A CONCEPTUAL VIEW OF A CORPORATION

In the Light of Corporate Governance, Ethics, and Corporate Social Responsibility

By Dr. Jesus P. Estanislao

Institute of Corporate Directors

Institute for Solidarity in Asia

[27 May 2003]

The Law Constitutes the Corporation as a Person

1. In a modern free and open society, a corporation is constituted as a juridical person

2. As a juridical person, a corporation has standing on its own. It enjoys freedom and autonomy. It is not a mere extension of anybody else, nor an instrument for anyone else’s private or personal use. It has rights of its own, and the fundamental rights it enjoys cannot and should not be trampled upon or violated by others.

3. As an institution with autonomy, a corporation has the power and capacity to act in pursuit of its goals. Since corporate goals bring the corporation beyond what it already is or what is already has, its capacity to act is generally oriented externally. It acts to go beyond itself.

4. A corporation, then, has the fundamental right to act and inter-act with others. It can enter into relationships with other persons. It can contract or take on duties towards others in the process of inter-acting and dealing with them.

5. As a corporation acts and inter-acts with others, it becomes a subject not only of rights, but also of duties. Its rights others are duty-bound to respect. In return, its duties towards others it is bound to discharge and carry out. Thus, in the process of living out its corporate life, a corporation becomes a complex institution, with claims upon others (its rights), and upon whom others may have rightful claims (its duties).

Why a Corporation Needs to Practice Good Governance

6. Among these other persons it deals with—they are separate and with a personality distinct from that of the corporation itself—are its different stakeholders. Chief amongst these stakeholders are the owners of the corporation, its shareholders. But there are other stakeholders as well. These include the officers and employees; customer; creditors and suppliers; the local community and the regulations; society and the economy in general.

7. It is incumbent upon the corporation, that it deals with all its stakeholders fairly, i.e. in accord with justice. Thus, a corporation is called upon to give to each of its many stakeholders what is their due. It is duty-bound to consider, protect and promote the legitimate claims of all its different stakeholders in an equitable manner.

8. A corporation is then called upon to be transparent about its operations and the results of such operations. Its reports to all its stakeholders need to be accurate and true, timely and comprehensive, in line with globally accepted standards of reporting.

9. A corporation holds itself accountable for all its actions to all its stakeholders, and these include the regulators and the general public (society and the economy as a whole). Since it has duties towards others, the corporation should make it possible for others to determine whether it has fully lived up to its duties and to take appropriate action, by way of rewards or sanctions, as a consequence.

10. The Board of Directors of the corporation is vested with original powers to act in behalf of the corporation. It is through the Board of Directors that a corporation performs corporate acts. It is therefore the Board of Directors—with its fiduciary duties—that is called upon to ensure that it acts with fairness, transparency, and accountability.

11. To secure fairness, transparency and accountability in all corporate acts, the Board of Directors takes responsibility for directing the body or the internal organization through the management it installs. It serves as the head by reserving to itself final decisions on strategy, major policies and capital expenditures as well as operating plans and budgets. It acts as the conscience of the corporation, installing a corporate culture that is fully ethical, professional, and compliant with laws and regulations.

12. The Boar of Directors is a collegial body and must always act collegially. It operates by a code of proper practices. This code helps nurture a culture of independence, diversity and openness on the part of individual directors, each of whom is expected to add value and contribute to the collective decisions and actions the Board of Directors eventually makes and takes. It also specifies guidelines on how the Board works during Board meetings through its committee structure. It further specifies how the Board empowers management through the authorities and powers it delegates and through the reporting accountability system it installs. It includes the mechanisms by which the Board evaluates its performance, assesses and reports on corporate performance, renews and rejuvenates itself, makes and carries out succession plans.

13. The Board of Directors takes in the big picture by looking at and caring about the entire forest, leaving operations, the small details, and the individual trees to the charge of management. Thus, it does not take its focus away from the long-term sustainability, development and progress of the entire corporation. Such a focus would highlight the critical importance of an ethical, socially responsible culture that a corporation must observe. As with any other person-natural or judicial—a corporation sustains itself and secures its long-term development and progress by taking diligent care of its relations with others, and by its strict observance of the norms of ethics and social responsibility.

