Research paper ( using the attached lecture notes ” structure of corporation”)
Identify and explain all the important parts of a large, publicly traded corporation’s governance structure. Then discuss how such a corporation is controlled internally – in theory, and in fact.
Identify and explain the main risks that large, publicly traded corporations pose
To their employees
To the economy at large
To the communities they have facilities in
To the environment
and explain how the corporate structure makes those risks larger than they would be if having the corporate form and the possibility of millions of investors were not an option.
Make sure that you footnote copiously, using Chicago style with full information footnotes at the bottom of the page. EACH fact gets its own footnote. There is no specific word limit, but being overly vague or general will not yield good results, and neither will being wordy. The way you ORGANIZE your paper WILL count for part of your grade, as will the quality of your research, and the sufficiency. Instructions for Chicago Style footnotes can be found in the Marist Online Library. Go to Research Tools>Reference Shelf>Citation Styles (blue tab)>Chicago/Turabian>Chicago Manual of Style Online.
Make sure your upload is a WORD document. Make sure it is ONE single Word document….do not create a bibliography as a separate document. Make the bibliography PART of your answer document.
Once you’ve researched and written it, leave it for a day, then come back and edit it. The way or ORGANIZE your paper WILL count for part of your grade, as usual, as will the quality of your research and the sufficiency of your footnotes.
Attachments:MBA 603 Structure of a Corporation – Lecture Notes
An overall objective of this course is to have you understand – to the extent that anyone understands – the structure and likely functioning of the total environment of business.
It’s a little like taking a human anatomy and physiology course — you are IN your body, and have been there for some time…..but you may not know a whole lot about how it works. And as high-performance athletes have found out, the more you know about the body’s structures…..how they’re put together, what they’re made of, what their functional strengths and limitations are, how they react to changes in diet, climate, and so on…….the better able they are to figure out ways to get the body to perform well in competitive situations.
That’s what we’re in. Competitive business situations.
But…….who is competing against whom, and what are the stakes?
When all cars, regardless of brand name, are made of parts produced and partially assembled in lots of different countries, can we say that the American automobile industry is competing against, say, the German automobile industry?
If we do say that, what do we mean?
Do we mean that the company that owns the wholly assembled cars when they are finished and ready to sell is the competing entity?
That is at least part of what we mean…..but who owns the company? Often, companies established and built up in one country are owned by people or corporations in another country. If Chrysler merges with Daimler-Benz, is the result a German corporation? In what sense might this be true?
Or if you establish a corporation, build it up, and then sell 30% of the stock to a Japanese multimillionaire, 25% to a Chilean multimillionaire, and 25% to an Italian multimillionaire, retaining 25% of the voting common stock for yourself, together with an employment contract for yourself which guarantees you $3,000,000 per year as CEO for the next ten years, and massive stock options for non-voting common stock convertible into 7% cumulative preferred stock on certain dates……..what sort of a corporation is that? If it’s incorporated in the United States, it will operate there under U.S. law, but much of the benefit of its operations, and ultimate control of the corporation, will be foreign. They can fire you (although they still have to pay you pursuant to your contract) and get somebody else; they can sell the corporation to a major multinational, thus “cashing in” their stock; or they can let you keep running it.
Is this “an American business”? A Japanese business, given a Japanese individual owns more shares than anyone else? Does this concept of a business belonging in any specific country even work anymore?
Can we assume that anything that helps that business grow and/or become more profitable is good for the American economy and the American public? And should that be our major concern? Should we limit our perspective to the economy of the country we live in? Should we perhaps, on the other hand, be asking a more local question: Is this business good for the communities in which it operates? (And then, of course, you have to define “community”.)
Or, as they say, Who Benefits?
Perhaps our way of asking questions needs to be changed. Perhaps we need to look at the MANY entities that have a vital stake in what corporations do, and then we need to ask:
WHO BENEFITS from a particular corporate structure or action, and — on the other hand –
WHO BEARS THE COSTS, MONETARY AND NON-MONETARY, of that structure or action? We also need to ask
HOW IS THAT CORPORATE STRUCTURE OR ENTITY CREATED AND REGULATED? Or, HOW IS CORPORATE ACTION CONTROLLED?
