The Social Responsibility of Corporations; J.Hasnas

Wait a minute. A business ethicist? Aren't they the butt of all those jokes? You know, "I looked up the word oxymoron in the dictionary and it said 'see business ethics. '" Or "One undergraduate says to another undergraduate, 'I just signed up for Busi ness Ethics 101.' The other responds, 'It must be a short course. '" Well, after years of being subjected to this derision, business ethicists are finallylaugh ing all the way to the bank. For the business ethics business is booming. Since 1990, there have been approximately 100 substan tial corporate contracts for outside ethics consultants each year, with about 25 to 30 major companies spending more than $50,000 and five spending more than $1 Dr. Hasnas is Assistant Professor of Business Ethics at Georgetown University and Senior Research Fellow, Kennedy Institute of Ethics. million. Ethicists can make from $25,000 to $150,000 a pop performing ethical audits of corporations and from $1 ,500to $4,500a day running ethics training programs. As Timo thy C. Mazur, a veteran ethics consultant, has expressed it, "Our market has just exploded. All of a sudden huge companies need ethics training fast. " Before too long, he adds, he and his fellow ethics consultants "will be driving BMW's instead of Honda Preludes. ,,1 What accounts for this rash of corporate interest in ethics? Have hard-boiled, prac tical-minded executives suddenly seen the light? Has the Age of Aquarius finally dawned? Or is there a more mundane ex planation? To suggest that the latter may be the case, let me tell you a story. I'll call it "A Brief History of the Social Responsibility of Corporations. "

Before beginning, 1 should say a word about what this phrase means. To claim that corporations have social responsibilities is to claim that corporations have moral obli gations to expend funds for socially benefi cial purposes even when such expenditures have not been authorized by the stockhold ers and are not in the financial interest of the 332 corporation. Thus, in telling a story about the social responsibility of corporations, I am not discussing either cases in which the stockholders have specifically authorized the expenditure offunds for social purposes, e.g., nonprofit corporations such as the Red Cross or the Nature Conservancy and for profit corporations in which the stockhold ers vote for "socially conscious investing," or those in which such expenditures are made in the belief that they will increase the firm's profitability, e.g., through the cre ation of customer goodwill. Rather, I am discussing the claim that corporations are obligated to make such expenditures when neither is the case.

A Story Once· upon a time, it was believed that corporations had no social responsibilities. This was because corporations were viewed as arrangements by which one group of people, the stockholders, advanced capital to another group, the corporate managers, to\be used to realize certain specified ends. Under this view, the managers were "agents" of the stockholders. They were empowered to manage the money advanced by the stockholders, but were bound by their agency relationship to do so exclu sively for the purposes delineated by their stockholder principals. The existence of this fiduciary relationship implied that managers could not have an obligation to spend cor porate funds in ways that had not been specifically authorized by the stockholders regardless of the social benefits that could accrue from doing so. Of course, both the stockholders and the managers were free to spend their personal funds on such projects, but when the man agers were functioning in their corporate capacity, they had a duty not to divert corporate funds away from the purposes expressly authorized by the stockholders, which were usually limited to maximizing the return on investment. Therefore, there could be, as Milton Friedman has expressed it, "one and only one social responsibility of business-to use its resources and engage in 333 activities designed to increase its profits so long as it . . . engages in open and free competition, without deception or fraud. ,,2 This view, known as the stockholder theory of corporate responsibility, was sup ported by a very simple moral argument.

The stockholders advanced their money on the condition that it be used in accordance with their wishes. If corporate managers accepted the money on this condition and then proceeded to spend it to accomplish social goals not authorized by the stockhold ers, they would be spending other people's money without their consent, which is wrong. As you may imagine, this was not a very popular theory in academic circles. If cor porations had no social responsibilities, what would there be for business ethics professors and consultants to do? This was clearly an intolerable situation which de manded a remedy. Fortunately, one was at hand in the form of the "stakeholder theory. " The stakeholder theory was originally a theory of management. It held that effective corporate management required "simulta neous attention to the legitimate interests of all appropriate stakeholders."3 A stake holder is anyone who has "a stake in or claim on the firm," and has been defined to include "those groups who are vital to the survival and success of the corporation, ,,4 i.e., its stockholders, customers, employ ees, suppliers, management, and the local community. Thus, the stakeholder theory, as originally conceived, contended that a corporation's financial success could best be achieved by giving the interests of all stakeholders equal consideration and adopt ing corporate policies which produce the optimal balance among them.

