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Good Corporation, Bad Corporation

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Guillermo C. Jimenez Elizabeth Pulos SUNY Fashion Institute of Technology

Good Corporation, Bad Corporation: Corporate Social Responsibility in the Global Economy

Good Corporation, Bad Corporation

Corporate Social Responsibility in the Global

Economy

Guillermo C. Jimenez Elizabeth Pulos

Open SUNY Textbooks 2016

©2016 Guillermo Jimenez and Elizabeth Pulos ISBN: 978-1-942341-25-3

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This publication was made possible by a SUNY Innovative Instruction Technology Grant (IITG). IITG is a competitive grants program open to SUNY faculty and support staff across all disciplines. IITG

encourages development of innovations that meet the Power of SUNY’s transformative vision.

Published by Open SUNY Textbooks, Milne Library (IITG PI) State University of New York at Geneseo,

Geneseo, NY 14454

About the Textbook This textbook provides an innovative, internationally-oriented approach to the teaching

of corporate social responsibility (CSR) and business ethics. Drawing on case studies in- volving companies and countries around the world, the textbook explores the social, ethical and business dynamics underlying CSR in areas such as: global warming, genetically-mod- ified organisms (GMO) in food production, free trade and fair trade, anti-sweatshop and living-wage movements, organic foods and textiles, ethical marketing practices and codes, corporate speech and lobbying, and social enterprise. The book is designed to encourage students and instructors to challenge their own assumptions and prejudices by stimulating a class debate based on each case study.

About the Authors Guillermo C. Jimenez, J.D. is a tenured professor in the department of International

Trade and Marketing at the Fashion Institute of Technology (S.U.N.Y.) in New York City. He also holds adjunct teaching appointments at NYU Stern Graduate School of Business, Brooklyn Law School, Iona College (New York) and at the International School of Man- agement in Paris, France. Prof. Jimenez teaches courses on international law, international management, multicultural management, and international corporate citizenship. He is the author of four previous books, including: the ICC Guide to Export-Import, 4th Edition (ICC Publishing, 2012), the first book on the new legal discipline of fashion law, Fashion Law: A Guide for Designers, Fashion Executives and Attorneys (Fairchild Publishing), and a multi-disciplinary review of political psychology, Red Genes Blue Genes: Exposing Political Ir- rationality (Autonomedia, 2009). Prof. Jimenez received his B.A. from Harvard and his J.D. from the University of California at Berkeley. As an international policy and legal expert, he has lectured in over 35 countries and collaborated with such intergovernmental organiza- tions as the United Nations, World Trade Organization and European Commission.

Elizabeth Pulos is Senior Manager of Compliance Administration at Worldwide Responsible Accredited Production (WRAP), a nonprofit dedicated to promoting ethical manufacturing around the world through certification and education. She has a BS in International Trade and Marketing from the Fashion Institute of Technology, where she was president of the CSR Club and recipient of the World Trade Week, New Times Group and PVH scholarships, as well as the SUNY Chancellor’s Award for Student Excellence. Prior to FIT, Elizabeth studied Music Performance at Mount Royal Conservatory and Environmental Science at the University of Calgary. A classically trained violist, she has performed in New York, Canada, Europe, the UK and Australia.

Reviewer’s Notes Guillermo Jimenez’s Good Corporation, Bad Corporation is a fair-minded and thoroughly

readable introduction to the concept of Corporate Social Responsibility. It is intended for students in business management and economics courses, but I think it is accessible to any college student in any discipline with an interest in the subject.

Chapter by chapter, students are encouraged not merely to master the information but to engage with it, to think critically about the real-world complexities of business ethics and to grasp competing rationales on both sides of tangled moral dilemmas. Rather than deal with abstractions, Jimenez walks the reader through the ways in which questions of CSR have actually played themselves out. There is no preaching or tendentiousness here. There is only respect for each student’s capacity to form intelligent opinions that are grounded in reason rather than in emotion.

Reviewer: Professor Mark Goldblatt, Chair, Department of Educational Skills, Fashion Institute of Technology (SUNY)

About Open SUNY Textbooks Open SUNY Textbooks is an open access textbook publishing initiative established

by State University of New York libraries and supported by SUNY Innovative Instruc- tion Technology Grants. This pilot initiative publishes high-quality, cost-effective course resources by engaging faculty as authors and peer-reviewers, and libraries as publishing service and infrastructure.

