Corporate Social Responsibility

• Author: J. Anthony Vanduzer
• Pages: 439-472

CHAPTER

12

CORPORATE

SOCIAL

RESPONSIBILITY

A.

INTRODUCTION

In

Chapter

1 we

described

a

business

organization

as the

intersection

or

locus

of the

claims

of

stakeholders, including owners, managers, credi-

tors,

customers,

the

public, government, tort victims,

and

others.

All

these groups

are

stakeholders because they have

a

stake

in

business

decision making.

In

this context, both partnership

law and

corporate

law

represent

an

intervention into

the

marketplace which,

to a

greater

or

lesser extent, pre-empts bargaining between these groups

and

puts

in

place

a

regime that allocates, among

the

stakeholders,

the

risks associ-

ated

with business activities carried

on

through corporations

and

part-

nerships.

As we

have seen,

in

many respects

the law of

corporations

favours

the

interests

of

shareholders over those

of

other stakeholders

by

allocating

the

risks

associated with

a

business

to

other stakeholders,

as

a

way of

encouraging shareholders

to

invest

in

businesses.

As

discussed

in

Chapter

8, one of the

ways that

it

does

so is

through

the

fiduciary

duty,

which requires management decision making

to be

directed

to

maximizing

the

value

of

shareholders' investment

in the

corporation.

Most

of the

previous chapters focused

on the

relationship between

management

and

shareholders

in

corporations incorporated under

the

CBCA

and

other Canadian corporate statutes.

We

discussed

the

alloca-

tion

of

responsibilities under

the

CBCA

among shareholders, directors,

and

officers,

in the

legislation

and in

practice,

for

both large

and

small

439

440 THE LAW OF

PARTNERSHIPS

AND

CORPORATIONS

corporations,

as

well

as the

mechanisms

in

place

for

shareholders

to

ensure that management

is

accountable

to

them.

In

this

chapter,

we

revisit

and

expand

on

this

previous

discussion

from

the

perspective

of the

interests

of

non-shareholder stakeholders

by

looking

at the

extent

to

which corporate

law

permits management

to

take their interests into account

in

making decisions about

the

busi-

ness. This

is a

critically important issue because

of the

conflicts

between

the

interests

of

shareholders

and

those

of

other stakeholders

which arise

in

some situations. Once

we

have sketched

out the

exist-

ing law and the

general nature

of the

interests

of

non-shareholder

stakeholders,

we

will look

at the

policy

arguments regarding

the

appro-

priateness

of

obliging management

to

maximize only

the

value

of

shareholders' investment

in the

corporation.

At the end of the

chapter,

we

will discuss some possible changes

to

corporate

law

rules

to

enhance management sensitivity

to the

broader social consequences

of

their actions while maintaining

in

place

the

basic obligation

to put

shareholders' interests

first.

B.

THE

INTERESTS

OF

NON-SHAREHOLDER

STAKEHOLDERS

IN THE

CORPORATION1

It

is a

trite observation that corporations have

an

enormous

and

multi-

dimensional impact

on

Canadian society. Decisions taken

by

manage-

ment

on a

day-to-day

basis

affect

the

profitability

of the

corporation

and the

value

of

shareholder investments

as

well

as the

security

of the

stakes

of

others with

financial

claims against

the

corporation, includ-

ing

employees, creditors, customers

and

suppliers,

and the

communi-

ty

in

which

the

corporation operates.

The

interests

of all

these

stakeholders

often

coincide:

all

have

a

general

interest

in the

financial

health

of the

corporation.

In

general, maximizing shareholder value

will have

the

effect

of

increasing

the

security

of any

fixed

claim that

a

stakeholder

has

against

the

corporation,

including

those

of

creditors,

employees, suppliers,

and

customers.2

Maximizing shareholder value

means maximizing

the

surplus over what

is

required

to pay

fixed

Much

of

this chapter

is a

revised

and

updated version

of

J.A.