In the United States there are a number of different entities which can be used to conduct business – sole proprietorship, partnership, limited partnership, limited liability partnership, limited liability company, and corporation. In some states there is even a thing known as a limited liability limited partnership!
We will concentrate on the corporation in this course, because large multinational corporations are such a hugely powerful segment of the world’s economy today. We will review the structure of a typical U.S. corporation and identify many of the entities that have an interest in what any given corporation does. We will take a look at the various modes of control that operate on a “domestic” corporation. Then we will see how that structure has adapted to the transnational arena, and we will again inquire who the stakeholders are, and how the entity is controlled.
To telegraph the punch line: administrative law, and those “gummint regulations” you’ve heard people complain about, are only ONE piece of the overall control of the behavior of a corporation.
So before we talk specifically about administrative law, you need to have the bigger picture. What IS a corporation, and what ARE the various ways in which we, in our Rule-of-Law, Western society, control it?
It’s its Own Person…
A corporation is a Separate Legal Person. Tom is a man; Selma is a woman; IBM is a legal person…….a non-human, non-corporeal PERSON. It can buy things, sell things, own things, pay taxes, hire people, fire people, and so on. It has some Constitutional rights, but not quite all the Constitutional rights of a natural person.
Who decides what sort of a person a corporation is, and what its rights and duties are? In the United States and most western countries, at the present time, citizens do — through our statutes, our court decisions, our regulations; but also through custom, through public opinion, through cultural moral standards…..we’ll go into the control mechanisms in much more detail further on in the course. For now, let’s stick to basics.
Corporations exist in these United States and in most other western industrialized countries because STATUTES ALLOW THEM TO BE CREATED pursuant to very specific procedures. In the U.S., corporations are formed mostly under the authority of STATE statutes…..if you haven’t gotten written permission from a state government, you don’t have a corporation. Whether you’re a sole shareholder corporation running swimming pool concession stands, or IBM, you have a certificate or charter of incorporation that you received from the state government of the state in which the corporation was formed. In New York, you submit your proposed Certificate of Incorporation, which tells how the corporation will be structured and governed to the Secretary of State, and you receive a Filing Receipt if the certificate is acceptable to the state. Your Certificate of Incorporation remains on file with the Secretary of State.
In Canada, corporations can be created through the federal government (a federal charter) or through a provincial charter if you plan only to operate only within a given province. Sometimes corporations have both charters for a variety of reasons. To complicate matters, all provinces except Quebec use common law like the US, Britain and the rest of the Commonwealth, while Quebec uses civil law (based on the Napoleonic code) like countries of the Francophonie. But in general terms both systems are similar in their treatment of corporations.
In the US, all corporations exist solely because the inhabitants of the states in which they were formed allow them to exist. If New York decided that corporations led to more bad than good, the Legislature could get rid of all corporations — at least prospectively, and maybe even retroactively if carefully done — incorporated in New York, simply by repealing the Business Corporation Law.
So states say what you have to do to create a corporation, and they also say what corporations in that state may and may not do.
Corporations have three basic pieces: • the Board of Directors; • the employees, including management; • and the stockholders or shareholders.
The thinking behind state corporation statutes is that the shareholders will elect the Directors, and the Directors will hire and fire top management in accordance with the will of the shareholders. The Board of Directors is the body which is legally charged with overseeing the corporation – deciding what it does; setting policy for how it shall be done; making sure that the corporation has the very best executives it can get, and that those executives act in the best interests of the corporation…..which of course includes the shareholders.