The pilot launched in 2012, providing an editorial framework and service to authors, students and faculty, and establishing a community of practice among libraries.

Participating libraries in the 2012-2013 pilot include SUNY Geneseo, College at Brockport, College of Environmental Science and Forestry, SUNY Fredonia, Upstate Medical University, and University at Buffalo, with support from other SUNY libraries and SUNY Press. The 2013-2014 pilot will add more titles in 2015-2016.

Contents Chapter 1

Corporations and their Social Responsibility 1

Chapter 2

Debating CSR: Methods and Strategies 20

Chapter 3

Climate Change 39

Chapter 4

Genetically Modified Organisms (GMOs) 53

Chapter 5

Social Entrepreneurship 68

Chapter 6

Marketing Ethics: Selling Controversial Products 84

Chapter 7

Organic Food: Health Benefit or Marketing Ploy? 97

Chapter 8

Fair Trade 109

Chapter 9

CSR and Sweatshops 123

Chapter 10

Corruption in International Business 133

Chapter 11

Corporations and Politics: After Citizens United 147

Chapter 12

Animal Rights and CSR 163

Appendix A

Nuclear Energy Is Our Best Alternative for Clean Affordable Energy by Emily Campchero 176

Appendix B

Friend, Foe, or Frock: Animal Rights in Fashion by Briana N. Laemel 195

Appendix C

Monsanto Company and Its Effect on Farmers by Akiko Kitamura 206

Appendix D

To What Extent Are Small-Scale Coffee Producers in Latin America the Primary Beneficiaries of Fair Trade? by Larissa Zemke 216

Corporations and their Social Responsibility|1

Chapter 1

Corporations and their Social Responsibility

Understanding Corporations and CSR The subject of this book is corporate social responsibility (CSR), a broad term that refers

generally to the ethical role of the corporation in society. Before we define CSR more precisely and before we explore in depth a number of case studies that illustrate aspects of the ethical role of corporations, we first need to understand exactly what corporations are, why they exist, and why they have become so powerful.

Today, the global role of corporations rivals that of national or local governments. In 2000, it was reported that, of the 100 largest economic organizations in the world, 51 were corporations and 49 were countries.1 General Motors, Walmart, Exxon, and Daimler Chrysler all ranked higher than the nations of Poland, Norway, Finland and Thailand (in terms of economic size, comparing corporate revenues with national gross domestic product, or GDP). This trend has continued, and for the past decade, 40 to 50 of the world’s 100 largest economic organizations have been corporations, with the rest being national economies. In 2012, Walmart was the twenty-fifth largest economic organization in the world, putting it ahead of 157 countries.2

For corporate employees, as for citizens living in communities dominated by large corporations, the corporation is arguably the most important form of social organization. For people such as corporate executives and shareholders, whose lives depend directly on corporations, it is not surprising that company politics often are considered more relevant than national or local politics. Corporations are also a major part of the daily lives of the world’s citizens and consumers. For devoted fans of iconic brands like Nike, Apple, Mer- cedes, or Louis Vuitton, the corporation can occupy a psychological niche very much like that of a member of the family. Indeed, if many teenagers today were forced to choose between an iPhone and a memorable night out celebrating their parents’ anniversary, the parents would likely celebrate alone. Similarly, those parents might also be loath to part with their cherished products. Dad would not easily say goodbye to his Chevrolet Corvette or Bose stereo, and Mom might not be easily persuaded to part with her Yamaha piano or Rossignol skis.

At the opposite extreme, for citizens who have been harmed physically or financially by corporations—like the Louisiana or Alaska residents whose beaches were fouled by

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massive oil spills, or the thousands of small investors who found their life savings wiped out by the Ponzi schemes of Bernie Madoff ’s investment company—the corporation can seem as dangerous as an invading army, or as destructive as an earthquake.

Despite their vast social role, corporations remain poorly understood by the world’s citizens. While school children everywhere are expected to study the structure and his- tory of their nation’s government, they are not similarly taught to appreciate the functions, motivations, and inner workings of corporations. Let us begin with a brief review of the nature of corporations.

BP oil rig explosion, photo by United States Coast Guard (2010, public domain). Figure 1.1 The 2010 explosion of a British Petroleum (BP) oil rig off the coast of Louisiana, the

cause of the worst environmental disaster in U.S. history.

