Mutual Support Revisited - Corporate Governance and Business Ethics

In the present part, I seek to establish the logical relations, if any, that exist among the three reformed theses. There exists logical support among the three theses if any thesis has as its implication the other two or any two have as their implication the third. As no one thesis will imply the other two if no pair of theses implies the third, the present task is that of determining whether any two theses logically imply the third.

Do the Reformed Normative and Instrumental ThesesImply the Reformed Descriptive Thesis?

The reformed normative thesis is the view that managers ought to afford consideration to the legitimate interests of stakeholders because those interests are intrinsically valuable and that the kind of consideration afforded (or the kind of interests that are legitimate) is incompatible with the investor-owned firm with fiduciary duties to shareholders alone. The reformed instrumental thesis is the view that certain positive effects follow from the adoption of stakeholder-oriented practices, whether substantive or procedural. Assuming that both of these theses are true, it does not follow either that the normative descriptive thesis is true or that the instrumental descriptive thesis is true. From the fact that certain practices are morally best (the reformed normative thesis) and the fact that certain aimed-for consequences follow from the adoption of those practices (the reformed instrumental thesis), it does not follow that people actually adopt those practices, whether for moral reasons (the normative descriptive thesis) or for other reasons (the instrumental descriptive thesis). People remain perfectly capable of being morally obtuse, instrumentally irrational, or both. Therefore, the reformed normative and instrumental theses do not imply the reformed descriptive thesis.

Do the Reformed Normative and Descriptive ThesesImply the Reformed Instrumental Thesis?

Again, the answer is no. From the fact that certain practices are morally best (the reformed normative thesis) and that people engage in them, whether for moral reasons (the normative descriptive thesis) or for other reasons (the instrumental descriptive thesis), it does not follow that these practices secure other aimed-for ends (the reformed instrumental thesis). It may be the case that the practices’ merits are moral alone. Therefore, the reformed normative and descriptive theses do not imply the reformed instrumental thesis.

Do the Reformed Instrumental and Descriptive ThesesImply the Reformed Normative Thesis?

Once more, the answer is no. From the fact that certain practices secure other aimed for ends (the reformed instrumental thesis) and that people engage in them, whether for moral reasons (the normative descriptive thesis) or for other reasons (the instrumental descriptive thesis), it does not follow that those practices are morally best. It may be the case that the practices’ merits are instrumental alone. Therefore, the reformed instrumental and descriptive theses do not imply the reformed normative thesis.

As no pair of reformed theses implies the third, it follows that no logical relations of implication exist among the three reformed theses.

Another Avenue to Mutual Support? Donaldson’s “Psychology of the Manager

In a response to Jones and Wicks (1999), Donaldson (1999) advances an argument he believes demonstrates an important relationship of mutual support between the normative thesis and the instrumental thesis. Donaldson (1999) argues that this relationship resides in what he calls “the psychology of the manager”. Reduced to its essential elements, Donaldson’s argument is that, for the manager, belief in stakeholder theory’s normative thesis (which he calls B-Normative) entails belief in stakeholder theory’s instrumental thesis (B-Instrumental). This is so because being a manager carries with it a fiduciary duty to maximize returns for shareholders. Thus, if the manager holds B-Normative, the manager must also hold B-Instrumental. Otherwise, the manager’s situation is untenable.

According to Donaldson, this is an implication of the principle ought implies can: if one ought to do as stakeholder theory’s normative thesis demands and one ought to satisfy one’s fiduciary duties to shareholders, then it must be the case that one can do both. One can do both only if managerial action satisfying stakeholder theory’s normative thesis also is (or does not conflict with) managerial action satisfying fiduciary obligations to shareholders. Therefore, concludes Donaldson, there exists a relationship of mutual support between the normative and instrumental theses where it counts in the psychology of the manager.

This argument is noteworthy for two, related reasons. First, by asserting the compatibility of managerial action satisfying stakeholder theory’s normative thesis with managerial action satisfying fiduciary duties to shareholders, Donaldson asserts the compatibility of stakeholder theory’s normative thesis with the investor-owned firm with fiduciary duties to shareholders alone the firm which Donaldson and Preston (1995) pronounce “normatively unacceptable”. As many stakeholder theorists maintain that their theory’s normative thesis is incompatible with, and therefore stands athwart, the investor-owned firm with fiduciary duties to shareholders alone, Donaldson’s (1999) argument is a retreat from what heretofore has been taken by many of its adherents as an animating commitment of normative stakeholder theory.

