PrepTest 22, Section 4, Question 18

Many people complain about corporations, but there are also those whose criticism goes further and who hold corporations morally to blame for many of the problems in Western society. Their criticism is not reserved solely for fraudulent or illegal business activities, but extends to the basic corporate practice of making decisions based on what will maximize profits without regard to whether such decisions will contribute to the public good. Others, mainly economists, have responded that this criticism is flawed because it inappropriately applies ethical principles to economic relationships.

It is only by extension that we attribute the quality of morality to corporations, for corporations are not persons. Corporate responsibility is an aggregation of the responsibilities of those persons employed by the corporation when they act in and on behalf of the corporation. Some corporations are owner operated, but in many corporations and in most larger ones there is a syndicate of owners to whom the chief executive officer, or CEO, who runs the corporation is said to have a fiduciary obligation.

The economists argue that a CEO's sole responsibility is to the owners, whose primary interest, except in charitable institutions, is the protection of their profits. CEOs are bound, as a condition of their employment, to seek a profit for the owners. But suppose a noncharitable organization is owner operated, or, for some other reason, its CEO is not obligated to maximize profits. The economists' view is that even if such a CEO's purpose is to look to the public good and nothing else, the CEO should still work to maximize profits, because that will turn out best for the public anyway.

But the economists' position does not hold up under careful scrutiny. For one thing, although there are, no doubt, strong underlying dynamics in national and international economies that tend to make the pursuit of corporate interest contribute to the public good, there is no guarantee�either theoretically or in practice�that a given CEO will benefit the public by maximizing corporate profit. It is absurd to deny the possibility, say, of a paper mill legally maximizing its profits over a five-year period by decimating a forest for its wood or polluting a lake with its industrial waste. Furthermore, while obligations such as those of corporate CEOs to corporate owners are binding in a business or legal sense, they are not morally paramount. The CEO could make a case to the owners that certain profitable courses of action should not be taken because they are likely to detract from the public good. The economic consequences that may befall the CEO for doing so, such as penalty or dismissal, ultimately do not excuse the individual from the responsibility for acting morally.

Many people complain about corporations, but there are also those whose criticism goes further and who hold corporations morally to blame for many of the problems in Western society. Their criticism is not reserved solely for fraudulent or illegal business activities, but extends to the basic corporate practice of making decisions based on what will maximize profits without regard to whether such decisions will contribute to the public good. Others, mainly economists, have responded that this criticism is flawed because it inappropriately applies ethical principles to economic relationships.

It is only by extension that we attribute the quality of morality to corporations, for corporations are not persons. Corporate responsibility is an aggregation of the responsibilities of those persons employed by the corporation when they act in and on behalf of the corporation. Some corporations are owner operated, but in many corporations and in most larger ones there is a syndicate of owners to whom the chief executive officer, or CEO, who runs the corporation is said to have a fiduciary obligation.

The economists argue that a CEO's sole responsibility is to the owners, whose primary interest, except in charitable institutions, is the protection of their profits. CEOs are bound, as a condition of their employment, to seek a profit for the owners. But suppose a noncharitable organization is owner operated, or, for some other reason, its CEO is not obligated to maximize profits. The economists' view is that even if such a CEO's purpose is to look to the public good and nothing else, the CEO should still work to maximize profits, because that will turn out best for the public anyway.

But the economists' position does not hold up under careful scrutiny. For one thing, although there are, no doubt, strong underlying dynamics in national and international economies that tend to make the pursuit of corporate interest contribute to the public good, there is no guarantee�either theoretically or in practice�that a given CEO will benefit the public by maximizing corporate profit. It is absurd to deny the possibility, say, of a paper mill legally maximizing its profits over a five-year period by decimating a forest for its wood or polluting a lake with its industrial waste. Furthermore, while obligations such as those of corporate CEOs to corporate owners are binding in a business or legal sense, they are not morally paramount. The CEO could make a case to the owners that certain profitable courses of action should not be taken because they are likely to detract from the public good. The economic consequences that may befall the CEO for doing so, such as penalty or dismissal, ultimately do not excuse the individual from the responsibility for acting morally.