Why Do Corporations Exist? There were no corporations in ancient Egypt, Greece, or Rome; or in imperial China

or Japan; or among the precolonial kingdoms of the Zulu or Ashanti. The Aztecs and Incas had no corporations, nor did the Sioux, Cherokee, or Navajo. It is true that in some classical and traditional societies there were certain forms of communal and religious organizations that anticipated the organizational capacities of corporations, but strictly speaking, they were not corporations.

Corporations are a relatively modern social innovation, with the first great corporations dating from about 1600. Since then, the growth of corporations has been phenomenal. What explains it? Why has the corporate structure been so successful, profitable, and pow- erful? Here are a few of the distinguishing characteristics of corporations.

Corporations are Creatures of Law The first point to make about corporations is that they are not informal organizations

or assemblies. In order to exist at all, corporations must be authorized by state or national laws. In their daily operations, corporations are regulated by a specific set of laws. Every country has laws that stipulate how corporations can be created; how they must be man- aged; how they are taxed; how their ownership can be bought, sold, or transferred; and how they must treat their employees. Consequently, most large corporations have large

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legal and government affairs departments. Since the laws and rules that may constrain corporations are written and enforced by the government, most corporations consider it of vital importance to seek influence over governmental regulators and lawmakers. In most countries, the very largest corporations have privileged access to top decision makers. The extent and reach of corporate influence over governments is one of the most controversial aspects of corporate existence.

Corporations Raise Capital for Major Undertakings The first great benefit of corporations is that they provide an organized vehicle for

pooling cash and capital from a large number of investors so that they can undertake major enterprises. Thus, one great stimulus to the growth of corporations was the rapid growth of international trade between 1400 and 1700 CE. In that era, sending a large vessel across the oceans was a major financial and logistical undertaking, which was also extremely risky; ships were often lost in storms. These early commercial ventures required such large capital investments that, at first, funding them was only within the reach of royalty. American schoolchildren are taught that the legendary explorer Christopher Columbus needed the royal patronage of Queen Isabella of Spain to support the voyages that led to the “dis- covery” of the New World. However, as new ocean trading routes were established and the vast potential for profits from trading spices became known, the first modern corporations were formed: the English East India Company, chartered in 1600, and its archrival, the Dutch East India Company, chartered in 1602. These companies are considered the world’s first multinational corporations, and they possessed most of the hallmarks of corporate structure that we see today.

Corporations and Other Business Structures Not all businesses or companies are public corporations. For example, in the US, it is

legal to operate a business in your own name (this is called a sole proprietorship) or with partners (a partnership). Corporations also come in a bewildering array of forms. Thus, in the US, we have C corporations, S corporations, benefit corporations (also B corporations), and limited liability companies (LLCs). In the UK, the term company is preferred to corporation, and we will notice that the names of most large UK companies followed by the designation plc or PLC (public limited company), as in Rolls-Royce plc, while smaller companies often have the designation Ltd (private limited company). In France, large companies are usually designated SA (société anonyme), while smaller ones may be known as SARL (société à re- sponsabilité limité). In Germany, large companies are designated AG (Aktiengesellschaft), while smaller ones are known as GmbH (Gesellschaft mit beschränkter Haftung). In Japan, the corresponding terms are KK (kabushiki kaisha) and YK (yūgen kaisha).

All of these terms define two basic aspects of corporations: 1) their limited liability (which applies to all corporations), and 2) their status as a public or private company. Public companies are allowed to sell their shares on public stock markets and tend to be the larger type of company.

The Importance of Limited Liability Why aren’t all businesses sole proprietorships or partnerships, instead of corporations?

The answer is found in the concept of liability, which refers to the risk of loss for debts incurred by the business, or for damages caused by the business.

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If you start a business as a sole proprietor or via a partnership, you (and/or your part- ners) are personally liable for any debts or damage that can be attributed to the particular business. Let us say that you have $1 million in assets and your good friend has $2 million in assets. Together, you agree to invest $250,000 each in a pizza delivery business (the business will start with $500,000 worth of capital). Unfortunately, in the first month of operation, one of your drivers negligently causes a car accident and severely injures a family driving in another car. The family sues you for their injuries and they obtain a court judg- ment ordering you to pay $3 million in compensation. Even though you had intended to invest only $250,000 in the business, now your entire fortune and that of your friend are likely to be wiped out in satisfying that court judgment. The same sort of result could arise if your business ran up $3 million in debt that it was unable to pay back. Thus, the founder of a sole proprietorship exposes his/her entire personal assets to the risk that the assets will be seized to satisfy liabilities incurred by the business.

