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Corporate Social Responsibility

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					                           Module II – Corporations and Policy



                             Chapter 4
                   Corporate Social Responsibility

                 • Who does corporation serve?
                 • Classic answer: Dodge v. Ford Motor
                          – Meaning of case
                          – Other constituency statutes
                 • Modern answer: corporate charity
                          – Corporate law
                          – Who should decide?
                 • Role of directors and lawyers
                          – Choices in takeover
                          – Choices in offshore operations

Corporations:                                Chapter 4               Slide 1
A Contemporary Approach            Corporate Social Responsibility     of 37
              Purpose of corporation


                          • Private property
                          • Social institution



Corporations:                          Chapter 4               Slide 2
A Contemporary Approach      Corporate Social Responsibility     of 37
                     Story of Ford Motor Co.

    SALES (cars)              PROFITS
1910       18,664             $4,521,509
1911       34,466             $6,275,031
1912       68,544             $13,057,312
1913       168,304            $25,046,767
1914       248,307            $30,338,454                        Ford Profits (1910-1916)



1915       264,351            $24,641,423
1916       472,350            $59,994,918
        (60% annual growth)   (45% annual growth)




Corporations:                            Chapter 4                                          Slide 3
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                          Henry Ford’s plans

• Product pricing
• Semi-eleemosynary
• Vertical integration




                                                                 Is he nuts?
                                                          Would you have invested?

Corporations:                           Chapter 4                                Slide 4
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                          Ford’s vision
“My ambition is to employ still
more men, to spread the benefits
of this industrial system to the
greatest possible number, to help
them build up their lives and their
homes. To do this we are putting
the greatest share of the profits
back in the business.”




Corporations:                        Chapter 4               Slide 5
A Contemporary Approach    Corporate Social Responsibility     of 37
                          Ford’s financing plan

Regular dividends.
     – Since 1908 $1.2 million
       annually
     – 60% return on investors'
       original $2 million investment

Special dividends.
     –   1911             $1,000,000
     –   1912             $4,000,000
     –   1913             $10,000,000
     –   1914             $11,000,000
     –   1915             $15,000,000



Corporations:                               Chapter 4               Slide 6
A Contemporary Approach           Corporate Social Responsibility     of 37
   Your advice …
         (as Ford Motor’s lawyer)




Corporations:                         Chapter 4               Slide 7
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            What did court decide …

                           Dividend policy
                          Vertical integration


                                                               Michigan Supreme Court

Corporations:                          Chapter 4                                  Slide 8
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Dividend policy                                  Vertical integration

                                                 "We are not, however, persuaded
“A business corporation is                         that we should interfere with the
   organized and carried on                        proposed expansion of the
   primarily for the profit of the                 business of the Ford Motor
   stockholders. The powers of the                 Company. ... The judges are not
   directors are to be employed for                business experts. It is
   that end. The discretion of                     recognized that plans must
   directors is to be exercised in the             often be made for a long future,
   choice of means to attain that                  for expected competition, for a
                                                   continuing as well as an
   end, and does not extend to a
                                                   immediately profitable
   change in the end itself, to the                venture. The experience of the
   reduction of profits, or to the                 Ford Motor Company is
   nondistribution of profits among                evidence of capable
   stockholders in order to devote                 management of its affairs.”
   them to other purposes."


  Corporations:                         Chapter 4                             Slide 9
  A Contemporary Approach     Corporate Social Responsibility                   of 37
                          Meaning of
                      Dodge v. Ford Motor?




                                                             anagnorisis (an-ag-NOR-uh-sis) noun
                                         The moment of recognition or discovery (in a play, etc.)



Corporations:                        Chapter 4                                        Slide 10
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              Property                                 Social institution
               (SWM)                                        (CSR)




Corporations:                       Chapter 4                           Slide 11
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                               Hypothetical
                          (non-shareholder constituents)




Corporations:                              Chapter 4               Slide 12
A Contemporary Approach          Corporate Social Responsibility      of 37
             Non-shareholder constituents

Assume Ford has new plans
• Drop workers' wages to $2 per
  day -- the market rate.
• Raise the price of Ford cars by
  20% -- the market will bear it.

Can employees and customers
  complain under modern "other
  constituencies" statutes?



Corporations:                       Chapter 4               Slide 13
A Contemporary Approach   Corporate Social Responsibility      of 37
             Pennsylvania Business Corporation Law
                          § 1715. Exercise of powers generally


(a) General rule.--In discharging the duties of their respective
   positions, the board of directors ... may in considering the best
   interests of the corporation, consider to the extent they deem
   appropriate:
    (1) The effects of any action upon any or all groups affected by
       such action, including shareholders, employees, suppliers,
       customers and creditors of the corporation, and upon
       communities in which offices or other establishments of the
       corporation are located.
    (2) The short-term and long-term interests of the corporation,
       including benefits that may accrue to the corporation from its
       long-term plans and the possibility that these interests may be
       best served by the continued independence of the corporation.
    (3) The resources, intent and conduct (past, stated and potential) of
       any person seeking to acquire control of the corporation.
    (4) All other pertinent factors.

