Company as a convenient moral and legal deflection device

By | May 1, 2014

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1.        When can you attribute legal responsibility to an organization such as the company, as opposed to those who own or run it and is the company a convenient moral and legal deflection device?

 

1.1    The fiduciary duties

 

The management or the director of a company is in general considered to be in a fiduciary relationship and have a responsibility to the company and the inability to fulfilled these fiduciary duties could make the management or direcotr of the company legally responsible for the wrongdoing they have done. According to Mary W. Cornog (1998, p. 68), a fiduciary relationship is one in which one person (company) places faith in another. For example, stockbrokers and real estate agents have fiduciary duties to their clients which means that they must act in the clients’ best financial interests. Similarly, members of a company’s board of directors have a fiduciary responsibility to protect the financial interests of shareholders. There are legal requirements for those with fiduciary responsibility and they can be sued for the breach of fiduciary duty if they fail in their responsibilities. Also fiduciary duty could also be the duty of a company if it is involved with the relationship with other parties such as investors. For example, when a pension fund holds money, it is holding it as a fiduciary for the individual retiree. In this case, the whole organization has a responsibility rather than the directors of the company alone because we can not break down the responsibility into parts though a company’s fiduciary responsibility is usually borne by its top managers who must ensure its brokers, advisers, financial managers and others keep a customer’s financial goals and well being in mind (Hamblen 1996. p. 50).

 

1.2    Company as legal person in legal issues

 

But in most case, when a company and another party are involved in the legal issues, the company should act as the legal person rather than the management or director of the company which is widely accepted in most jurisdiction systems. According to Louis Goldberg (1980 p. 130), legal personality is an artificial creation of the law. Legal personality may be granted to entities other than individual human being, e.g. a group of human being, a fund or an idol. For example, twenty men may form a corporation which may sue and be sued in the corporate name. And in particular, decisions in the large companies are made by a group of people, the responsibility will be first borne by the company rather than the individual managers or directors.

 

The legal person could be traced in various legal system. For example in India, a company registered under the Companies Act is a legal person, separate and distinct from its individual members. Property of the company is not the property of the shareholders. Director of a company is merely its agent for the purpose of management; and an incorporated company has a separate existence and the law recognizes it as a legal person separate and distinct from its members. A new legal personality emerges from the moment of incorporation but the members who form the incorporated company do not pool their status or their personality (vakilno1.com 2003). From the statement of the Company Act 1956 (India), we can see that the India company laws recognize the legal personality of a company and directors of the company are the agents of the company in term of being in charge of the duty of management. Therefore, in most case when a company as a legal person is involved in a litigation with another party (individuals or company), the company is legal responsible for any penalty that will be issued by the court. For example, in the 2008 Chinese milk scandal which was a food safety incident in the People’s Republic of China, involving milk and infant formula, and other food materials and components, adulterated with melamine. By November 2008, China reported an estimated 300,000 victims, with six infants dying from kidney stones and other kidney damage, and a further 860 babies hospitalized. The chemical appeared to have been added to milk to cause it to appear to have a higher protein content (bbc.co.uk 2008). Sanlu Group at the heart of China’s melamine-tainted milk scandal was fined about 50 million yuan (7.3 million U.S. dollars) for the damage caused by the melamine-tainted milk products to the victims (mostly the babies) (xinhuanet.com 2009), though the directors of the groups were also penalized for their inability to fulfill their duties, in the litigation between the company and the consumers, the company as a legal entity was sued.

 

1.3    Company as a convenient moral and legal deflection device

 

In my understanding, company is a very convenient moral and legal deflection device, here I try to talk about how a financial or accounting scandal could happen. In the very beginning, the majority of us are greedy, we want more money, higher return and promotion, this is the motivation of most illegal and immoral behaviors; secondly, because ownership and management is separated in the limited liability companies which are the major form of business in the nowadays economy life, the owners set up representative team in the form of board of directors to monitor the performance of the management; thirdly, higher returns and higher risk business practices tend to promote performance of the company in a short period of time which is highly desired by the owners and shareholders, in particular the short term investors. Therefore, for the individual interests, the board could tend to press the management to engage in illegal and immoral business practices, and the management in many case are also willing to do so because their compensation is linked with their performance. So we can see here that the limited liability actually large contribute to the functioning of the illegal and immoral behaviors. The corporate governance actually allow such negative behaviors if they could bring in sufficient short term interests such as monetary compensation to the key parties involved. But such limited liability actually seem to be necessary to encourage people to engage in the economy activities because they do not need to worry too much about the consequence and these consequences are well controlled under the name of limited liability. Therefore, to answer the question, I will say that company has been an effective and convenient moral and legal deflection device