The Corporate Environment William J Frey College of

The Corporate Environment William J. Frey College of Business Administration University of Puerto Rico at Mayaguez

Read… • A Short History of the Corporation (m 17314) • Developing Ethics Codes and Statements of Values (m 14319) • Moral Ecologies in Corporate Governance (m 17353) • Gray Matters for the Hughes Aircraft Case (m 14036)

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 – 17 th and 18 th 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 Create a device to (a) hold of a practice or skill the privileges of some (monopoly / responsibility) 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 Unchartered joint stock companies Create a device (a) to hold privileges of trade (b) where investors provide capital and (c) that delegates operations to managers

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 Limited corporation whose legal person with (a) legal operations are defined in rights and duties, (b) and limited by the charter owned by shareholders, (c) run by managers, (d) regulated through state 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 legislation 2. Right for judicial review for rights infringement by federal legislation 3. Protection against “unreasonable searches and seizures” 4. Right to trial by jury 5. Right to compensation for government takings 6. Right to freedom from double jeopardy 7. Right to trial by jury in civil case 8. Right to free commercial speech 9. Right to corporate political speech 10. Right against coerced speech 11. 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) Elect a Captain & Quartermaster These appoint… Skilled Crew: surgeon, carpenter, caulker, armorer, musician Unskilled Crew (Volunteers) Unskilled crew: Draftees (Shanghaied)

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. )