BA-300
haanooy
CLASS2SKITSANDHANDOUTSRevisedSummer20201.docCASE 1: THE ETHICS OF FAMILY BUSINESS: SON’S SPOT
Based on Alsever, J. (2011): “Father’s Footsteps.” Inc., November: 52
[It is 10:50 a.m. on October 12, 2009 at Vandelay Industries’ Welcome Basket Division in Pinellas Park, Florida. The company sends a set of offers from local merchants to people who have relocated. Michael Plummer, Jr., the son of the founder, is sitting at what was his father’s desk. As the scene opens, Plummer is signing paychecks for the company’s 30 employees. Cliff Hallmark, the company’s Chief Financial Officer, knocks on Michael’s door.]
Michael: Come in.
Cliff: Hi, Mike. I know you wanted to see me. Before we get down to business, though, let me once again give you my deepest condolences on the death of your father and tell you how moved I was by your eulogy at his funeral.
Michael: I still can’t believe he’s gone from a heart attack – at the age of 57. The day before he died, he went to an Alice Cooper concert and sped home in his Ferrari. He was always driving too fast around town, his car radio blasting classic rock. He didn’t care. He was his own man. He left his mark and this company is his legacy.
Cliff: He certainly changed my life profoundly.
Michael: How?
Cliff: As a stuffy accountant, I always questioned the way your Dad managed outside the box. Whether it was financial or emotional support he gave his employees, I felt I always left his office saying, “you’re crazy!” He showered friends and employees with gifts and even sometimes paid for strangers’ groceries at the market. Still, things always seemed to work out as he expected they would. He always ran with whatever was in his heart and what he felt was right. What he got in return was a staff that was as dedicated to pleasing him as I’ve ever seen and it paid huge dividends. Still, his approach didn’t always work out perfectly for the business.
Michael: Oh? I was always impressed by my father’s motives as an entrepreneur in starting this business. He believed he was building a community by introducing new families to local businesses.
Cliff: True enough. But he also was famous -- in my view infamous -- for paying for car washes and massages for employees and paying the rent of cash-strapped friends. In addition, the company payroll has become bloated, Mike. Your Dad was paying people who didn’t actually do anything. Also, instead of hiring the right person for the job, he hired friends. I guess all of that is why you wanted to see me.
Michael: That’s part of it. But there’s more on my mind, Cliff. I need some basic guidance.
Cliff: I’m ready to listen and let you know what I think.
Michael: It was always my father’s dream that I take over this business. Heck, I started working in the business stuffing envelopes when I was 5. That was 30 years ago. But I never felt it was my calling. I wanted to do medicine. When I was 20, you’ll remember that I turned down an offer to join the business at a salary of $65K a year to enlist in the Army as a medic. I still remember what he said to me when I broke the news. He said, “This is the dumbest thing you’re going to do.” He thought I was crazy to turn him down.
Cliff: I thought you were crazy, too. But, he really turned around. He was so proud when your military service eventually took you to South Korea where you ran an urgent-care clinic. He used to brag to me and others about how you had turned down the easy money to seek your own path.
Michael: All was well until 2000, when I received a sudden phone call that my Dad had suffered a heart attack. I rushed back here to Florida, where my then-wife and two daughters lived. Thanks goodness he survived quintuple bypass surgery. We both were happy we were able to bond and develop a close relationship while he recovered. But I knew my place was in Korea. Dad and I continued to talk by phone a few times a week. When Dad told me he needed some help with things here later in 2000, I returned to work for the company.
Cliff: You made some real improvements to our company’s IT functions.
Michael: The best part of the job was all the time I spent with my father. Then I got the call a little over a week ago that Dad had had a second heart attack. As I said in my eulogy, he was the strongest man I’ve ever known. A couple of days after my father died, I got a call purely by coincidence from a business broker wanting to know if I was interested in selling the business.
Cliff: This is the first I’m hearing of this. What did you tell the broker?
