CHAPTER FOUR

The Corporation
And
External Stakeholders

Corporate Social Responsibility

Corporate social responsibility (CSR) involves an

organizations duty and obligation to respond to its
stakeholders and the stockholders economic,
legal, ethical, and philanthropic concerns and
issues
Social concerns of stakeholders
Corporate interests

What is the philosophical and ethical context

from which corporate social responsibility
and ethical decisions are made? What role
does the free market play?

Free Market Constraints

Minimal moral restraints

Full competitiveness with entry and exit
Relevant information available to everyone
Accurate reflection of all production costs in
prices
(assumes an equal balance of power,
knowledge, and sophistication)
Problems:
Resource-rich firms create unequal information
Advertising is used questionably
Invisible hand does not exist for all situations
(imperfect markets)

Social Contract

A set of rules and assumptions about behavior

patterns among the parties to the contract
Changing
Used to be: stable, reliable, predictable
Now: disregard for safety, equity, responsibilities
toward customers and society as a whole

Uneasiness with corporate power and influence

(violates the quid pro quo norm)
Covenantal Ethics concerned with both social
and economic relationships

Figure 4.1: External Stakeholders, Moral

Stakes, and Corporate Responsibilities

Moral Bases for Social Responsibility

Trustee for societys resources

Two-way open system, open disclosure
Social costs and benefits
Consumer pays for consumption and effects
on society
Social involvement in core competency areas

Competitive Advantages for Socially

Responsible Firms

1.
2.

3.

Reputation
Successful social investment portfolios
Ability to attract quality employees

Expectation of public that organizations will

engage in philanthropy

Corporate Social Responsibility

and Stakeholder Management

Balancing Carrot and Stick approaches

Carrot

voluntary self-regulation

Vision/Mission/Values
Ethics

programs
Best Practices/Risk Management
Philanthropy
Stick

external regulatory compliance

Laws;

court cases
Regulation
Congressional oversight

Summary of Sarbanes-Oxley 2002

Establishes an independent public company

accounting board to oversee audits of public
companies
Requires one member of the audit committee to be
an expert in finance
Requires full disclosure to stockholders of complex
financial transactions
Requires CEOs and CFOs to certify in writing the
validity of their companies financial statements
Prohibits accounting firms from offering other
services, like consulting, while also performing audits

Summary of Sarbanes-Oxley 2002

(cont)

Requires ethics codes, registered with the Securities

and Exchange Commission (SEC), for financial officers
Provides a 10-year penalty for wire and mail fraud
Requires mutual fund professionals to disclose their vote
on shareholder proxies, enabling investors to know how
their stocks influence decisions
Provides whistle-blower protection for individuals who
report wrongful activities to authorities
Requires attorneys of companies to disclose wrongdoing
to senior officers and to the board of directors, if
necessary

Best Practices for

Corporate Boards of Governance
1.

2.
3.
4.

5.
6.

7.

Separating the role of chairman of the board when the

CEO is also a board member
Setting tenure rules for board members
Regularly evaluating itself and the CEOs performance
Prohibiting directors from serving as consultants to the
companies which they serve
Compensating directors with both cash and stock
Prohibiting retired CEOs from continuing board
membership
Assigning independent directors to the majority of
members who meet periodically without the CEO

Cons and Pros of Sarbanes-Oxley

Cons

Pros

It is too costly

Government costs also increase

to regulate the law

It impacts negatively on a firms

global competitiveness
CFOs are overburdened and
pressured by having to enforce
and assume accountability
An exodus will occur of public
companies returning to private
ownership

The costs of implementing is

minimal compared to the costs of
not having it
The changes required to enact this
law are difficult, but more than 70%
of directors viewed the law as
positive
The data does not support the
argument that this law presents a
competitive disadvantage to global
firms
Financial officers may in fact be
suffering from the lack of internal
controls they had before
If a company uses the SarbanesOxley Act as a reason to not go
public, the firm should not go public
or use investors funds

Revised 1991 Federal Sentencing

Guidelines: Compliance Incentive
1.

