BARRETT_MANUSCRIPT_Evaluating Business Ethics.2016

Is Business Ethics An Oxymoron? A Kantian and Stakeholder Theory Approach to Evaluating Business Ethics.

Craig D. Barrett, Esquire

Author Note

Adjunct Professor for Masters Business Administration Program, Graduate and Professional Studies, Averett University, Danville, VA (MCB Quantico Campus). Correspondence regarding this manuscript should be addressed to Craig D. Barrett. Email: [email protected] or regular mail at 15660 William Bayliss Court, Woodbridge VA 22191. The author can also be reached on cell phone at 703-409-6808.

CONTENTS Introduction: The Purpose of Ethics…………….………….……….…………………………………..p. 3 The Difficulty with Business Ethics…………………………………………….………...............….…p. 4 Introduction of the Procedural and Substantive Challenge…………………….…………..….p. 4 Procedural Problem with the Application of Kantian Ethics……………………...…...….…….…...…p. 6 Organizational Ethics vs. Individual Ethical Theory………………………....…………....…..p. 6 The Challenge of Directly Applying Kant’s Ethics…….………………….……..............….…p. 6 Overcoming the Challenge…………………………………………….……….………..……..p. 8 The Substantive Problem: Applicability of Categorical Imperative……………………………..…….p. 10 Categorical Imperative: Act Only on Maxims that can be Willed as a Universal Law……….p. 11 Categorical Imperative: Treat Humanity as Ends……………………………….……………p. 15 Stakeholder Theory: Response to the Substantive Challenge…..……………………….…….…….…p. 16

What Stakeholder Theory Must Accomplish……………………………………….………….p. 16 Distributive Justice and Social Contract Theory: Broader Theoretical Considerations to Provide A Normative Basis to Stakeholder Theory………………...…………………………………..p. 17

Concluding Thoughts: A Moral Conception of Business Decisions……………..…..………………..p. 22

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Is Business Ethics An Oxymoron? A Kantian and Stakeholder Theory Approach to Evaluating Business Ethics. Craig D. Barrett

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Abstract When we speak of ethics, we think of a set of rules or principles that guide our

actions. Our basic understanding leads us to believe that ethical principles ought to be

followed by everyone under similar circumstances. Said rules or principles would lose

their utility as a guide if it were the case they apply only to certain individuals while others

are unreasonably exempt from the duty to act (or to refrain from acting) in a particular

way. Equally problematic is when given two identical circumstances—all things being

equal—the obligation holds only in one situation and not the other. The issue at hand is

whether we can hold corporations to the same ethical standards to which we hold

individual persons, employing the same ethical analysis to determine the blameworthiness

of business entities. Such a determination serves as the basis for Business Ethics.

However, business entities are dissimilar from persons in very fundamental ways which

calls into question our method of morally judging business entities and thus the notion of

Business Ethics. These fundamental differences cannot be ignored and warrants further

analysis if we are to do justice to any discussion that attempts to determine what in fact

business ethics is and whether such a notion is even coherent. The following paper will

identify and explore the paradoxical tension between the notion of “business” and “ethics”

when viewed through a Kantian lens and will aim to reconcile that tension by appealing to a

version of stakeholder theory. Thus, we can make sense of a normative ethical theory that

serves to guide business practice.

Keywords: Stakeholder theory, Ethics, Kant, Kantian, Business Ethics, categorical

imperative.


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1. Introduction: The Purpose of Ethics

Before beginning an analysis on the coherency of “business ethics”, it is important to

understand the general purpose of ethics. Such an understanding requires a firm grasp of the

assumptions that are at work in our ethical considerations. First, we assume there are actors,

organized socially, whose actions have an effect on others (in that social setting) either for better

or for worse. These actors realize that it is advantageous for them to organize into groups

because there is a higher probability of success for them to operate through mutual cooperation

than it would were one to attempt to succeed at life on their own. Thus these actors operate

within a social setting marked by a set of complicated relationships, connecting one person to

another.1 It is in one’s best interest—one might reason—to operate within this social setting or

well-organized society than it is to go at it alone. As a result, it is in one’s best interest to work

in such a way that would contribute to the sustainability of this well organized society of mutual

cooperation. This leads to the second assumption: these actors have a tendency to act in

accordance with their self-interest.2 This motivation by self-interest has as its direct object some

“good” that is —for some reason or another—relatively difficult to come by or is characterized

by relative scarcity. Because these actors are rational and motivated by their self-interest, they

naturally desire more of a “good” than less for themselves; and, securing more of this “good”,

which is the object of their interest, will invariably breed conflict with others seeking to secure

the same good for themselves due to its relative scarcity. As Rawls explains, “there is conflict of

1 Borrowing from Rawls, central to this discussion of ethics is the role of social institutions and individuals’ position in society. That is, moral considerations independent of society and social institutions however basic or complex may not be possible, for human existence outside society does not exist. As Rawls explains, “the major social institutions define men’s rights and duties and influences their life prospects, what they can expect to be and how well they can hope to do.” (Rawls, A Theory of Justice, p. 7) Thus a coherent discussion of ethics must assume the complex relationship we have in a social setting. 2 This is not to discount the occurrence of altruistic behavior or to suggest that it is somehow irrational when one acts altruistically. On the contrary, one might sacrifice one’s self or prioritize the interest of someone else over their own in an attempt to materialize a much more important overarching interest: a parent might sacrifice herself for the protection of a child in an attempt to perpetuate the species, or an activist might sacrifice themselves in the name of a greater political cause for example. These instances of altruism do not gainsay the claim that rational beings are beings that act in a manner that is consistent with of preserving their self-interests (however defined) but are consistent with self interested pursuits.


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interests since persons are not indifferent as to how the greater benefits produced by their

collaboration are distributed, for in order to pursue their ends they each prefer a larger to a lesser

share.” (Rawls, A Theory of Justice, p. 4.) Thus there becomes a need for ethical principles that

can regulate the interaction between members of society with regards to the fair distribution of

the goods available, recognizing and protecting the respective rights of citizens. Such ethical

principles support the notion of justice and fairness, which are central in the preservation of a

well-ordered society. The question that remains: where does an artificially formed entity such as

a corporation fit into all of this? And how do we define its obligations and duties in ethical

terms? The difficulty of this inquiry, however, should not be underestimated. Nevertheless it is

a challenge I will undertake in the discussion that follows. In an attempt to get a grasp on the

notion of “business ethics”, I will examine stakeholder theory through a Kantian lens with a

reliance on the social contract theory.

