Ethical Foundation in Fiduciary Relationships - Literature review Example

? I. Question According to Joseph Johnston, the stakeholder theory is not a viable long-term option because the fiduciary principle of natural law,which competes against stakeholder theory, would tend to exert a stronger motive force upon the manager The fiduciary relationship is founded on the element of trust, and it “gives rise to an ethical obligation of loyalty on the part of the fiduciary” (Johnston). In his article, Johnston traced the fiduciary responsibility to the code of Hammurabi and to Biblical passages, particularly the familiar exhortation, “No servant [man] can serve two masters.” (Luke 16:13, Matthew 6:24). By doing so, Johnston supplied not only a moral or ethical foundation to fiduciary duty, but also a spiritual one (i.e. eternal law), further bolstering its obligatory nature, then calling attention to the Roman jurists and the contemporary court pronouncements to the same effect, adding a legal dimension to the duty. All these aside, Johnston argues that the fiduciary obligation is encompassed within natural law, that is, it is within the nature of man as a free, rational and social being to render fiduciary loyalty where the situation calls for it. In the context of business, the fiduciary relationship exists between the owner of the business and the person that owner has hired to discharge the business. In modern corporate parlance, the business owner would be the shareholders, those who have invested financial resources in the business entity. The steward hired to conduct the affairs of the business is the modern business manager, or the Chief Executive Officer (CEO) in large corporations. In the Biblical metaphor, therefore, the CEO is the servant who is morally charged to owe loyalty to the shareholders. Johnston argues that one who serves in a fiduciary position cannot serve his interest first before the interest of the person/s to whom trust is owed, legally, the cestui que trust or beneficiary of the trust relationship. Corollary to this argument is that the person entrusted cannot substitute his own judgment for that of the trustor, or undertake an action that he knows jeopardizes the trustor’s best interests. The conflict therefore arises in the modern business context, where advocates of corporate social responsibility insist that business managers, particularly for large corporations, have a duty not only to shareholders but also to other stakeholders – customers, employees, suppliers, the immediate community and society in general – to likewise serve their benefit and welfare in the conduct of their business. This is seen to run counter to the fiduciary relationship because management would have to decide in favour of the benefit of other shareholders, at times to the detriment of the aim to maximize shareholder gain and corporate profit. It is the equal obligation to stakeholders as to shareholders that Johnston believes is untenable in practice From a legal standpoint, I would tend to agree with Johnston. Given an either-or proposition, the fiduciary relationship would supersede the stakeholder relationship. From a practical perspective, however, it is apparent that seldom is one drawn into the choice of one side to the exclusion of the other. Most business owners are aware that keeping customers satisfied, employees engaged and motivated, suppliers operationally viable, and the community supportive, would eventually translate to business gain and growth. By serving stakeholder interests, managers may forego opportunities for short-term profits but benefit the shareholders in terms of long-run and sustainable profitability. From a utilitarian perspective, therefore, the satisfaction of stakeholder interests also serves the interests of the shareholders, and there is no conflict. It is also often forgotten that the shareholders are themselves stakeholders of the company, particularly as customers, and oftentimes also as employees, because of employees’ share options. Shareholders are also part of the community and larger society. In this sense, the principle of universal duties applies, because shareholders would not want their company doing to the other stakeholders what they would not want done to them also as stakeholders. Therefore, other than in the case of an actual and immediate controversy where the interests of shareholders and other stakeholders are diametrically opposed and all viable, then there is no reason why stakeholder theory would not work in practice, given a competent and informed management team. II. Question 2 I agree with much of the analysis of Kelman in the context of environment, health and safety considerations, and with his first two conclusions which state that (1) certain decisions may be right although costs outweigh the benefits; and (2) not all benefits and costs should be expressed in monetary terms. I qualify my agreement with the third conclusion. Kelman is right when he examines the nature of costs and benefits through utilitarian theory; in effect, he highlights that “satisfaction” by which utilitarian benefit is gauged would be an untenable metric where the duty involved implies an absolute moral obligation – that is, where benefits exceed costs only through the violation of an absolute duty to do or abstain (i.e., to fulfil a promise, or not to kill). This reasoning is therefore consistent with eternal law. The decision to undertake an action for which the benefits do not exceed the cost may be a moral choice where it is consistent with eternal law, and the alternative is contrary to eternal law. This would be an easy contrast to understand. However, it is more consistent with positive law to view Kelman’s contention in light of distributive justice. For instance, if those less favoured in life could not afford the cost of their needs, or do not produce for society the value of what they consume for their subsistence, then by the cost-benefit analysis these people should not be allowed to live. Obviously, therefore, there are situations where the cost-benefit analysis does not morally apply. In a humanitarian society, “Those less favoured in life should be more favoured in law,” as articulated by Thomas Reed Powell. This should not detract, however, from use of the cost-benefit exercise. At best, cost-benefit should not be determinative, but advisory. Undertaking the exercise, though, would force management to take a more careful view of the advantages and disadvantages of the proposed measure, something that might not have been done and would have, therefore, left much uninvestigated. The cost-benefit investigation