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Business Ethics and Stakeholder Theory

Wesley Cragg
Gardiner Professor of Business Ethics
York University, Toronto, Canada.

Published: “Business Ethics and Stakeholder Theory”, Business Ethics Quarterly, Volume 12,
issue #2, April 2002, pp. 113-143.
Reprinted in Corporate Social Responsibility, Eds. Wesley Cragg, Mark Schwartz and David
Weitzner, (London: Ashgate, 2009) 550 pp.

Abstract

Stakeholder theorists have typically offered both a business case and an ethics case for business
ethics. In the first sections of this paper, I evaluate arguments for both approaches and find them
wanting. I then shift the focus from ethics to law and ask: “Why should corporations obey the
law?” Contrary to what shareholder theories typically imply, neo-classical or profit
maximization theories of the firm can offer answers based only on instrumental justifications.
Instrumental justifications for obeying the law, however, are pragmatically and normatively
incoherent. This is because the modern corporation is a legal artefact. It exists because
communities create the legal framework necessary for its existence. Individual corporations can
therefore be said to owe their existence to a partnership (what might be called a social contract)
between shareholders and governments, a partnership that is itself built on the shared though
often implicit understanding that corporations have an unconditional (categorical) obligation
both to obey the law and to treat their stakeholders ethically while generating wealth for their
shareholders.

I] Introduction:

a) Business ethics and investor owned companies

The work of business ethics revolves essentially around two questions: Why be ethical? And
what does ethics require of people engaged in the business of business? The fact that business
ethics revolves around these two questions, however, has a perplexing character that is both
practical and theoretical. The perplexity derives from the fact that the challenge these questions
pose is not confined to the realm of business but rather are endemic to the human condition. In
practical terms, individuals and groups encounter the challenge posed by the questions “Why be
ethical?” whenever they are faced with situations where the “efficient” way of accomplishing
their goals and objectives clashes with moral values. And practically speaking, the second
question is a common companion for those working in areas like medicine or new technologies
or politics where the facts are not clear, or impacts are hard to predict, or moral dilemmas
involving the apparent conflict of moral principles are encountered, or borderline cases are at
issue. Looked at from a more abstract and philosophical perspective, the question “Why be
ethical?” has been an explicit challenge to moral philosophers since Plato posed the issue in the

1
form of the myth of Gyges ring in the Republic. Why be ethical, Thrasymachus asks, if one
discovers that he or she can reap all the social benefits of a good reputation for ethical behaviour
and all the benefits of breaking ethical rules and principles at the same time? 1
Seen from this perspective, business people and organizations are not a special case.
They face the challenge of deciding whether their activities will be guided by ethical principles
when ethics and self-interest appear to diverse in significant ways. And they face the challenge
of applying moral values in complex environments where their application is neither clear nor
straight forward.
All of this is quite true, of course. However, it is incomplete particularly with respect to
investor owned corporations in market economies. Here too, the challenge is posed at both a
practical and theoretical level. Practically speaking, the measure of success for managers and
corporations is profits. And the most obvious and unavoidable obligations of managers and the
investor owned companies they manage flow to shareholders who are the putative owners. This
fact is not just a popular perception. It is enshrined in systems of remuneration particularly for
most senior management where compensation is linked directly to share prices. It is embedded
in modern legal systems via for example “the business judgement rule” which gives management
exclusive authority for the conduct of the affairs of a company but requires that they exercise
their responsibility with the exclusive financial interests of the company’s shareholders in mind
(Donaldson and Preston, 1998, 184). And it is reflected in media commentary and annual
meetings of corporations where discussion of non financial issues are typically regarded as an
unwelcome and inappropriate intrusion.i
What is evident in practice is echoed strongly in theory. The dominant view of the
modern corporation in management literature is that the exclusive obligation of the corporation
is to maximize shareholder return, constrained only by an obligation to obey the law and (on
Friedman’s interpretation) respect conventional morality. Support for this view comes from
agency theory, firm-as-contract theory, neo-classical economic theory and so on. And although
it has been variously criticized in the literature as myopic (Blair, 1998, 47), and descriptively
inaccurate and unacceptable (Donaldson and Preston, 1998, 191), it remains, as Freeman points
out (1998, 125), a view that scholars and managers alike “continue to hold sacred”.
Whether the focus is practical or theoretical, the effect of this dominant view is to set
managers within a tightly constrained moral environment quite unlike that of any of the other
environments in which moral agents are likely to find themselves. And this, of course, is the
source of the perplexity for business ethics. Seen from a moral perspective, the dominant view
is seriously truncated. Not only does it place severe limits on the obligations of managers to
people directly affected by their actions, it constrains any attempt to propose that managers and
the companies they manage should be concerned on ethical (as opposed to instrumental or
strategic) grounds for the wider social, environmental and economic impacts of their activities
and the general conditions of the societies in which they conduct business. That is to say, the

i
The competition for the rights to develop the Busang gold deposit in Indonesia offers an illustration of this point.
A number of Canadian companies became involved in the bidding in an environment in which it was widely
regarded as clear that the key decisions around participation and development would emanate from the President
of Indonesia or his close associates. In response to this belief, a Canadian company, Barrick Gold, hired the
youngest son of the President as an advisor on a very substantial retainer that would be activated only if Barrick
Gold was selected to develop the deposit. Although the ethical implications of this arrangement were obvious,
commentators in the Canadian business press were almost uniformly complimentary noting that this was the way
business was done in Indonesia, an accurate observation, and complimenting Barrick Gold on their astuteness in
this matter. Pride changed to chagrin, of course, when the deposit was discovered to be a gigantic hoax..

