Abstract
Henry Hansmann has claimed we have reached the “end of history” in corporate law, organized around the “widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders.” In this paper, I examine Hansmann’s own argument in support of this view, in order to draw out its implications for some of the traditional concerns of business ethicists about corporate social responsibility. The centerpiece of Hansmann’s argument is the claim that ownership of the firm is most naturally exercised by the group able to achieve the lowest agency costs, and that homogeneity of interest within the ownership group is the most important factor in achieving lower costs. He defends this claim through a study of cooperatives, attempting to show that homogeneity is the source of the competitive advantage most often enjoyed by shareholders over other constituency groups, such as workers, suppliers and customers, when it comes to exercising control over the firm. Some business ethicists, impressed by this argument, have taken it to be a vindication of Milton Friedman’s claim that profit-maximization is the only “social responsibility” of management. I would like to suggest that this conclusion does not follow, and that the “Hansmann argument” lends itself to a less minimalist view, what I refer to as a “market failures” approach to business ethics.
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Notes
Hansmann writes: “I use the term ‘cost-minimizing’ here to mean ‘efficient’ in the economist’s very broad sense of that word—that is, to refer to a situation in which there is no alternative arrangement that could make any class of patrons better off, by their own subjective valuation, without making some other class worse off to a greater degree” (2000, p. 23).
Boatright writes, “Whether a corporation is owned by investors, employees, customers, suppliers, or some other constituency is determined by the costs and benefits of ownership as reflected in the market choices made by each group. The standard argument holds that whatever the assignment of ownership, the resulting system of corporate governance is optimal not only for the constituency with control and a claim on the residual but also for all other constituencies” (2002, p. 48).
Kent Greenfield summarizes the argument as follows: “Shareholders do not have a complete ‘bundle of rights’ to make them ‘owners’ in the traditional sense, nor are they owners in any other way that would distinguish their contribution to the firm from the contributions of other stakeholders” (2006, p. 126). The force of this argument, he argues, is the reason that “no prominent contemporary corporate law scholar uses property rights as the primary rationale for shareholder dominance” (2006, p. 47).
It follows, he says, that “the shareholder–management relation is not ‘ethically different’ for any reason that is unique to that relation” (Boatright 1994, p. 403).
For a response to this argument, see Philips et al. (2003). They assert that “Managerial opportunism is a problem, but it is no more a problem for stakeholder theory than the alternative. Indeed, there may be reason to believe stakeholder theory more resistant to managerial self-dealing” (p. 484). The argument presented in support of this claim, however, is entirely hypothetical, based on speculation about how managers and stakeholder groups might respond to the incentives they face. Hansmann, by contrast, offers empirical considerations in support of his view. For a similar argument, that looks rather to the public sector for empirical evidence regarded the effects of multiprincipal agency problems, see Heath and Norman (2004).
This is for simplicity of presentation. It does not affect the results if one imagines the firm already being owned by one group, entertaining bids for a transfer of control to some other.
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The development of this paper has benefited from discussions with John Boatright, Margaret Blair, Wayne Norman, Alexei Marcoux, Eric Orts, Alan Strudler, members of the Legal Studies and Business Ethics program at the Wharton School of Business, as well as participants in the Trans-Atlantic Business Ethics Conference held at York University.
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Heath, J. Business Ethics and the ‘End of History’ in Corporate Law. J Bus Ethics 102 (Suppl 1), 5–20 (2011). https://doi.org/10.1007/s10551-011-1192-3
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DOI: https://doi.org/10.1007/s10551-011-1192-3