As a management theory, the stakeholder approach implies no social responsibilities for corporations. It simply describes a method for improving corporate perfor mance. However, if it could be converted from a management theory to an ethical theory, if an argument could be found that showed that corporate managers have a moral obligation to act in the interest of 334 THE FREEMAN • JULY 1994 stakeholders other than the stockholders even when this would not financially benefit the firm, then it would become a true theory of corporate social responsibility. This is precisely what happened. A Plot Twist: Staking a Claim to Autonomy The argument that the stakeholder theory embodied the ethical obligations of manag ers was based upon Kant's principle of respect for persons. This fundamental eth ical principle holds that every human being is entitled to be treated not merely as a means to the achievement of the ends of others, but as a being valuable in his or her own right, as an end in himself or herself.

But to respect someone as an end is to recognize that he or she is an autonomous moral agent with free will and desires of his or her own. Thus, the principle of respect for persons requires respect for individual au tonomy. The stakeholder theorists applied this to the world of business by claiming that cor porations are bound to respect this principle as much as anyone else. Thus, corporations may not treat their stakeholders merely as means to corporate ends, but must recog nize that as moral agents, all stakeholders are entitled "to agree to and hence partici pate (or choose not to participate) in the decisions to be used as such,"5 and, there fore, that they are entitled to "participate in determining the future direction of the firm in which they have a stake. ,,6 But, because it is impossible to consult with all of a firm's stakeholders on every corporate decision, this participation must be indirect. There fore, the firm's management has an obliga tion to "represent" the stakeholders' inter ests by giving each equal consideration and managing the corporation so as to achieve an optimal balance among them. As a result, corporate management has a fiduciary rela tionship not only to the stockholders, but to all the stakeholders, and may often be re quired to sacrifice the stockholders' inter ests to those of other stakeholders.

This argument was just what the doctor ordered. It not only derives corporate social obligations from the libertarian principle of respect for persons, but these obligations are so amorphous (What does it mean to "keep the relationships among stakeholders in balance,"7 anyway?) as to guarantee the need for countless academic articles to ex plain precisely what they required. In fact, its only drawback is that it is clearly un sound. There is nothing wrong with the claim that corporations are morally bound to respect the autonomy of their stakeholders, but this implies neither that stakeholders are entitled to a say in corporate decision-making nor that the corporation must be managed in their interest. The fact that the stakeholders must agree to be "used" by the corporation implies only that no stakeholder may be forced to deal with the corporation without his or her. consent. Although this certainly means that corporations are morally obli gated to honor the contracts they enter into with their customers, employees, suppliers, and managers and to live up to any repre sentations they freely make to the local community, it does not mean that these stakeholder groups are entitled to more than they freely bargained for.

Employees, suppliers, and customers ne gotiate for and autonomously accept wage and benefit packages, purchasing arrange ments, and sales contracts, respectively. If managers were to break the agreement they have with the stockholders to maximize return on investment in order to provide one or more of these groups with benefits in excess of those they freely accepted, they would not be respecting the autonomy of these groups, but violating that of the stock holders. Thus, far from being entailed by the principle of respect for persons, the stake holder theory requires its violation. A Happy Ending The fact that the stakeholder theory vio lates its own fundamental premise did not hinder its acceptance, however, for it was a fallacy whose time had come. For the last two decades, it has simply been ideologiTHE SOCIAL RESPONSIBILITY OF CORPORATIONS 335 cally unacceptable to argue that corpora tions could be ethically bound to "selfishly"