2.
3.

4.

5.

6.
7.

Established standards and procedures capable of

reducing the chances of criminal conduct
Appointment of compliance officer(s) to oversee plans
Took due care not to delegate substantial
discretionary authority to individuals who are likely to
engage in criminal conduct
Established steps to effectively communicate the
organizations standards and procedures to all
employees
Took steps to ensure compliance through monitoring
and auditing
Employed consistent disciplinary mechanisms
When an offense was detected, took steps to prevent
future offenses, including modifying the compliance
plan, if appropriate

The Role of Laws and the Regulatory

System in Corporate Governance

Regulate competition
Protect consumers
Promote equity and safety
Protect the natural environment
Ethics and compliance programs to deter and
provide for enforcement against misconduct

Five Goals of Government Policy Makers

toward Consumers
1.

2.

3.

4.

5.

Providing consumers with reliable information

about purchases
Providing legislation to protect consumers
against hazardous products
Providing laws to encourage competitive
pricing
Providing laws to promote consumer choice
Protecting consumers privacy

Examples of Laws Promoting and

Prohibiting Corporate Competition

Sherman Antitrust Act, 1890: Prohibits monopolies

Clayton Act, 1914: Prohibits price discrimination, exclusivity,
activities restricting competition.
Federal Trade Commission Act, 1914: Enforces antitrust laws
and activities.
Consumer Good Pricing Act, 1975: Prohibits price
agreements in interstate commerce between manufacturers
and resellers.
FTC Improvement Act: Empowers the FTC to prohibit unfair
industry activities.
Antitrust Improvements Act, 1976: Supports existing antitrust
laws and empowers Justice Department investigative
authority.
Trademark Counterfeiting Act, 1980: Gives penalties for
persons violating counterfeit laws and regulations.
Digital Millennium Copyright Act, 1998: Protects digital

Responsibility toward Consumers

Duty to inform fully and truthfully

Duty to not misrepresent or withhold
information
Duty to not force or take undue advantage of
through fear or stress
Duty to take due care to prevent foreseeable
injuries

Examples of Laws
Protecting Consumers

Pure Food and Drug Act, 1906: Prohibits mislabels on food and
drugs in interstate commerce.
Federal Hazardous Substances Act, 1960: Controls labels on
hazardous substances of products used in houses.
Truth and Lending Act, 1960: Requires full disclosure of credit terms
to buyers.
Consumer Product Safety Act, 1972: Establishes safety standards
and regulations of consumer products (created the Consumer
Product Safety Commission (CPSC)).
Fair Credit Billing Act, 1974: Requires accurate, current consumer
credit reports.
Telephone Consumer Protection Act, 1991: Issues procedures to
avert undesired telephone solicitations.
Childrens Online Privacy Protection Act, 1998: Requires the FTC to
make rules to collect online information from children under 13
years old
Do Not Call Implementation, 2003: Coordinates the FTC and FCC
to provide consistence rules on telemarketing practices.

Examples of Laws
Protecting the Environment

Clean Air Act, 1970: Designated air-quality standards; state

implementation plans required for approval.
National Environmental Act, 1970: Established policy goals for
federal agencies; enacted the Council on Environmental Quality to
monitor policies.
Federal Water Pollution Control Act, 1972: Prevents, reduces, and
eliminates water pollution.
Endangered Species Act, 1973: Provides a conservation program
for threatened and endangered plants and animals and their
habitats.
Noise Pollution Act, 1972: Controls noise emission of manufactured
products.
Safe Drinking Water Act, 1974: Protects the quality of drinking water
in the U.S; sets safety standards for water purity and requires
owners and operators of public water to comply with standards.
Toxic Substances Act, 1976: Requires testing of certain chemical
substances; restricts use of certain substances.
Food Quality Protection Act, 1996: Requires a new safety standard
that must be applied to all pesticides used on foods: reasonable