2
answers the dominant view implies for our two questions seem seriously flawed.

b) The appeal of stakeholder theory

The appeal of stakeholder theory lies in its capacity to address the perplexities generated
by the dominant view of management and the modern investor owned corporation currently in
place. Its goal is to build a robust answer to the question “Why should investor owned
corporations be managed ethically and what does this mean for the way business is conducted?”.
The tools it brings to this task are both empirical and normative. Empirically, stakeholder theory
rests on an observation or what we might call a fact. Corporations have stakeholders. That is to
say, the activities of corporations impact on individuals and collectivities whose interests aare
thereby affected both negatively and positively. Those interests may revolve around basic needs
like food, water or shelter. They may involve issues of health or safety. They may concern the
capacity of those involved to accomplish their goals and objectives or to experience a decent
standard or living or quality of life. That is to say, the activities of corporations give those they
impact a stake in those activities.
Equally important, stakeholder theory creates a mechanism and thereby opens the door to
bringing fundamental moral principles to bear on corporate activities . That is to say,
stakeholder theory opens the door to the application of what Charles Taylor describes as the
fundamental moral insight of Western civilization, namely, “the universal attribution of moral
personality”. This means that:
in fundamental ethical matters, everyone ought to count, and all ought to count in the
same way. Within this outlook, one absolute requirement of ethical thinking is that we
respect other human agents as subjects of practical reasoning on the same footing as
ourselves.”ii
Applied to the activities of investor owned corporations, this principle requires that managers
acknowledge that all corporate stakeholders have equal moral status and acknowledge that status
in all their activities.
There remains a crucial question, however. Having opened the door to the application of
fundamental, widely shared moral principles in the conduct of business, why should managers
walk through it? In particular, why should managers walk through this door given the risks it
potentially creates for the ability to compete effectively in the marketplace and given prevailing
assumptions about their obligation to maximize profits?
In what follows, I propose to evaluate three answers that stakeholder theorists have given
to this question. The first two are the standard answers that have evolved in the literature, both
of which, I shall argue, are inadequate. The third answer is implicit in much of the literature but
has not been explicitly articulated. In setting it out, I shall argue that it contains the seeds of a
persuasive response that has both predictive and normative validity.

II] Stakeholder theory and the business case for business ethics
The first and most common answer offered by stakeholder theorists to the question
“Why be ethical?” is a pragmatic, business oriented one. I propose to call it the business case for
ethical stakeholder management. Its strategy is to show that stakeholder management is the most
effective and efficient way to successful business outcomes. It has two thrusts each with a
pragmatic goal.
ii
Quoted from ‘The Diversity of Goods” in Anti Theory in Ethics and Moral Conservatism Edited by Stanley G.
Clarke and Evan Simpson (1989), p. 224.

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 To begin with, as Thomas Donaldson and Lee Preston point out, empirical studies have
shown that “many managers believe themselves, or are believed by others to be practising
stakeholder management.” “Managers may not make explicit reference to ‘stakeholder
theory’”, they claim, “but the vast majority of them apparently adhere in practice to one of the
central tenets of stakeholder theory, namely, that their role is to satisfy a wider set of
stakeholders, not simply the share owners (Donaldson, 1998, 184).
Max Clarkson’s studies add considerable credibility to this claim. The strength of
stakeholder theory, he suggests, is its value for describing the world accurately and in a way that
links directly to the imperatives of management. On this account, stakeholder theory is not
normative but rather descriptive in intent, explanatory value and practical application. This puts
stakeholder theory in the mainstream of what Annette Baier describes as “genuine and useful
theories” of a sort found primarily in science (1989, 33). Theories are useful, Annette Baier
suggests, when they “tell us what the world is like” and what we need to know “if we are to act
successfully in it, either to maintain something in it, or to change it.” She goes on to point out:
Moral agents ... need theories, or rather the reliable facts good theories produce -- facts
about the way people react, about the costs and consequences of particular ways of life,
on those who adopt them and their fellow persons (Baier, 1989, 34).
Clarkson’s defence of stakeholder theory meets these criteria. He argues that not only do
managers focus on stakeholder issues, they must do so if they are to avoid corporate breakdown
and failure (Clarkson, 1998, 259). Clarkson distinguishes between primary and secondary
stakeholders in this regard. He defines primary stakeholders as those “without whose continuing
participation the corporation cannot survive as a going concern” and points out that “there is a
high level of interdependence between the corporation and its primary stakeholder groups
(Clarkson, 1998, 259). Secondary stakeholders are defined as “those who influence or affect, or
are influenced or affected by, the corporation.” However, secondary stakeholders are not
“engaged in transactions with the corporation and are not essential for its survival”. On the other
hand, secondary stakeholders “can cause significant damage to a corporation”. Because of their
possible impact on the welfare of a corporation, effective managers will attend to their interests
as well (Clarkson, 1998, 260).;
Stakeholder theory, Clarkson points out, also sets the stage for effective measurement of
corporate social performance by distinguishing between stakeholder issues and social issues,
something that normative theories, whose focus is corporate social responsibility, cannot do
(Clarkson, 1998, 254-258). The central problem with the concept of corporate social
responsibility, as Clarkson points out, is the difficulty of setting out in a persuasive way
“precisely what it implies for whom” (Clarkson, 1998, 255 quoting Freeman). iii Clarkson puts
this point in the following way:
A multitude of issues have been described as social issues in the CSP literature. Under
the rubric of the Social Issues in Management division of the Academy of Management,
an extraordinarily wide range of subjects pertaining to business and society is discussed
at conferences and written about in journals. It has become impossible to define what is,
or what is not, a social issue. … The connotation of social is society, a level of analysis
that is both more inclusive, more ambiguous, and further up the ladder of abstraction that
a corporation itself. (Clarkson, 1998, 255)
Finally, Clarkson argues that stakeholder theory provides a structure and rationale for
understanding and explaining why building ethics into planning and operations is a sound
iii
See also Blair (1998, 47) who echoes this point.