2. The Difficulty with Business Ethics

There is generally some consensus as to what constitutes ethical behavior as it relates to

individual rational beings, i.e., people. For example, we basically agree that lying, breaking

promises because keeping said promise no longer benefits us, or using people for our own

personal gain are all morally frowned upon. However, such consensus often fails to carry over

when we attempt to define the ethical behavior of a corporation or define what constitutes

business ethics. In business, creative advertising may be called “lying”; an economic efficient

breach of a contract might be called “breaking of a promise”; and, the purpose of business, which

is to generate profit, might in effect treat people as a means toward that end. Nevertheless, the

aforementioned are acceptable business practices. The difficulty of defining the sort of behavior

that ought to be undertaken by a corporation—beyond mere compliance with established laws—


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is one often taken for granted and often ignored when we engage in a discussion regarding

“business ethics.” For if “ethics” suggests a normative theory that guides action, what exactly

are we saying a business “ought” to do under certain circumstances when it involves the interests

of others? Whose interests is a corporation responsible for protecting, and why? Concepts such

as duty, moral agency, and categorical imperative are all familiar terms in a discussion about the

moral ethics of individual rational beings. However, without rigorous examination of the

appropriate application of those terms, within the context of “business ethics”, such concepts

may lose their coherency in our attempt to determine the acceptable behavior of business entities.

2.1. Introduction of the Procedural and Substantive Challenge

There are two fundamental questions we must consider. First, can (or must) we consider

a business as a moral agent in order for it to have moral obligations or duties in the first place? If

moral obligations are dependent upon the presence of moral agency, we must then answer the

question of what constitutes a moral agent and whether a business in fact possesses the

characteristics required to constitute it as a moral agent as such. Arguably, if we fail to

constitute the corporation as a moral agent, then any notion of moral obligation assumed by a

non-moral agent becomes nonsense—and, equally perplexing would be this notion of “business

ethics.” For how could there be a field of ethics for entities that are non-moral agents? Second,

even if we can assume a corporation has ethical obligations, how can we define the duty of a

corporation, and can we effectively apply Kant’s categorical imperative in this instance? These

two questions, respectively, imply a procedural and substantive challenge that must be

considered when determining the duty of a corporation. The procedural question pertains to

whether a business is one to which the categorical imperative is appropriately assigned in the

first place—i.e., is it proper to treat a corporation as a moral agent; and, the substantive question


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examines whether the categorical imperative can serve as an effective guide for normal business

practices.

Kant “believed that reason provided the basis for the categorical imperative, thus the

categorical imperatives of morality were requirements of reason.” (Bowie, “A Kantian

Approach,” p. 2.) The categorical imperative, although it captures the key feature of individual

morality, does not apply as neatly to a corporation. A corporation’s inability to “reason”

presents some difficulty in supporting the position that a corporation is subject to the categorical

imperative in the first place. I will take on this procedural question in the next section. Second, I

will then address the more substantive challenges of the categorical imperative as it applies to

corporate responsibility. Finally, I will appeal to stakeholder theory from a social contract

perspective to make sense of a Kantian approach to business ethics. The purpose of this paper is

to bridge the gap between (1) business ethics as we may think it applies to corporations and (2)

our normal understanding of Kantian ethics as it applies to the individual morality of persons.

Because corporations are made up of people, our first instincts are to hold businesses

accountable for moral actions using similar reasons we use to hold people accountable.

However, as I will explain later, this reasoning is flawed and thus will not do. It is my intention

to make sense of business ethics, grounded in Kantian ethics, in such a way that is consistent

with our intuitions. Thus we might properly evaluate the actions of a corporation as it operates

under real life market conditions.

3. Procedural Problem with the Application of Kantian Ethics: Moral Agency and the Assignment of Moral Obligation

3.1. Organizational Ethics vs. Individual Moral Theory

There is a distinction that ought to be recognized between organizational ethics and

individual moral theory. Too often in our discussion of business ethics the two obvious distinct


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fields are confounded, leading to strange and often counter-intuitive claims as to what a business

organization ought to do when acting in its capacity as a corporate entity and considering its

place in society. Despite the recognition of the corporation as a legal “person’, an ethical theory

centered around the actions of business entities cannot be modeled perfectly after a Kantian

theory of ethics, as that theory was intended to apply specifically to rational beings, i.e., humans.

Although there are some parallels between what we perceive to be the responsibilities of

corporations and the moral responsibilities of humans—i.e., ideas such as fairness, justice, duty,

frequently appear in discussions of both theories—the concept of “humans” as a subject of ethics

is not interchangeable with the concept of “business entities.” Thus we cannot expect to

establish a singular ethical theory for these two distinct concepts that can provide univocal

guidance for both. Humans and corporation are simply not the same type of being. Rather, a

custom ethical theory for corporations must be constructed from the bottom up rather than

simply adding it as an addendum to the moral theory we hold sound for human beings.

Stakeholder theory is one such theory as will be discussed. Although, some Kantian concepts

may reappear in the context of business ethics, its implications are vastly different than those

considered in the context of (Kantian) moral theory regarding individual persons. Such

differences cannot simply be ignored; and, although a Kantian approach is possible when

understanding the obligations of corporations, some issues arise when directly applying Kant’s

ethics to corporations outside the stakeholder theory framework.

3.2. The Challenge of Directly Applying of Kant’s Ethics

For Kant, autonomy and rationality are necessary for moral agency. Furthermore, in order

for there to be a moral obligation, there must be a moral agent (i.e., a rational being) to whom the

obligation attaches. To elucidate this point, consider for example animal rights activists who


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argue that humans have a duty not to mistreat animals based on our status as rational beings.

