Ethical Realism

May 3, 2011

Ethical Implications of Corporations

Filed under: ethics,philosophy — JW Gray @ 5:03 am
Tags: ,

Corporations are an incredibly powerful force in in the United States. They have a huge influence in politics and the lives of millions of employees. First, I will discuss the nature and moral justification for corporations. Second, I will discuss various moral debates concerning corporations, such as (a) whether corporations have moral responsibility, (b) the nature of corporate social responsibility, and (c) the importance of institutionalizing ethics within corporations. This discussion is greatly based on chapter five of Business Ethics (Third Edition, 1999) by William Shaw.

Introduction

What are corporations?

Corporations are “limited liability companies” created by “incorporators” and owned by investors called “stockholders” or “shareholders” who have certain rights and responsibilities. Stockholders “may sue and be sued as a unit and… are able to consign part of their property to the corporation for ventures of limited liability” (160). The investors enjoy “limited liability” meaning that investors can’t be sued for all their worth. They aren’t liable to the amount of damage they can do to society and customers. Instead, they can only be sued for the amount equal to their investment.

Limited liability extends to investors who have little influence on the corporation they (partially) own, but limited liability doesn’t extend to anyone who has an active role when making illegal decisions. These people can face legal action for the crimes they commit. The investors often have little to no idea what is going on in their corporation, and the illegal actions of the employees are often dealt with separately.

The term “limited liability” is a bit deceptive because I think we can all agree that investors who know little about what the corporation they invest in is doing should have less liability than is humanly possible, and “limited liability” is actually “limited immunity.” A person can invest in a horrible corporation that does an incredible amount of damage and that person is immune from being responsible for any damage beyond the investment made.

Moral justifications for corporations

I will discuss two moral justifications for corporations. These are considerations in favor of having corporations, but they don’t sufficiently prove that corporations are morally justified. There are many considerations for and against corporations and we would have to assess them all to know for sure whether or not corporations are morally justified.

Corporations were originally considered to be morally justified because they were created to advance public interests. However, that’s no longer the case. Corporations no longer need to serve the public good and can just try to make a profit. This change was caused (in part) due to the arguments of Adam Smith and Alexander Hamilton, who concluded that corporations shouldn’t be required to serve the public good for at least two reasons:

One, they thought that the “invisible hand” of a free market would assure us that corporations would serve the public interest without doing so intentionally (161). Due to the invisible hand, corporations offer the best goods and services at the lowest prices to remain competitive and profitable. Corporations are often very good at being productive, and the existence of corporations can lead to greater prosperity.

Two, they thought that people should have the right to create corporations due to a “right of association” (ibid.).

It should also be noted that limited liability can encourage investment. People might not want to invest their money in companies if they have to take an active role to make sure the company is behaving morally, legally, and responsibly; and risk their entire fortune from each financial investment in companies. Without limited liability there would probably be a lot less investment in companies and a lot less productive companies as a result.

Objections to corporations

It’s not obvious that corporations are morally justified. I will discuss seven objections to corporations. These objections don’t prove that corporations shouldn’t exist, but they are considerations against using corporations, and we might be able to find solutions to these problems.

First, corporations are a violation of the free market. The fact that investors don’t have to pay for the actual amount of damage they are (partially) responsible for can encourage risky behavior by allowing investors to risk other people’s well being rather than their own. A free market demands that people provide the best goods and services because of the financial ruin involved with harming others and breaking the law.

Second, the idea of a business doing a great deal of damage and no one being liable to pay for the entire amount of damage sounds like a violation of a person’s actual rights and responsibilities. We have a right to be compensated to the harm done to us, and companies have a responsibility to compensate for that harm.

Third, giving investors limited liability and protecting ignorant investors from criminal charges encourages people to be irresponsible. It encourages investors to be ignorant because it validates claims that ignorance can excuse their involvement in a crime. It might be a better idea to encourage people to be responsible and take an active role in their business investments to make sure that nothing illegal or immoral is happening there. We don’t want ignorance to be a free “get out of jail free card.”

Fourth, corporations don’t seem conducive to the responsibility of the employees. Managers and executives in particular can be encouraged to make a profit at the expense of moral and legal considerations. These managers and executives can be fired for not making enough profit and it can be that the only managers or executives who can keep their jobs are ones who are willing to break the law. Additionally, corporate employees often think that obedience is an excuse to breaking the law or committing immoral acts because they can lose their jobs for insubordination. Moreover, when large amounts of people work together, it’s not always clear who should be blamed for immoral or illegal behavior. Sometimes we think everyone shares blame, but we don’t always think we should send everyone to prison.

