code of ethics

Corporations

Week 1 Workshop

MBA402 Governance, Ethics and Sustainability

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Welcome

Play Video

• Asked to recite a poem by a group of university students, boxing legend Muhammad Ali says:

• In groups discuss what he meant.

Small Group Discussion

Me …We

• In groups, think of at least two ways Adithya and her community could gain access to international trade markets.

Adithya sits on the shore of Colaba Island at sunset and watches another fleet of Portuguese merchant vessels, fully loaded with all the riches of her beloved Maharashtra, slowly begin its long voyage back across the Atlantic.

She wonders at the magnitude of the wealth leaving her home forever in those timber hulls and of the countless ways it could have been spent for the benefit of her entire community, rather than enriching a mere handful of foreign traders. Not that her people are poor; there are many that own valuable land, livestock and businesses. But the international trade markets have very costly barriers to entry and there is no individual in Adithya’s community that could afford to establish a rival enterprise and reap the vast rewards on offer.

Small Group Challenge Mumbai, 1618

Fraternity • Fraternity means friendship and mutual

support among a group of people sharing common interests.

• The word ‘corporation’ comes from the Latin word corpus which means ‘body’ or ‘body of people’.

• The first corporations were fraternities of people sharing or pooling their resources to achieve things together they could not achieve individually.

Earliest Corporations

• Prior to the 17th century, the earliest corporations were created in Europe as not-for-profit organisations to build institutions for the public good, such as universities and hospitals.

• These corporations were established by charter – an act granted by a monarch or passed by a parliament.

Earliest Governance

• These corporations had written bodies of fundamental principles detailing their duties and were overseen by the government.

• Operating beyond these constitutional limitations was forbidden and punishable by law.

Achievements of Corporations

What are some of the major contributions corporations have made to the betterment of society?

• Scientific discoveries • Technological progress • Medical developments • Economic growth

In groups, provide one example of each.

Small Group Discussion

We are determined that our nation, and the world as a whole, shall not be the plaything

of one small corner of the world.

• What does Indonesian President Sukarno mean when he says:

• In groups, figure out at least two strategies William could recommend to the King to reduce the size of the convict population.

The Americans win the War of Independence and refuse to accept any more British convicts. Before long the prisons are overcrowded with the city’s poor, many of them convicted for stealing food to survive. The prison barges recommended by Lord William Darcy, adviser to King George III, fill as quickly as the prisons and soon choke the Thames, stalling sea traffic and shutting down the docks.

His Majesty the King convenes an emergency meeting to resolve the matter. The Admiral of the Royal Fleet blames William for what he describes as a disgrace to the British Empire and calls for his immediate resignation. William, realising just how grim his prospects have become, folds his hands behind his back so nobody sees them shaking. He is out of friends, out of ideas, and out of time.

Small Group Challenge London, 1783

Imperialism • Imperialism is a policy of extending a

country’s power and influence. • Corporations were used by European

imperial powers to advance colonial expansion by maintaining draconian control of trade, resources and territory in Asia, Africa and the Americas.

• Three examples: the East India Company, the Dutch East India Company and the South Sea Company.

East India Company • The East India Company, regarded as

history’s first corporate raider, received a Royal Charter from Queen Elizabeth I in 1600 to pursue trade in India.

• The company plundered India. Powis Castle, a private house in Wales, stores more Mughal artefacts than on display at any one place in India – including the National Museum in Delhi.

Dutch East India Company

• The Dutch East India Company was established by the Dutch government in 1602 and granted a 21-year monopoly on Dutch spice trade with Asia.

• The company had quasi-governmental powers including the ability to wage war, imprison and execute convicts, and establish colonies.

Advantages of Imperialism

• Were there any advantages to foreign countries from imperialism? o Introduction of new technology? o Improved sanitation and health

care? o Establishment of infrastructure? o Better means of transportation?

South Sea Company

• The South Sea Company was incorporated in Britain in 1711 to reduce the size of public debts and was given exclusive rights to trade with Spain’s South American colonies, mainly in slaves.

Who am I?

Play Video

Small Group Discussion

We know what we are, but know not what we may be.

• What does English playwright William Shakespeare mean when he says:

• In groups, advise George if he should take legal action against Salomon to recover his business loan.

George Farwell has a problem… Salomon & Co Ltd, a small boot-making enterprise to which George gave

a substantial business loan, has failed and gone into liquidation. George was expecting to recover at least some of the loan principal after the business assets were sold and the proceeds distributed among the creditors. But the sole director and majority shareholder of the failed company, Aron Salomon, is claiming a security interest over the liquidated funds.

George’s lawyer explains that Aron Salomon used his position as director to arrange the security interest in favour of himself. But as Aron Salomon is the sole director and majority shareholder of Salomon & Co Ltd, he basically is the company and he shouldn’t be able to issue a security interest to himself over business assets he effectively owns.

George seeks your advice.

Small Group Challenge London, 1896

Who is the Corporation?

Directors?

Shareholders?

Customers?

Employees? Suppliers?

Broader Community?

?

Separate Legal Entity

• The landmark case of Salomon v Salomon & Co Ltd upheld the doctrine of corporate personality.

• That is, a corporation is a legal person or entity separate from its owners (shareholders) and controllers (directors).

Capacity and Rights

• Corporations have the legal capacity to enter contracts and hold many of the same rights a natural person does.

• Corporations can: o buy, own, and sell property. o sue and be sued. o enter contracts on their own behalf.

Limited Liability

• Shareholders have limited liability. • This means the debts and obligations of

the company do not belong to the shareholders; they belong only to the corporation itself.

• Shareholders, directors, employees cannot be pursued by creditors if the corporation becomes insolvent.