Thus, we have a duty to refrain from actions that might be considered cruel to animals; however,

no such duty exists for animals. We do not, for example, hold a lion morally accountable for

mauling its trainer or for injuring other animals. Because animals lack rationality, they are not

considered moral agents to which we could assign blamed. Christine Korsgaard in her article

“Personhood, Animals, and the Law” explains that the basis of rationality is defined by

“normative self-governance.” This is the capacity to be governed by thoughts about what you

ought to do or believe. (Korsgaard, “Personhood, Animals, and the Law,” p. 26) In the

empiricist tradition of Hume and Locke it was common to attribute to human beings alone the

capacity to form what is called second-ordered attitudes, which is the basis for normative self-

governance. (Korsgaard, “Personhood, Animals, and the Law,” p. 26) These are attitudes

towards our own desires and serve as the basis for regulating our actions in accordance with our

understanding of what is “right”, thus not giving in to hedonistic desires without regard to moral

consequences: “Though one may desire to do something, I may disapprove of that desire and

reject its influence over me.” (Korsgaard, “Personhood, Animals, and the Law,” p. 26.) Second-

tier attitudes, Korsgaard explains, are what make humans subject to the “ought.” If this is the

case, a corporation—like an animal—can never be subjected to the “ought” since the

corporation—properly speaking—does not have desires and cannot engage in the act of

“normative self-governance.” Thus, the question of moral obligation, which is the subject of

ethics, entails the question of what constitutes moral agency. It therefore seems if we cannot

constitute a “being” as a moral agent, a discussion of ethics that might govern the actions of said

being would be incoherent. This is the procedural problem.


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Though it is true the corporation as a whole has as its constitutive parts “real”

autonomous rational beings—i.e., people—that alone cannot not support the position that a

corporation is a moral agent, subject to the same categorical imperatives like promise-keeping

for example. This would be an appeal to an informal fallacy, which is the fallacy of

composition. This fallacious inference improperly attributes characteristic of the parts of a whole

to the collective whole. This simple logical point makes it difficult to move from a Kantian

argument we hold sound for individuals to an ethical argument regarding corporations grounded

in a similar Kantian theory. For example, just because all of the parts of a machine are made in

Germany does not necessarily mean the machine comprised of those parts is made in Germany

as well. For it could be the case the parts were shipped to the United States and the machine was

assembled there. Thus, a corporation made of moral agents does not make the corporation, as

such, a moral agent as well. However, it does not seem correct to end the story there, for we do

say “a company ought to do such and such”, or “this company is responsible for thus and so

harm.” And we feel justified in doing so. Unless we are willing to concede that such “moral-

language” as it relates to corporations is no more than a misnomer—that is to say, it is no more

than an improper application of language to corporate behavior—we will need to do more work

here. This incongruence between the corporate collective and the individual moral agent is not

the undoing of business ethics. However some work must be done to overcome this challenge.

3.3. Overcoming the Challenge

The question then is whether a corporation is the sort of entity that can be the subject of

moral duty. This then leads us to the following question: is moral agency a necessary

precondition for a corporation in order for it to have moral responsibilities thus making sense of

the notion of business ethics? As stated, if moral agency is based on rationality, moral


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responsibility is not possible. However, we may still be able to make a case for Business

Ethics. In Margaret Gilbert's article “Who's to blame? Collective Moral Responsibility and Its

Implications for Group Members,” she explores the question of blameworthiness as it pertains to

individuals and the collective group to which the individuals are said to belong. Since the

corporate entity only exists as an entity made up of people, the actions of the corporate entity

necessarily are actions carried out by people. Gilbert explores the asymmetry between the flow

of blameworthiness to individuals (from the group) as compared to the flow of blame to the

collective (from individuals) as it pertains to the same act. The example she provides is one

where we as humans assume responsibility for environmental pollution even though I as an

individual may not have specifically engaged in any activities causally connected to the pollution

of the environment. In such a case, the collective (not the individual) serves as a distinct subject

to our moral judgment. (Gilbert, “Who's to Blame,” p. 102) Here, although what is true for the

whole is not necessarily true of its constitutive parts, blame still attaches to both entities. In the

business context, although Enron as a company may have been blameworthy for a variety of

corporate malfeasance deserving of sanctions, the manager of research and development of

Enron may not be held personally responsible or viewed with the same approbation. However,

to the extent that the manager’s efforts are in support of the success of a corrupt company and is

identifiable with the company, she shoulders blame in that regard. Conversely, the bad acts of an

individual, whether CEO or line-worker, might be imputed to the organization. Thus, the

corporate collective is worthy of blame and deserving of punishment even if there was no

unanimous corporate endorsement of the bad act by the members of the collective group. This

pattern of the assignment of blame in the latter case is also present in our legal system of Agency

and Tort Law. The theory of Respondent Superior (“imputed liability”) in law endorses the


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rendering of liability to the corporation (the principal) for the specific actions of the individual

employee (acting as agents of the corporation) in instances when the company stands to benefit

from the wrong committed or if the wrong committed was within the scope of their employment

in support of the collective objective. “Under the doctrine of respondent superior…the principal

may be held liable for an agent’s tort even though the principal was blameless.” (Posner,

Economic Analysis of Law, p. 114) Thus blame is assigned to the collective (or corporation)

even though the collective did not formally endorse the “bad act” in question.

Even though the status of moral agency does not go from individual member to corporate

collective—because of the requirement of rationality—does not prevent one from passing

judgment on the corporate entity under a theory of imputed liability. It is uncontroverted that a

corporation is made up of individual autonomous beings. It cannot exist otherwise. However,

although we may not be able to claim the corporate collective is a moral agent as such, if an act

is wrong and causes harm as a result, said act is wrong whether attributed to an individual

member of the collective or attributable to the entire organization. Said act may be attributed to

the corporation because the individual actor was acting at the behest of the corporate entity or

because the corporate entity benefitted from the commission of the “bad act.” In this way, the

corporate collective “owns” the actions and may therefore be judged accordingly—though not in

exactly the same way we morally judge individual actors. Thus by focusing on the act itself, and

not necessarily on the constitution of the “actor” (as moral agent) we can make coherent moral

judgments about business practices. Granted, because of the absence of rationality, this is not a

perfect “Kantian” judgment of business practices so to speak. However, even if Kant’s theory

does not perfectly apply to corporate practices, “he still has a lot to offer the business ethicist”.

