r Ethics and a Changing World



Ethics Behind the News

A Question of Corporate Social Responsibility

An exchange between Sr. Doris Gormley, a Fransiscan nun, and T.J. Rodgers, CEO of Cypress Corporation, made headlines in the Wall Street Journal during the July news lull. For those who might have missed it, this was a fairly contentious exchange involving, on the surface, the proper constituency of a public company Board of Directors (should it include women, minorities, etc. or just technical business types?) and raising the question of whether a diverse Board is important in shaping a social conscience in a public company . This issue dropped too quickly from the front pages. There are important issues raised by this exchange which bear further consideration, not only by stockholder activist groups and corporate managers, but by society at large. We decided to offer some alternative viewpoints and invite comment from the Web visitors.

Sr. Gormley is a shareholder activist whose Fransiscan order owned stock in Cypress. She used the connection to write Mr. Rodgers and ask him to install a more racially and gender diverse Board. In the particular framework of correct corporate governance adhered to by shareholder activists, this is a routine request. The moral force of Sr. Gormley's request rests on the suggestion that the company is practicing racial and gender discrimination unless women and minorities are included. This hint of discriminatory intent and immoral practice probably wasn't fair to Mr. Rodgers (and likely not intended by Sr. Gormley), or to the other CEOs to whom similar letters were sent. There isn't anything intrinsically moral about a racially and gender diverse Board.

As Sr. Gormley said in the WSJ article, though not in her letter, her real concern had to do with the social integrity of business and her goal had been "to spark a dialogue". But her strategy for encouraging dialogue backfired. Instead of a spark there was an explosion. Rather than joining issue her letter led to further retrenchment. Rodgers went "ballistic" (in modern jargon) and wrote what must in the circumstances be seen as an extremely harsh response. What strikes one immediately about Rodger's six page response is his seeming inability or unwillingness to try to understand what Sister Gormley was trying to say. Maybe Sr. Gormley's stockholder activist strategy was misguided. Racial and gender quotas may be blunt instruments for raising the issue of corporate social responsibility. But her concerns are legitimate and worth talking about. The substance of Sr. Gormley's suggestion seems to be that we need public company Board members who have not only technical, financial, or managerial expertise in running a corporation, but have a broad view of human and social good and a vision as to the human purposes of society's largest and most powerful institutions. That is an important point to raise.

It seems useful to pull out what might really be at stake here and then to see if some common ground for dialogue might be found.

1. On Mr Rodgers rejection of Sr. Gormleys suggestion that corporate morality requires racial and gender representation on the Board. Rodgers attempted to claim the moral high ground using categories ("moral" for a different constituency than corporate responsibility activists of course) by resting his argument on profit maximization and what this means in terms of human freedom and what failure to pursue it means in terms of harming people. His argument amounts to a claim that it would be immoral to put individuals on the Board who would not contribute to profit maximization because people are harmed if maximization is not pursued.

The moral ground on which a corporation and capitalism rests runs roughly the same: societal good = greatest good for greatest number = greatest economic good = corporate profit maximization. Mr. Rodgers, like many CEOs, might like to say that his moral duty to society is discharged by focusing only on the latter -- profit maximization. Sr. Gormley is questioning this and proposing that we need people with a broader view to keep the larger question of societal good before the mind of the corporation and its management. In raising this question, especially in current times, Sr. Gormlley's position seems to us, and we would guess to most people in society, to be on solid moral ground. The question is, "Is profit maximization necessarily or always the primary moral good?

As an example of what another perspective might bring to a Board decision take a statement from Mr. Rodgers letter. Mr. Rodgers mentions that Cypress has pre-tax profit of 30%. Suppose they were higher, 50%, 70%, pick a number. Would it be in order to raise the question of whether Cypress' profit margins are excessive and thus harmful (immoral?) to its customers and ultimately to the end-users? Could a question come up at Cypress' Board meeting of what is a fair price, or even a "just" price, when a corporation holds sufficient pricing power to take a 30% profit? Could a discussion ensue that reducing prices might be the correct thing to do? The Board might not decide to take such actions, but Sr. Gormley and many others would like to think that our powerful social institutions are discussing and seriously considering such points.

Although we are raising these questions on moral grounds, it might be considered that moral practice is often good business practice. Customers and consumers know when they are being fairly treated; most stockowners, it would seem (at least individuals for they are consumers too), would want to think that they have obtained their return in a just manner.