is important, but in the end management must base its decision on a broader range of considerations other than this one criterion. There is great value in corporate sustainability. From a cost-benefit point of view, all corporate social responsibility (CSR) programs should not be undertaken, if the immediate and direct costs and benefits are to be solely considered. However, in the long run, the benefits not only to the company but to its customers, employees, and suppliers would work to the sustainability of the business and, of course, its profitability. An example of this is Case 4-1 (“Susan Shapiro and the Workplace Dangers”) where a particularly health-threatening business process that exposes people to a carcinogen. In the case, the subject was told to render her proposal in terms of a commensurate return on investment – that is, for the necessary changes she wanted made to show a greater financial benefit compared to the cost. In instances like these, costs and benefits, if ever considered, should be viewed from the broad perspective, with more than the material or financial aspects taken in the assessment. III. Question 3 Freeman’s model of Stakeholder Analysis is founded on the theory that management has a fiduciary responsibility not only to the company’s shareholders, but also its stakeholders. The stakeholders of a firm include its customers, employees, suppliers, the community it is located in and interacts with, the government and society in general, as well as its shareholders and “any group or individual who can affect or is affected by the achievement of the firm’s objectives: (Freeman, 2010:25). Freeman’s theory is that stakeholders and shareholders alike both have the right to demand of the firm the performance of certain acts, since all have a vested stake in the corporation (Freeman, 2010). Stakeholder analysis involves the identification of a firm’s strategic stakeholders, the nature of their relationship with the company, how they may be affected by the company’s actions, and how the company may be affected by them. It is only after a thorough consideration of those matters that the management may decide on a course of action that best serves the interest and welfare of as many of them as possible, and to avoid causing any injury or damage as much as possible. There is a generally accepted concept that stakeholder theory and shareholder theory are in conflict with each other. It springs from the perception that serving the interests of shareholders puts the interest of other stakeholders at jeopardy, or vice versa. Management’s duties to the shareholders are defined by its fiduciary relationship with them, that is, its obligation to maximize shareholder wealth and the firm’s profitability. I believe, however, that the interest of shareholders and stakeholders are not in conflict with each other; on the contrary, working for the interest and benefit of stakeholders would help in advancing the interest of the corporation, since the corporation can only thrive if its customers, employees, suppliers, community, and its other stakeholders also prosper along with it. As with any other relationship between individuals and firms, there will be instances where interests will clash, but these conflicts are governed by the merits of the circumstances and the law governing them, something for the courts to decide. In such cases, the proper course of action is for the management to protect its contractual obligation as agent of the shareholders, but only to the extent that it does not cause undue harm to the other stakeholders, and it does not transgress the law. The existence of synergies between the various stakeholder interests and that of the shareholders is more than just an ethical one; it is also recognized in case law. The Supreme Court of New Jersey through the pen of Judge Jacobs ruled that “an act that supports the public welfare can also be in the best interest of the corporation itself” (A.P. Smith Manufacturing Co. v. Barlow, 13 N.J. 145, 98 A.2d 581, 1953 N.J. 39 A.L.R.2d 1179). All too often, the erection of conceptual barriers between the two is motivated by personal advocacies or interests, whereas a competent manager acting in good faith will always find the middle ground that will serve both interests. Freeman, R.E. (2010) Strategic Management: A Stakeholder Approach. New York, N.Y.: Cambridge University Press IV: Question IV 1. Two groups benefited from the sale: the store that made the sale, in so far as they get their capital back, and those persons who bought the wafers that turned out not to be defective, in so far as they were able to enjoy a luxury product that they purchased for a low price. 2. The groups harmed were all those who had bought the wafers that proved to be defective, in that they spent their money, no matter how meagre, on a product that they did not derive any benefit from. 3. The group that will be able to exercise their rights by shipping the defective wafers is the store that had bought the wafers in the first place. They exercise the right to dispose of their property in the manner they want to. 4. The group whose rights are ignored by this shipment is the group of customers who bought the product. They have a right to be informed of any possible material defect of the product before they buy it. 5. The moral problem is: What is the best action for the company to take in order to minimize its losses in a manner that does not cause damage or injury to others? 6. The economic outcome to the company is that the firm may either recover its investment, suffer a slight loss, or suffer a significant loss in the amount of the entire outlay for the imported wafers. If it recovers its entire investment or outlay, then that means it is able to sell its entire stock of wafers at cost. If such were the case, then the economic outcome to the customers is that some of them will get the benefit of a product at more than their money’s worth, if the product is not defective, or if the product is defective, then the customers who purchased the same would suffer the economic loss of what they paid because they did not get the value of their product. However, there is another outcome: If customers bought the defective product and consumed it, and the customer got sick and needed medical care, then the economic outcome for them is that they suffer the loss of the price they paid for the product, plus the added cost of their medical care and treatment. 