Why a Corporation Needs to be Ethical

14. Its view of itself, of others, and of its wider environment shapes the corporate culture it observes and lives. But this view cannot be unrelated to—in fact it needs to be determined by—what the corporation fundamentally is.

15. As a juridical person, with goals it pursues beyond itself, and therefore with a capacity to deal with others and its wider environment—in the process acquiring rights over them and assuming duties towards them—a corporation needs to have a culture characterized by openness and participation. The corporation, in all its aspects and levels, needs to be open to relationships that can be productive, meaningful, and beneficial. It also promotes participation from everyone up to the full extent of their ability and capacity to contribute towards the attainment of corporate goals.

16. In its relationship with others, its culture of solidarity leads it to look for ways and means by which it can serve others’ needs, help promote their genuine welfare, and contribute to their further development. Its ability to put flesh and substance to its spirit of solidarity towards others is a test of its own progress towards its corporate goals. Indeed, these goals are best achieved to the extent that a corporation can help meet the others’ needs with efficiency, effectiveness, and excellence. In always trying to do this, the corporation needs to stimulate fresh and varied thinking within its ranks and maintain dynamism in responding to the changing demands and requirements of others.

17. In its dealing with its wider environment, its culture of stewardship imposes upon the corporation a deep sense of responsibility for securing long-term sustainability. Thus, it needs to invest on resources so these are property maintained, improved, and kept productive for the use of succeeding generations. It also needs to contribute towards maintaining and improving natural and man-made systems that provide the environment for societies and economies to thrive in and progress. It is in this light that a corporation needs to constantly assess itself and monitor all aspects of its operations to ensure that it acts properly and within bounds in contributing to a safe, sustainable, and positive environment.

18. A culture of openness and participation, of solidarity and stewardship is guided by norms and standards. It is ideal for the corporation on its own to set the highest possible norms and standards for all its corporate acts in all aspects and levels of corporate operations. Self-regulation and self-determination in securing a high moral tone for one’s corporate culture, with the commitment to compliance and enforcement that go with these, would provide the surest and strongest defense against possible deviation from, or falling below, those norms and standards.

19. An internal corporate culture of ethics would also need to be complemented and reinforced by external norms and standards. Intermediate associations, to which a corporation belongs, should make their own articulation of a code of proper ethical practices and set up mechanisms for its enforcement and compliance. Higher bodies are also called upon to do the same. Regulatory authorities do not stop at issuing rules and regulations that the laws may mandate; they should also be vigilant about strict compliance, thereby imposing appropriate sanctions for non-compliance and giving rewards and public recognition for very high levels of compliance. Global conventions and universally accepted practices also set external standards for ethical corporate behavior. Indeed, in an increasingly interdependent world, these standards are gaining currency and wider acceptance.

20. The corporation, then, as a juridical person acts and behaves according to its view of itself, others, and its wider environment. This view is shaped by the culture of openness and participation, solidarity and stewardship that flows out of its fundamental character as a free and autonomous personality. That culture is necessarily ethical since it is guided by norms and standards that draw the line between what is acceptable and proper, what is good and correct, what is moral and legal—and what is not.

21. A corporate culture that is highly ethical and strictly observed, with effective enforcement mechanisms to facilitate over-all compliance, would make the corporation true to its fundamental character and its foundational identity. Moreover, such a culture greatly helps the corporation to move unswervingly towards its long-term corporate goals and puts it on the right and sure track towards the realization of its vision and fulfillment of its mission. Such a corporate culture faithfully lived would be a clear sign that its governance is trying to abide by the principles of fairness, transparency and accountability. Finally, that culture enables the corporation to act at all times, at all levels of its operations in a socially responsible way.

Why a Corporation Needs to be Socially Responsible

22. Social responsibility is inherent in the corporation. As a juridical person, it is called upon to aim towards goals, which it can achieve only together with other persons. Thus, a corporation is essentially oriented towards others that it deals and works with. In the process of dealing and working with them, it takes on responsibilities towards them through the duties it assumes in relation to them. These responsibilities it discharges with due cared and diligence in order to move forward to its corporate goals.