In practice, it usually doesn’t work that way, at least in large corporations. In large corporations, especially those whose stock is traded on the stock exchanges, the president or chief executive officer controls the flow of information to the Board of Directors so that they will tend to see things the way the CEO sees them. This undermining of the checks and balances that were intended to exist in the Board of Directors-Management-Stockholders structure gets worse when the CEO is also the Chairman of the Board of Directors, because the Chairman of the Board sets the agenda for Directors’ meetings and actually controls the flow of the meetings. Of course, if management deliberately withholds or falsifies information it gives to the Board, those executives can be sued personally for any damage to the corporation that results….but members of the Board of Directors can be held personally liable to outsiders and to shareholders if the court finds that the directors didn’t try hard enough to get good information on which to make decisions. Here’s a question: can the Board of Directors, or a CEO/Chairman, be held personally liable to employees whose pensions have been decimated as a result of the company’s stock plummeting in value when it comes to light that Management has been cooking the books and the Board ought to have known? Can Enron employees recover the lost value of their pensions from Enron Directors if it is shown that they knew or should have known that Management was engaging in deceptive practices that ultimately led to the fall in the stock’s value? Exactly how hard a director has to push for more information in a given case depends on the director’s area of expertise; what the director knew or should have known; the history of the corporation; the track record of the CEO, and so on. The Enron, WorldCom, Tyco, and other debacles have begun to swing the pendulum in the direction of making directors MORE accountable for what the CEO does. And Sarbanes-Oxley, which grew out of those scandals, makes much more explicit many of the transparency and accountability obligations of CEOs, CFOs, and directors. Still, in practice, the CEO and his or her top team of managers control the corporation. But they must make sure that the course they chart for the corporation takes into account all the forces that operate on the corporation, or else the corporation can run into serious trouble. And what forces are those? Well, of course, there are the immediate market forces: what are the corporation’s competitors doing? Are they putting out a similar product at a much lower price? Have they evolved a substantially better version of the same product? Have the usual buyers of the product become tired of it? Have transportation costs gone up? Do competitors have a much better ad campaign running on Sunday night football? Has the national union to which the corporation’s production workers belong just signed a contract for a much higher hourly wage at the plant belonging to a competitor in the next state? Has the main supplier of a key part raised his or her price by 20% in the last two weeks? And then there are the many forces which do not arise directly out of the immediate financial environment created by one’s competitors, customers, suppliers, and employees. For example, what will be the effect (short-term, medium-term, and long-term) of the well-financed TV ad campaign against purchasing goods which have been manufactured using child and/or forced labor…….when three of your important components have been manufactured in China, and you have reason to believe that most, if not all, of the plants in question use both child and forced labor? In other words, what will the effect upon your business of your customers’ moral outrage at you, outrage aroused by persuasive publicity created by social activist groups? And don’t assume this publicity is always unfavorable – what will be the positive effect of a publicity campaign by an environmental group which highlights your adherence to a voluntary code of standards that your suppliers must meet with respect to labor conditions before you will buy from them?
The Tug of War
Therefore it should not come as a surprise that there is always quite a tug-of-war about who controls the actions of a corporation, and that there are many different avenues of a corporate control. Domestically, corporate management exerts the most direct control. A corporation, especially a large one, is a vertically hierarchical entity, with top management in command, to a greater or lesser extent. Within the corporation, however, employee groups may exert counterbalancing force, aided by the legal structure of the United States or whatever country they are operating in. For example, due to the existence of labor laws, unions can prevent corporate management from simply dictating what the wages of unionized workers will be – management has to bargain with the union about that and many other topics, and if no agreement is reached, the union can call a strike, which may cripple the corporation vis-à-vis its competitors and customers. More subtly, if the corporation is dependent on a particular class of employee that has special expertise in an area crucial to the corporation, management will not be able to dictate terms and conditions of employment to them, either, because if it tries to, those employees will simply leave. Silicon Valley companies have to treat their