(Bowie “A Kantian Approach,” p. 12) For as stated earlier, we do—as common practice—pass


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moral judgment on corporate activity. However, the fact that we engage in a particular act

cannot serve as a normative basis or as justification for that act. Description of a practice alone

is not sufficient to serve as justification of this practice, as you cannot obtain an “ought” from an

“is”. This is in philosophy a well-known error in reasoning called the naturalistic fallacy.

However, so long as the corporate entity is considered the “but-for” cause of the complained-of

act in question, even if the actions are executed by the employees for corporation’s benefit, we

are justified under the Tort Law theory of respondent superior (see, supra p. 8) in ascribing

blame to that corporation. If we accept the proposition that a corporation can be blameworthy as

argued above, then we can argue they possess duties: For the assignment of blame properly

occurs when one fails to carryout one’s duties as assigned. However, how might we define the

duties of corporate entities? This brings us to the substantive issue and is one that will be

addressed in a discussion of stakeholder theory. These are taken up in greater detail in the

sections that follows, first examining the substantive issue in greater detail.

4. The Substantive Problem: Applicability of Categorical Imperative To Corporations

A summary of Kant’s categorical imperative might be summarized as follows:

1. Act only on maxims which you can will to be universal laws of nature; 2. Always treat the humanity in a person as an end and never as a means only; 3. So act as if you were a member of an ideal kingdom of ends in which you were both

subject and sovereign at the same time

In his article “The Kantian Approach to Business Ethics,” Bowie explains, “Kant’s ethics

is an ethics of duty rather than an ethics of consequences.” The ethical person, he continues, “is

the person who acts from the right intentions.” (Bowie, “A Kantian Approach to Business

Ethics,” p. 2) Such intentions must not be concerned with the consequences of a particular act

but must instead focus on the duty (or obligation) that give rise to the act in the first place. Thus,

Kant’s ethics has as its fundamental principle the “categorical imperative”, which provides the


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outline for ethical duty. “The categorical imperative,” Bowie continues, “is not irrelevant in the

world of business. If a maxim for an action when universalized is self-defeating, then the

contemplated action is not ethical. That is Kant’s conceptual point.” (Bowie, The Kantian

Approach, p. 5)

4.1 Categorical Imperative: Act Only on Maxims that can be Willed as a Universal Law

However despite Bowie’s claim of the categorical imperative’s applicability in the world

of business, there are some challenges in a applying the categorical imperative to business

organizations. Consider the applicability of (1) “act only on maxims which you can will to be

universal laws of nature.” On Kantian grounds, Bowie argues, a corporation must act only on

maxims it can will to be universal business law without yielding a contradiction in its practice or

yield a “self-defeating” end. From an individual perspective it is easy to see how this might play

out: consider one who engages in the act of stealing in order to secure more resources for herself.

She could not universalize this act of stealing as a universal law without endorsing the act of

stealing in general, to include the stealing of resources from herself; and, for her to endorse the

act of “being stolen from” contradicts (or defeats) her original purpose to secure more resources

for herself—which was the motivation for her to steal in the first place. Thus the act of stealing

in this case cannot be morally endorsed according to the categorical imperative. In this way

Bowie argues, “when enough people behave immorally…certain business practices…become

impossible.” (Bowie, “A The Kantian Approach,” p.5.)

What is problematic about Bowie’s assessment here is (1) corporations are not—strictly

speaking—individual persons (an issue addressed in the previous section); and, (2) although the

act of going back on promises, for example, may be an act that cannot be universalized as

universal law for persons, the efficient breach or renegotiation of a contract is a common


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acceptable business practice. A contract represents a legally enforceable promise; however,

when its terms are no longer advantageous to a party of the contract, it is not uncommon for a

business to renegotiate or refuse to honor those terms. Bowie acknowledges this point in his

article explaining, “[executives] point out that, in the real world, contracts are often

‘renegotiated’ and yet business people still engage in contract making.” To this, Bowie simply

replies: “These executives raise an interesting point.” (Bowie, “A Kant Approach,” p. 4) Bowie

then cites to some other “real world” business examples that support Kant’s point but never

directly addresses the issue of “broken-promises” in business contracts. I contend this is more

than just “an interesting point” and represents a substantive issue that merits further examination,

for it calls into question the applicability of the categorical imperative to very common business

practices.

Consistent with the law (and supported by one legal economic theory) it is a common

practice for companies to engage in what is called an efficient breach. According to Black’s

Law Dictionary, efficient breach theory is a modern contract theory that endorses the breaching

of a contract and payment of damages to the non-breaching party if doing so would be more

“economically efficient [than performing under the contract]...[And this] occurs when the

breaching party will still profit after compensating the other for its ‘expectation interest.’”

(Black’s Law Dictionary, Abridged Sixth Edition.) It should be noted, however, “this theory is

not well accepted.” (Id.) However, the point here is not to argue the merits of the “efficient

breach theory”; rather, the point is to demonstrate how the categorical imperative of “promise

keeping” may not be “self-defeating” if violated in the context of normal business practices. As

Richard Posner explains,


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In some cases a party is tempted to break his contract simply because his profit from breach would exceed his profit from completion of the contract. If it would also exceed the expected profit to the other party from completion of the contract, and if damages are limited to the loss of that profit, there will be an incentive to commit a breach.” (Posner, Economic Analysis of Law, p. 120.)