Sr. believes that such a viewpoint might require a diversity in background and perspective that goes beyond technical or business acumen. She has a pretty good point. She is convinced that this broader view is more likely to evolve with a Board that has racial and gender diversity. She might be correct here too, but that is a separate point and it is at least subject to debate. And it is not really a debate about what is moral vs. immoral. The question is simply what is the most effective way that we as a society might get the broadest view of societal good operating in our largest corporations?

What it appears Sr. Gormley would like Mr. Rodgers to consider is a corporate governance philosophy that ensures a broad view of societal good. In mentioning that the competition is severe and survival is an omnipresent issue as the reason for needing technically proficient and managerially experienced Board, Mr. Rodgers assumes that survival of Cypress corporation is the greatest good. Of course survival of Cypress and other corporations is very important and he should have the sorts of people on his Board that make it possible. But there are actions and practices that that we as a society would not want our corporations to engage in (and there are some who have crossed this line) in order to survive. A Board member with a larger view might be helpful in bringing this perspective to Board deliberations when those occasions arise.

2. On Mr. Rodgers suggestion that Sr. Gormley's requirements are immoral: Mr. Rodger's defines immoral as causing harm to people. Again to his line of moral justification. societal good = greatest good for greatest number = greatest economic good = profit maximization. The opposite of that is Societal harm = less than the greatest good for greatest number = less than the greatest economic good = less than profit maximization. In this line of reasoning anything that reduces profit maximization causes harm to people and is immoral. In this case he defines moral harm in terms of threatening investment returns. Sr. Gormley's requirements are immoral because they would cause a corporation like Cypress to be run on something other than a profit-making basis. Running the corporation on less than a profit making basis could cause the stock to be worth less (or worse case threaten the survival of the company) and this could harm investors.

First of all, it isn't clear that running a corporation with a broad view of societal good (which is what we take Sr. Gormley's suggestion to be) harms the corporation. Such a corporate governance philosophy would reflect a general understanding of what a corporation is supposed to be about. It may in the long run make a corporation more successful and valuable. That is a factual question, not a moral question, that could be tested.

The more important point arises in the situation when it is possible that following a less than profit maximizing philosophy might actually result less of a return or a lower stock value. If a Board decided to pursue such a course of action would this be "harmful" in such a way that is immoral? It might be economically harmful to stockholders in a marginal way (even a big margin like the 18% return of ethical investments vs. a 25% return of the S&P) but what if it produced greater social good, say, for example, when it kept more suppliers solvent or more people employed in an economic depression.

Don't the Sisters of the Society of St. Francis, and other stockholders for that matter want a society that is free of social strife, just, harmonious, flourishing. Is it possible to have a comfortable retirement, whether you are a nun or a retired executive, if society is breaking down around you? These are the issues that Sr. Gormley and other stockholder activists are asking CEOs and corporate Boards to consider.

Maybe Mr. Rodgers found the approach offensive and annoying. But a lot of people are worried that reducing societal good to economic value and then allocating it by market forces just isn't working. Many believe that in the era of a global economy and weak representational government that society itself is increasingly shaped by the decisions made in corporate boardrooms. Those who have such concerns want a larger view of societal good to be represented. To put it in terms of Cypress' products if we had the best semicoductors possible and brought out a new generation every 6 months but society at large slipped inexorably into moral decline would society be better for it? Introducing moral and social considerations might complicate the Board decision making process. However, it is very complex world (and all the complexities aren't just technical) and this is going to be the world of the corporate Boards of the future. Is it so far off base to suggest that society may be better served by having some Board members with a broad perspective and not merely managerial experience and technical acumen.

Interest group shareholder activism may not be the best way to get this general point across. It might be an annoyance to CEOs to have moral good seemingly so narrowly defined by each interest group, with each interest group acting as if it believes that its particular cause encompasses all there is to being a moral corporation, e.g., being green or having a diverse board = morally good corporation etc. Moral good does not mean a single cause just like moral good doesn't mean profit maximization.

A last point. Mr. Rodgers makes a point in his letter about the importance of freedom. In fact, in the article in the WSJ he said of Sr. Gormley, "she did hit something I am emotionally attached to and that is freedom." For Mr. Rodgers it seems that Moral good = a) the freedom to pursue maximum economic advantage and b) the freedom from government interference and taxation. One suggestion for Mr. Rodgers would be that he take time for further reflection on the concept of freedom. As I am sure Mr. Rodgers is well aware, there are conditions of moral and spiritual freedom that are just as important to a human life as conditions of economic or political freedom. The corporation may have a responsibility to help create and preserve these conditions of freedom as well. This is an issue that Sr. Gormley might help us all with.


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