Aristotelian Corporate Governance Introduction - Corporate Governance and Business Ethics

Elsewhere (Fontrodona and Sison 2006; Sison 2007, 2008), I had laid out and argued against the different theories that configure today’s dominant conception of the firm, its assumptions regarding human beings and their behavior, and the corporate governance model it proposed. According to the neoclassical paradigm (Roberts 2004), further enriched with contributions from transaction cost economics (Coase 1937), shareholder theory (Friedman 1970) and agency theory (Jensen and Meckling 1976), the firm is fundamentally a nexus of contractual relationships between shareholder-principals and manager-agents for the purpose of maximizing the value of the shareholder-principals’ investments.

These doctrines imply that human beings are, before anything else, economic agents, fully constituted as individuals, that is, independent of all social bonds. They manifest rationality precisely by choosing, among available options, those which promises the highest returns in terms of utility. Although in the end, utility money or power requires transformation into pleasure or psychological satisfaction in order to actually benefit human beings, it is nevertheless posited as the supreme good or object of desire. Human actions are to be evaluated solely on the basis of consequences, in particular, their usefulness in bringing about states of satisfaction. Just like any other organization, the business firm functions as the result of more or less coordinated individual actions. The key to corporate governance, therefore, lies in subverting through contracts the utility of other agents (mainly managers) so much so that it becomes aligned with the interests of shareholders.

Very few of the different premises that served to support the neoclassical theory of the firm would be of use in articulating an Aristotelian version of the corporate common good and corporate governance. The main reason is that the kind of activity they describe does not qualify, strictly speaking, as human action (praxis). At most, it belongs to the category of artisan production (poiesis, techne) in Aristotle’s own classification or theory of action. It refers to activities befitting slaves or guest foreign workers no matter how knowledgeable or expert they may be but not free men or citizens, in accordance with the characteristics of the social classes in Aristotelian politics. These activities are carried out primarily for the production of an external good, a material object or service (extended to mean utility, profit or shareholder value) and not for the agent himself, his technical, intellectual, cultural or moral growth and improvement (in a word, virtues).

Much has already been said, by way of criticism, of the individualism, utilitarianism, and consequentiality reasoning deeply embedded in the neoclassical economic conception of the firm. Similarly, much has been written with regard to the corollary theories of why production should be carried out in the firm instead of the market, how the relationship between capital providers and manager-employees should be framed, and what the firm’s overarching purpose ought to be. Certainly, transaction cost economics could explain the existence of the firm vis-à-vis the market because of greater efficiency, and agency theory could provide an economic and legal template for the contract between workers and capitalists. But in themselves, they do not give reasons why efficiency should be measured in terms of shareholder value maximization, nor for the underlying social web that make contractual agreements possible. Although in the past, I myself have offered my own reading of these issues, this time, I would like to take a different focus. This paper intends to have a more constructive outlook and explain how Aristotelian corporate governance founded on the corporate common good might be conceived, taught and practiced.

In light of the foregoing, Aristotelian corporate governance requires a radical Change of tack from conventional theories. I shall attempt to develop this broad theme in three major stages. First, I will render something that could pass for an Aristotelian theory of the firm, fully aware that Aristotle himself did not deal with such an institution in his writings. I will have to provide an account of the proper locus and purpose of the firm within the overall context of society. Secondly, I will offer, through an analogy with the common good of the polis or the state, an account of the common good of the firm. I will also propose ways in which the particular common good of the firm could be integrated or subordinated to the wider common good of the political community. Lastly, I will try to explain the theory and practice behind what could stand as Aristotelian corporate governance, one that seeks to achieve the corporate common good.

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