4
management strategy and why firms with records of “ethical” management might be expected to
outperform competitors lacking this focus on the medium or long term measured by
conventional financial and market tests of performance.iv
This last observation provides the link to the second thrust on which the business case for
business ethics stakeholder theory rests, namely the instrumental value
of ethical business conduct, that is to say, its usefulness in achieving conventional business goals
like increased market share or enhanced share value. Here, the evidence is not conclusive.
However, it is suggestive (Clarkson, Deck & Shiner, 1992) and runs counter to what Margaret
Blair describes as finance and market myopia models whose focus is share value and for which
shareholders are the only significant stakeholder (Blair, 1998, 47). It is true that there is as yet
no “compelling empirical evidence that the optimal strategy for maximizing a firm’s
conventional financial and market performance is stakeholder management” as Donaldson and
Preston point out (1998, 187). However, there is a good deal of circumstantial evidence. Some
of it is found in the apparent success of ethical investment funds using ethical, social or
sustainability screens and ethical investment strategies. Some of it comes from studies
undertaken by international organizations like the OECD (Organization for Economic
Cooperation and Development) that have found that “respect for basic labour standards ...
supports rather than undermines open trade-oriented growth policies in developing countries”
(OECD, 1996).v Stakeholder theory provides an explanation for these apparent patterns in
financial markets, international development and corporate history that runs counter to the
received wisdom of conventional financial, neoclassical, economic and shareholder theories of
management as they are normally interpreted.
In short, stakeholder theory addresses issues that are recognizable to business managers
competing in competitive markets in ways that expand but do not challenge in a fundamental
way their vision of their responsibilities as business managers.
Unfortunately, in spite of its obvious attractiveness, the business case for stakeholder
theory is fatally flawed. Understanding why this is the case is an important first step to
developing a convincing justification for ethical business conduct.
The flaw lies in the fact that the business case for ethical business conduct is a political or
pragmatic management model. As Clarkson points out:
(C)orporate decisions are usually made on the basis of market forces, for example,
employee productivity or customer satisfaction, not necessarily because they are socially
desirable. Managers are interested in results, first and foremost.
On Clarkson’s view of the matter:
Performance is what counts. Performance can be measured and evaluated. Whether a
corporation and its management are motivated by enlightened self-interest, common
sense, or high standards of ethical behaviour cannot be determined by the empirical
methodologies available today. (1998, 258)

iv
This is a claim that I shall be examining in detail at a later point in the discussion.
v
The standards being referred to in this quotation are similar to those in a recent ILO (International Labour
Organization) declaration setting out a set of core labour rights (House and Mutua, 2000). The relationship
between economic development and maximizing conventional financial market performance on the part of any
particular firm is indirect. However, economic development enhances business opportunities. If respect for basic
labour standards has this effect, it is in the interests of individual firms to support respect for the decent treatment
of labour by way of creating a positive business environment in which opportunities for enhancing financial
performance are increased.