The result can be quite different for a corporation. One of the principal advantages of a corporation, from an investor’s point of view, is that the corporation provides a legal a “shield” from liability. A shareholder of a corporation only risks the stock that the share- holder owns. The shareholder’s personal assets are not in jeopardy. When a corporation suffers an adverse legal judgment and does not have sufficient funds to satisfy the judgment, the corporation simply goes bankrupt. The party or parties who have been injured cannot sue the owners—the shareholders—of the corporation because the corporation acts as a shield from liability.

Why does society allow the shareholders of a corporation to retreat behind the cor- porate shield, while we do not allow the same for owners of a so-called mom-and-pop business in the form of a sole proprietorship? The main purpose of the liability-shield is to encourage investment in corporations. People are more willing to invest in a corporation (by acquiring stock) because they need not fear that their personal assets can be seized to satisfy the business’s debts or liabilities. The underlying implication is that corporations and corporate investment provide important benefits for society, which explains why govern- ments have been willing to adopt laws that protect and encourage corporate ownership. As many U.S. states learned in the nineteenth century, it can make sound economic sense to attract large corporations because they often become major employers and taxpayers. Cor- porations may enhance the ability of the local economy to compete with foreign economies that are supported by the productivity of their own corporations.

In many instances the ability of corporations to retreat behind the corporate shield has been controversial. For example, several major airlines (notably American Airlines) have been accused of choosing to declare bankruptcy over finding a way to pay high wages to their pilots and cabin personnel.3 The airlines were attacked by labor unions as having used the bankruptcy as a tactic to avoid meeting the union’s demands for fair wages. Such corporations are able to benefit from an option provided by US bankruptcy law, known as Chapter 11 reorganization, which allows them to enter bankruptcy temporarily. The courts appoint a trustee to run the corporation, and the trustee is empowered to take any ac- tions necessary to reduce the corporation’s debts, including revoking labor agreements with employees. Such corporations can later “emerge” from bankruptcy with fewer employees or with employees earning lower salaries.

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Corporations Permit Wealth Creation and Speculation in Stocks

While all corporations possess limited liability, not all of them are permitted to raise money in the stock market or have their shares traded in stock markets. Here, we find the important distinction between public corporations, which may have their shares traded on stock markets, and private corporations, which may not have their shares traded on stock markets.

As a rule, large corporations and multinational corporations choose to do business as public corporations because big companies have such enormous capital needs that they may best raise funds by placing stock for sale in public stock markets. However, this is not always the case; there are some very large corporations that choose to remain private, which means that they raise money directly from investors rather than from making stock available on stock markets.

On the whole, ownership of a corporate interest in the form of stocks is more freely and easily transferable than ownership of an interest in a sole proprietorship or partnership. If you want to sell a mom-and-pop store, you generally have to sell the whole business; you cannot sell a small portion when you need to raise money.

If you are one of the members of a partnership and you want to sell your share, you will generally have to get prior approval from the other partners; needing to do so may discourage possible investors because they may not want to go to the trouble of seeking ap- proval from your partners. However, if you inherit a thousand shares of stock in Apple from your wealthy aunt (which, in 2013, would have had an approximate value of $420,000), and you find that you need extra money, you can sell one hundred shares (or about $42,000 worth). Such a transaction is easy because there are lots of investors eager to own Apple shares and you do not need anyone’s approval. This ease of transferability also encourages people to invest in stock instead of in other businesses, because it is so easy to sell corporate stock as needed.

When a corporation grows and/or becomes more profitable, the shareholders benefit financially in two ways. First, the corporation will often distribute a portion of its profits to the shareholders in the form of dividends, a certain annual payment per share of stock. Second, if a corporation is growing rapidly and is expected to be very profitable in the future, more investors will want to own its stock and the price of that stock will increase. Thus, ownership of stock is an investment vehicle that provides many advantages over other types of investments. For one thing, you can own stock without having to personally take part in the management of the company. In addition, you can sell all or part of your ownership when you need the funds. Finally, if the corporation is very successful, it will not only pay a steady revenue stream—through dividends—but your shares will become more valuable over time.