Michael: At first, I was shocked by the offer and turned him down. But in the last few days, I’ve been thinking. A lot of family members are fighting over the ownership and direction of the company. Employees don’t know what’s going to happen now. And there are other challenges too, which you as the CFO know all too well.
Cliff: Right. Because of the recession, sales are down 24 percent. And your Dad’s generosity and payroll practices have been an added weight on the company’s finances, even though I know he had the best of intentions.
Michael: I could sell the business and share the proceeds with my two sisters. I could retain equity and hire someone else to run the business. Or I could bite the bullet and run the business myself. After all, my sister, aunt, and cousin are employees. Dad and I spoke about the future of this company not that long ago, when neither of us had any idea I would be in this position at this time. He said that he understood that I would feel obligated to take over the business in this situation, but that he would understand if I sold it instead. I’m the one who has to make this call since Dad’s will put me in charge of his estate. So, Cliff, you worked closely with my Dad and you know me pretty well. What do you think I should do?
Cliff: This is a tough one, Mike, and it’s not a decision I can make for you. There really is no right or wrong option here. I guess I’d ask you to ask yourself one question: If you wrote your obituary, what would you want it to say?
[They exit.].
Objectivism: Whether the business decision I make is ethically sound depends on whether my decision is ____________ _______________, meaning that it results neither in _____________ _______________ to others nor in sacrificing others to myself. To live for my own sake means that the achievement of my own happiness is my highest moral principle.
Three driving beliefs of objectivism, or virtuous egoism as Scalet calls is, are:
1. Relationships are ___________ only to the extent that they ________ the individual.
2. __________________ activity is the noblest activity in human life.
3. The measure of what each person ____________ is what the person does or ___________.
(Rand, A. 1964 “Objectivist Ethics” in The Virtue of Selfishness, pp. 30, 34; Scalet, § 13.4.)
The Ethic of Care: Whether the business decision I make is ethically sound depends on whether my decision results in _________________ __________ and __________________________________. My decision must be tailored to ________________________________ of the situation facing me. Applying abstract ________ and _____ is less important than my responsibility to preserve the ___________ of ___________________. The theory’s focus on _________________ makes it closer to ________________ than ___________________ theories such as Rawls’ __________________. This theory originated as a ______________ response to ____________________ ethical development, which was based on a study of subjects who were all _______. Since the theory’s development, however, ________________ have been observed to apply the principles of the ethic of care.
Virtue Ethics: I am an ethical decision-maker if my decision-making is ________________ with the _____________ of my highest ethical _____________________ and those of my most respected ________ in my ____________ or _____________________________. A shortcut under this theory to determine whether a particular action is ethical is to __________ how my action would reflect on ____________________ if it _______________ in the ______________.
SHAREHOLDER PRIMACY V. STAKEHOLDER ORIENTATION
SHAREHOLDER PRIMACY ORIENTATION
In making decisions, a share-issuing corporation must have a single __________: to make as much money as possible while conforming to the basic ____________ of the society, both those embodied in _____ and those embodied in ___________ ________________. A business has a ______ to its shareholders to use its resources in open and __________ competition to ___________ its ____________ within the rules of the __________, which is to say within the law and without ______________ or fraud.
(Source: Friedman, M. 1970 “The Social Responsibility of Business is to Increase its Profits,” New York Times Magazine: September 13.)
STAKEHOLDER ORIENTATION
Those with a stakeholder orientation contend that a corporation has responsibilities to all of the corporation’s stakeholders, defined as those who are _____________ ______________ by the firm’s activities, such as ________________, ______________, shareholders, the communit(ies) in which the company does business, broader ____________, the _________________, and suppliers.
The core reason those with a stakeholder orientation believe companies have this great _____________ to ___________ as a whole is because companies exert great ___________ that profoundly ___________ people’s lives.
The debate between those with a shareholder primacy orientation and those with a stakeholder orientation is not __________ management has __________ responsibilities beyond maximizing profits. Both shareholder primacy advocates and stakeholder advocates agree that management does have such responsibilities. The ___________ between the two camps is about the __________ and __________ of those responsibilities.