VanDuzer,

"To

Whom

Should Corporations

Be

Responsible? Some Ideas

for

Improving Corporate

Gover-

nance"

in

Governance

in the

21st

Century:

Transactions

of

the

Royal

Society

of

Canada

(Series

VI,

Vol.

X,

1999)

(Toronto:

U of T

Press, 2000), with permission.

R.

Romano, "Comment: What

is the

value

of

other constituency statutes

to

shareholders?"

(1993)

43 U. of T. L. J. 533

[Romano].

1

2

Corporate

Social Responsibility

441

claims.

In

most situations, maximizing this surplus makes

it

more like-

ly

that

fixed

claims will

be

paid.3

There

is

also increasing evidence that

behaviour

by

corporations

which

is

sensitive

to a

broad range

of

stake-

holder interests

is

often

profitable.4

Sometimes, however,

the

value

of the

shareholders' investment

in

the

business

of the

corporation

may be

maximized only

at the

expense

of

other stakeholder interests. Shutting down

a

money-losing plant

to

preserve corporate profitability

is one

example.

The

workers

laid

off

and the

community

in

which they live

and

work

may

suffer

greatly

from

such

a

decision designed

to

safeguard shareholders'

financial

interests.

Seeking

to

maximize profits

by

scrimping

on

pollution-con-

trol technology

is

another example

of

management imposing

a

cost

on

society

for the

benefit

of

shareholders.

We

seek

to

prevent some

of

these sorts

of

adverse social

effects

by

direct regulation.

It is

also commonplace, however,

to

hear claims that

corporations

should

be

responsible

for the

effects

of

their

actions

on

society,

even

in the

absence

of

direct legislative

intervention.5

Assertions

by

corporate managers

confirm

that they view themselves

as

account-

able

to a

wide range

of

societal

interests.6

Recently,

we

have

witnessed

greater

concern about

the

social impact

of

corporate action

on two

other

fronts.

First, both individual

and

institutional shareholders have shown

increasing concern about interests apart

from

their

own

financial gain.

The

growing role

of

ethical investment

funds

and the

adoption

by

some

As

discussed below (see note

17 and

accompanying text), where

the

corporation

is on the

brink

of

insolvency, high-risk strategies

to

create some value

for

share-

holders

may

prejudice

fixed-claim

holders.

C.

Forcese, Owning

Up: The

Case

for

Making

Corporate

Managers

More

Responsive

to

Shareholder

Values

(Ottawa: Democracy Watch, 1997)

[Forcese],

at 7; E.

Reg-

uly,

"Winning

in

Industry Doesn't Have

to

Mean

Wasting

the

Environment,"

The

Globe

and

Mail,

5

March 2002.

See J.

Andriof,

S.

Waddock,

B.

Rusted,

& E.

Sutherland Rahman,

Unfolding

Stakeholder Thinking:

Theory,

Responsibility

and

Engagement

(Sheffield:

Greenleaf,

2002),

for an

extensive study

of the

link

between good corporate

citizenship

and

financial

success.

J.

Richard

Findlay

"Too Many Boards Still Fail

to

Grasp Public's Expectations:

Corporations Must Consider Society's Needs

As

Well

As

Shareholders,"

The

Globe

and

Mail,

19

January 2000, B13.

E.g.,

more than

a

decade ago,

a

vice-president

of the

Royal

Bank

was

quoted

as

saying that contrary

to the old

belief

that

the

shareholder

is

king, today's corpo-

ration

is

responsible

to a

wide variety

of

groups beyond shareholders

—

cus-

tomers, employees, suppliers,

and

even

the

general public ("Shareholder

Activists

Out of

Line: Banker Says,"

The

Globe

and

Mail,

8

December 1990

at

B-

3). The

increasing currency

of

such views

in the

1990s

was

described

in L. E.

Hebb,

"Consider

the

Other Stakeholders,"

The

Globe

and

Mail,

2

July 1996,

B2.

3

4

5

6