To elucidate this point, consider the following example (inspired by a well-known illustration by

Judge Posner): assume Company A contracts to deliver 100 widgets to Company B for $1 per

widget. Company B will in turn use these 100 widgets to create 25 machine gadgets it plans to

sell in the market place for $10 per gadget (10 x $25= $250 in gross sales) thus realizing a profit

of $150 before assembly cost, shipping, warehousing etc. (i.e., $250 cash after sales -$100 the

cost of the widgets = $150 before-cost earnings). Assuming said costs to Company B are $2.50

per gadget (2.50 x 25=$62.50), Company B expects to yield a net profit of $87.50 ($150-

62.50=$87.50) if Company A performs per the contract. Assume further that instead of selling

the 100 widgets to Company B as contracted, Company A sells the widgets to Company C who

finds itself in desperate need of the widgets in question and is willing to pay double the market

value at $2 per widget ($2 x 100=$200). Company A, not wanting to pass up on an arbitrage

opportunity, decides to breach the contract it has with Company B, paying Company B damages

in the amount of $88 dollars—in effect purchasing the “right” to keep the widgets. The dollar

amount in damages Company B receives is $0.50 more than Company B would have realized

had the contract been honored. Additionally, Company A as a result of the breach realizes a gain

of $112.00 (after damages paid to Company B), $12 more than the gains Company A would have

realized had it honored the contract in the first place. In such an example, all players in the

market, Company A, B, and C fair better than they would had the parties performed in

accordance with the original contract. Thus, breaching the contract is Pareto Superior to


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honoring the contract. Here market efficiency, dictates what is in the best interest of all parties

involved and is thus the action that ought to be taken.

This idea was never more clearly expressed than in Ronald Coase’s “The Problem of

Social Cost.” The Coase Theorem is concerned with resolving the conflict between competing

activities. The conflict arises when the pursuit for profits for one activity threatens the gains of a

competing activity. Here the parties enjoy legal entitlements with regards to their respective

activities for which a market valuation is attached. The point of conflict is as yet unresolved;

and, the market is capable of determining the practical outcome of the dispute based on the

market value of each activity no matter what legal resolution is proposed at the point of conflict.

The basic thesis of Coase is that efficient market theory can better resolve the disputes between

two parties where “rights” and “obligations” are in question. Rather than appealing to legal

institutions to adjudicate what is “right”, “fair”, or “just”, the wider normative application of the

Coase Theorem asserts that legal liability ought to be determined based upon economic

efficiency. And rather than imposing punishment upon the “wrong-doing” company, that

company might simply be required to pay “rents” to the suffering party in an amount dictated by

the market. In such a case, the (complained-of) act must generate more value through its activity

than the value created if the company were to refrain from that activity. Here this value creates a

larger “pie” to be shared by all interested parties who each in effect will enjoy a larger share.

Because the administration of justice comes with associated transaction costs, the size of the

“pie” is substantially reduced when justice is sought through the court system.3 This “transaction

3 In the section on administrative cost, Kaplow and Shavell’s explanation illustrates, in my view, how transaction cost associated with the legal system lead to market inefficiency. They explain, “The administrative costs of the liability system are the legal and other costs (notably the time of litigants) involved in bringing suit and resolving it through settlement or trial. These costs are substantial; a number of estimates suggest that, on average, administrative costs of a dollar or more are incurred for every dollar that a victim receives through the liability system. In contrast, the administrative cost of receiving a dollar through the insurance system is often below fifteen cents.” (Kaplow and Shavell, Economic Analysis of Law, p. 1673)


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cost” reduces the value available for all parties to share—or so a proponent of the Coase

Theorem might argue.4 Thus the more valuable harm-causing activity—absent transaction cost

however defined—might be able to buyout and induce the less valuable activity to forgo its legal

rights. The more valuable harm-causing activity is now free to pursue its activity so long as the

value it generates is sufficient to conduct the buyout and still retain a gain. Thus, the Coase

Theorem posits that the determination of legal liability (and perhaps also moral responsibility)

becomes moot where efficient markets are concerned. In pursuit of establishing economic

efficiency, “[l]aw and economics derive the guiding principle that the courts should mimic the

markets: the courts should determine issues of liability on the basis of what the market in ideal

conditions would determine as the efficient outcome of the dispute between parties.” (Halpin,

Disproving The Coase Theorem? p. 322.) Thus an efficient breach of a promise—from a

business perspective—if adopted as a universal law does not “defeat” the activity of contract-

making but may fall under the vast array of business practices supported by market efficiency.

Such practices do not defeat contracting between businesses, but facilitates its negotiation in a

free market.

4.2. Second Categorical Imperative: Treat Humanity as Ends

The second representation of the categorical imperative requires that we treat humanity as an

end and never as a means. Such an idea of the categorical imperative may be difficult to apply

in that a corporation is an artificially created entity formed for the sole purpose of generating a

profit.5 If we accept profit seeking as the function of a business, how can a corporation ever

4 It should be noted that in my paper to which I cite, supra at p.13, I argue against this position. In that discussion, I contend that we cannot ignore the value that society places in the act of formally assigning blame to the harm-causing party. This assignment of blame can only be acquired through the institution of laws, which necessarily comes with an associated transactional cost. Thus, our desire to hold wrong-doers accountable for their actions cannot always be replaced with cash compensation—however, oftentimes it can. 5 Obviously to the extent that such a pursuit runs afoul established laws, such actions ought to be avoid; however, this—arguably—is because purposefully violating the law threatens the corporation’s profits and because violation of the law might lead to costly fines or substantial diminution of market value that could lead to the corporation’s ultimate undoing.


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avoid treating beings—whether employees, customers, investors or suppliers—other than as a

means to that end? This then violates Kant’s categorical imperative if we accept Bowie’s

position that “it is a central tenant of Kant’s moral philosophy that an action is only truly moral if

it is morally motivated.” (Bowie, Kantian Approach, p.11). Thus a theory on business ethics

must do more than speak to the instrumental function of managerial decisions. That is, it must

establish something more than “a framework for examining the connections…between the

[ethical] practice of…management and the achievement of various corporate performance

goals.” (Donaldson and Preston, Stakeholder Theory, p. 67. Here defining “instrumental

function” of morality.) This would be no more than engaging in a moral act because it is

instrumental or a means in achieving various ends or performance goals. Consider, for example,

a company that produces defective cars that might cause the death of others. A decision by

management to recall these cars may only be because in the short-run it restores the confidence

of the consumer in the company’s brand. Thus in the long-run, the corrective action preserves

the company’s market share amongst those customers—promising the company’s continued

success—serving as an instrumental basis for a manager’s decision. Although the decision

considers the customer and perhaps the community writ large, there is still a component of that

decision that seems to casts a lascivious eye toward profit preservation. However, this is not a

desirable start for an ethical theory. On Kantian grounds, “it is the intention behind an action

rather than its consequences that make an action good…For Kant if a merchant is honest so as to

earn a good reputation, these acts of being honest are not genuinely moral.” (Bowie, A Kantian

Approach to Business Ethics, p. 1) In such a case—a decision made on purely instrumental

grounds cannot be said to be “ethical” because people are not treated as ends in themselves but

merely as means to a more self-serving corporate objective. However, it seems odd that we


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should expect an artificially created entity formed for the purpose of creating profit to have an

obligation to materialize some end that does not preserve profit. Thus claiming there exists a

branch of ethics that imposes such an obligation on businesses may seem equally odd.