(Source: S. Scalet, “Markets, Ethics, and Business Ethics” 2018.)
BUSINESS ROUNDTABLE PRESS RELEASE ON STATEMENT ISSUED 8/19/2019:
Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.
“The American dream is alive, but fraying,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
“This new statement better reflects the way corporations can and should operate today,” added Alex Gorsky, Chairman of the Board and Chief Executive Officer of Johnson & Johnson and Chair of the Business Roundtable Corporate Governance Committee. “It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”
Industry leaders also lent their support for the updated Business Roundtable Statement, citing the positive impact this commitment will have on long-term value creation:
“I welcome this thoughtful statement by Business Roundtable CEOs on the Purpose of a Corporation. By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers,” said Bill McNabb, former CEO of Vanguard.
“CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value,” said Tricia Griffith, President and CEO of Progressive Corporation.
“This is tremendous news because it is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society,” said Darren Walker, President of the Ford Foundation.
The Business Roundtable Statement on the Purpose of a Corporation is below and the full list of signatories is available here.
Statement on the Purpose of a Corporation
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
· Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
· Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
· Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
· Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
· Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.
8/19/19 Response to Business Roundtable Statement Issued by Council of Institutional Investors:
Council of Institutional Investors Responds to Business Roundtable Statement on Corporate Purpose
Washington, D.C., August 19, 2019 —The Council of Institutional Investors (CII) today expressed concern on a new Business Roundtable (BRT) statement on the purpose of a corporation. The statement undercuts notions of managerial accountability to shareholders, in CII’s view. The Council has a productive relationship with BRT that has included discussion on corporate “stakeholder” obligations, but we respectfully disagree with the statement issued by the BRT earlier today. The BRT statement suggests corporate obligations to a variety of stakeholders, placing shareholders last, and referencing shareholders simply as providers of capital rather than as owners. CII believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners. Accountability to everyone means accountability to no one. BRT has articulated its new commitment to stakeholder governance (which actually resurrects an older policy view) while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group. Americans depend on strong companies not only as employees and communities, but also as owners, including through pension funds and other retirement holdings. CII supports putting capital to its best use for long-term performance, which includes addressing stakeholder contributions to that objective. It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value. CII has welcomed BRT’s earlier focus on long-term value for shareholders, including recent BRT steps to combat excessive focus on the short-term, notably by discouraging company provision of quarterly earnings guidance. We do believe it is a challenge for boards and executives to keep their focus on the longer-term. But clearly companies with strong leadership have shown an ability to do so, particularly where they provide shareholders with thorough disclosure and clear articulation of long-term strategic vision. Much of the discussion on “stakeholder” governance focuses on individual companies, and seems to downplay or ignore the role of markets. Shareholders have a very particular role in allocating (and re-allocating) equity capital. Public equity generally is highly liquid, and no doubt company managers often are frustrated by a sense that they are vulnerable to changes in company valuation that can be rapid, as investors reassess company prospects. While we appreciate that CEOs do not like to feel constrained and subject to market forces, nothing in the BRT statement will change this real-world dynamic of public equity markets. While it is important for boards and management to have and articulate long-term vision, and sustain focus on the long-term strategy where they have strong conviction, a fundamental strength of the U.S. economy has been and continues to be efficient allocation of equity capital. If “stakeholder governance” and “sustainability” become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.
Integrative Social Contracts Theory: Whether the business decision I make is ethically sound depends on whether my decision is compatible with the _________ ethical rules of the _______________ in which I am doing business, meaning those ethical rules or norms that a community develops within its broad moral ___________ that do not conflict with any _____________, a norm sufficiently ______________ that it serves as a guide for evaluating ___________ but less ____________ norms. __________________ are generally reflected in ___________________ religious, philosophical, and cultural beliefs.
(From Dunfee, T. and Donaldson, T. 2006 Social contract approaches to business ethics: bridging the “is-ought” gap in A Companion to Business Ethics, pp. 44-46 as well as other writings by Dunfee and Donaldson.)
