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How Might a Consideration of the Management of Corporations and of the Proper Boundaries of Markets in More Relational Terms Change How We Think About the Values at Stake in Enterprise and Exchange Beyond Maximizing Profits?

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Many managers think of ethics as a question of personal scruples, a confidential matter between individuals and their consciences. These executives are quick to describe any wrongdoing as an isolated incident, the work of a rogue employee. The thought that the company could bear any responsibility for an individual’s misdeeds never enters their minds. Ethics, after all, has nothing to do with management. In fact, ethics has everything to do with management. Rarely do the character flaws of a lone actor fully explain corporate misconduct. More typically, unethical business practice involves the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organization’s operating culture

Ethics, then, is as much an organizational as a personal issue. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.

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Institutional logic holds that companies are more than instruments for generating money; they are also vehicles for accomplishing societal purposes and for providing meaningful livelihoods for those who work in them. According to this school of thought, the value that a company creates should be measured not just in terms of short-term profits or paychecks but also in terms of how it sustains the conditions that allow it to flourish over time. These corporate leaders deliver more than just financial returns; they also build enduring institutions. Rather than viewing organizational processes as ways of extracting more economic value, great companies create frameworks that use societal value and human values as decision-making criteria. They believe that corporations have a purpose and meet stakeholders’ needs in many ways: by producing goods and services that improve the lives of users; by providing jobs and enhancing workers’ quality of life; by developing a strong network of suppliers and business partners; and by ensuring financial viability, which provides resources for improvements, innovations, and returns to investors. In developing an institutional perspective, corporate leaders internalize what economists have usually regarded as externalities and define a firm around its purpose and values

They undertake actions that produce societal value—whether or not those actions are tied to the core functions of making and selling goods and services. Whereas the aim of financial logic is to maximize the returns on capital, be it shareholder or owner value, the thrust of institutional logic is to balance public interest with financial returns. Institutional logic should be aligned with economic logic but need not be subordinate to it. For example, all companies require capital to carry out business activities and sustain themselves. However, at great companies profit is not the sole end; rather, it is a way of ensuring that returns will continue. The institutional view of the firm is thus no more idealized than is the profit-maximizing view. Well-­established practices, such as R&D and marketing, cannot be tied to profits in the short or long runs, yet analysts applaud them. If companies are to serve a purpose beyond their business portfolios, CEOs must expand their investments to include employee empowerment, emotional engagement, values-based leadership, and related societal contributions. Business history provides numerous examples of industrialists who developed enduring corporations that also created social institutions. The Houghton family established Corning Glass and the town of Corning, New York, for instance. The Tata family established one of India’s leading conglomerates and the steel city of Jamshedpur, Jharkhand. That style of corporate responsibility for society fell out of fashion as economic logic and shareholder capitalism came to dominate assumptions about business and corporations became detached from particular places. In today’s global world, however, companies must think differently.

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A business is a productive organization—an organization whose purpose is to create goods and services for sale, usually at a profit. Business is also an activity. One entity (e.g., a person, an organization) “does business” with another when it exchanges a good or service for valuable consideration. Business ethics can thus be understood as the study of the ethical dimensions of productive organizations and commercial activities. This includes ethical analyses of the production, distribution, marketing, sale, and consumption of goods and services (see also Donaldson & Walsh 2015). Questions in business ethics are important and relevant to everyone. This is because almost all of us “do business”—i.e., engage in a commercial transaction—almost every day. Moreover, many of us spend a major portion of our lives engaged in, or preparing to engage in, productive activity, on our own or as part of productive organizations. Business activity shapes the world we live in, sometimes for good and sometimes for ill. While the question of whether firms themselves are moral agents is of theoretical interest, its practical import is uncertain

Perhaps BP itself was morally responsible for polluting the Gulf of Mexico. Perhaps certain individuals who work at BP were. What hangs on this? According to Hasnas (2012), very little. Firms such as BP can be legally required to pay restitution for harms they cause even if they are not morally responsible for them. What ascribing agency and responsibility to firms enables us to do, according to Hasnas, is blame and punish them. But, he argues, we should not engage in this practice. Phillips (1995), by contrast, argues that in some cases no individual employee in a firm is responsible for the harm a firm causes. To the extent that it makes sense—and it often does, he believes—to assign responsibility for the harm, it must be assigned to the firm itself. On Phillips’s view, corporate moral agency makes blaming behavior possible where it would otherwise not be.

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For the most part, a more serious concern, identified in the social choice literature, has to do with whether voting is an appropriate method of aggregating individual tastes into social preferences. Given well-known collective choice problems, it is possible that market value maximization can be justified as a second-best objective in a world where the social preferences of shareholders are sufficiently heterogeneous

We cannot rule this out. But in the absence of evidence establishing this conclusion to be correct, we believe that shareholder welfare maximization should replace market value maximization as the proper objective of companies.

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Donaldson, T. & J.P. Walsh, 2015, “Toward a Theory of Business”, Research in Organizational Behavior, 35: 181–207.

Phillips, R. & J.D. Margolis, 1999, “Toward an Ethics of Organizations”, Business Ethics Quarterly, 9(4): 619–638.

Piker, A., 1998, “Strict Product Liability and the Unfairness Objection”, Journal of Business Ethics, 17(8): 885–893.

Powell, B. & M. Zwolinski, 2012, “The Ethical and Economic Case Against Sweatshop Labor: A Critical Assessment”, Journal of Business Ethics, 107(4): 449–472.

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