Donaldson and Preston explain that although descriptive and instrumental justifications “are

significant aspects of the of stakeholder theory, its fundamental basis is normative.” (Donaldson

and Preston, Stakeholder Theory, p. 67) In this way, Donaldson and Preston concede there is a

need for the theory to have some “normative bite” if it is to have any ethical significance. As

such, it is imperative (no pun intended) that our justifications of corporate activity go beyond

profit generation (which is an instrumental justification) if we are to establish a normative basis

in support of our moral judgments in the context of business ethics.

5. Stakeholder Theory: Response to the Substantive Challenge

5.1. What Stakeholder Theory Must Accomplish

In their article “The Stakeholder Theory of the Corporation: Concepts, Evidence, and

Implication,” Thomas Donaldson and Lee Preston argue that managers can apply stakeholder

theory to guide their decisions. They “believe that the ultimate justification for the stakeholder

theory is to be found in its normative base.” Donaldson and Lee conclude that the alternative to

stakeholder theory, which is a style of management centered on shareowner interests, is

untenable. (Donaldson and Preston p. 88.) “Stakeholders are persons or groups with legitimate

interests in procedural and/or substantive aspects of corporate activity and are identified by their

interest in the corporation, whether the corporation has any corresponding functional interest in

them.” (Donaldson and Preston, p. 67 emphasis in the original.) However, even if we concede

that developing a normative theory around the interest of shareowners is in fact “untenable,” how

do we justify imposing an “ought” on business organizations that requires it to take into


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consideration the interests of these “other” persons? Consider for example the following: the

adoption of certain technology may increase efficiency in the production of the product the

company sells, however, this technology results in the elimination of hundreds of jobs and the

termination of hundreds of employees; or the outsourcing of jobs increases a company’s profit

margin but also devastates the economy of the adjacent community as a result of the decreased

economic activity in that area; or finally, the carbon emissions of a corporation’s industrial plant

is central to its production and profit but reduces the quality of air for future generations. Why

should a company, in any of these instances, forgo immediate profit to preserve jobs for

employees, or help to maintain the economic stability of the adjacent community, or preserve the

environment for future generations? Consequently we must reveal what Donaldson and Preston

allude to as the “normative base” of the stakeholder theory. It is this ”normative base” that is

doing most of the theoretical heavy lifting here. Second, who qualifies as a “legitimate”

stakeholder in the first place, and how must we consider and adjudicate their varied and

sometimes conflicting interests? To the latter question, the solution starts with how we must

define “interest.” If it is the case that the type of “interest” determines whether one has a

legitimate stake, which is at the root of stakeholder theory, it becomes necessary to delineate

with some clarity what and how interests are considered legitimate. To accomplish this, we must

appeal to a theory of property rights. Here we argue that stakeholders have entitlements and

rights in the value created by the corporation because of the relationship corporations have with

them and society writ large. Then it must be determined how that value can be fairly distributed

amongst those with these legitimate claims.


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5.2. Distributive Justice and Social Contract Theory: Broader Theoretical Considerations to Provide A Normative Basis to Stakeholder Theory

“Even the most enlightened corporations are almost always justified in part on the

grounds that such actions are profitable, it appears [then] that even the best actions of the best

corporations are not truly moral.” (Bowie Kantian Theory p. 12.) Enhancing profit, arguably,

represents the “self interest” of the company and is the purpose of the corporation’s existence,

for the corporation was formed for that purpose. Although other interests may be considered, the

self-interest of the corporation (i.e., profit) may seem to subordinate all other interests (not

leading to profit.) Milton Friedman argues “the whole justification for permitting the corporate

executive to be selected by stockholders is that the executive is an agent serving the interest of

the principal. This justification disappears when the corporate executive imposes taxes and

spends the proceeds for social purposes.” (Friedman, The Social Responsibility of Business, p.

4, emphasis added.) Here Friedman is incorrect: the justification for a manager’s decision does

not necessarily “disappear” simply because it serves the interest of other interested parties and

results in some social good. Friedman’s point fails to consider the duty a manager may have as

agent of multiple principals, i.e., the various stakeholders. Consider stakeholder theory as

outlined above which suggests a business, specifically managers, should consider the interests of

not only shareowners—whose primary interest is profit—but also to others who too have a

“stake” in the success of the firm or who are somehow otherwise impacted by the activities of

the firm. Under stakeholder theory, the decisions made by management are not always “profit-

driven” and must consider the respect for and dignity of other stakeholders, treating them as ends

in themselves and not merely as means. This represents the notion of “the what” with regards to


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the actions managers should take, but we must determine “how” these interests ought to be

managed. Stakeholder theory thus requires support in order to succeed as a normative theory.

Although stakeholder theory advocates argue that mangers ought to shift their focus from

a shareowner centric style of management to a stakeholder style of management, this theory must

still consider the interest of shareowners, though not as a primary focus. The theory expands the

category of persons whose interests ought to be protected by managerial decisions. Notably, in

order for a theory to fail to qualify as a stakeholder theory, such a theory would “have to

specifically instruct managers to ignore the interests, values, and rights of one or more category

of persons…” (Hasnas p. 50); thus stakeholder theory requires a manager to consider the interest

of (all) those who might have a stake in the company’s success and not just the interest of the

shareowner. However, the theory is vulnerable to criticism of it failing to be a normative theory.