Fifth, it’s not obvious that the “invisible hand” has worked out so well. Corporations haven’t always acted in the public interest. BP decided to risk the environment to rake in the dough and lead to a horrific oil spill that devastated our ocean waters, several banking corporations were involved in fraud that lead to the financial crisis, and Goldman Sachs has been involved in several scandals over the years.

Sixth, consumers have not done a good job at punishing corporations for their immoral actions. BP and banking corporations involved in immoral acts are still highly profitable. The invisible hand argument assumes that consumers act in their rational best interest, but they often don’t.

Seventh, we don’t really have a free market, in part because corporations are allowed to lobby the government and give donations to politicians in the hope for favorable legislation and subsidies. This has further protected corporations from the need to act responsibly. Banks that took risks and committed fraud got a bailout from the government and federal reserve, and has faced little to no punishment for their crimes.

Are corporations morally responsible?

In many ways corporations are treated as “legal persons” with rights and responsibilities. Corporations now have a highly unrestricted freedom of speech, and they are allowed to offer their opinion in the form of political donations, lobbying, advertising, and so on (162). The Supreme Court ruled that corporations have a constitutionally protected right to free speech in the 1978 decision “First National Bank of Boston v. Bellotti,” which included the right to donate to politicians (ibid.). The 2010 a Supreme Court decision “Citizens United v. Federal Election Commission” ruled that it’s a constitutional right for corporations to spend unlimited amounts of money to influence political campaigns.

Freedom of speech involves moral opinions and can have a harmful impact on people—especially when it involves political funding and lobbying, which is one of the most cherished corporate activities. If corporations have the right to make moral decisions that can hurt people, then perhaps they should also be morally responsible for the benefits and harms caused by their actions.

If corporations are in some sense legal persons with constitutionally protected rights, then perhaps they also have moral or social responsibilities. It seems a bit unfair to give corporations all the rights of being a person without any of the responsibilities—all the benefits and none of the costs. The wealthy could then use corporations as a haven to be irresponsible and destructive without any significant moral responsibilities, and with the only risk being the loss of a financial investment.

What is moral responsibility?

There are at least four types of moral responsibility:

  1. People are morally responsible if they can be appropriately praised or blamed for their behavior (163). If people choose to give to a charity that saves lives of their own free choice, then we think they are appropriate praised. However, if people are forced to give to a charity that saves lives at gunpoint, then we don’t think they deserve praise for doing so.
  2. People are morally responsible insofar as they are accountable to the welfare of others, and have duties to help other people (ibid.). Parents are responsible for their children and have to provide food for their children, the news has a duty inform us of political misconduct, accounting auditors have a duty to keep an eye out for fraud, and so on.
  3. People are morally responsible insofar as they are capable of making moral and rational decisions (ibid.). Children, certain people who are insane, and most nonhuman animals seem to lack this kind of moral responsibility. We don’t think they fully deserve praise or blame for their actions because they aren’t fully capable of thinking morally or rationally.
  4. Finally, people are morally responsible insofar as they are good at acting and thinking in a rational and moral manner. Such people can not only think rationally, but they choose to do so. Our moral heroes who display moral virtue, such as Socrates and Mohandas Karamchand Gandhi, seem like they are highly morally responsible insofar as they are exceptional people with an unusually high degree of moral virtue.

Can corporations think and behave morally?

Can corporations think and act morally or rationally? If so, then it is possible for corporations to be appropriately praised and blamed, accountable for the welfare of others, and virtuous. I will consider a case for and against the idea that corporations can think and act morally.

Corporations have various goals (related to making profit) and they have procedures to decide how to best achieve these goals (164). Some philosophers argue that corporate decision making is like a machine and is incapable of making moral or rational decisions because the profit motive will override all moral considerations (ibid.). Individuals within corporations can be morally responsible, but that doesn’t mean a corporation, an abstract social construct, can be morally responsible.

On the other hand some people, such as Kenneth E. Goodpastor, have argued that corporate decision making is analogous to human deliberation because many conflicting goals can be relevant other than profit (165).

What is the nature of personal moral responsibility within corporations?

