There is a mismatch between the law and corporate ethics. According to Boston College Law School’s Kent Greenfield it can only be addressed by changing the law itself, and aligning it better with ethics. In his paper Corporate Ethics in a Devilish System, Journal of Business & Technology Law 3: issue 2 (2008): 427-435, Greenfield talks about companies behaving unethically but within the bounds of the law.
“In essence, a corporation should consider the cost of illegality as the penalty, fine or other costs discounted by the chance of the exposure of the corporation’s illegality. The law, in other words, merely imposes a price for illegal behavior. If the corporation is willing to pay, then no problem with illegality.”
The mismatch comes from the confusion that complying with the law is the same as behaving ethically. Ethics means more than obeying the law.
Greenfield argues that the limited liability of corporate law is “inconsistent with the ethical norm of taking responsibility for one’s own actions since it shields people from liability that arises from their wrongful conduct.” I don’t agree. Actions of a corporation happens through the individuals in the corporation. Corporate law has evolved over the last few years, holding executives personally responsible for illegal actions. The limited liability of a corporation shields investors from losing more than their invested capital. It does not shield the actors within the corporation.
Greenfield proposes changing rules of governance where companies would be required to give stakeholders who don’t own stock – like for example employees and communities – to make their views part of the firm’s governance.
“Bringing the views of non-shareholder stakeholders into the governance of the firm would not only make it more likely that the corporation will consider broadly the impacts of its decisions, it also will – because shareholders tend to have a very short time horizon – necessarily cause the firm to take a longer term view of its decisions and strategies. Such inclusion will also cause corporations to internalize more the costs of their decisions.”
I agree that the movements in price of a public companies stock can influence corporate decision-making. Many people have argued about setting the proper incentives for management to look to the long term and not pay attention to the short-term gyration of stock prices.
But Greenfield ignores private corporations. One of the arguments for private equity is that ownership and management can look to the long-term goals of the firm rather than focusing on short-term stock price gyrations. Everyone is focused on creating the long term value of the company.
Thanks to Leon Gettler of SOX First for pointing out the article: Corporate Ethics and Law.