techies with tender loving care for this reason. In a book called Politics and Markets, Charles Lindblom identifies five major methods of social control: authority, exchange, persuasion, morality, and tradition (or custom). (These Five Forces will be invoked again in other weeks of this course. If you want to delve into them now, read the Lecture Notes for Week Five.) In the United States and much of the western world, authority is exercised primarily through secular legal structures and systems, both inside and outside the corporation. Inside the corporation, as we have discussed, corporate management – as authorized by law – calls most of the shots, but if a union exists (and it has to have been brought into existence by procedures which are carefully described in statutes, regulations, and cases) then the law provides that authority over certain things the corporation wishes to do must be shared with the union in specified ways. The balance in the management-labor split varies from country to country, in ways which reflect their history and culture, but which are now embedded in their legal systems. Corporations are affected by control from the outside exercised through statutes, regulations, and case law. But probably the most pervasive manifestation of outside authority over corporations is administrative regulation. In this US context this would be agencies such as the Environmental Protection Agency, the Federal Trade Commission, the Securities and Exchange Commission, the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, and so on. In the United States a corporation can be put pretty much out of business if it makes a habit of disobeying a lot of regulations, which means that if the American people want clean water, they have a reasonable shot at getting it, because the legal system can be made to work for them through administrative agency oversight of corporate pollution activity. Of course, the public has to put its money and its votes where its mouth is. If political overseers of administrative agencies are not voted out of office when they go “soft on pollution,” then there will be little or no enforcement of the laws. But there are forces other than authority that shape corporate behavior. Importantly, there are market forces — part of what is meant by “exchange”. If other firms innovate, and produce the CD, the market for vinyl records crumbles. If people are suddenly willing to pay much more than before for high quality sunglasses, the corporations that make the high-end sunglasses start to do better, and the low-end corporations have to scramble to change their strategy. And then there is persuasion. If people are persuaded by the evidence communicated to them that butter is bad for their health, dairy products corporations have a downturn, and soy and corn product corporations have an upturn as people switch to margarine. If they are persuaded that food grown without chemical pesticides, herbicides, and fungicides are better for their health than food grown the usual way, then they will be willing to pay higher prices for organic food, and food corporations will have to change their products in order to meet the demand which has been altered by persuasion – persuasion resulting from communication of scientific research to the public.
One popular way of conceptualizing many of the forces that are brought to bear on corporations is to talk about STAKEHOLDERS. A stakeholder is a group or other entity that has a stake in what the corporation does and how it does it, because it or the interest(s) it represents will be affected by the corporation’s activities. You will be assigned Chapter Three of Carroll and Buchholz, an in-depth look at stakeholder theory and its applications, in Week Six (on sustainable economic development). But of course you can go there now, if it will be helpful.
Customers are stakeholders because their purchasing power will be positively or negatively affected by the corporation’s products and the prices charged for them.
Stockholders are stakeholders because their wealth will be increased or decreased depending on how the corporation does.
Competitors are stakeholders for the same reason, only in reverse.
Employees are stakeholders because their entire ability to pay their bills depends on how the corporation treats them and, in extremis, on how the corporation does in its various markets.
The community in which a corporation has offices or production facilities is a stakeholder because it invests money in infrastructure, schools, and services in order to attract JOBS for its inhabitants it does not want to make that investment and then have the jobs disappear!
And now we are being forced to recognize that in order to avert The Tragedy of the Commons (you DO know what this is….you had it in economics…..put it in quotes and google it if you can’t quite bring it to mind….) we must recognize the Natural Environment itself as a stakeholder. “…..said the Lorax: Who speaks for the trees?” (Dr. Seuss) This is related to but not the same as the shorter-term interest of the public in their immediate health (see below), and it goes even farther into the future than assuring the continued existence, medium term, of our current food chains. Ultimately, it goes to the issue of the habitability of the planet. We used to think that there was no QUESTION of our being able to affect overall habitability, but now we know there IS reason to question.
