The Corporate Environment

William J. FreyCollege of Business Administration

University of Puerto Rico at Mayaguez

Read…

• A Short History of the Corporation (m17314)

• Developing Ethics Codes and Statements of Values (m14319)

• Moral Ecologies in Corporate Governance (m17353)

• Gray Matters for the Hughes Aircraft Case (m14036)

Terms from History of Corporation• Ultra Vires

– Literally “beyond the power”. If a corporate charter designates something as “ultra vires” in relation to the corporation, it literally means that this action goes beyond the legitimate powers of the corporation.

• Implied Powers– If a company knows of an activity (or should know of it) and still permits

the activity to continue, then its consent is implied and the power to perform the action implied.

• Joint stock company– 17th and 18th centuries in Great Britain. Companies were formed to

carry out complex business activities. Investors put their money into the venture and managers oversaw the activities. Joint Stock Companies produced problems because of unlimited liability

• Corporate shield– The corporate shield protects investors by distributing financial risk.

Investor liability limited to amount of investment.

Agency and Charters• Law of Agency

– Responsibility of agents to remain faithful to the interests of principals• Principal

– Originate action and determine its goal. Delegate executive authority to agent if unable to execute action working alone

• Agent– Carries out or completes action originated by another. Responsible to principal

to remain faithful to the principal’s goals and interests• Corporate Charter

– Founding document of corporation– Originally the charter was a device of corporate control because it outlined what

the corporation could and could not do. If not permitted by charter it was ultra vires (=beyond the power).

• Charter Mongering– Charters allow incorporation for all legal activities. Charter no longer defines

boundaries for legitimate and illegitimate corporate activities

Corporate legal and moral responsibility

• Corporation Internal Decision Structure or CIDS– Corporate goals, decision recognition rules, roles, and organizational flow chart– Licenses re-describing individual actions as corporate actions.

• Corporate Responsibility– Holding corporations legally and morally responsible for actions performed in their name.

Creates philosophical problems concerning the meaning of “personhood” and “agency.”• Legal Person

– Created in and through the law. A legal person has legal standing: it can sue and be sued. Legal persons also have legal rights and duties.

• Natural Person– Primarily human beings. Natural persons act through the medium of their bodies.

Natural persons also have minds which form intentions (goals, purposes). Criminal law applies to natural persons who have minds (that form intentions), bodies (that act to realize intentions) and a connection between the two such that minds direct the activities of bodies.

• Stock Dilution– A corporate punishment (a fine) that goes beyond the deterrence trap by tapping into the

future earnings of a corporation. The stock of a company is divided (or diluted) and the additional shares are distributed to the victims of corporate wrongdoing or to the state. These shares are, then, liquidated at some future date.

The corporation can be understood as a series of interrelated solutions to different, successive historical problems

Problem Solution Organizational Form

Successfully transferring stewardship over church holdings to new abbot

Create a “passive device to hold property”

Proto-corporation

Control over and regulation of a practice or skill (monopoly / responsibility)

Create a device to (a) hold the privileges of some particular trade, (b) establish rules and regulations for commerce, and (c) holds courts to adjudicate grievances among members

Medieval guilds that evolve into regulated companies

Pooling capital and resources and directing complex ventures

Create a device (a) to hold privileges of trade (b) where investors provide capital and (c) that delegates operations to managers

Unchartered joint stock companies

As modern corporation emerges, limiting but fixing liability becomes central concern

Problem Solution Organizational Form

Limiting investor liability, limiting manager liability, and balancing the two

Corporation evolves into a legal person with (a) legal rights and duties, (b) owned by shareholders, (c) run by managers, (d) regulated through state charter

Limited corporation whose operations are defined in and limited by the charter

Ultra Vires (charter prevents growth) and Charter Mongering

Granted broad powers through more broadly defined charters

Corporation as an essential business tool

Finding agent responsible for wrongdoing

(a) Due Process, equal protection, and free speech rights, (b) legal duties, (c) legal standing, (d) Federal Sentencing Guidelines, and Sarbanes-Oxley Act

Corporation as a legal person

Sample Corporate Rights• Conferred by common law precedent

1. Right for judicial review on state legislation2. Right for judicial review for rights infringement by federal

legislation3. Protection against “unreasonable searches and seizures”4. Right to trial by jury5. Right to compensation for government takings6. Right to freedom from double jeopardy7. Right to trial by jury in civil case8. Right to free commercial speech9. Right to corporate political speech10. Right against coerced speech11. Right to form Political Action Committees and fund them

anonymously

Pirate Inc.