5
But why, it might be asked should this focus on performance lead managers to embrace
stakeholder theory, it might be asked? Clarkson’s responds:
Fairness and balance in the distribution to its primary stakeholder groups of the increased
wealth and value created by the firm are necessary to preserve the continuing
participation of each primary group in the firm’s stakeholder system and to avoid
favouring one group unduly and at the expense of other groups. (1998, 265-6)
This view is a corner stone for the business case for business ethics. What is important on this
account is that corporations act ethically. Why they do so is not relevant.
Unfortunately, it is simply not the case that ethical treatment of even primary
stakeholders is required to ensure their continued participation of primary stakeholders. Just as
gauging the reasons of management for acting as they do is not relevant, so too, gauging the
reasons of primary stakeholders for cooperating or continuing to participate in a wealth
generating relationship with a corporation is not relevant on this view. What counts is what can
be measured, namely, performance.
The difficulty is that long term primary stakeholder participation can be and has been
achieved in a variety of ways, many of them unethical. These include deception (health
implications of working with asbestos for which the Thetford mines in Quebec, Canada is an
illustration, or marketing strategies in the tobacco industry), coercion (for example, labour
conditions under military dictatorships as is currently reported to be the case in Burma and the
Sudan), brute necessity in the face of severe deprivation (for example people working under
appalling labour conditions in factories in underdeveloped countries and South Africa under
apartheid), and so on. Indeed corporate history is filled with examples of companies that have
been successful by conventional marketing and financial standards both by and while cutting
sharp ethical corners.
Indeed unethical behaviour traditionally has centred in many cases in ensuring that
stakeholders, who, under ethical management systems, would be primary stakeholders, do not
become primary stakeholders; that is to say, do not acquire the leverage that would give them the
power to disrupt or block a corporation from achieving its objectives.
All of this is to say nothing of what Clarkson describes as secondary stakeholders. Here
examples of unarguably unethical treatment by successful corporations of their stakeholders are
legion. Clarkson’s comments in this regard are again ironically revealing. Secondary
stakeholders are those affected by or capable of affecting corporation corporate activity.
However, they are not essential for a corporation’s survival even though they may on occasion
be able to cause significant damage (1998, 260). What success will require is that these
stakeholders be managed effectively if they must be managed at all. What counts, remember, is
performance. Stakeholders who are marginal, politically, economically or socially speaking, can
safely ignored, on this interpretation of stakeholder theory. This is likely to be particularly true
of involuntary stakeholders, whose participation is not by choice. Here it may be possible and
indeed historically has been possible to off-load or externalize costs without serious risk to the
corporation involved or to impose terms that are anything but fair.
The point here is not that those advocating the business case would condone unethical
behaviour where success either called for or tolerated it. Rather, while the business case for
business ethics offers pragmatic reasons for ethical treatment of stakeholders, it opens the door
to pragmatic arguments for ignoring them as well. And even where it is obvious that unethical
behaviour may create significant risks for managers, the theory cannot differentiate between
being and appearing to be ethical. This, of course, is the “Gyges scenario” to which Plato points

6
so effectively in the Republic. If success, conventionally measured, is the goal, then the
appearance of ethical conduct will suffice. What is important is that management be seen as (i.e.
give the appearance of being) ethical by those in a position to affect its ability to achieve its
goals. And this can be managed in a variety of ways by astute managers, as the history of
business again too often confirms.
From all of this it follows that stakeholder theory, given a purely descriptive or empirical
formulation, cannot bear the weight required to make a convincing business case for genuinely
ethical business management. At the same time, as a theory of management, stakeholder theory
has attractive features. In particular, as we have seen, its capacity to account for relationships
between ethical conduct and effective management and to offer explanations for those
relationships in a way that makes the business case for business ethics initially so appealing and
persuasive is obviously attractive. There is an insight here to be mined, as indeed I shall attempt
to do, in the final section of this paper.

III] Stakeholder theory and the ethics case for business ethics
The problem on which empirically grounded stakeholder theory stubs its toe, as many
commentators have pointed out, is the fact/value dichotomy. Identifying this dichotomy has
become a standard move in the logical analysis of prescriptive ethical theories and their
justification. Kenneth Goodpaster, for example, points out that what he calls “stakeholder
analysis” is an important management tool. However, seen from the perspective of management
decision making, it is “morally neutral” (1998, 106). As he observes:
A management team ... might be careful to take positive and (especially) negative
stakeholder effects into account for no other reason than that offended stakeholders might
resist or retaliate (e.g. through political action or opposition to necessary regulatory
clearances). It might not be ethical concern for the stakeholders that motivates and
guides such analysis, so much as concern about potential impediments to the achievement
of strategic objectives. Thus positive and negative effects on relatively powerless
stakeholders may be ignored or discounted in the synthesis, choice and action phases of
the decision process. (1998, 107)
From the fact that managers do think about stakeholders and that effective management requires
that stakeholder interests be considered, it does not follow that managers ought to treat
stakeholders ethically. All that follows is that managers must address stakeholder interests
strategically if they are to be successful.
To put this point in the language of philosophical analysis, descriptive accounts of human
behaviour can never, by themselves, provide the foundation for inferences to how human beings
ought to behave in the absence of evaluative or value infused premises or assumptions. Facts,
taken alone, cannot entail values.vi
This raises a crucial question. Management theory is prescriptive. Its purpose is to
provide an account that will guide management decision making in ways designed to increase
the chances for success. Descriptive stakeholder theory, too, appears to be and is implicitly
recognized to be prescriptive. Why is this so? The question, as I hope to show, is central to
moving to a clear understanding of the foundations of corporate social responsibility.
Management theories are prescriptive because they are built on assumptions about the

vi
David Hume, the Scottish enlightenment philosopher, is most often identified as the source of this insight. It is
restated by many twentieth century philosophers. One of the most direct and influential of those restatements can
be found in The Language of Morals, by R.M. Hare.

