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CHAPTER FOUR
The Corporation
And
External Stakeho lders
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Corporate Social Responsibility
Corporate social responsibility (CSR) involves anorganizations duty and obligation to respond to itsstakeholders and the stockholders economic,legal, ethical, and philanthropic concerns and
issues Social concerns of stakeholders
Corporate interests
What is the philosophical and ethical contextfrom which corporate social responsibilityand ethical decisions are made? What role
does the free market play?
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Free Market Constraints
Minimal moral restraints
Full competitiveness with entry and exit
Relevant information available to everyone
Accurate reflection of all production costs inprices
(assumes an equal balance of power,knowledge, and sophistication)
Problems: Resource-rich firms create unequal information
Advertising is used questionably
Invisible hand does not exist for all situations
(imperfect markets)
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Social Contract
A set of rules and assumptions about behaviorpatterns among the parties to the contract
Changing
Used to be: stable, reliable, predictable Now: disregard for safety, equity, responsibilities
toward customers and society as a whole
Uneasiness with corporate power and influence
(violates the quid pro quo norm) Covenantal Ethicsconcerned with both social
and economic relationships
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Figure 4.1: External Stakeholders, Moral
Stakes, and Corporate Responsibilities
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Moral Bases for Social Responsibility
Trustee for societys resources
Two-way open system, open disclosure
Social costs and benefits
Consumer pays for consumption and effects
on society
Social involvement in core competency areas
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Competitive Advantages for Socially
Responsible Firms
1. Reputation
2. Successful social investment portfolios3. Ability to attract quality employees
Expectation of public that organizations willengage in philanthropy
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Corporate Social Responsibility
and Stakeholder Management
Balancing Carrot and Stick approaches
Carrotvoluntary self-regulation
Vision/Mission/Values
Ethics programs Best Practices/Risk Management
Philanthropy
Stickexternal regulatory compliance
Laws; court cases
Regulation
Congressional oversight
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Summary of Sarbanes-Oxley 2002
Establishes an independent public company
accounting board to oversee audits of public
companies
Requires one member of the audit committee to bean expert in finance
Requires full disclosure to stockholders of complex
financial transactions
Requires CEOs and CFOs to certify in writing thevalidity of their companies financial statements
Prohibits accounting firms from offering other
services, like consulting, while also performing audits
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Best Practices for
Corporate Boards of Governance
1. Separating the role of chairman of the board when theCEO is also a board member
2. Setting tenure rules for board members
3. Regularly evaluating itself and the CEOs performance4. Prohibiting directors from serving as consultants to the
companies which they serve
5. Compensating directors with both cash and stock
6. Prohibiting retired CEOs from continuing boardmembership
7. Assigning independent directors to the majority ofmembers who meet periodically without the CEO
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Cons and Pros of Sarbanes-Oxley
Pros The costs of implementing is
minimal compared to the costs ofnot having it
The changes required to enact this
law are difficult, but more than 70%of directors viewed the law aspositive
The data does not support theargument that this law presents acompetitive disadvantage to globalfirms
Financial officers may in fact besuffering from the lack of internalcontrols they had before
If a company uses the Sarbanes-Oxley Act as a reason to not gopublic, the firm should not go publicor use investors funds
Cons It is too costly
Government costs also increase
to regulate the law
It impacts negatively on a firmsglobal competitiveness
CFOs are overburdened andpressured by having to enforceand assume accountability
An exodus will occur of publiccompanies returning to privateownership
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Revised 1991 Federal Sentencing
Guidelines: Compliance Incentive
1. Established standards and procedures capable ofreducing the chances of criminal conduct
2. Appointment of compliance officer(s) to oversee plans
3. Took due care not to delegate substantial
discretionary authority to individuals who are likely toengage in criminal conduct
4. Established steps to effectively communicate theorganizations standards and procedures to allemployees
5. Took steps to ensure compliance through monitoringand auditing
6. Employed consistent disciplinary mechanisms
7. When an offense was detected, took steps to preventfuture offenses, including modifying the compliance
plan, if appropriate
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The Role of Laws and the Regulatory
System in Corporate Governance
Regulate competition
Protect consumers
Promote equity and safety
Protect the natural environment
Ethics and compliance programs to deter and
provide for enforcement against misconduct
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Five Goals of Government Policy Makers
toward Consumers
1. Providing consumers with reliable information
about purchases
2. Providing legislation to protect consumers
against hazardous products3. Providing laws to encourage competitive
pricing
4. Providing laws to promote consumer choice5. Protecting consumers privacy
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Examples of Laws Promoting and
Prohibiting Corporate Competition
Sherman Antitrust Act, 1890: Prohibits monopolies
Clayton Act, 1914: Prohibits price discrimination, exclusivity,activities restricting competition.
Federal Trade Commission Act, 1914: Enforces antitrust laws
and activities. Consumer Good Pricing Act, 1975: Prohibits price
agreements in interstate commerce between manufacturersand resellers.
FTC Improvement Act: Empowers the FTC to prohibit unfairindustry activities.
Antitrust Improvements Act, 1976: Supports existing antitrustlaws and empowers Justice Department investigativeauthority.
Trademark Counterfeiting Act, 1980: Gives penalties forpersons violating counterfeit laws and regulations.
Digital Millennium Copyright Act, 1998: Protects digital
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Responsibility toward Consumers
Duty to inform fully and truthfully
Duty to not misrepresent or withhold
information
Duty to not force or take undue advantage of
through fear or stress
Duty to take due care to prevent foreseeable
injuries
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Examples of Laws
Protecting Consumers
Pure Food and Drug Act, 1906: Prohibits mislabels on food anddrugs in interstate commerce.
Federal Hazardous Substances Act, 1960: Controls labels onhazardous substances of products used in houses.
Truth and Lending Act, 1960: Requires full disclosure of credit terms
to buyers. Consumer Product Safety Act, 1972: Establishes safety standards
and regulations of consumer products (created the ConsumerProduct Safety Commission (CPSC)).
Fair Credit Billing Act, 1974: Requires accurate, current consumercredit reports.
Telephone Consumer Protection Act, 1991: Issues procedures toavert undesired telephone solicitations.
Childrens Online Privacy Protection Act, 1998: Requires the FTC tomake rules to collect online information from children under 13years old
Do Not Call Implementation, 2003: Coordinates the FTC and FCCto provide consistence rules on telemarketing practices.
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Examples of Laws
Protecting the Environment
Clean Air Act, 1970: Designated air-quality standards; stateimplementation plans required for approval.
National Environmental Act, 1970: Established policy goals forfederal agencies; enacted the Council on Environmental Quality tomonitor policies.
Federal Water Pollution Control Act, 1972: Prevents, reduces, andeliminates water pollution.
Endangered Species Act, 1973: Provides a conservation programfor threatened and endangered plants and animals and theirhabitats.
Noise Pollution Act, 1972: Controls noise emission of manufactured
products. Safe Drinking Water Act, 1974: Protects the quality of drinking water
in the U.S; sets safety standards for water purity and requiresowners and operators of public water to comply with standards.
Toxic Substances Act, 1976: Requires testing of certain chemicalsubstances; restricts use of certain substances.
Food Quality Protection Act, 1996: Requires a new safety standardth t t b li d t ll ti id d f d bl