Second, though Donaldson’s (1999) argument may persuade upon a casual reading, it fails to demonstrate a relationship of mutual support between B-Normative and B-Instrumental. For by situating these beliefs in the manager’s mind, Donaldson relies implicitly upon at least one other belief to make the intended connection. This is the belief that it is morally permissible for one to be a manager with fiduciary duties to shareholders. Call this B-Fiduciary. In other words, what Donaldson advertises as an implication of the relationship between B-Normative and B-Instrumental must be analyzed instead as a relationship among B-Normative, B-Instrumental, and B-Fiduciary.

Why is this destructive of his argument? Donaldson’s argument is intended to demonstrate the incompatibility of two beliefs, such that if the first (BNormative- true) is true then the second (B-Instrumental-false) must be abandoned in favor of its converse (B-Instrumental-true). Instead, his argument at best demonstrates the incompatibility of three beliefs (B-Normative-true, B-Instrumental-false, B-Fiduciary-true) but abandoning any one of those beliefs cures the incompatibility. Consequently, embracing the normative thesis does not, as Donaldson contends, bring with it embrace of the instrumental thesis. Consider the following case, Esteban’s Dilemma (ED): ED. Esteban is a manager in an investor-owned firm with fiduciary duties to shareholders alone. He holds B-Normative-true and B-Instrumental-false. Upon reading Donaldson (1999) and recognizing that his situation is untenable, Esteban concludes that some aspect of his belief-structure must be abandoned. But which?

One aspect of Esteban’s belief structure that could go is B-Normative-true. If Esteban adopts the converse (B-Normative-false), maintains B-Instrumental-false, and maintains B-Fiduciary-true, he finds himself out of the bind Donaldson identifies. However, suppose that Esteban (like Donaldson) is committed to BNormative- true. Two other possibilities remain.

The second aspect that could go is B-Instrumental-false. If Esteban maintains B-Normative-true, adopts B-Instrumental-true, and maintains B-Fiduciary-true, he finds himself out of the bind Donaldson identifies. According to Donaldson, this result is compelled by the logic of the theses. But because Donaldson does not acknowledge that a third belief is in play, he fails to admit a third possibility (Donaldson 1999).

The third aspect that could go is B-Fiduciary-true. If Esteban maintains BNormative- true, maintains B-Instrumental-false, and, acting upon the normative implications of adopting B-Fiduciary-false, terminates his career as a manager with fiduciary duties to shareholders, he finds himself out of the bind. The normative thesis compels Esteban to manage in a way that, if the instrumental thesis were false, would be incompatible with the aims of the investor-owned firm with fiduciary duties to shareholders alone. Esteban could cure the incompatibility among his three beliefs by abandoning B-Fiduciary-true. Although his belief is inconsistent with remaining a manager in an investor-owned firm with fiduciary duties to shareholders alone, Esteban’s belief underwrites being a manager in a firm animated by other aims (e.g., a nonprofit firm, workers’ cooperative), being an ant corporate activist, or being a perfectly ordinary member of the Society for Business Ethics.

This third conclusion should strike no one strange. It is the conclusion to which more than a few of those impressed by normative stakeholder theory subscribe. They believe that the truth of the normative thesis entails that the investor-owned firm with fiduciary duties to shareholders alone is morally impermissible and, therefore, that managing such a firm toward its animating objectives is morally impermissible, as well. No aspect of their worldview is undermined by the belief that the instrumental thesis is false. Donaldson himself, when writing with Preston, seems to adopt this view when calling for the adoption of a revised, stakeholder-oriented law of corporations (Donaldson and Preston 1995).

The important point for present purposes is this: subscribing to the normative thesis does not compel one to adopt the second alternative, as Donaldson erroneously maintains. Either the second alternative or the third alternative will cure the incompatibility among the three beliefs, consistent with maintaining B-Normative. Consequently, Donaldson’s claimed, necessary relationship in the “psychology of the manager” between belief in the normative thesis and belief in the instrumental thesis is illusory.


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