7
nature and purpose of private sector investor owned corporations. What virtually all
management theories assume is that the purpose of a management theory is to provide the
foundations for successful management. Successful managers are managers who do well what
managers are supposed to do. The role of managers is in turn defined by the nature and purpose
of the corporation. The purpose of the corporation on conventional accounts is to maximize
profits for the benefit of the people who have invested in it and who are by virtue of their
investment the corporation’s owners. Managers, therefore, have an obligation to maximize share
value for the benefit of investors.
Shareholder theory defines managers as agents and investors as their principals
(Goodpaster 1998, 115). As agents, managers have fiduciary obligations that derive from their
role as agents. Those obligations are ethical in nature. And so shareholder theorists like Milton
Friedman correctly conclude that on their account of the matter, managers have ethical
obligations, namely, the obligation to maximize profits. With respect to other stakeholders,
however, the only obligation is to think strategically. The value of any object of strategic
thinking is instrumental. Its value resides in its utility for the achievement of corporate
objectives.
What is important here is to recognize that conventional shareholder theories (I shall call
them conventional management theories since they dominate the thinking of the business
community and business educators at this moment in history) is that they are prescriptive. They
prescribe a set of fiduciary obligations that have ethical content. They also provide a framework
for strategic decision making whose goal is to determine the strategic (i.e. instrumental) value of
anything or anyone that might serve to either enhance or impede accomplishing the primary
purpose of the corporation which is to maximize profits for the benefit of shareholders.
Given this view of the nature and purpose of the corporation, is there any entry point for
a more expansive view of business ethics? Goodpaster suggests one such answer. “No one can
expect of an agent”, he says, “behavior that is ethically less responsible than what he would
expect of himself.” “I cannot”, he says “(ethically) hire done on my behalf what I would not
(ethically) do myself” (1998, 117).
There are two ways to interpret this view. The first asserts that while agents have
obligations to principals, they remain moral agents in their own right. The second interpretation
would see agents as moral agents by proxy; that is to say, they take on the moral personality of
their principals. Both interpretations add pieces to the business ethics puzzle. Neither, however,
provides an adequate account as it stands. The first interpretation has two strengths. First, it
points to one of the disturbing aspects of agency theory as it tends to be interpreted in
management contexts. The conventional view is that managers are agents of investors who
invest in corporations with a view to maximizing share value and therefore the value of their
financial investment. The sole moral responsibility of managers is then to ensure the
achievement of profit maximization on behalf of investors. Frequently, this view accepts that
management should act within the constraints of law and conventional morality, though the
justification for respecting these two constraints is less than clear. vii
vii
I have been unable to locate any systematic justifications for the view that management should work within the
constraints of law and conventional morality by standard bearers of the standard market and finance profit
maximization theories. Milton Friedman does not offer a justification for tacking these caveats onto his account.
The obvious interpretation would justify respect for law and conventional morality on instrumental grounds. The
behaviour of many CEO’s would suggest this is in fact how law is frequently viewed by corporate leaders. That is
to say, the law should be respected because of the cost to share value of fines and public approbation in the event
of discover and conviction for illegal activity. The same “public relations” justification would seem often also

8
 What is striking about this view is the degree to which is seems to require that agents
surrender their character as moral agents. The manager becomes an instrument at the service of
investors for the pursuit of their pecuniary interests. This of course is viewed as a clear strength
of shareholder theories. Accountability, it is argued, is clear and direct on this account.
Shareholder theories locate clearly the responsibility of managers, identify clearly and
unambiguously to whom they are accountable and provide a standard by which performance can
be measured. What is more, shareholder theories allow for the alignment of the moral
responsibilities of management, i.e. their fiduciary obligations, with their self interest through
systems of rewards and penalties. This approach is illustrated by systems of remuneration whose
obvious goal is to align the interests of managers with those of shareholders by generating very
significant financial rewards in return for increasing the value of the shares of the companies
they manage. On this view, an ideal system would align the interests of shareholders and senior
management so tightly that the need to appeal to the fiduciary obligations of managers would
become otiose. The effect is to turn managers into “pure” agents whose goals and objectives as
managers are solely those of their principals whose goals and objectives are assumed in turn to
be profit maximization.
No publicly held corporation or management theorist would publicly espouse the view
just described, of course. The reasons are obvious. Stripping human beings of their character as
moral agents is to strip them of their character as human beings. It is, as Kant put it, to see
managers as means only. This view of manager/agents constitutes, therefore, a fundamental
challenge to the view that moral personality is inalienable. The view that moral personality or
agency cannot be relinquished, sold or otherwise alienated by individuals (i.e. by moral agents)
is a fundamental tenant of law.viii It is also a fundamental tenant of post renaissance morality as
it has evolved in western liberal democratic societies. It follows on both legal and moral
grounds that any theory of management must make a place for moral agency in its account of the
role and responsibilities of managers. The alternative is to accept that corporations and their
agents operate in a social and economic space that is fundamentally amoral in character. ix
Goodpaster’s account of the business ethics builds on the recognition that moral
personality is inalienable. On the first interpretation of his position suggested earlier, he is
proposing that managers do not cease to be moral agents responsible for acting morally when
they step into their role as managers. That is to say, their overriding moral obligation is to meet
their fiduciary (role based) obligations to their principals in a manner that is consistent with the
moral obligations that everyone has to treat everyone they interact with as ends and not as means
only.
This set of observations obviously requires further comment. However, before extending
the analysis, we need to explore the second of the two possible interpretations of Goodpaster’s
apply to the degree to which conventional morality is respected as well. Seen from this prespective, managers
have just one moral obligation, to maximize profits on behalf of investors.
viii
The principle is also enshrined in international law. It was the thesis, for example, that justified the
Nuremberg trials. Moral personality can, of course, be lost through the loss of mental capacity, for example.
However, it cannot be taken away. Criminals, for example, who are imprisoned as punishment have their freedom
restricted. However, they do not lose their status as human beings subject to the basic protections of the law but
also with a continuing legal obligation to obey the law.
ix
This, of course, is how corporations and their agents are viewed particularly by left wing critics. If the
argument of this paper is cogent, dominant management theories and free market philosophies that underlie them
are exposed in principle to this criticism.

