Philosophy
162F
Lecture 4
Notes
The Purpose of the Corporation
Friedman Argument One:
- Corporate managers are employees of the
owners of the Corporation, i.e., the
stockholders.
- Stockholders hold stock in corporations with
the intention of receiving a return on their
investment, i.e., the corporations' profits, and
they are entitled to those profits as
owners.
- Any profits spent by managers on social
causes amounts to managers spending money that
is not theirs but is instead, the rightfully
owned money of the stockholders.
- Therefore, managers must not spend profits
on social causes but instead provide the
stockholders with all of the corporation's
profits.
Friedman Argument Two:
- All the agents involved in a corporation
have an understanding of their role and their
recompense for that role.
- The role of the stockholder is to provide
capital. Their recompense is all of the
profit.
- The role of managers is to ensure that
agents play their correct roles in a corporation
and that agents receive their proper
recompense.
- Therefore, managers must act to ensure that
stockholders receive all the profit from the
corporation.
Friedman Argument Supplement:
- If there is any authority capable of
diverting that to which an agent is entitled, it
is a properly functioning, democratically
elected government.
- Managers are not democratically
elected.
- When a manager diverts profits for the
purposes of the public good, they are acting as
an authority capable of diverting
entitlements.
- Therefore, it is not correct for managers to
divert profits, even for the public good.
Freeman Argument:
- Corporations are part of the ordinary
operation of our economy.
- The actions of corporations touch on people
in society whether or not they wish this
interaction.
- Freedom and personal choice are required for
the creation of contracts.
- Managers must create proper contracts with
those that a corporation interacts, or else they
must act as if there are proper contracts. That
is, they must act in such ways such that they
respect the autonomy of those who interact with
the corporation that they manage.
John Hasnas
John Hasnas points to a particular relationship
between the nature of business and any normative
theory that would be applied to a business
setting.
Hasnas adopts the following definition of a
business from Robert Hessen's article, A New
Concept of Corporations: A Contractual and Private
Property Model" (See the endnotes of Hasnas' piece
in the text.)
A business is, "a voluntary association
of individuals, united by a network of
contacts," organized to achieve a specific end.
(Pg. 72)
For Hasnas,
- an adequate theory does not add to the
ethical commitments that one explicitly takes up
as a participant in a business
- an adequate theory takes into account all
the ethical commitments that are explicit in a
business
Note the technical definition Hasnas
provides:
(Hasnas') social responsibility: those
ethical obligations, if any, that businesses or
business persons have to expend business
resources in ways that do not promote the
specific purposes for which the business is
organized. (Pg. 66)
Hasnas definition of the Stockholder Theory:
"According to this theory, businesses
are merely arrangements by which one group of
people, the stockholders, advance capital to
another group, the managers, to be used to
realize specified ends and for which the
stockholders receive an ownership interest in
the venture. Under this view, the managers act
as agents for the stockholders." (Pg. 66)
Hasnas' deontological argument in favour of the
Stockholder theory is pretty much the strict
contract argument for Stockholder Theory.
Claim: The public good can justify that
managers divert corporate profits.
Problem One: The public good is (largely)
irrelevant to the claims of Stockholder Theory.
Why: The Stockholder Theory is about
duties between people; these particular duties
should not be violated. One needs to argue this
claim rather than simply assert the principle of
utility, which rejects all such claims.
Problem Two: The claim about managers
arises from a false analogy.
Why: The claim about managers arises from
the analogy linking managers and their powers to
those of democratic governments. Hasnas thinks that
an equally good analogy can be drawn between
managers who divert profits and any embezzler of
funds.
Two core principles of Stakeholder
Theory:
Principle of Corporate
Legitimacy
The corporation should be managed to
the benefit of and with the consent of its
stakeholders.
The Stakeholder Fiduciary
Principle
Managers bear a fiduciary
responsibility to the stakeholders of the
corporation and the corporation as an
abstract entity.
Hasnas sees the argument in favour of
Stakeholder theory as the following:
- Agents should treat people with the respect
due their autonomy.
- Businesses should be held to this standard
as well.
- It is impossible for businesses to directly
address the autonomy of those they effect, so it
is up to managers to do the best they can to
consider the interests of those that the
business effects.
For Hasnas, the limit of this argument is that
no person should be forced to do business with a
particular company.
John R. Boatright
Definition time-out (from the online Oxford
English Dictionary):
- fiduciary: as an adjective,
- Of a person: In trust of a person or
thing; holding something in trust.
- Of or pertaining to something held in
trust.
- fiduciary: as a noun,
- One who holds anything in trust; a
trustee.
Boatright's point is that we must evaluate
theories of corporate governance be in terms of
what is best for the public good. In this respect,
shareholders are no more special than any other
group important to the operation of a
corporation.
- Boatright assents that shareholders have
rights over the overall control of a corporation
(e.g., the election of the board of
directors)
- Boatright also admits that managers act as
fiduciaries to management of the corporate
assets.
- But, this doesn't mean that managers should
only consider shareholder profit.
- There is a logical gap between the ownership
rights of shareholders and the fiduciary duties
of managers.
Risk argument:
- Law and the particulars of their contract
protect those who lend to a company.
- There is nothing to prevent shareholders in
the event of the failure of a business.
Equity Argument:
- Shareholders cannot be protected by contract
as other groups involved in the business because
- they cannot voluntarily withdraw
from their relationship (they can only sell
their shares),
- their investments are not associated with
particular assets.
Boatright's Counter Argument One:
- Existing shareholder rights (e.g., voting on
board of directors, shareholder resolutions)
offer protections other groups do not have.
- These do not rely on the position taken in
Stockholder Theory.
Boatright's Counter Argument Two:
- Shareholders have options through the stock
market that other stakeholders do not have.
- They can dump their commitment to the
company through selling their shares.
- The stock market provides opportunities for
profit outside of the traditional operation of
the business.
- Risk can be minimized through
diversification.
Aside: What about those
corporations that do not trade on the stock
market?
Boatright argument against the strict
contract argument
- Shareholders rarely meet managers.
- Often shareholders buy their stock from
previous owners.
- The information of the corporation is
provided to investors it not usually specific
and is viewed skeptically.
- Shareholders do not get to negotiate the
terms of their position, they either sign on as
a shareholder, buying stock, or they do
not.
Conditions for agency
- Consent to agency
- The power to act on another's behalf
- The element of control
Boatright sees that the law prevents these
criteria from being met by managers.
- Managers are guided by law independent of
the wishes of the shareholders.
- Managers cannot act in a legal sense on
behalf of shareholders. The legal sense of
action changes would require that the
relationship of the shareholders and a third
party would change. In law, a shareholder vote
is required for any such change.
- The day-to-day (and most of the long-term)
management of a corporation is wholly in the
purview of managers.
- Boatright is not arguing that managers have
no duties to others.
- There is a role for the current corporate
structure and for the decisions of
shareholders.
- We need some restraint on the actions of
managers because it is not in the public good to
allow managers free reign over the corporations
they control.
In Class Assignment
Get into a group of three or four.
Choose one of the three cases at the end of
chapter one. Discuss the case and answer three
or four of the questions at the end of the case
with a short answer. How many questions you
answer depends on the number of people in your
group. Hand in your answers, together with the
names of the people in your group at the end of
class.
Out of Class Assignment
Choose one of the three cases at the
end of chapter one. Answer two of the questions
at the end of the case with a short answer. This
assignment is due Wednesday, May 18th.
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