Wrongful Harms All Constituencies Including Shareholders example essay topic

Running Head: Business Ethics Business Ethicsnameschool The modern theory of the firm, which is central to finance and corporate law, views the corporation as a of contracts among the various corporate constituencies. Upon this foundation, finance theory and corporate law postulate shareholder wealth as the objective of the firm. Research in business ethics has largely ignored this contracts theory of the firm except to reject the financial-legal model as normatively inadequate. Philosophers generally bring philosophical theories of ethics to bear on problems of business, and they regard the contractual theory of the firm primarily as a subject for criticism using the resources of philosophical ethics. In particular, stakeholder theory, which stresses the importance of all groups that affect or are affected by a firm, has been proposed as a more adequate theory of the firm for studying business ethics. An important benefit of business ethics research conducted within such a framework would be a narrowing of the gulf between business ethics and the fields of financial economics and corporate law.

Business ethics is widely dismissed as irrelevant by researchers in these fields because of its failure to recognize the existing financial and legal structures of the corporation, which are built largely on a contractual foundation. Hence, a common framework could increase the relevance of business ethics research and create a mutually beneficial dialogue. As a framework for identifying and analyzing many common business ethics problems, the contractual theory focuses our attention on the need to provide adequate safeguards for each constituency's interests. Corporate governance is concerned primarily with protecting shareholder interests, in part because the special contracting problems of shareholders are best met by the residual claims that the law of corporate governance creates. The comparative neglect of other constituencies in corporate law is not a matter of concern as long as their interests are adequately protected in some way. How the interests of each constituency are protected -- whether by means of corporate governance structures or other means -- is a matter of what works best in practice.

Before we can devise means for protecting the interests of each constituency, however, we need some understanding of the particular vulnerabilities of non shareholder constituencies. How specifically can employees, customers, and other constituencies be wronged such that a remedy ought to be devised? In other words, what are the main ethical problems in business? The following three-fold classification, which is derived from the literature on the ethical problems of contracting, does not encompass every business ethics problem, and, indeed, the next section lists many kinds of problems that are not related to contractual relations. The classification provides a useful perspective; however, on a great many problems of business, and by viewing them within the context of the contractual theory, appropriate remedies can also be identified. Wrongful Harms All constituencies, including shareholders, are vulnerable to loss of one kind or another from the activities of a firm.

Many of these losses take the form of negative externalities, such as occupational hazards, consumer injury, discrimination, wrongful discharge, pollution, and plant closings. Shareholders, too, can be harmed by fraud, financial manipulation, and mismanagement that reduce the value of a company's stock. Whether harm is 'wrongful' depends, of course, on some standards for the harms that constituencies ought to be protected against, and although developing such standards is difficult, we have many examples in tort law and government regulation. For example, developing a standard for workplace safety consists of deciding which possible harms are 'wrongful's uch that workers ought to be protected against them. Misallocation Imperfect contracting results mainly in allocation problems in which one stakeholder group benefits (rightly or not) at the expense of another. Whether employees or shareholders bear the cost of declining business, for example; or whether manufacturers or consumers bear the cost of product obsolescence and the switchover to new products; or whether private employers or public agencies bear the cost of medical care -- these are all allocation problems that result from incompleteness or a lack of specificity or transformations in the contractual relations among various constituencies.

Just as wrongful harms depend on some standard of wrongfulness, so misallocation's assume some standard of what constitutes a 'right' allocation. Misappropriations Some of the most egregious corporate wrongs involve sudden upheavals in which one constituency enriches itself in violation of settled agreements. Takeovers in which shareholder gains come at great expense to other constituencies constitute a prime example; but other examples include corporate restructurings that result in layoffs and the use of permanent replacement workers to crush union strikes. Such conspicuous instances of greed are often challenged in court, but even legal maneuvers may still be regarded as flagrant violations of implicit contracts or other commonly accepted understandings.

Misappropriations are like the allocation problems of imperfect contracting insofar as they arise from a lack of knowledge or foresight, but they are more akin to post-contractual opportunism, which usually results from a lack of monitoring. (Kenneth E. Goodpaster, 2001) Remedies Given this classification of business ethics problems, the task of safeguarding non shareholder constituencies now becomes a question of the most appropriate and effective remedies for each of these three kinds of threats, as well as a question of the extent to which these remedies can be accommodated within the contractual theory of the firm. Although many remedies are available, they fall into three broad categories. Tort Remedies The usual remedy for recovery from wrongful harms is tort law. Many of the examples given above are tortious negative externalities which can be remedied through the courts. Management Responsibility Corporate law, including the law on fiduciary duties, defines the legal responsibility of management, especially in the exercise of managerial discretion.

