A Social Contract Account for CSR as an Extended Model of Corporate Governance (I): Rational Bargaining and Justification

Abstract

This essay seeks to give a contractarian foundation to the concept of Corporate Social Responsibility (CSR), meant as an extended model of corporate governance of the firm. It focuses on justification according to the contractarian point of view (leaving compliance and implementation problems to a related article, [Sacconi 2004b, forthcoming in the Journal of Business Ethics]). It begins by providing a definition of CSR as an extended model of corporate governance, based on the fiduciary duties owed to all the firm’s stakeholders. Then, by establishing the basic context of incompleteness of contracts and abuse of authority, it analyses how the extended view of corporate governance arises directly from criticism of the contemporary neo-institutional economic theory of the firm. Thereafter, an application of the theory of bargaining games is used to deduce the structure of a multi-stakeholder firm, on the basis of the idea of a constitutional contract, which satisfies basic requirements of impartial justification and accordance with intuitions of social justice. This is a sequential model of constitutional bargaining, whereby a constitution is first chosen, and then a post-constitutional coalition game is played. On the basis of the unique solution given to each step in the bargaining model, the quest for a prescriptive theory of governance and strategic management is accomplished, so that I am able to define an objective-function for the firm consistent with the idea of CSR. Finally, a contractarian potential explanation for the emergence of the multi-fiduciary firm is provided.

Appendix 1

I have proposed in previous works (see Sacconi, 1991) a social contract view of the firm’s ownership and managerial ethics based on a re-examination of the theory of firm, as well as the notion of extended fiduciary duties (see also Sacconi, 1999, 2000). The cooperative-game-theory of the firm put forward by Mashairo Aoki (1984) can be taken as the path breaking work in this theorizing on the firm. When intervening in a discussion about the stakeholder approach to company law (see also Chapman, 1993; Daniels, 1993; Machey and Miller, 1993; Romano, 1993), Oliver Hart himself has recognised that the risk that non-controlling stakeholders may be subjected to contracting costs by those who own the firm would justify the extension by some corporate statutes of fiduciary duties also to the stakeholders at risk (Hart, 1993).Thereafter, convergence to a similar model arises from the merger of the incomplete contract model and Alchian and Demestz’s team production theory of the firm. Hence the firm can be seen as a ‘nexus’ of specific investments regulated by incomplete contracts and a governance structure, rather than as a nexus of complete contracts, (Rajan and Zingales, 2000; Zingales, 1998). Based on a similar view, which combines different theories of the firm, is the model of multi-stakeholder governance developed by Margaret Blair and Lynn Stout, which sees the purpose of corporate governance structures as being prevention of opportunistic behaviour among the members of the team that make specific investments. When applied to a public company, this model translates into a board of directors acting as a mediating hierarchy: an authority system charged with the task of striking the appropriate balance in the protection of diverse interests (see Blair and Stout 1999). The (controversial) legal basis for this form of ‘impartial governance’ exercised by the board of directors and by management in the US joint-stock company is the ‘business judgement doctrine’: the manager’s use of a standard of professional conduct which insulates his/her choices against claims by shareholders (see Blair and Stout, 1999; but also see Meese 2002). Similarly, on a view of the firm as stakeholders’ productive team (Kaufman, 2002), the board of directors has been seen as a governance structure representing the point of view of all those stakeholders who (a) contribute to creating value; (b) undertake non-diversifiable risks; (c) possess strategic information (Kaufman et al., 2003).