23. The very first demand of social responsibility is for the corporation to maintain its viability, secure its vitality and dynamism, and strengthen itself institutionally for the long term. In other words, the corporation owes it to tall its stakeholders to take very good care of itself so as to sustain itself in effectiveness, and operate with greater efficiency and higher levels of excellence over the long haul. For the corporation to be able to continue to consider, protect and promote the interests of all its stakeholders, its first and foremost responsibility is to stay alive, dynamic, strong and progressive. To be able to do so, it needs to foster a spirit of enterprise within its internal organization that it entrusts to management. The spirit of enterprise calls for due observance of the principle of subsidiary, which promotes from the ground up continued self-renewal, non-stop self improvement and institutional strengthening.

24. The second demand of social responsibility is for the corporation to observe self-restraint and a commendable degree of selflessness in its focus of rendering genuine service to others, more specifically to all its stakeholders. The orientation to serve needs to be deeply embedded, and take a long-term dimension. It is against this long-term horizon that it aims to harmonize the many seemingly conflicting claims between shareholders and the other stakeholders. The corporation, in many instances, may have to endure short-term pain and may cause such temporary pain on some, perhaps even n many, of its stakeholders, in view of the long-term gain it should win for all. Indeed, the spirit of solidarity drives a corporation to trying to make a real difference for the better, adding as much value as possible, and meeting the needs of customers and others who can reward it with their custom, favor, support and other resources. Solidarity oftentimes requires it to put in a lot of sacrifice or even to suffer temporary losses to secure the loyalty and the vital interests of other it is duty-bound to serve. Its generosity and grandeur of spirit under trying circumstances would often be more than amply rewarded.

25. A third corporate social responsibility is towards the wider environment in which the corporation operates. The corporation is duty-bound to maintain and improve both the physical as well as the economic and social environment, which provides the milieu for its operations. As a steward, the corporation must see to it that in the course of undertaking its operations, it eventually leaves the environment much better that the one it found when it started. The over-all physical environment and natural systems that its corporate operations may affect should be renewed and brought back to a self-sustaining level. Of equal importance is the over-all economic and social system, which also needs to be bought up to a much higher level of conduciveness for corporations to achieve their goal and for society and the economy to progress. Thus, the corporation must exercise due care and sensitivity so that it helps--rather than hinders--the capacity of physical and natural systems as well as of economic and social systems to sustain themselves and provide a positive environment for long-term growth and development.

26. The help that a socially responsible corporation may extend can be systemic or specific. By doing its part of being a responsible citizen in keeping the over-all system healthy and sustainable, a corporation would already be doing what is strictly necessary. In many instances, however, particularly in developing economies, this may not be enough. Indeed, the circumstances may often call for corporations to be deeply involved in specific programs aimed at reducing the levels of poverty and corruption, improving the immediate prospects of the marginalized sectors of society, and helping those who cannot help themselves to acquire the skills, knowledge and attitudes to bring themselves beyond the poverty line. Continuing education for life for all offers many specific niches that corporations can claim as their most direct and effective contribution to helping targeted groups of people develop themselves.

The Essential Need for Responsible Citizenship

27. A socially responsible corporation seeks to achieve sustainability not only for itself, but also for the others it must serve as well as for the environment it works in. Corporate commitment to sustainability is derived form the outward-oriented character of the corporation. It drives the corporation towards governance practices that take on a long-term and broad perspective, mindful of the delicate but firm inter-relations within micro-systems in the wider-physical, economic and social environment. In taking on such a perspective, it fosters a highly ethical culture that asks to be actually observed and strictly enforced within the corporation.

28. It is the recognition that it is part of a much broader system, including the physical natural environment but particularly the wider economy and society that makes a corporation acknowledge its citizenship. Indeed, the corporation is born within that wider system, with the law constituting it, investing it with rights, and ensuring respect for its rights as a juridical person. It acts in inter-relationship with other in that system. It operates within the environment that the wider system provides, and depends to an essential degree upon that system of which it is a citizen.