The public at large, represented by law enforcement officials and activist special interest groups, is a stakeholder for many reasons: because environmental degradation caused by the corporation (air, water, or soil pollution, for example) can adversely affect the health of people everywhere. and of the plants and animals which need to exist in order for people to eat……also because in order for the public to be assured of high quality goods and services for reasonable prices, monopolies cannot be allowed to flourish unchecked………also because cultures tend to want to uphold their values, whatever those values may be, and in our culture we disapprove strongly of making children work long hours…..we believe they should be getting a formal education in surroundings which are physically safe and healthy. And now, a corporation’s stakeholders can include entities outside the country of incorporation: one’s competitors may be from all over the globe, for example. One’s stockholders can also be up to 100% from countries other than the country of incorporation. Further, the people affected by the pollution created in Eastern Europe may be the citizens of countries downwind…..and they may mobilize politically to make their stake in the collective corporate polluting activity felt – through political means, such as getting their own governments to refuse important privileges to the polluting country’s trade interests, or through consumer activity such as boycotts. Similarly, in this country, producers of meat have had to think seriously about what to feed their animals. Meat producers and consumers in the European Union have blocked imports of meat from animals which have been fed hormones, because they believe such meat to be unhealthy for humans, and they have presented sufficient evidence to the WTO so that the WTO sustained the ban. So while there is no obstacle to selling hormone-containing meat in the U.S. – virtually all of the meat you buy in the supermarket comes from animals routinely fed both hormones and antibiotics, unless it is specifically labelled as being free of those substances – corporations that want to expand their markets internationally must deal with pressure from European stakeholders who want less “chemicalized” food. Our producers may soon have to deal with the day when we will not be able to export beef which has had feed with animal by-products in it, because of the connections with Mad Cow Disease. Whether that day arrives, or how soon it does, depends in large part on consumer pressure on the importing governments.
Regulation usually refers to direct exercise of Authority by government entities. In the United States this occurs both by direct statutory action at the state and federal levels, AND through administrative agencies created at the state and federal levels by legislation. What will be the effects of proposed regulation, arising out of medical research, which will force you to abandon the use of several soft plastic parts which your most popular product now uses? (The research has found that the soft plastic gives off toxic fumes which are carcinogenic….try researching phthalates.) What does corporate counsel say about the complaint the State Attorney General has just lodged against the corporation alleging that the distribution agreement the corporation has signed with several competitors as well as regular distributors is in fact a price-fixing agreement in violation of anti-trust law? If counsel advises you that the Attorney General is likely to succeed, how do you have to change your business arrangements, and what will the effects be? Why has the town council in the town that has your third largest plant started a high-profile negative publicity campaign about the corporation’s plans to increase productivity by laying off 20% of the workforce? What does this say about the community’s view of the corporation’s obligation to serve the economic interests of the communities in which it uses municipal services, and of the people who become dependent on it for their livelihoods? Clearly, the web of reciprocal benefits and obligations is much larger than just the statutory and administrative/regulatory framework that exists in the legal system. Corporations are citizens of the entire culture or society, and must respond appropriately to all the various pressures which any citizen faces.
A society’s MORAL values also shape corporate behavior, both from the inside and from the outside. To the extent that corporate managers insist on refraining from immoral actions (whether or not they are illegal), to that extent the corporation is unable to act immorally, because a corporation can only act through people. A good case can be made that if all people restrained themselves and forced themselves to behave morally 95% of the time, at home and at work, we wouldn’t need most of the laws and regulations that we have – because people and the entities they control would be self-regulating.
EXAMPLE: A manufacturer of steel members for bridges is going to be shipping a container load of five-foot steel beams to a construction company that has a contract to build a bridge. The person supervising the shipment knows that this shipment will be one of six identical shipments of six competing companies…and that once the beams are unpacked and used, no one will be able to tell which company supplied which beam. He or she finds out the day before shipment that the alloy mix used was the wrong one – resulting in beams which are much too brittle, and which will soon crack and shatter under normal bridge use. He or she stops the shipment, even though it means the company fails to make its deadline and may be liable for delay damages; notifies the buyer of the problem, and promises to ship out properly formulated beams right away. This supervisor felt it would be WRONG (which is a moral term) to ship beams knowing they were not what had been ordered; that they were not appropriate for a bridge; and that eventually they might result in injury to people as well as expensive repairs to the bridge. This supervisor therefore prevented the corporation from acting immorally, even though chances were that nobody would ever find out which corporation sent the flawed beams, much less that somebody knew about it, or who that person was.