However, management responsibility extends beyond what is legally required and is shaped by many factors, including social pressure, accepted business practice, and managers' own preferences. For example, the corporate social responsibility movement attempts to address business ethics problems largely by influencing managers' conception of their own responsibility. Political Action The political process provides a means for protecting each corporate constituency. Obvious examples include worker protection legislation, consumer legislation, anti discrimination law, securities law, and, indeed, virtually the whole of business law. The political process also enables constituencies to protect their interests by pressure that does not result in specific legislation. For example, public concern about downsizing with the threat of legislation may have had some influence on corporate decision making.

Ultimately, the systems of tort and corporate law are the province of the political process, and all economic decision making still takes place within a politically created framework. Many al locative decisions are also left to the political process, and the dividing line between the economic and the political -- between management responsibility and the responsibility of government -- is itself a matter of public choice. These categories suggest many remedies for business ethics problems within the framework of the contractual theory of the firm. Expanding managerial responsibility, which is the primary remedy suggested by stakeholder theory and calls for corporate social responsibility, has its merits, but the task of safeguarding employees and consumers from wrongful harm, for example, may be more effectively addressed by traditional tort remedies. Because tort law creates legally enforceable rights, this remedy might also be preferred by employees and other stakeholders, who would be more vulnerable if their protection were made the responsibility of management alone. Similarly, with regard to allocation, some al locative decisions are made by managers and others are left to the political process, but to the extent that the responsibility of management is enlarged to include the interests of non shareholder constituencies, decisions about allocation that arise from imperfect contracting are shifted from the political to the economic sphere.

Whether allocation is best handled by managers -- and ought, therefore, to be part of their responsibility -- or is better left to the political process is itself a complex question of public policy which cannot be answered here. The important point is that decisions about the means used to protect non shareholder constituencies determine the division between the two spheres. The firm yields no specific prescriptions about the role of the corporation in such matters as addressing social problems or participating in politics. In particular, the theory is neutral with respect to contending views on the distinction between the public and the private, which affect how managers use their discretion in the public policy process. Thus, the institutional role of the corporation in society, which is at the core of disputes over social responsibility, is regarded by the theory of the firm as a matter of choice to be made by corporate managers, shareholders, and the rest of society. (Allen Kaufman, Lawrence Zacharias, and Marvin Karson, 1995.) Conclusion In conclusion we can say that the firm has been developed in financial economics and corporate law for purposes of explanation in those fields, it also provides an important framework for research in business ethics, conducted from both a descriptive and a normative perspective.

Within this framework, business ethics is concerned mainly with protecting or serving the interests of the various constituencies or stakeholder groups that form the nexus of contract firm. Many means exist for safeguarding the interests of these constituencies aside from explicit contracting. These means include implicit contracts, gap-filling judicial interpretations, and government regulation. In the financial and legal articulation of the firm, shareholders have mainly residual claims, and these are the basis for shareholder primacy. However, other groups are protected largely by fixed claims, which are not necessarily inferior and may even be superior in some respects to the residual claims of shareholders.

Whether any given corporate constituency is adequately protected is a complex question that depends not on the features of these two kinds of claims in the abstract but on the efficacy of the actual claims of the group in question. Business ethics problems can be identified mainly as wrongful harms, misallocation's, and misappropriations. These categories are commonly employed in economics, finance, and corporate law in the analysis of various kinds of problems, which are usually attributed to market failures, imperfect contracting, and other causes. However, many of these other kinds of problems arise from larger economic and political forces that would affect any theory of the firm.

Bibliography

Kenneth E. Goodpaster, 'Business Ethics and Stakeholder Analysis,' Business Ethics Quarterly, 1 (2001), 53-73;
Allen Kaufman, Lawrence Zacharias, and Marvin Karson, Managers vs. Owners: The Struggle for Corporate Control in American Democracy (New York: Oxford University Press, 1995.
Alderson, A. and Kakabadse, A., (1994), 'Business Ethics and Irish Management: A Cross-Cultural Study', European Management Journal, Volume 12, Number 4, December, pp.
432-441. Abelson, R. and Nielson, K., (2003), 'The History of Ethics', in Edwards, P.