According to one such criticism, Hasnas explains, “the injunction that business ‘pay attention’ to

stakeholders does not mark out any definite normative theory.” (Id. p. 50.) Any managerial

decision would be justifiable since every act would be in the interest of some stakeholder; and, if

everyone is a legitimate stakeholder, stakeholder theory would endorse any act on the basis that

it furthers the interest of someone. There is no “definite normative theory” here; and, no

guidance, then, will be available under this theory. Thus there must be an appeal to another

theory that might guide us in prioritizing the interests of the various stakeholders we are now

considering.

To start, the “interests of all stakeholders are of intrinsic value. That is, each group of

stakeholders merit consideration for its own sake and not merely because of its ability to further

the interest of some other group, such as shareowners.” (Donaldson and Preston, Stakeholder

Theory, p. 67) The for-profit corporation is an artificially created entity formed for the purpose


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of creating value. Thus the appropriate question becomes simply: who has rights in the value

generated by the corporation? Thus persons acting in their capacity as managers are merely

agents of those whom might be identified as having legitimate property claims to that value. In

this way, the stakeholder theory is based on a much broader philosophical theory, supported by a

notion of distributive justice. More precisely, how ought the primary goods, i.e., profit,

generated by the corporation be distributed amongst existing parties who may have a legitimate

claim to the value created by the corporation? Stakeholder theory recognizes a right to the value

created by the company amongst those other than the shareowner. Such a notion can be

normatively based on the evolving theory of property rights. (Donaldson and Preston,

Stakeholder Theory, p. 83.) The irony in this view, as Donaldson and Preston point out, is that

“property rights” have most commonly been associated with shareowner’s interests. (See id. at

p. 83.) However, as Donaldson and Preston explains, the most persuasive view of property

rights is as a bundle of many rights and not the unlimited rights of one party. The rights and

entitlements of owners are merely part of the story here: because the adjudication of rights,

privileges, and obligations are done amongst human actors, we must also consider the plethora of

human rights and obligations based on our coexistence qua humans, a relationship which is far

more complicated than mere “property ownership” would suggest. There is a mutual

dependency we have on one another. As such, we must consider society—independent of the

individual property owner—even in the context of the ownership of specific property, for

without society and the preservation of its well-being, the “thing” which is the subject of

ownership and enjoyed by its owner would not exist in the first place. Thus not even a privately

owned track of land purchased with the hard-earned dollars of the owner should be used to

dispose of toxic nuclear waste. Or in the less extreme case, all property is subject to taxes


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revenue, which is used for the public good. Here there is a feature of stakeholder theory that

provides a normative approach to business ethics: shareholders or owners or investors are not

the only ones entitled to the value created from trade, sales, production etc. Rather, an account

can be defended where other stakeholders are entitled to the residual gain on a notion of

distributive justice and a version of social contract theory.

From a social contract perspective, each stakeholder is not only essential to the

corporation’s ability to generate profit, but is also essential to the corporation’s very existence.

The corporation reaps the benefits from the mutual cooperation of those who work in society for

the mutual advantage of all members within that society; and, as a beneficiary of the advantage

created, the basic theory of social contract requires the corporation also to treat those participants

as ends rather than means to more self-serving ends. For without society’s participants, the self-

serving ends could not be realized in the first place. The notion of social contract theory coupled

with a theory of Kantian ethics and distributed justice is doing the philosophical “work” here,

grounding stakeholder theory as a normative one. Thus Donaldson and Preston are correct in

saying, “more formal normative justifications of stakeholder theory might be based on broad

theories of philosophical ethics, such as utilitarianism, or narrower “middle-level” theories

derived from the notion that a social contract exists between corporation and society.”

(Donaldson and Preston, Stakeholder Theory, p. 83.)

From a Kantian perspective it is not acceptable to give priority to some stakeholders’

interest simply because they out number other stakeholders as advocated by utilitarianism. A

corporation, then, may decide not to enhance corporate profit or shareowner gain if so doing fails

to treat stakeholders (other than shareowners) with dignity and respect. These other stakeholders

by virtue of their position in society, relationship to the corporation, and contribution to its


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continued existence, arguably, possess a property interest in the corporate created value. Thus

those with a legitimate claim to the value created by the corporation must be treated with the

respect and dignity that would require the manager to consider their interest, treating them as

ends insofar as their existence is the necessary precondition upon which the existence of the

corporation rest. Thus when considering the “just” distribution of corporate-created value, every

stakeholder is entitled to their fair share for reasons that can be justified on Kantian grounds and

considering the special relationship developed between corporations and other entities in the

context of the social contract tradition. As a result, a fair distribution of corporate value may

appropriately reduce the value or profit for shareowners.

Thus the Stakeholder theory suggests that matters are more complicated: stakeholder

relationships are involved, and human beings are more complex than standard accounts assume.

All stakeholders must be treated as ends in themselves because each stakeholder is sine quo non

to the formation and continued existence of the corporate entity. In this way, we can evaluate the

behavior of the corporate entity in its treatment of the many stakeholders who have a property

stake in the value that a corporation creates because, in a sense, neither the corporation nor the

value it creates would exist but-for the existence of these stakeholders. Thus there is nothing

incoherent about a corporation—from an ethical standpoint—taking into consideration the stake

of say, employees, suppliers, or the adjacent community, eliminating profit generating behavior

that might adversely impact on those stakeholders. From a social contract theorist perspective,

without these stakeholders and—to be sure—without society writ large, the corporation itself

would not exist. From one perspective, it is not necessarily the case the corporation is forgoing

greater profit in the interest of, say, preserving a living wage for employees; rather, a portion of

the value generated by the corporation is returned to the population of persons, i.e., employees,


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who make it possible for the company to generate value in the first place. Their role then must

be considered on moral grounds, as their contribution creates an entitlement and a right to the

value generated by the corporation. How that value is distributed might be determined on

Kantian grounds of justice and fairness, perhaps set in the Rawlsian tradition of Justice as

Fairness for example.6

6. Concluding Thoughts: A Moral Conception of Business Decisions

An action undertaken by a corporation that results in its inability to turn a profit may lead

to its inability to meet pay roll, cover invoices from suppliers, or pay overhead which enables the

corporation to bring their product or services to market. These inabilities may result in the

company’s failure and ultimate dissolution. A corporation’s failure can adversely affect its

employees who are now faced with unemployment, other businesses that rely on that

corporation’s economic role in society, and adversely impact customers who now no longer

receive products and services from the failed company. Conversely, decisions that may increase

profit can lead to the damage of the environment when shortcuts are taken, the exploitation of

low wageworkers, and the damaging of the economy through unfair business practices. When

corporations understand that they do not function independent of society, it becomes natural to

adopt a stakeholder approach; for like individuals, business entities can only realize their

objectives within the framework of the social cooperation for mutual advantage that

characterizes a well ordered society. Thus every decision made by a corporation should take into

account the interests of those who not only have a equity interest in the company, but also, those

whose existence makes it possible for the corporation to do business in the first place.

