An Ethics for Corp Governance

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INTRODUCTION

AN ETHIC FOR CORPORATE GOVERNANCE?

Jane Collier and John Roberts

C

orporate governance is a complex and contested issue, and its ambiguities become even more problematic when ethical considerations are taken into account. This introduction attempts to address these complexities, to illuminate their ethical aspects, and to situate the eight papers presented here within what we believe to be an integrative heuristic framework. The dominant theoretical perspective on governance relationships and their associated problems is to be found within economics, and in particular within agency theory. With the separation of ownership from control (Berle and Means 1932) a potential problem arises in the context of what is now constituted as a relationship between the owners (principals) and directors (their agents). How can the principals ensure that the agents are serving the owners' interests rather than their own? Against the backdrop of the assumption of au essentially selfseeking, opportunistic human nature only market discipline, monitoring, and incentives can be used to align agent behavior with the interests of the distant and/or absent shareholder understood as the owner. In recent years there has developed a perspective that runs counter to this theorization ofthe key governance relationship and its problem. The elaboration of so-called stakeholder views of the corporation (Freeman 1993, Blair 1995) argues both empirically and normatively that there is a wider range of relevant relationships, and thus a greater number of interests at stake in the governance of the corporation. It is not only shareholders who have made firm-specific investments in the organization, but also employees, suppliers, and customers, and their interests must therefore also be taken account of in the constitution and conduct of corporate governance. Associated with this view is a very different conception of the director as steward (Davis et al. 1997) or trustee of the corporation (Kay 1996), where the corporation is conceived, not as a set of ownership nghts accruing to those who assume the residual risk of a business, but as a social institution. From this perspective the duties of directors lie in aligmng and balancing a wide variety of potentially competitive interests within the corporation. Beyond these conceptions of governance there is yet another set of issues revolving around the concerns of "indirect'" stakeholders. The focus here is on the effects of corporate activity on the communities within which a company operates. The basis of these wider relationships is the tacit "license to operate." ©2001. Business Ethics Quarterly, Volume JL Issue 1 ISSN 1052-150X

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the granting of rights and associated obligations to the corporate entity by the wider society. The state and legal institutions play a key role here in setting the ground rules within which corporations can be expected to operate, and in enforcing sanctions where possible. However, this balance of rights and duties has been upset by the globalization of product and capital markets, and asymmetries of power have been introduced by what many see as the weakening ofthe power ofthe nation-state associated with the growth of transnational corporations (Deetz 1992). Some take the process of globalization as a sign that it is now corporations who "rule the world" (Korten 1995). Others focus on the resultant market anarchy with which both corporations and national governments struggle to cope (Gray 1998, Soros 1998). Globalization creates a borderless world, and at the same time dissolves the constraints on corporate conduct that operate within national boundaries. Each of these different conceptions of corporate governance and its associated problems suggests a very different approach to defining an ethic that is both necessary and appropriate to corporate governance (Hasnas 1998). Within the agency view of governance there is in principle no ethics and hence no ethical problem. Instead we are confronted with an atomized self-seeking individual, who must be closely watched and can only be frightened or incentivized into taking account of the interests of others. The only ethical imperative at work here is a Friedmanesque dictum to pursue profit maximization. By contrast, stakeholder theory is explicitly ethical in its orientation and normatively prescriptive in its assertion that not only stockholder returns but also a wider set of interests should be acknowledged as central to the activities of the corporation. Of course, stakeholder arguments also appeal to enlightened selfinterest insofar as "taking account" of other interests in the conduct of the firm will serve to secure the cooperation of those who are essential to wealth creation, thereby ensuring optimal shareholder returns. Nevertheless, the ethical weight of stakeholder arguments rests firmly on notions of the responsibility and accountability implied by society's legitimation of corporate activity. The wider corporation-society view of governance is arguably even more moralistic in its claims and assertions. There is a tendency within this view to demonize the corporation and its agents, atvd there is a sense in which such critical conceptions share the pessimistic assumptions of agency theory. But in the name of this view moral claims are made against the corporate body and its agents, often on behalf of those that are either too weak or too impotent to raise a voice against global "corporate colonization." These "voiceless" claimants include the natural environment, the exploited, and future generations (Bauman 1993). Against the backdrop of these very different conceptions of corporate governance and its associated ethical problems, we as editors reflected on how this issue of BEQ might add value to these debates and, more pragmatically, illuminate the place for ethics within corporate governance. Despite the differences of orientation and interest in the above accounts of corporate goverriance, we maintain