9
account.
On the second interpretation, Goodpaster may be suggesting that managers are moral
agents by proxy; that is, as agents, they take on the moral personality or moral character of their
principals. This view is subject to severe criticism as our discussion of the first interpretation
above implies. However, it does have the merit of pointing out that investors are also moral
agents. Moral agency by its nature constrains the pursuit of pure self interest. It follows that
investors have an obligation to evaluate all their actions in light of their impact on others. Those
others, as we have already seen, are by definition the corporation’s stakeholders.
The effect of this observation is to remind us that the profit maximization view of the
interests of investors abstracts from reality in a way that is both empirically inaccurate and
morally unacceptable. At a purely empirical level, it is uncontroversial that investors are people
with complex interests. There is no empirical evidence to show that investors as a class
approach the activity of investment in a single minded way. On the other hand, there is a good
deal of evidence that shows that people are prepared to invest within a framework that includes
moral parameters as the growth of ethical investment funds over the past few decades
demonstrates. x
Seen from a moral perspective, investors are moral agents who carry into all their social
interactions an obligation to evaluate their actions within a framework that includes moral
criteria. And that framework will require that they evaluate the impact of their investment
decisions from a moral perspective. The virtue of this second interpretation of Goodpaster’s
position is that it addresses this point.
Goodpaster’s own extension of stakeholder theory is to argue that while managers have
obligations to stakeholders, they differ in character from the obligations managers have to
shareholders. The obligations to shareholders, he suggests, are fiduciary obligations. The
obligations to stakeholders are non fiduciary obligations. The problem with this view is that it
derives the obligations that managers have to stakeholders not from their role as managers but
rather from their status as human beings. As people or human beings, managers on this account
have a general moral obligation to take into account the impact of what they do on those likely
to be affected by their decisions, that is to say on their stakeholders. In this respect, managers
are no different from anyone else. As managers, however, managers have a moral obligation
only to maximize profits for investors.
Law provides the framework for a fitting analogy. Judges, it has been argued, have an
obligation to apply the law as they find it set out by authorities responsible for its creation. They
have this obligation whether they regard the law as moral or immoral. On this view, if a judge is
compelled, by the law he has been entrusted to apply, to reach a verdict that he or she regards as
immoral, the only option is to resign as judge. xi
x
What does seem to be true is that investment fund managers, acting as intermediaries, do appear to believe for
the most part at this point in time that their primary obligation as fund managers is to maximize profits and that
this requires that moral considerations not enter into investment decisions in a principles rather than a strategic
way.
xi
Those familiar with the extended discussion of this point in the legal and philosophical literature will recognize
the position here described as positivist in nature. Natural lawyers would dispute this interpretation of judicial
responsibilities. For natural lawyers, an unjust law is no law at all and therefore judges do not have an obligation
to apply it.That is to say, judges do not have a legal or a moral obligation to enforce unjust laws. My point is
independent of this controversy. The purpose of the analogy is to illustrate what is implied by Goodpaster’s
position. The analogy does extend to critical evaluation of the position, however. For exactly the kinds of
arguments that have led critics to reject positivist interpretations of the notion of legal obligations will also apply

10
 This view, implicit in Goodpaster’s account has many problems. However, for our
purposes, its central defect is its failure to offer an integrated account of business ethics. Rather,
it aligns business ethics with profit maximization. As managers, managers’ sole ethical
obligations are their fiduciary obligations to stakeholders. The result is a description of the role
of “business manager” that is both empirically and ethically impoverished. What is lost in
Goodpaster’s account is the promise implicit in stakeholder theory to provide an integrated,
morally grounded theory of business management.