Many people share responsibility within a corporation and they often refuse to accept personal responsibility—to be whistleblowers, to disobey orders to break the law, and so on (165). Perhaps we cannot consider corporate employees to be responsible in the sense of being capable of thinking rationally and morally for themselves. For example, National Semiconductor sold products to the Defense Department without conducting the promised tests on the products and were fined over a million dollars as a result (ibid.). The corporation then refused to tell the Defense Department which individuals made the decision to have incomplete testing because such a decision was “an industry pattern beyond any one individual’s responsibility” (166).

A corporation that blames a few individuals for breaking the law when several people actually share responsibility could even be form of scapegoating—blaming a few so that many others can get away scott free. Consider how many low-ranking soldiers in the military are found guilty of war crimes, but almost no high-ranking ones are blamed. It seems plausible to think that high ranking officers are at least partially responsible as well. Additionally, it seems plausible that corrupt corporate culture can make immoral acts almost inevitable. Consider how it seems plausible to think that CEOs can occasionally face being fired if they aren’t willing to pollute or break the law to increase profits.

If we find out that corporations and corporate employees both lack moral responsibility, that would be a serious problem. If no one is responsible, then who is going to pay for the damage done to people by corporations? There are at least two possible solutions to this problem. One, we can attribute responsibility to corporations just like we do people in general. Unfortunately, if corporations are punished, then the individuals who are morally responsible could get off scott free. Two, we can assign responsibility to corporate employees and dismiss the claim that they lack responsibility. Unfortunately, if individuals are punished, then the corporation could continue to encourage or demand immoral behavior. Of course, we could decide that both corporations and corporate employees are both responsible and we could punish both corporations and individuals.

What’s the extent of corporate responsibility?

There are at least two major ideas of corporate responsibility other than to abide by the law (and refuse to hurt people).

1. To maximize profits.

Some people think that corporations only have a duty to maximize profits. Some people think it’s the duty of the government to look out for the public interest, not corporations. A corporation that sacrifices profit to look out of the public interest is committing themselves to the wrong role. Milton Friedman even suggested that corporations should feel free to pollute to whatever extent is legal:

[Business people who] believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends, that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers… [are] unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades. (168-169)

Of course, pollution can hurt people, and could be taken to be a violation of our rights. Pollution destroys the environment, makes us sick, and can even cause fatal illness. People might be willing to pay $50 a year to a corporation if it would agree not to pollute, but that would be a form of coercion. The corporation would be paid to stop hurting people, but it wouldn’t be “free trade” because free trade can’t allow people to be coerced into conducting business transactions.

There are at least five arguments that corporations only have a duty to make profit:

  1. Some argue that it’s because the investors agree to invest their money in corporations precisely because they want to make profit. It would be a violation of an implicit contract or promissory agreement involved with such investments (171). Of course, even if this is true, we can wonder if this contract is morally binding given that it requires us to abandon certain moral considerations (172).
  2. Some argue that corporate social responsibility will harm our economy by going against the “invisible hand” (169, 173-174). We need corporations to be as profit making as possible to help our civilization prosper. Some people object that the “invisible hand” has not been guiding corporations—perhaps because they are too monopolistic or massive (174). Our “free market” hasn’t been stopping the immoral behavior of corporations or our social ills (such as pollution and poverty).
  3. Some argue that we can’t trust corporations to be moral on their own, so we should rely on government regulation rather than demand corporations to self-regulate (ibid). Perhaps people are too selfish or unethical to make sure corporations can act in the public interest on their own (without government incentives). Some people reject this idea because (i) it requires an “intrusive government,” (ii) the government is greatly influence by corporations that can prevent government regulation through lobbying, or (iii) laws and regulations can’t stop every single possible immoral act that corporations will engage in (175).
  4. Some people argue that corporations are too inept to be ethical (ibid.). Of course, lots of people aren’t particularly informed about moral philosophy and we still demand that they are ethical. We demand everyone behave morally whether they are moral experts or not. Being ignorant about ethics isn’t a get out of jail free card.
  5. Some people think that corporations are evil or corrupt. They are full of greed and selfish people who don’t know what is truly important if life, so their corrupt idea of behaving ethically will spread their “values” to the rest of our culture (176). However, corporations have already been doing everything they can to spread corrupt values and even use such values to influence politics (177). Perhaps their corrupt values are partially caused more from being told to be self-interested profit seekers rather than to also care for other people in our society. Additionally, it’s unclear that corporate charity is really infused with corrupt values.