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that there is value in each approach, and the selection of articles in the special issue of BEQ reflects this perspective. The paper that is possibly most firmly rooted m the assumptions of agency theory is that of Maitland, who by arguing for the essentially voluntary nature of contracts, insists that legal reform of the "corporate rules of the game"' would fail to realize real change in the balance of interests. From within a similar set of assumptions Wieland seeks to add to the standard efficiency-based transaction-cost framework a consideration of governance ethics as the moral resources and behavioral constraints that underpin economic transactions in a firm context. In a similar vein Ryan presents a model of shareholder decision making in which assumptions of self-interested oppportunism are augmented by what is argued to be an essential and decisive component of trust in shareholder/company relationships. What these papers have in common is the fact that they seek to argue for the importance of ethics within the morally bleak horizon of the economic assumption of self-interested opportunism. Dalton's empirically grounded review of the adoption of stock options by directors in the USA presents an argument that moves between the assumptions of agency and stakeholder theory. Agency theory's assumptions of self-interest define both the problem and the necessary form of the solution: only self-mterest can be used to align the interests of directors and shareholders. From the perspective of stakeholder theory however, the widespread adoption of stock options as a performance-related element of director compensation can only serve to compromise director independence and the ethical capacities that come with that independence. In a similar vein McCall explores the relative weight of arguments that insist on the importance of the property rights of shareholders as against the rights of employees, and uses this analysis in order to develop what he calls a strong case for employee participation. In a more critical set of reflections Hendry argues that stakeholder theory has failed to explore the space that exists between impossible idealism and mundane realism, and it therefore runs the risk of presenting a weakened challenge to the primacy of stockholder interests and an inadequate basis for policy discussions. The relevance and usefulness of stakeholder theory would be greatly served, he argues, by a pragmatic examination of the potential for institutional reform on the one hand, and by the differentiation and mundane empirical understanding of different stakeholder interests on the other, A similar pragmatism informs Driscoll's review of recent reforms in the governance of mutual funds. The paper explores the combined impact of legislation, director independence, peer review, training, and regulation on the ethical conduct on individual directors, and draws optimistic conclusions as to the potential for the ethical self-regulation of independent directors acting as guardians of customer interests. One conclusion that emerges here is that the different theonzations of the problem of corporate governance, whether they be grounded in managerial opportunism or in the neglect of direct or indirect stakeholder interests, inadvertently

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serve as a potent stimulus of moral claims and arguments. One result of this development is that it allows us to regard the claims that are made on behalf of shareholders in relation to directors as providing a model of the potential for effective corporate accountability in relation to other stakeholder interests. Roberts's paper extends this perspective by exploring the development of new forms of "ethical" accountability in relation to the social and environmental impact of corporate activity. The paper looks to bodily sensibility as the ground for understanding ethics within business, and seeks to give an account of the systematic marginalization of ethical sensibility by an organizationally induced narcissistic preoccupation with the defense or elaboration of the corporate or individual self-interest. In conclusion, the view we want to present here is that of a systemic and relational view of the nature of corporate governance and ethics. Rather than argue for the supremacy of any particular group of stakeholders, we want instead to conceive of interests as a moral property of relatedness. In this sense corporate governance is about the way in which we seek to manage the interdependencies in which we are all immersed. Though we assign the role of governance to particular groups, notably boards of directors within and the state and judiciary beyond the firm, governance in practice is comprised of an almost infinite series of responsibilities distributed among the various stakeholders, and possibly falling between them. The conduct of directors, ministers, lawyers has to be understood in the context of the choices and actions of employees, consumers, citizens, shareholders. One ofthe potential dangers of stakeholder theory, at least in its populist manifestations, lies in the apparent failure to notice that its categories are not distinct, that the role of director, shareholder, employee, consumer, parent are often no more than different facets of an individual's experience. From this perspective the problems of governance cannot be resolved at a single site, by boards of directors, but only in a change of conduct across these multiple chains of interdependent relationships. At every point there is both a space and a necessity for ethical concern and ethical conduct. Nor are good intentions enough, for effects ramify all too easily beyond these intentions in the poorly understood or unanticipated consequences of well-intentioned actions. The very breadth and range of issues that can be related back to governance; the effects of corporate activity, whether economic, environmental, or social; and the degree to which these are and are not acknowledged in current governance mechanisms— all these suggest the need for a broad and possibly different conception both of responsibility and the mechanisms that are established to reflect on these.

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