INTRODUCTION

AN ETHIC FOR CORPORATE GOVERNANCE?

Jane Collier and John Roberts

Corporate governance is a complex and contested issue, and its ambiguitiesbecome even more problematic when ethical considerations are taken into

account. This introduction attempts to address these complexities, to illuminatetheir ethical aspects, and to situate the eight papers presented here within whatwe believe to be an integrative heuristic framework.

The dominant theoretical perspective on governance relationships and theirassociated problems is to be found within economics, and in particular withinagency theory. With the separation of ownership from control (Berle and Means1932) a potential problem arises in the context of what is now constituted as arelationship between the owners (principals) and directors (their agents). Howcan the principals ensure that the agents are serving the owners' interests ratherthan their own? Against the backdrop of the assumption of au essentially self-seeking, opportunistic human nature only market discipline, monitoring, andincentives can be used to align agent behavior with the interests of the distantand/or absent shareholder understood as the owner.

In recent years there has developed a perspective that runs counter to thistheorization ofthe key governance relationship and its problem. The elaborationof so-called stakeholder views of the corporation (Freeman 1993, Blair 1995)argues both empirically and normatively that there is a wider range of relevantrelationships, and thus a greater number of interests at stake in the governanceof the corporation. It is not only shareholders who have made firm-specific in-vestments in the organization, but also employees, suppliers, and customers,and their interests must therefore also be taken account of in the constitution andconduct of corporate governance. Associated with this view is a very differentconception of the director as steward (Davis et al. 1997) or trustee of the corpo-ration (Kay 1996), where the corporation is conceived, not as a set of ownershipnghts accruing to those who assume the residual risk of a business, but as a socialinstitution. From this perspective the duties of directors lie in aligmng and balancinga wide variety of potentially competitive interests within the corporation.

Beyond these conceptions of governance there is yet another set of issuesrevolving around the concerns of "indirect'" stakeholders. The focus here is onthe effects of corporate activity on the communities within which a companyoperates. The basis of these wider relationships is the tacit "license to operate."

©2001. Business Ethics Quarterly, Volume JL Issue 1 ISSN 1052-150X pp 67-71

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the granting of rights and associated obligations to the corporate entity by thewider society. The state and legal institutions play a key role here in setting theground rules within which corporations can be expected to operate, and in en-forcing sanctions where possible. However, this balance of rights and duties hasbeen upset by the globalization of product and capital markets, and asymmetriesof power have been introduced by what many see as the weakening ofthe powerofthe nation-state associated with the growth of transnational corporations (Deetz1992). Some take the process of globalization as a sign that it is now corpora-tions who "rule the world" (Korten 1995). Others focus on the resultant marketanarchy with which both corporations and national governments struggle to cope(Gray 1998, Soros 1998). Globalization creates a borderless world, and at thesame time dissolves the constraints on corporate conduct that operate withinnational boundaries.

Each of these different conceptions of corporate governance and its associ-ated problems suggests a very different approach to defining an ethic that is bothnecessary and appropriate to corporate governance (Hasnas 1998). Within theagency view of governance there is in principle no ethics and hence no ethicalproblem. Instead we are confronted with an atomized self-seeking individual,who must be closely watched and can only be frightened or incentivized intotaking account of the interests of others. The only ethical imperative at workhere is a Friedmanesque dictum to pursue profit maximization.

By contrast, stakeholder theory is explicitly ethical in its orientation and nor-matively prescriptive in its assertion that not only stockholder returns but also awider set of interests should be acknowledged as central to the activities of thecorporation. Of course, stakeholder arguments also appeal to enlightened self-interest insofar as "taking account" of other interests in the conduct of the firmwill serve to secure the cooperation of those who are essential to wealth cre-ation, thereby ensuring optimal shareholder returns. Nevertheless, the ethicalweight of stakeholder arguments rests firmly on notions of the responsibilityand accountability implied by society's legitimation of corporate activity.

The wider corporation-society view of governance is arguably even moremoralistic in its claims and assertions. There is a tendency within this view todemonize the corporation and its agents, atvd there is a sense in which such criti-cal conceptions share the pessimistic assumptions of agency theory. But in thename of this view moral claims are made against the corporate body and itsagents, often on behalf of those that are either too weak or too impotent to raise avoice against global "corporate colonization." These "voiceless" claimants includethe natural environment, the exploited, and future generations (Bauman 1993).