The analogy between the modern corporation and the pirate ship

CID Structures

• Corporate Goals• Decision Recognition Rules and Procedures• Corporate Roles• Corporate Organizational or Managerial System (Flow

Chart)

• We can identify CID Structures in…– business corporations– Pirate ships– your work groups

Corporate Internal Decision Structures

• Corporate Goals: Principle objective of the organization– Charter– Informal charter– Core Values and Mission Statement

• Decision Recognition Structures– Rules and procedures that help us to recognize

individual actions as a corporate actions– Example: liquidating travel budget after a trip (Not a

private vacation but a corporate activity)

Corporate Internal Decision Structures• Roles

– An individual’s station and its associated duties within the corporate hierarchy itself

• Organizational management structure embodied in the organization’s flow chart– How the roles are coordinated with one another within the

corporation’s managerial system.– Reporting relations. The corporate ombudsperson reports to the

CEO.

• All four components of the CIDS work together to synthesize, coordinate and subordinate individuals and their actions in the performance of the corporations activities.

Your Challenge…• Outline your group’s Internal Decision Structure• Corporate Internal Decision Structure becomes your

Group Internal Decision Structure– What are your group goals? Is your action designed to pursue

them?– What rules help us to recognize a decision as belonging to your

group?• Procedure for realizing value of justice

– What group role are you playing?• Leader, spokesperson, mediator, secretary/ documenter, devil’s

advocate, motivator, conscience

– What is your organizational flow-chart? • Horizontally or vertically organized? How are your roles coordinated

and synthesized? What procedures subordinate your individual actions under group intentions?

Ethics of Teamwork• Goals– What are your value goals for the semester?

• Recognition rules and procedures– What rules and procedures that signal when you are acting

for your group? (When are you subordinating individual interest to group interest?)

• Roles– Leader, spokesperson, mediator, secretary/ documenter,

devil’s advocate, motivator, conscience

• Flow chart or management system– How do you coordinate different individuals and their roles?

Your job this semester as you “incorporate your group”

• Build a Corporate (group) Internal Decision Structure– Finalize your goals– Identify and test procedures that help to recognize actions of your

group’s members as group actions– Identify and distribute the roles that individuals are playing in your group– How is your group organized? How do you synthesize and subordinate

individual actions and decisions into group actions and decisions?

• Draw a picture of your group’s CID Structure– Organize it as a flow chart from a class assignment to final group product– How does your group collect disseminated knowledge and skill from your

individual members?

• What is the greatest challenge you have faced so far?– What is your response?– Have you kept your goals and procedures “in tact” as you have faced

these?

Pirate Charter• Articles of Agreement

– Signed by each member of the pirate crew– Outline the ship’s hierarchical structure– Detail the different roles of the pirate community

• Recruitment and Public Relations– Democratic election of captain offered alternative to

authoritarian captains of military and merchant marine– Attempted to overcome anti-pirate propaganda and portray

pirates more as responders to injustice than parasitic thieves.

• Pirate crew, itself, plays the role of directors of the pirate corporation when it holds an election of captain and quartermaster

Pirate Decision Recognition Rules

• Majority vote by crew to elect captain and quartermaster– Captain Roberts: “Every Man has a Vote in the

Affairs of Moment; has equal Title to the fresh Provisions, or strong Liquors, at any Time seized, and may use them at Pleasure, unless a Scarcity make it necessary, for the Good of all, to vote a Retrenchment.” From Leeson, 62

Pirate Roles• Directors

– By charter, members of crew become directors when they elect by vote the captain and quartermaster

• Managers– Captain and Quartermaster: Crew has to follow orders of captain when the

ship is engaged in battle; otherwise, they can remove “managers” by vote (Something like the Business Judgment rule which allows stakeholders to sue managers)

• Professional Crew (individuals with highly valued knowledge and skill)– Surgeon, carpenter, caulker, armorer, musician– “Ye ship’s surgeon shall have two hundred crowns for the maintenance of

his medicine chest and he shall receive one part of the spoil.” (Custom of the Brothers of the Coast)

– Unskilled Crew– Draftees (Kidnapped)

Pirate Flow Chart

Directors (Voting members of crew)

Skilled Crew: surgeon, carpenter, caulker, armorer, musician

Unskilled Crew (Volunteers)

Unskilled crew: Draftees (Shanghaied)

Elect a Captain & QuartermasterThese appoint…

Creating Corporate Responsibility and Agency by Re-Description from CIDS

• CID Structure licenses (permits) a re-description of a human action as a corporate action if it can be directly related to all elements of the corporation’s Internal Decision Structure.

• Thus X (an action performed by an individual) can be re-described as Y (a corporate action) if…– It carries out a corporate policy as outlined in the charter,

mission statement, or values statement– Takes place in accordance with a decision recognition rule– Is performed as a part of carrying out a corporate role– And this role has a clear and designated location in the

corporate flow chart

Example from Pirate World

• Setting aside 200 crowns for the maintenance of the surgeon’s medicine chest…– Contributes to the pirate ship’s overall objective of

maintaining a healthy crew– Conforms to a decision recognition rule spelled out in the

pirate ship “Articles of Agreement”– Carries out a role responsibility (It’s the quartermaster’s job

who has the overall responsibility of distributing spoils)– And the quartermaster role has a clearly designated place in

the overall pirate ship hierarchy (Quartermaster is selected by the crew serving as directors, reports to the captain, etc.)