IV] Shareholder theories, prescriptivity and the law

Shareholder theories come in a variety of shapes and sizes. However, they have two
things in common. They yield prescriptions and the prescriptions they yield have moral content.
Let us look at each characteristic briefly in turn.
Shareholder theories yield prescriptions. If they did not, they would not be management
theories. Their goal is to guide managers in fulfilling their role as managers. They yield
prescriptions because they give management a purpose, namely, profit maximization. This
ascription of purpose is in fact a description. Seen from a management perspective, it is a
description of the role of managers as managers. Seen from a general business perspective, it is
a description of the purpose of private sector, for profit corporations.
The description of the function or role of managers and the function or purpose of
investor owned, for profit corporations is persuasive for several reasons. First, it appears to
describe accurately why investor owned corporations are created and why investors invest in
them. The theory asserts that the purpose of for profit corporations is to generate profit. People
invest where there is expectation that their investment will increase in value. If their research or
intuition tells them profits are unlikely, they turn to other investment instruments. If they
discover that an investment is gradually losing value and conclude that things are unlikely to
improve, they withdraw their money and look elsewhere for a place to put it. In short,
shareholder theory would appear to mirror reality.
Second, the view that the function of the managers of investor owned, private sector
corporations and the corporations they manage is to maximize profits fits easily into the
theoretical framework of both management and economic theories.xii This description of the
function of management and the corporations they manage seems therefore to have the backing
of plausible accounts of what counts as a sound scientifically grounded theory. xiii That is to say,
shareholder theories have pragmatic value. They provide guidance to agents seeking to
accomplish their goals and purposes in complex business environments. Shareholder theories
are in their turn embedded in economic theories which are in turn attractive because they
connect to a way of doing business that has been remarkably successful at generating economic
growth and wealth. What makes this matrix of theories even more attractive is the way they in
turn nestle within over arching theories of human conduct, for example, Adam Smith’s Wealth
of Nations.
It is important to note that all these connections and interrelationships gain their

to Goodpaster’s attempt to locate the moral obligations of managers to stakeholders relative to the moral
obligations of managers to principals (i.e. investors).
xii
This, of course, should come as no surprise is as much as, in business schools, strategy is taught frequently if
not for the most part as applied economics.
xiii
See Baier, 1989, 34.

11
attractiveness from the intersection of what I propose to call their descriptive/prescriptive
accuracy. They are descriptive; that is to say, they describe the function of management and
generate “facts” about the nature of management and the role of managers. They are
prescriptive; that is to say, they provide guidance to management and provide what gives every
appearance of being a simple clear benchmark against which the performance of managers can
be assessed.
It would be a mistake to stop here, however. For, as Goodpaster points out, shareholder
theories also generate moral prescriptions. Managers hold the investment of investors in trust.
The capital put at their disposal is not theirs to do with as they please. It is the property of their
investors who invest with the expectation that their investment will grow in value. By virtue of
their function, managers have a fiduciary obligation to their shareholders to manage profitably.
People who invest in for profit corporations have a right to expect managers to fulfil these
obligations, a right that has both moral and legal stature.
It is worth noting here that the idea that moral obligations follow from roles is neither
strange nor limited to business contexts. Doctors, nurses, dentists, accountants, indeed all
professionals have moral obligations that flow from the functions they perform as do parents and
other care givers, civil servants and others performing roles in society that create and require
trust. Equally, the idea that organizations have moral obligations, though more tendentious
because of the contest character of the concept of collective or group as opposed to individual
responsibility, is none the less a common place in every day life. Hospitals have moral
responsibilities by virtue of what they are, as do schools, churches, clubs, governments and so
on. What differentiates for profit corporations is not the fact that they have moral
responsibilities by virtue of their function. Rather it is the fiduciary character of those
obligations, namely, the obligation to increase the value of the money invested in them.
Shareholder theory, however, fails a crucial test, a test of internal, prescriptive
coherence.xiv Understanding the nature of that failure lies at the root of finding a sound
normative foundation for stakeholder theory.
As we have already noted, shareholder theories assume that the function of an investor
owned corporation is to maximize profits for the benefit of their shareholder owners. Typically,
shareholder theories accept that managers have this as their central obligation. However, also
typically, shareholder theorists accept that managers have a responsibility to pursue their goals
and objectives within the constraints of law and conventional morality. Setting aside the issue of
conventional morality for the moment, this assumption raises a significant question. How does
shareholder theory justify the proposition that managers should work within the constraints of
law? To put this another way, what is the answer of shareholder theory to the question: “what
policy should govern a corporation’s approach to fulfilling its legal obligations?”
The obvious answer is that failure to work within the constraints of law generates risks.
Further, taking the risks associated with breaking the law is inconsistent with the fiduciary
responsibilities entailed by the obligation to maximize shareholder wealth.
If we accept this account, the obligation that shareholder theory attaches to obeying the
law is simply a corollary of the fiduciary obligation to maximize profits, namely, do not put the
investments of shareholders unreasonably at risk. This in turn grounds respect for the law on

xiv
Critics of shareholder theory might justifiable complain that shareholder theory fails a series of tests, not just
the one I am about to describe. This may be true. However, the failures most frequently ascribed to shareholder
theories are descriptive failures. The test I focus on is a prescriptive coherence test and therefore different in kind
and also, I would suggest, more fundamental.

