Class 6 – Theories of the Corporation

Corporate Goals and Social Responsibilities

[2.200] Positions and practices – The CB writers postulate that if managers are free from shareholder controls, how are corporate goals defined?

• Empirically, do managers substitute other priorities – of personal interests, the corporate organization or of society? And

• Normatively, what goals ought corporate managers adopt in their discharge of corporate social responsibility – just strict profit maximization, social amelioration or something in between?

• Doctrinally, What interests does the law enjoy directors to serve and what limits are set on ‘corporate altruism’

• Directors have the ultimate discretion about how to achieve goals of profit maximization and shareholder wealth but they are not free to act for a fundamentally different purpose

  • However, as a social and economic institution they must comply with the law and adhere to ethical considerations and public welfare claims within limits of responsible conduct

• Two competing claims, that of Berle (that company’s act solely for their shareholders) and Dodd (expounding a managerialist ethic of a corporation affected not only by laws but by the attitude of the public and business opinion as to their social obligations)

  • On the second view the corporate personality is a ‘professional’ even though its stockholders are not – and hence it can employ its funds in a manner appropriate to a person practicing a profession and imbued with a sense of social responsibility without being guilty of breach of trust

  • Eventually Berle was to agree with Dodd and claim that a corporate conscience had evolved in the US [p 70.9] – these statements stand completely contrary to economist Milton Friedman’s statement that “the social responsibility of business is to increase its profit”

• This model of ‘business statesmanship’ has been variously adopted around the world

  • A centrel tenet is that management owes duties beyond the corporations legal constitutes to the ‘four parties to industry’ – labour, capital, management and the community (and perhaps government, suppliers and consumers)

  • The management function is to allocate corporate resources between competing interest groups to achieve both corporate and public goals

  • The Confederation of British Industry proposed adoption of similar guidelines of companies to recognize the obligations arising from relationships with all such groups to strike a balance between their interests and that of the company proprietors

  • In Australia these principles of Corporate Social Responsibility are expressed in the ASX Corporate Governance Principles and Recommendations including

    • Principle 3 “Companies should promote ethical and responsible decision-making” – such decisions should not only comply with legal obligations but reasonable expectations of stakeholders (shareholders, employees, customers, suppliers etc.)

    • Recommendation 7.1 – listed companies should “establish polices for the oversight and management of material business risks and disclose a summary of those polices” – such risks include “operational, environmental, sustainability...etc.

      • These are not mandatory but listing rules require that companies disclose in annual reports the extent to which they have followed the ASX principles during the reporting period and giving reasons for not doing so (ASXLR 4.10.3)

What corporate social responsibility might mean (if it were to really matter)

• There are no settled definitions to CSR – different variants would have different implications – e.g. those permitting directors to have regard to non-shareholders interests and those imposing a duty to do so

• Redmond says the real question is whether directors should have a license or a duty to sacrifice shareholder interests for the common good/third parties

  • This generally depends on perceptions as to the efficiency and equity of markets for satisfying social goals

  • It also evokes distinctions between private and public character of corporations

• [2.206] Shareholder Primacy - This conception is based on the idea that the overriding objective of all companies is “the preservation and the greatest practical enhancement over time of their shareholders’ investment” (Hampel Committee UK, 1998)

  • It is based on the assumption that the duty of management is to maximize the wealth of their principal – shareholders – and corporate law works to promote this end

  • Such a claim is usually based on the fact that:

    • Shareholders are the ultimate risk bearers (ranking after debtors in claims)

    • Their entitlement to surplus income during the firm’s life

    • Their monopoly of voting rights and of the right to sell control of the company through disposal of assets, and monopoly rights to bring suit for wrongs suffered by the company which it hasn’t sought to vindicate

  • These justifications are disputed on a number of grounds including:

    • That it will allow the externalization of costs of operations *(e.g. environmental costs) NOTE FOOTNOTE 174

      • O: This is a failure of allocating property rights, not the corporate form

      • The incentive to dos o will arise since if companies voluntarily assume social costs it might effectively externalise, it risks its long term survival against competitors

• [2.207] Pluralist/multifiduciary models – this model creates a multifiduciary duty requiring directors and managers to run the company in the interest of all those with a stake in its success – balancing the claims of competing stakeholders (employees, the community etc.), each of which are recognized as valuable in their own right

  • These models are often based on a theory of the corporation as a ‘community’ that responds to the harm to which other stakeholders are exposed by a management focus on solely shareholder interests

    • Such a theory was popularized in the takeover boom of the 1980s to which communitarians responded by saying that the post-acquisition gains for shareholders was achieved through wealth...

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