• What does Scottish economist Adam Smith mean when he says:

Small Group Discussion

When regulation is in support of the workman, it is always just and equitable;

but it is sometimes otherwise when in favour of the masters.

• In groups, advise Gilford Motors if it should take legal action against EB Horne for breaching the restraint of trade clause.

Gilford Motor Co Ltd has a problem… EB Horne, their former CEO, has set up his own business and has even

approached Gilford Motor’s clients. Luckily, when Horne joined Gilford Motors he signed an employment contract containing a restraint of trade clause which prohibited him from approaching the company’s clients after leaving the company.

Gilford Motors explains this in a cease and desist letter to Horne threatening legal action if he does not comply. But Horne responds saying that he hasn’t breached the restraint of trade clause because he’s operating the business through a company, JM Horne & Co Ltd. His company, he claims, is a separate legal person not subject to the restraint of trade clause and therefore free to approach Gilford Motor’s clients.

Gilford Motors seek your advice.

Small Group Challenge London, 1933

Regulation of Companies • Corporations law controls or regulates the

ways corporations can be used and operated by their directors to protect third parties, shareholders and the corporation.

• Corporations law imposes duties on directors and confers rights upon third parties, shareholders and the corporation.

• Corporations law gives shareholders confidence to invest their money in corporations.

Restrictions on Use

• The courts will not permit a corporation to be used as an instrument of fraud.

• In such cases the court will treat the shareholders and corporation as one.

• This is also called piercing the corporate veil.

Directors’ Duties

Directors owe legal duties to the corporations they control: • Duty to exercise powers with care, skill,

and diligence • Duty to exercise powers in good faith in

the best interests of the company and for a proper purpose

Directors’ Duties

• Duty not to improperly use position to gain a personal advantage for, or to cause detriment to, the company

• Duty not to improperly use information obtained for personal advantage or to cause detriment to the company

• Duty to prevent the company trading whilst insolvent

Evolution of Corporations

Fraternity Imperialism Identity Regulation

Playtime

Week 1 Workshop

MBA402 Governance, Ethics and Sustainability

Denise Summers, your executive assistant, bursts through the door of your new office in a state of panic.

“Sorry boss. I know it’s your first day on the job but we have a serious problem out here.”

“What is it?” you ask. “The AFP have arrested all of the old Meridian board members. They’ve all

been charged with breaching their directors’ duties. It’s all over the news.” You curse under your breath. You knew when Meridian’s new board asked

you to be their CEO there’d be tough days ahead. But you didn’t think it would start on the first damn day.

You take a deep breath. “The previous directors deserve to stand trial for what they did. They were supposed to act in Meridian Group’s best interests, not their own. That’s why our shareholders voted them off the board and replaced them with a new board of directors. And we knew ASIC and the AFP would catch up with the old directors soon enough, right?”

“We knew, sure,” Denise agrees, “but apparently the rest of Meridian’s employees didn’t. They’re out there now emptying their desks into cardboard boxes.”

You jump to your feet. “What! Why?” “The press are calling it Australia’s biggest corporate scandal, ever. The

employees are all in shock. They feel betrayed and ashamed and don’t want to work for a company that’s now infamous for its greed and corruption.”

You take a quick look outside your office. There’s a large group of employees still watching the story break on the flat screen but many are packing up their personal belongings. A few are already at the elevators waiting for a lift.

Without the employees Meridian doesn’t have a hope. And you are the only person that has any chance of convincing them to stay…

Group One In your group, prepare a short speech to the employees that will persuade them not to leave. Focus on the following:

• Explain the concept of fraternity and the origin of corporations

• Discuss how corporate structures give small investors access to large business ventures

• Give an example of something remarkable people were able to achieve by using a corporation

Group Two In your group, prepare a short speech to the employees that will persuade them not to leave. Focus on the following:

• Explain that just as corporations can used for good they can also be used for bad

• Discuss how corporations can become powerful and how this power can be abused

• Give an example from history of a corporation that was used by one group of people to take advantage of another

Group Three In your group, prepare a short speech to the employees that will persuade them not to leave. Focus on the following:

• Explain the concept of separate legal entity • Discuss the stakeholders that make up a corporate

structure • Explain why the company itself is a victim of the

previous board’s behaviour

Group Four In your group, prepare a short speech to the employees that will persuade them not to leave. Focus on the following:

• Explain how corporations law regulates corporate activity

• Discuss the previous board’s actions and why they were against the law

• Explain how corporations law gives shareholders confidence to invest their money in corporations

Group One Group Two

Group Three Group Four

• Deliver your speech to the Meridian employees and convince them to stay.

‘Ding.’ The lift doors open and the first of the departing employees cram themselves in.

“Hey! Wait a minute!” you call after them as you stride over to the group still watching the flat screen and switch it off. “Please, I can appreciate just how hurt and angry you all must feel about this but please hear me out.”

The ones still at their desks don’t stop packing and the ones at the lift continue to squeeze inside.

“I get that you don’t know me and have no reason to trust me. But if you give me just five more minutes of your time and after hearing me out you still want to leave then I’ll book a fleet of taxis and pay for your trip home myself.”

Silence. Then the lift slowly empties and everybody comes to crowd around you. The pain and confusion in their eyes breaks your heart.

You take a deep breath and steady yourself to speak…

Your speech is over. No one moves. Finally, Denise speaks up. “You may not know our new CEO but I’ve been

an employee here at Meridian for over nine years now and you all know me. And I’ve worked for enough CEO’s in my time to know the real thing when I see it.”

She turns and gives you a smile. “And our new CEO here is the real thing.” The crowd murmurs. Denise continues. “This morning is just the beginning. There will be more

days like this to come. But with the right leadership we can together reclaim what’s been taken and make our company great again.”

A handful of employees nod. “Who’s with us?”