The supervisor’s company lost money in the short term, but the company’s reputation was enhanced: everybody loves doing business with somebody whom they can depend on to do the right thing. So the company will get orders in the future that they otherwise might not have gotten….and they may also be able to ask for and get a higher price than other companies, because of the “quality built in.” AND society benefitted: nobody is going to die or be crippled because of those beams giving way.
In fact, our society — unlike a police state, for example — does expect all of us to be self-regulating most of the time, so that we do not have to spend large portions of our GDP making and enforcing rules and regulations. The more people self-regulate, and insist that their organizations behave similarly, the fewer laws and regulations we need, and the fewer government employees we need to pay to enforce the rules and regulations we do have.
What’s more, business becomes more profitable and prices to consumers or other customers can go down, because businesses do not have to build into their prices a certain amount of money to spend on filling out government forms, on suing companies who have not kept their word, and so on. The number of lawyers would be vanishingly small. So would the number of regulatory agencies. BUT……morality is a culturally dependent concept. There are other countries in which there is NO expectation that anyone will self-regulate; or that people will generally tell the truth; or that there is such a thing as an internalized standard of right and wrong that each of us is responsible for upholding whether anyone is looking or not. And that, of course, creates problems.
The Western European/North American business system that has generated such a lovely standard of living for people in general is NOT MERELY a particular economic system and a particular legal system, although of course those are essential elements. It is a combination of an economic system, a political system, a legal system, AND COMMON CULTURAL VALUES which businesspeople are generally expected to adhere to, even though they aren’t necessarily written down anywhere. It turns out that the system only really works IN THE CONTEXT OF THAT SYSTEM OF COMMON CULTURAL VALUES. Russia adopted capitalism; Russia adopted democracy; Russia had Harvard Law School professors over there making their legal system like ours just as fast as they could go. But it didn’t work. Why? Because the CULTURAL VALUES of Russia are those of a police state — go ahead and do anything you want as long as you don’t get caught. And once the KGB was no longer in charge, EVERYBODY felt free to act unrestrainedly……with the result that our business system, which is supposed to be so wonderful, failed to operate there. It failed to bring them the prosperity that it has brought us. BECAUSE…..the cultural values are AN ABSOLUTELY ESSENTIAL PART OF THE SYSTEM. Not that everybody adheres to them all the time……but if more and more people STOP self-regulating, then gradually the system’s ability to produce goods and services of high quality for reasonable prices for the majority of people will decline….not noticeably at first, but after a while, it will become very noticeable…..of course, by then, it will be too late to stop the decline quickly, because cultural values take time to change…..in ANY direction.
So you can see that the external cultural environment of the organization has a powerful shaping action on the course the corporation steers. This means that while all cultures are worthy of respect as human creations which have been labored over for centuries or millennia, it is NOT necessarily true that all cultures are equally good as environments in which a business system like the one we already have, can operate. Careful evaluation of culture, then, is an important step a business must take before deciding to invest or operate in another country. Are there any aspects of Country X’s culture which will make it more difficult, more expensive, or impossible to operate this part of the business in Country X? Or perhaps there are aspects of Country X’s culture which will make operation of part of the business there LESS difficult and LESS expensive! The point is, cultural values matter very much to businesses. “Cultural risk” and “cultural competitive advantage” must be assessed BEFORE a decision is made to operate in a particular country, because culture IS one of the potent forces of CORPORATE CONTROL.
Moreover, the MANAGEMENT culture inside a corporation is a powerful force which can blow away the ethical standards of all but the most stalwart and conscious employees, BECAUSE of the vertically hierarchical power and reward structure that corporations use.
So you as individuals need to assess management culture from the point of view of risk to yourself before you agree to work in a particular organization…..
BOTTOM LINE: Control of corporations is a culturally embedded, traditionbound phenomenon. The web of controlling forces and mechanisms will vary from country to country and from time to time. To be a successful captain of an organization, you must stay alert to the nuances as they change.