Against the backdrop of these very different conceptions of corporate gover-nance and its associated ethical problems, we as editors reflected on how thisissue of BEQ might add value to these debates and, more pragmatically, illumi-nate the place for ethics within corporate governance. Despite the differences oforientation 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 specialissue of BEQ reflects this perspective. The paper that is possibly most firmlyrooted m the assumptions of agency theory is that of Maitland, who by arguingfor 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 ofinterests. From within a similar set of assumptions Wieland seeks to add to thestandard efficiency-based transaction-cost framework a consideration of gover-nance ethics as the moral resources and behavioral constraints that underpineconomic transactions in a firm context. In a similar vein Ryan presents a modelof shareholder decision making in which assumptions of self-interestedoppportunism are augmented by what is argued to be an essential and deci-sive component of trust in shareholder/company relationships. What thesepapers have in common is the fact that they seek to argue for the importanceof ethics within the morally bleak horizon of the economic assumption ofself-interested opportunism.

Dalton's empirically grounded review of the adoption of stock options bydirectors in the USA presents an argument that moves between the assumptionsof agency and stakeholder theory. Agency theory's assumptions of self-interestdefine both the problem and the necessary form of the solution: only self-mter-est can be used to align the interests of directors and shareholders. From theperspective of stakeholder theory however, the widespread adoption of stockoptions as a performance-related element of director compensation can only serveto compromise director independence and the ethical capacities that come withthat independence. In a similar vein McCall explores the relative weight of ar-guments that insist on the importance of the property rights of shareholders asagainst the rights of employees, and uses this analysis in order to develop whathe calls a strong case for employee participation.

In a more critical set of reflections Hendry argues that stakeholder theory hasfailed to explore the space that exists between impossible idealism and mundanerealism, and it therefore runs the risk of presenting a weakened challenge to theprimacy of stockholder interests and an inadequate basis for policy discussions.The relevance and usefulness of stakeholder theory would be greatly served, heargues, by a pragmatic examination of the potential for institutional reform onthe one hand, and by the differentiation and mundane empirical understandingof different stakeholder interests on the other, A similar pragmatism informsDriscoll's review of recent reforms in the governance of mutual funds. The pa-per explores the combined impact of legislation, director independence, peerreview, training, and regulation on the ethical conduct on individual directors,and draws optimistic conclusions as to the potential for the ethical self-regula-tion of independent directors acting as guardians of customer interests.

One conclusion that emerges here is that the different theonzations of theproblem of corporate governance, whether they be grounded in managerial op-portunism 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 thisdevelopment is that it allows us to regard the claims that are made on behalf ofshareholders in relation to directors as providing a model of the potential foreffective corporate accountability in relation to other stakeholder interests.Roberts's paper extends this perspective by exploring the development of newforms of "ethical" accountability in relation to the social and environmentalimpact of corporate activity. The paper looks to bodily sensibility as the groundfor understanding ethics within business, and seeks to give an account of thesystematic marginalization of ethical sensibility by an organizationally inducednarcissistic preoccupation with the defense or elaboration of the corporate orindividual self-interest.

In conclusion, the view we want to present here is that of a systemic andrelational view of the nature of corporate governance and ethics. Rather thanargue for the supremacy of any particular group of stakeholders, we want in-stead to conceive of interests as a moral property of relatedness. In this sensecorporate governance is about the way in which we seek to manage the interde-pendencies in which we are all immersed. Though we assign the role ofgovernance to particular groups, notably boards of directors within and the stateand judiciary beyond the firm, governance in practice is comprised of an almostinfinite series of responsibilities distributed among the various stakeholders, andpossibly falling between them. The conduct of directors, ministers, lawyers hasto be understood in the context of the choices and actions of employees, con-sumers, citizens, shareholders. One ofthe potential dangers of stakeholder theory,at least in its populist manifestations, lies in the apparent failure to notice that itscategories are not distinct, that the role of director, shareholder, employee, con-sumer, 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 singlesite, by boards of directors, but only in a change of conduct across these mul-tiple chains of interdependent relationships. At every point there is both a spaceand a necessity for ethical concern and ethical conduct. Nor are good intentionsenough, for effects ramify all too easily beyond these intentions in the poorlyunderstood or unanticipated consequences of well-intentioned actions. The verybreadth and range of issues that can be related back to governance; the effects ofcorporate activity, whether economic, environmental, or social; and the degreeto which these are and are not acknowledged in current governance mechanisms—all these suggest the need for a broad and possibly different conception both ofresponsibility and the mechanisms that are established to reflect on these.

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