Corporations:                               Chapter 4               Slide 14
A Contemporary Approach           Corporate Social Responsibility      of 37
              ALI Principles of Corporate Governance
     § 2.01 The Objective and Conduct of the Corporation

     (a) Subject to the provisions of Subsection (b), a corporation
        should have as its objective the conduct of business
        activities with a view to enhancing corporate profit and
        shareholder gain.

     (b) Even if corporate profit and shareholder gain are not
        thereby enhanced, the corporation, in the conduct of its
        business:
           (1) Is obliged, to the same extent as a natural person, to act
              within the boundaries set by law;
           (2) May take into account ethical considerations that are
              reasonably regarded as appropriate to the responsible conduct
              of business; and
           (3) May devote a reasonable amount of resources to public
              welfare, humanitarian, educational, and philanthropic
              purposes.


Corporations:                           Chapter 4                         Slide 15
A Contemporary Approach       Corporate Social Responsibility                of 37
                          Corporate charity

                          #1 Legality
                 #2 Propriety - fiduciary duties
                     #3 Shareholder role?



Corporations:                           Chapter 4               Slide 16
A Contemporary Approach       Corporate Social Responsibility      of 37
                          #1 legality




Corporations:                       Chapter 4               Slide 17
A Contemporary Approach   Corporate Social Responsibility      of 37
                          MBCA § 3.02 GENERAL POWERS
Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its
    corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its
    business and affairs, including without limitation power:
(1) to sue and be sued, complain and defend in its corporate name;
(2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or
    in any other manner reproducing it;
(3) to make and amend bylaws, not inconsistent with its articles of incorporation or with the laws of this state, for
    managing the business and regulating the affairs of the corporation;
(4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or
    personal property, or any legal or equitable interest in property, wherever located;
(5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;
(6) to purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or
    otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity;
(7) to make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations
    (which may be convertible into or include the option to purchase other securities of the corporation), and secure any
    of its obligations by mortgage or pledge of any of its property, franchises, or income;
(8) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for
    repayment;
(9) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
(10) to conduct its business, locate offices, and exercise the powers granted by this Act within or without this state;
(11) to elect directors and appoint officers, employees, and agents of the corporation, define their duties, fix their
    compensation, and lend them money and credit;
(12) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option
    plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents;
(13) to make donations for the public welfare or for charitable, scientific, or educational
  purposes;
(14) to transact any lawful business that will aid governmental policy;
(15) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and
   affairs of the corporation.


Corporations:                                            Chapter 4                                                     Slide 18
A Contemporary Approach                        Corporate Social Responsibility                                            of 37
                     Internal Revenue Code
§ 170. Charitable contributions and gifts

(a) Allowance of deduction.
  (1) General rule. There shall be allowed
  as a deduction any charitable contribution
  payment of which is made within the
  taxable year. ***

(b) Percentage limitations. ***
     (2) Corporations. In the case of a
  corporation--
       (A) In general. The total deductions
  under subsection (a) for any taxable year
  … shall not exceed 10 percent of the
  taxpayer's taxable income.


Corporations:                          Chapter 4               Slide 19
A Contemporary Approach      Corporate Social Responsibility      of 37
                          Isn’t giving away money
                             contrary to SWM?




Corporations:                            Chapter 4               Slide 20
A Contemporary Approach        Corporate Social Responsibility      of 37
       Theodora Holding Corp. v. Henderson
                                     (Del. Ch. 1969)


      Theodora
  (Mrs. Henderson)



      Theodora                       Mr. Henderson
     Holding Corp.                                                   Boys Camp --
                                                                   Alexander Dawson
                                                                      Foundation
                                                       $$
                             Board

                           Alexander
                          Dawson, Inc.




Corporations:                              Chapter 4                           Slide 21
A Contemporary Approach          Corporate Social Responsibility                  of 37
The test to be applied ... on the validity of a
   [corporate] gift … is that of reasonableness, [for
   which the IRC] furnishes a useful guide.
Contemporary courts recognize that unless
  corporations carry an increasing share of the
  burden of supporting charitable and educational
  causes that the business advantages now
  reposed in corporations by law may well prove
  to be unacceptable to … an aroused public.
The contribution … "cost" … some fifteen cents
   per dollar of contribution, taking into                        William Marvel (1954-1982)
   consideration the federal tax provisions …
… rehabilitation and education of deprived but
   deserving young people is peculiarly
   appropriate in an age when a large segment of
   youth is alienated even from parents who are
   not entirely satisfied with our present social and
   economic system.