To make profits and help people

Some people think that corporations have a duty to make profits in addition to helping people. Corporations have some sort of responsibility to make people’s lives better either through quality products and services or some sort of charity. There are at least four arguments to support this view:

  1. Some argue that with power comes responsibility (ibid.). Corporations have the power to do great amount of good and evil to society at large (170). Those in the position to do the most good have the responsibility to help people. For example, scientists who are best equipped to cure cancer might have a responsibility to do so.
  2. There is an implicit social contract between society and corporations that demand that corporations benefit society rather than harm it. If corporations harm us, then we have no reason to allow them to exist (ibid.). This argument is supported by the fact that most Americans believe that a corporation’s highest priority is to the employees and “[o]nly 17 percent think stockholders deserve the highest priority” (171).
  3. Corporations don’t just make decisions that effects them and those who engage in agreements with them. Their decisions and business deals can harm people and cause hidden costs to others, which are called “externalities.” For example, pollution or harm done to nonhuman animals. Corporations must somehow try to pay for these externalities—the hidden costs they force on others—or the business can cause more harm than good. A company that makes computers can sell each computer for $300, but creating each computer might cause $400 of damage to others through pollution. It would be unfair of that corporation to reap all the rewards of their business without paying for any of the damage it does. It might be more appropriate for the corporation to charge $700 for each computer and to use $400 to clean up the pollution the business causes.
  4. Some people could argue that insofar as we allow corporations to enjoy the rights of being legal persons, we must demand corporations to accept responsibilities of being persons as well. Allowing corporations to have the rights of people without the responsibilities could turn corporations into havens that allow the wealthy to escape their moral responsibilities.

Institutionalizing ethics within corporations

We need to know how corporations can best live up to their moral responsibilities (177-178). Even if corporations don’t have a duty to help people, they still have a duty to obey the law and encourage trust with the public. It is plausible to think that one way this can be done is by improving the corporate culture and make sure employees are taking morality seriously. At least four steps can be taken (178):

  1. Corporations should admit that they have moral responsibilities and make their moral commitments visible.
  2. Corporations should encourage their employees to take moral responsibilities seriously. Employees can be rewarded for being ethical rather than punished. There should be a way for employees to voice moral concerns or be whistleblowers without fear of retaliation.
  3. Corporations should seek rather than try to avoid criticism.
  4. Corporations need to respect the individuality of people and the diversity of groups.

Corporate moral codes

Corporations can make their commitment to being ethical explicit and educate their employees about the moral code in an attempt to improve the importance of ethics within the culture of the corporation and foster trust with the public as a result (180). Top management can do the following:

  1. Articulate the corporation’s moral values and goals.
  2. Articulate an ethical code applicable to all employees.
  3. Set up an ethics committee that has the power to enforce the moral code and oversee ethical issues within the business.
  4. Add ethical training to other forms of job training.

Conclusion

Although corporations are an entrenched force in our civilization that probably aren’t going anywhere soon, it’s not obvious that corporations are morally justified or supported by any system of justice. Libertarian justice don’t necessarily support limited liability considering that it allows companies to disrespect human rights and refuse to pay the full damages done. Utilitarian justice doesn’t necessarily support corporations because it’s not clear that limited liability is really best for the “greater good.” Rawls’s theory of justice doesn’t necessarily support corporations because limited liability can give the wealthy more rights and less responsibilities than are enjoyed by the poor, and it’s not clear that the poor will benefit from it.

We have little choice but to live in a world with corporations, and the arguments here offer a greater support to the view that corporations have a moral responsibility beyond merely making a profit. Even if we only demand that corporations make a profit, we still need to demand that corporations obey the law and encourage trust with the public. This can require an improved corporate culture that takes ethics seriously, and it is plausible to think that corporate moral codes enforced by ethics committees can do a lot to help improve corporate cultures.

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1 Comment »

  1. [...] Corporations are an incredibly powerful force in in the United States. They have a huge influence in politics and the lives of millions of employees. First, I will discuss the nature and moral justification for corporations. Second, I will discuss various moral debates concerning corporations, such as (a) whether corporations have moral responsibility, (b) the nature of corporate social responsibility, and (c) the importance of institutionalizing … Read More [...]

    Pingback by Ethical Implications of Corporations (via Ethical Realism) « Hebrew Hutong — May 15, 2011 @ 9:42 am | Reply


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