pursue profit or that it is wrong to force those wealthy enough to purchase stock to expend funds to benefit downtrodden work ers, local communities, or society in gen eral. The stakeholder concept was so pop ular that in the late '70s and early '80s several corporations voluntarily amended their charters to permit managers to base their business decisions on their effects on groups other than the stockholders. This was followed by the advent of corporate "constituency" statutes which permitted (and sometimes required) corporate manag ers to consider the interests of employees, customers, suppliers, and communities in making business decisions. Although origi nally adopted as anti-takeover, rather than ethics, measures (the statutes allowed cor porate management to escape its fiduciary duty to stockholders to accept generous buy-out offers by declaring that doing so would not be in the interests of one or more of the other stakeholder groups), these stat utes have, to date, enacted the stakeholder theory into law in 29 states. 8 The triumph of the stakeholder theory had a profound effect on the way corporations were viewed. The widespread acceptance of the idea that corporations had ethical obli gations to serve the interests of the wider society made it possible to ascribe moral characteristics to corporations themselves, rather than merely to the individuals who comprise them. Corporations which met their obligations were described as having a good corporate character or being good corporate citizens; those that did not, as socially negligent. It now made sense to speak in terms of corporate culpability.

This had a major impact on the Federal Sentencing Guidelines for Corporations which were designed to revise and regular ize the fines that could be assessed to corporations convicted of violating federal law. The Guidelines, which took effect in 1991,drastically increased these fines above previous levels, but allow for significant reductions for corporations that have dem onstrated "good citizenship" as determined by a "culpability score." To receive a fa vorable culpability score, a corporation has to have an "effective" program to discour age illegalbehavior by the firm's employees; Le., an ethics training program.9 The finan cial difference this can make is so great that one expert has stated that it would be professional malpractice for corporate counsel to fail to recommend such a pro gram.tO Now, when we consider that it is ethicists who supply these programs, we may be led to suspect that it is the adoption of the Federal Guidelines that is primarily respon sible for the current influx of ethics consult ants to BMW showrooms. This may explain why the Guidelines are sometimes referred to as the Business Ethicist Full Employment Act. Unfortunately, it also suggests that the surge of corporate interest in ethics may not herald the Age of Aquarius after all, but is just one more example of businesses looking to their financial interest. However, like all stories that begin with "Once upon a time,"

this one has a happy ending. For after years of sufferingcruel jokes as the ugly ducklings of the academic community, business ethi cists have finally blossomed into the swans of the corporate world. And they lived happily ever after. D 1. Rorie Sherman, "Ethicists: Gurus of the 90's," Na tional Law Journal, January 24,1994, pp. 1,30-31. This article is also the source of financial data in this paragraph. 2. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 133. 3. Thomas Donaldson & Lee E. Preston, "The Stake holder Theory of the Corporation: Concepts, Evidence, Im plications," Academy of Management Review (forthcoming). 4. See William M. Evan & R. Edward Freeman, "A Stakeholder Theory of the Modern Corporation: Kantian Capitalism," in Ethical Theory and Business , pp. 97,100. (Tom L. Beauchamp & Norman E. Bowie eds., 3d ed. 1988). 5. Ibid. 6. Ibid., p. 97.

7. Ibid., p. 103. 8. For a useful discussionof these statutes,see Eric W. Orts, "Beyond Shareholders: Interpreting Corporate Constit uency Statutes," 61 George Washington Law Review 14(1992). 9. For a useful discussion of the Guidelines, see Ilene H. Nagel & Winthrope M. Swenson, "The Federal Sentencing Guidelines for Corporations: Their Development, Theoretical Underpinnings, and Some Thoughts about Their Future," 71 Washington Law Quarterly 205 (1993). 10. See Michele Galen, "Keeping the Long Arm of the Law at Arm's Length," Business Week, April 22, 1991, p. 104 (quoting Professor John C. Coffee of Columbia University Law School).