  Corporations:                           Chapter 4                                  Slide 22
  A Contemporary Approach       Corporate Social Responsibility                         of 37
                           #2 propriety
                          (fiduciary duties)




                                                               Pet charities?
                                                               (personal conflicts)



Corporations:                          Chapter 4                              Slide 23
A Contemporary Approach      Corporate Social Responsibility                     of 37
                                                           Kahn v. Sullivan
               Shareholders
                                                             (Del. 1991)




                                               $$
                   Board

                                                                Armand Hammer
              Occidental                                           Museum
              Petroleum

Corporations:                           Chapter 4                               Slide 24
A Contemporary Approach       Corporate Social Responsibility                      of 37
Delaware Supreme Court (quoting
  Vice Chancellor):

     If the Court was a stockholder of
     Occidental it might vote for new
     directors, if it was on the Board it
     might vote for new management
     and if it was a member of the
     Special Committee it might vote
     against the Museum project.

     … gift to the Museum was within
     the range of reasonableness
     [Theodora Holdings]

     … Occidental received an                                  Justice Randy Holland
     economic benefit in the form of
     good will from the charitable
     donation …


Corporations:                          Chapter 4                                       Slide 25
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               #3 – shareholder role?




Corporations:                       Chapter 4               Slide 26
A Contemporary Approach   Corporate Social Responsibility      of 37
                          Shareholders?

Would you put money in bank if your
  banker could decide to give up to
  10% of your interest to charities of
  his choice?

Why do shareholders tolerate that
  1.8% of pretax corporate profits go
  to charities chosen by managers?
                                                             Prof. Victor
Shouldn’t shareholders be able to vote
                                                              Brudney
  on giving their money away?


                                                                            Prof. Allan
                                                                              Ferrell


Corporations:                        Chapter 4                                   Slide 27
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          Role of corporate lawyers
                  in CSR …




Corporations:                       Chapter 4               Slide 28
A Contemporary Approach   Corporate Social Responsibility      of 37
                          What is your role?
                           (who do you want to be?)

   Morals of                     Duty of                            Lawyer
  marketplace                 independence                     interdependence




   Justice Potter              Chancellor Wm.                    Prof. Richard
      Stewart                      Allen                            Painter

Corporations:                          Chapter 4                            Slide 29
A Contemporary Approach      Corporate Social Responsibility                   of 37
            ABA Model Rules of Professional Conduct

Rule 2.1 Advisor

In representing a client, a lawyer shall exercise independent
    professional judgment and render candid advice. In rendering
    advice, a lawyer may refer not only to law but to other
    considerations such as moral, economic, social and political factors,
    that may be relevant to the client’s situation.




Corporations:                        Chapter 4                      Slide 30
A Contemporary Approach    Corporate Social Responsibility             of 37
               #1 Advise board in takeover
                          (hypothetically speaking)




Corporations:                            Chapter 4               Slide 31
A Contemporary Approach        Corporate Social Responsibility      of 37
                               # 1 - James Trains

You represent James Trains as outside counsel.

JT is a CSR company that makes kids’ toys. But
    the board’s decided the company has to sell to
    a bigger firm to stay viable.

All American Toys, another CSR firm, is interested
    in buying and promises to keep JT’s plants
    and most employees - its bid is 35% over
    market.

Two other bids come from (1) TOTW, a non-CSR
   firm that uses child labor - but its bid is 40%
   over market, and (2) Piggy Banks, which
   proposes a leveraged buyout that will lead to
   belt-tightening - its bid is the same as TOTW

You read Delaware case law to require that the
   board take the highest bid.

                          Your advice to the board?.


Corporations:                               Chapter 4               Slide 32
A Contemporary Approach           Corporate Social Responsibility      of 37
      # 2 Advise board on legal arbitrage
                          (hypothetically speaking)




Corporations:                            Chapter 4               Slide 33
A Contemporary Approach        Corporate Social Responsibility      of 37
                               # 2 - Exogen

You represent Exogen as outside counsel.

The company has a “situation.” OSHA is thinking of
   banning one of the chemicals used in the
   company’s manufacturing process – Durasol.

The company, however, is about to move its
   manufacturing to Indonesia. The world is flat.

The company just needs to buy some time. The GC
   has proposed a nifty legal campaign – hearings,
   appeals, and even a trump card that can be
   played at the end (an OSHA official’s daughter
   works for an Exogen competitor!) At least three
   years in dilatory tactics.

                           Your advice to the board?.



Corporations:                          Chapter 4               Slide 34
A Contemporary Approach      Corporate Social Responsibility      of 37
Lawyering style
• Morals of marketplace 7
• Independence 1
• Interdependence 4

Recommendations to board
• Use of Durosal
      –   Investigate effects further 2
      –   Consider alternative 4                                         # 2 – Exogen
      –   Move to Indonesia fast 2                                    Student responses
      –   Stop using chemical 1
•    OSHA proceeding
      –   Do not actively delay 3
      –   Delay OK 7
      –   Do not delay using daughter 2
•    Potential liability
      –   Discuss pros and cons 5
      –   Consider harm to US employees 2
      –   May hurt shareholder value 3
      –   May hurt company reputation 5




Corporations:                                       Chapter 4                        Slide 35
A Contemporary Approach                   Corporate Social Responsibility               of 37
                          The end




Corporations:                       Chapter 4               Slide 36
A Contemporary Approach   Corporate Social Responsibility      of 37

				
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