (2014), The Barna Group (2006), Bhasin & Hicken (2012), Chick-fil-A (2012), O’Connor
(2012), Schmall (2007), “What Dan Cathy Said” (2012).
Business Ethics Case Study 3.1: The Chick-fil-A Same-Sex
Marriage Controversy (continued)
fie82537_03_c03_067-098.indd 98 10/15/15 11:32 AM
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Required Resources
Text
Fieser, J. (2015). Introduction to business ethics [Electronic version]. Retrieved from https://content.ashford.edu/

  • Chapter 2: Capitalism
  • Chapter 3: Corporations

Articles
Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits (Links to an external site.)Links to an external site.New York Times Magazine. Retrieved from https://philosophia.uncg.edu/media/phi361-metivier/readings/Friedman-Increase%20Profits.pdf

  • Friedman presents a two-part clarification of what we may understand as social responsibility. The first part states that the responsibility of business is to its shareholders by using its resources to increase profits. Most stop here and assume that Friedman is advocating an ethics of egoism. But the important second part is that Friedman argues that business must be bound by the law and rules of honesty and decency toward others.
    Accessibility Statement(Links to an external site.)Links to an external site.
    Privacy Policy does not exist.

Smith, J. W. (2015). The Uber-all economy. Market News, 49(6), 26. Retrieved from http://www.ama.org/

  • The full-text version of this article can be accessed through the EBSCOhost database in the Ashford University Library. This article outlines the characteristics of the Uber business model.

Steinmetz, K. (2015, June 17). Why the California ruling on Uber should frighten the sharing economy (Links to an external site.)Links to an external site.Time. Retrieved from http://time.com/3924941/uber-california-labor-commission-ruling/

  • This article examines the effects of the ruling on the growing independent contractor sector.
    Accessibility Statement does not exist.
    Privacy Policy

Multimedia
IJ Sales. (2014, February 4). What is Uber? (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/pZBMo59iwPo

Learn Liberty. (2011, August 22). Top three common myths of capitalism | Learn Liberty (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://www.youtube.com/watch?v=KGPa5Ob-5Ps

LibertyPen. (2009, November 13). Milton Friedman–Lesson of the pencil (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/4ERbC7JyCfU

Macat Education. (2015, August 10). An introduction to Friedrich Hayek’s The road to serfdom–A Macat economics analysis (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/ONATaFzi82I?list=PLRXstY5OaIwfFdYTwRlwB-gnNCg8oH9sw

Mashable. (2014, October 9). What is Uber? | Mashable explains (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/tQlgavP5cmo

PragerU. (2015, April 6). Profits are progressive (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/tdHwewUuXBg?list=PLIBtb_NuIJ1w_5qAEs5cSUJ5Bk0R8QLaY

TechCrunch. (2015, June 17). Uber driver ruled employee, not contractor, in CA | Crunch report (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/n3QJWPg5TLA

Recommended Resources
Articles
Formaini, R. L. (2001). The engine of capitalist process: Entrepreneurs in economic theory (Links to an external site.)Links to an external site.Federal Reserve Bank of Dallas Economic and Financial Review, 4(2-11). Retrieved from https://www.dallasfed.org/assets/documents/research/efr/2001/efr0104a.pdf

  • This article surveys the history of economic thought in order to present the emergence of the notion of entrepreneurship and the role it plays in the capitalist process.

Marx, K. (1959). Estranged labour (Links to an external site.)Links to an external site.. In, Economic and philosophic manuscripts of 1844 (M. Mulligan Trans.). Moscow: Progress Publishers. Retrieved from http://www.marxists.org/archive/marx/works/1844/manuscripts/labour.htm (Original work published 1932)

  • In this manuscript, Marx develops his theory of worker alienation.

Multimedia
Fernandes, S. [Sujatha Fernandes]. (2014, May 21). Marx’s theory of alienation (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/xx3PBBuHfY4

  • This video explains Marx’s framework for psychological significance of how a worker perceives the appreciation of his labor investment in the products that result from it.

Macat Education. (2015, September 2). An introduction to Milton Friedman’s The role of monetary policy–A Macat economic analysis (Links to an external site.)Links to an external site. [Video file]. Retrieved from https://youtu.be/kcqdKv7dbG4?list=PLRXstY5OaIwfFdYTwRlwB-gnNCg8oH9sw

  • This video presents Milton Friedman’s examination of the effects that a government’s monetary policy can have on the economy and for how long.

Website
Smith, A. (2013). An inquiry into the nature and causes of the wealth of nations (Links to an external site.)Links to an external site.. Retrieved from http://www.gutenberg.org/files/3300/3300-h/3300-h.htm#link2HCH0001

  • This contribution by Adam Smith marks the emergence of economics proper from its roots in philosophy. The scope is quite broad but the three emerging concepts are: division of labor, productivity, and free markets.

 

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