7. The legal requirement that the company must comply with is to comply with the warranties of a contract of sale. In selling the product, the company implicitly guarantees that the product is without defect, and if found defective, the product is to be replaced with a new, non-defective product, or refund the customer’s money. The company is also bound to pay restitution for any injury or damage done to the customer as a result of selling the product to the customer, moreso since they knowingly sold it to them with the high likelihood that it may be defective or even harmful. At the very least, they are bound by the good faith principle to inform the customer of the possibility of defect, so that the customer is duly notified and forewarned that purchasing the product is at their own risk. 8. Under all ethical systems, the company is bound to observe the moral duties of good faith and full disclosure about their product. Under Contributive Liberty, they may leave the final decision to purchase to the customer, since the customer may very well derive good value from the product if what they purchased was not defective. Under Utilitarianism, the company must generate the greatest number of benefits for the greatest number of people. Therefore, if customers would discover defects in their products, the company must refund their payments. However, if the product does not have any defect, then the company may keep the proceeds of their sale. Under Universalism, the company should adopt the action that everybody else would have adopted, given the same circumstances, and that would be to sell the good products at cost and reimburse the cost of defective products. Finally, under Eternal law, the products should not be sold at all because of the chances that the product may cause harm to others. Knowing the problem with the product, the company is morally obliged under this ethical system to not sell a product it knows has a good chance of being defective. 9. The Social Contract is that agreement among people to form a society of their choosing and in which they would live together, and that they are bound by a set of obligations that are consistent with society’s expectations. In this case, the Social Contract will first and foremost require the company to fully disclose the possible defect of the product, and secondly, to guarantee the reimbursement of the price for products that are returned for defect. The reason is that in a free market society, the company may only obtain compensation for a product that the customer may find useful. If the product offers no benefit to the customer, then the seller is not entitled to its price. 10. Yes, Sarah should blow the whistle on the company’s plan to dump defective product on an unsuspecting public. Whistle-blowing is the act of an employee in providing information, causing information to be provided, or assisting in any investigation by authorities related to a possible violation of the law. Sarah’s option is to contact the proper regulatory agency such a that dealing with food, public health, or retail commercial businesses, which is charged with the enforcement of the law. In this case, the risk to Sarah is that in contravention of the whistleblower’s act, the firm may retaliate against her. 11. The legal issues may include graft and corruption charges against both the local politician and the company, for which clear evidence must be shown, not just Maria’s allegation. The ethical issue involved is the lack of good faith and the intention to lie or conceal the truth, inasmuch as the politician’s help was solicited to enable the defective sale. There is a conflict of interest on the part of the politician, who is an elected official whose interest should be to protect the welfare of his constituents, but who instead elected to advance his material gain. The pressure involved in making the payment, on the part of the politician, is that he allowed himself to be put in a position where he must perform the unlawful act for which the company paid him, in contravention of his sworn duty, and that his act if discovered would be divulged to the public and ruin his political career. He is therefore compelled not only to perform the illegal act, but to cover it up and propagate a fraud in the process. This compounds the original immoral act. 12. The role of the government with regard to food safety is to act as steward of the public safety and as such, it is the duty of government to safeguard the health of its citizens. A firm selling product it knows has a high possibility of being contaminated should not be allowed by the government to sell such product. The firm, after all, is a juridical person, an artificial person allowed by the government to conduct business according to the manner it has declared in its registration. Its business does not include selling defective products that may endanger the public’s health for any reason, much less in the interest of monetary gain. The government may therefore cancel the firm’s license to operate, since it exists only as a creation of persons with the permission of the state. There are already regulations that are set up to address all manner of sales situations, although this situation may present additional considerations, particularly where legal loopholes on the whistleblower aspect of the case may be addressed. This business cannot be allowed to self-regulate, because the risk posed to the public health and safety of a food retail company is too high, and the temptation for such businesses to take advantage of the public is too strong, for the company to be trusted. The public is at the mercy of such companies, therefore the government is needed to intervene as a regulator and to ensure through regular monitoring that the company is constantly compliant with the regulations. 13. Sarah can find a solution that may help the business recover some of its losses if she could find a recycling use for the product that does not involve public consumption of it. For instance, there are several industries that make use of spoiled food products for legitimate commercial or industrial purposes. Research and development have helped greatly in the design and formulation of new processes that use recyclable materials. In this sense, the tenets and practices of corporate social responsibility may be instructive in finding a means to legitimately recycle the products or improve the purchasing and storage practices of the company. Quality control may help in the future receipt of deliveries and the storage of supplies prior to their distribution, which should minimize the recurrence of similar incidents and eliminate the need to dump defective products Shaw, B. & Corvino, J. (1996) “Hosmer And The ‘Why Be Moral?’ Question.” Business Ethics Quarterly, Jul96, 6(3):373-383 Read More