The advantages of stock ownership as an investment vehicle explains the growth of the world’s great stock exchanges, such as the New York Stock Exchange or the Hong Kong Stock Exchange. Stock exchanges are like enormous flea markets for stock, because you can either buy or sell stock there. Unlike the goods available in ordinary markets, though, the price of stocks fluctuates constantly, literally minute by minute. A stock that was worth $10 last year may now be worth as much as $1000 or as little as $0.10. Thus, stock markets are also somewhat like casinos or lotteries, because they allow investors to speculate on the future.

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Speculation has its pros and cons. The potential for wealth creation through stock ownership has spawned an important industry that employs hundreds of thousands of people and generates vast profits: financial services. Stock brokerages, investment banks, and trading houses have arisen to provide expert guidance and services to investors.

American colleges and universities have developed a highly collaborative and perhaps even symbiotic relationship with the financial services industry. For one thing, since there are many jobs and professional occupations in financial services, virtually all universities offer courses and majors in finance or financial economics, and many also have graduate business schools that prepare students for careers in the financial services industry.

Perhaps equally importantly, most colleges and universities depend on private and charitable donations to help defray the cost of running the institution and, consequently, to keep tuition rates and fees lower (although many students will find it hard to imagine how tuition could be any higher). When wealthy individuals and corporations make donations or charitable contributions to colleges and universities, they often do so by giving corpo- rate stock. Even when they make a cash donation, the university may find that it is most financially convenient to use that cash to acquire corporate stock. As a result, the largest universities have amassed vast holdings of corporate stock, among other investments. The financial resources of a university are often held in the form of a special trust known as an endowment. Universities prefer not to sell off parts of the endowment but rather seek to cover costs by using the interest and dividends generated by the endowment.

At times, the corporate holdings of universities have become quite controversial. For example, in the 1970s and 1980s, a growing student movement called on universities to divest (to sell all their stock) in any corporations that did business with the racist apartheid regime that controlled South Africa at that time. Many commentators believe that it was this pressure on corporations that led to the fall of the apartheid regime and the election of South Africa’s first black president, Nelson Mandela.

Corporations Can Have Perpetual Existence It is possible but rare for family-owned businesses to remain sole proprietorships for

several generations; more commonly, they eventually become corporations, or they are sold or transferred to a new business operator. Very often, a small business is sold when the founder dies, because the founder’s children or heirs either do not want to work in the family business or are not as gifted in that business as was the founder. Even in successful, family-owned businesses where a child or relative of the founder inherits the business, it still happens that after a generation or two, no further family members are qualified (or wish) to join the business, and the business must be sold.

However, corporations are structured from the outset to have a potentially perpetual existence, because corporations do business through their officers and executives rather than through their owners. Although it is possible for owners to have dual roles as shareholders and as executives, it is not necessary. One common scenario is for the founder of the corpo- ration to act as its chief executive officer (CEO) until such time as the corporation becomes so large and successful that the shareholders prefer to transfer management responsibility to an executive with specific professional experience in running a large corporation.

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Disadvantages of the Corporate Form

Separation of Ownership and Management Functions

One potential disadvantage of the corporate form (from the point of view of its founders) is that, as the corporation grows, the original founders may lose control and even be pushed out of the corporation by newcomers. This happened to Steve Jobs, the legendary cofounder of Apple, who was pushed out of his leadership role in 1985 by Apple’s board of directors, only to return in the mid-1990s and retake his role as CEO. More recently, in 2013, George Zimmer, the founder of the apparel retailer Men’s Wearhouse, was ter- minated as chairman of the board by his own board of directors. This situation can arise because, as a company grows, the founders may be tempted to part with some portion of their equity by selling stock to new investors. Corporations are ultimately controlled by the board of directors, who are voted into office by the shareholders. If a founder allows his or her share of corporate stock to drop beneath 50%, then the founder will no longer be able to elect a majority of the board of directors, and may become subject to termination as an officer by the board. The board of directors is thus a sort of committee that controls the fate of the corporation, and it does this principally by choosing a CEO and supervising the CEO’s performance.

Dual Taxation Although the tremendous growth in the number and size of corporations, and their

ever-increasing social role, is due in part to their advantages as an investment vehicle, there are some financial disadvantages worth mentioning. One of the most important is so-called dual taxation, which refers to the practice in most countries of taxing corporate profits twice: once when the corporation declares a certain amount of profit, and again when the corporation distributes dividends to shareholders. The complexity of corporate tax regula- tions is such that even small …