6 See John Rawls discussion of justice as fairness in his book A Theory of Justice.


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One clear example of this is when Goldman Sachs used Credit Default Swaps to reduce

the risks inherent in the mortgage-backed securities it sold in the market place. The default

swaps were basically an “insurance policy” taken against the mortgage backed security in the

event the borrower failed to repay the underlying mortgage from which the mortgage security

derived.7 Goldman Sachs collected fees by packaging the mortgaged backed securities they sold

to investors which in turn created greater liquidity for the banks to originate loans for home

purchasing. Greater liquidity led to more available loans, which led to greater demand for

homes because more people now had access to mortgages. This greater demand for homes

artificial increased home value, which is a simple matter of supply and demand. In addition,

more loans led to more origination fees for (saving and loan) banks and led to more security

products such as mortgage securities for investors to purchase; and, thus this led to more fees for

investment banks such as Goldman Sachs. The moral issue is this: while Goldman sold these

securities to (and collected fees from) their clients, they also purchased these Debt Swaps

(insurance policies) against the very products they sold to their clients. Thus Goldman stood to

make money should borrowers fail to repay these mortgages; however, if and when these same

borrowers defaulted, Goldman’s clients who held these mortgage securities would lose money as

a result. Thus in essence, Goldman stood to make money on the failure of a product they sold to

their clients who would in the end lose millions.

On a phone conference, one top Goldman executive stated—and I am paraphrasing

here—“there is nothing wrong with conflicts of interests in business; rather, it is how you

manage these conflicts that is important to good business practices.” Here we have a case where

7 Technically, although credit default swaps function as an insurance policy, it is treated as a financial instrument rather than an insurance policy subject to a variety of regulations. Arguably, the intention behind calling these products financial instruments titling them “credit default swaps” or “credit default obligations” rather than “credit default insurance policies” was with the intentions of side-stepping the regulations imposed upon insurance products: One such regulation requires that the entity ensuring the policy (in this case AIG) actually has the liquid cash to cover the losses the policy is intended to protect the policy holder against.


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Goldman engaged in actions that affected a variety of stakeholders all of whom were owed a

duty. They are as follows: (1) clients who were sold risky financial product; (2) shareholders,

who are entitled to —when legally possible—the minimization of risks of their capital invested

which prompted the purchase of the Default Swaps in this case; and, (3) society and the financial

system which was devastated due to the oversaturation of subprime-lending in the market,

facilitated by mortgage-backed securities sold by Goldman. Though there was nothing overtly

illegal about Goldman’s purchase of $2 billion in Default Swaps or their standing to gain from

their clients’ losses, an evaluation as to whether their actions were “right” can be effectively

determined by applying stakeholder theory as presented in the discussion above. One might

argue that in this case, sufficient consideration was not given to clients and the financial impact

on society writ large with an over emphasis on the interest of shareowners and profit. This

becomes increasingly more apparent when we consider the $183 billion of taxpayer dollars used

for the corporate bailout of insurance company giant AIG who owed Goldman approximately

$13 billion dollars. Thus in the end, Goldman was paid $13 billion from AIG who was bailed-

out by the collective earnings of members of the same society devastated by Goldman’s actions

that spawned the housing bubble in the first place.

This interdependency between corporation and society requires the corporate entity to

treat all these stakeholders as ends in themselves and not simply a means to leverage greater

profit (for the benefit of one of many stakeholders). Moreover, the claims to the value created by

the corporation are not the exclusive property interest of shareowners. Thus managers should

not limit their consideration to what is in the interest of shareowners and investors alone when

making decisions. A broader understanding of property rights includes a consideration of the

many and complex relationships between society’s participants to include its citizens as well as


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corporate entities. This broader understanding of property rights requires one to consider the

claims and rights of other stakeholders and the obligation the corporation may have to them.

Thus decisions based on stakeholder theory, coupled with Kantian and social contract

consideration, provides a more comprehensive approach of what a corporation ought to do,

considering its place in society and the overall implications and impact of its actions. And

although such decisions may at times appear also to maximize profit, managers must have some

justification for those decisions beyond mere profit maximization.

References

1. Bowie, “A Kantian Approach to Business Ethics”, Ethical Issues in Business: a philosophical approach. 7th ed. New Jersey: Prentice Hall pp. 61-71

2. Bowie, “A Kantian Theory of Meaningful Work” 3. Coase, Ronald H., The Problem of Social Cost, (1960). The Journal of Law &

Economics, volume III, pp1-44. 4. Donaldson and Preston, “Stake holder Theory of the Corporations Concepts, Evidence,

and Implication,” The Academy of Management Review, Vol. 20, No. 1 (Jan., 1995), pp. 65-91

5. Friedman, Milton, “The Social Responsibility of Business is to Increase Its Profits,” (1970) The New York Times Magazine, September 13, 1970

6. Haplin, Andrew, “Disproving The Coase Theorem?” (2007) Economics and Philosophy, 23, pp321-341

7. Hasnus, John, “Whither Stake Holder Theory? A Guide for the Perplexed Revisited,” (2012) Springer Science Business Media B.V.

8. Kosgaard Christine, “Personhood, Animals, and the Law”, Think Philosophy for Everyone, Summer 2013, 25-32

9. Margeret Gilbert, “Who's to Blame? Collective Moral Responsibility and Its Implications for Group Members” (2006) Midwest Studies in Philosophy, Blackwell Publishing, Inc.

10. Posner, Richard Economic Analysis of Law, Sixth Ed., Aspen Publishers (2007) 11. Rawls, John, Theory of Justice, Harvard University Press (1971)

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