12
instrumental considerations and generates a hypothetical prescription: “do not break the law, if
doing so will put the financial interests of shareholders unreasonably at risk.” The result is a
business or pragmatic justification for obeying the law that is with respect to the question,
“Should corporations obey the law?”, morally neutral. Corporation should obey the law if
breaking the law generates risks that are incompatible with their fiduciary obligations.
It is arguable, that this observation simply demonstrates the explanatory power and the
pragmatic value of shareholder theory. Explanatory power lies in the capacity to generate
accurate predictions. Here the theory would seem to capture reality. For there is a good deal of
evidence that managers do act frequently as this account would seem to predict. That is to say,
breaking the law is a well tried option for many managers. For example, virtually all modern
legal systems proscribe bribery. Yet bribery in many parts of the world has become an epidemic
nourished by the business practices of large and small national corporations as well as by
multinational corporations in their off-shore operations. What is true of bribery, is clearly true
of money laundering, respect for environmental regulations, labour laws and so on.
In contrast, however, most multinational companies are very careful to commit
themselves publicly to respect the laws of their home country. Respect for the law is also a
prominent component of most corporate codes of conduct. A 1992 American Law Institute
report entitled Principles of Corporate Governance, which is written on the explicit assumption
that the purpose of the corporation is “enhancing corporate profit and shareholder gain”, says
that “‘(e)ven if corporate profit and shareholder gain are not thereby enhanced,’ the corporation
must abide by law.”(Donaldson, 1998, p. 191).
This kind of pronouncement, common in the corporate world, begs for a justification.
Needing explanation as well is why working within the law is a “taken for granted” provision of
shareholder theories. Finally, it is important to try to uncover the “logic” of public cynicism that
so often results from the uncovering of illegal and unethical corporate conduct.
All of these issues are related, I shall propose. Their relationship lies in understanding
why respect for the law is a fundamental corporate obligation.

V] Artefacts, legal artefacts and the concept of a corporation

Understanding the relation of corporations and law rests on two things. First,
corporations are legal artefacts. That is to say, they exist because the law creates the conditions
for their existence and operation. Second, as legal artefacts, corporations have an unconditional
obligation to obey the law. It is this second factor that necessitates an examination of the claim
common to shareholder theories that corporations should obey the law. For, if shareholder
theories imply that the justification for obeying the law on the part of investor owned
corporations is an instrumental or pragmatic justification, they must also imply that in
appropriate circumstances it is acceptable (indeed even manadated) for corporations to break the
law. The appropriate conditions would occur where breaking the law would enhance profits or
avoid loses without incurring undue risks; which is to say where detection was either unlikely or
alternatively not “material”.xv It is obvious that no theory of management could actually make
this implication of the theory explicitly, if indeed it is an implication of the theory. To say
publicly that breaking the law is acceptable where it generates no risk of detection or

xv
“Materiality” is the standard that determines what auditors have an obligation to report to the Board of
Directors of a corporation. “Material” here means significant enough to be reported to stockholders or significant
enough to have a bearing on assessments of the financial status of an organization or corporation.

13
alternatively generates no unacceptable risks of detection, or yet again where the consequences
of detection are on balance manageable, would in fact not be tolerable because of its impact on
reputation and trust. But again, this is an outcome that requires explanation. After all, if profit
maximization is the purpose of investor owned corporations, why is setting out explicitly the
implications of this view for corporate policy governing legal obligations not tolerable? In
what follows, I shall argue, that a central weakness of shareholder theories lies in their inability
to provide a coherent account of why corporations should obey the law.. Let us now look at
each of the two things that underpin an understanding of the relation of corporations to the law
in turn.
Corporations are legal artefacts, artefacts created using tools provided by law. Artefacts
are things (entities) created by agents with some goal or purpose in mind. xvi Tools are a
paradigm example of artefacts. The purpose of a hammer, for example, is to drive nails. All
artefacts have a function. And no artefacts exist as artefacts naturally without the intentional
intervention of an agent who either creates the artefact or identifies or shapes a natural object for
a particular use.xvii
It is important to note here that, whether something is an artefact, and, what kind of
artefact it is, is a matter of fact. Furthermore, to identify something as an artefact is to ascribe to
it a function, an ascription which again is a matter of fact. This is not true of other kinds of (i.e.
non functional) descriptions. The result is that descriptions of artefacts have a distinct logical
character. They have built into them the concept of function. Because their function is a part of
their meaning, descriptions of artefacts generate evaluations and indirectly prescriptions. xviii
Role descriptions have a similar character. Built into them are criteria of evaluation. Thus, from
the proposition that the function of a manager is to ensure that a corporations fulfils its function,
it follows that a manager is a good manager if he or she fulfils the function or role of manager
well. Hence, to describe corporations as having a purpose is to build into the description of
corporations a benchmark against which the operations of corporations can be assessed. It also
provides a foundation for the ascription of fiduciary obligations. For, if the purpose or function
of a corporation is to maximize share value, and this is publicly recognized and affirmed, then
investors in corporations have a legitimate expectation that those responsible for the
management and direction of corporate activities will understand that their purpose is to guide
the corporation in the achievement of its function. A good manager will therefore be a manager
who is a profit maximizer, that is brings it about that the corporation for which he or she is a
manager fulfils its function well. Because shareholder theories ascribe a function or purpose to
investor owned corporations, their theories are implicitly normative in nature and entail specific
conclusions about the fiduciary obligations of managers of those corporations.
In short, shareholder theories derive their action guiding implications from the fact that
they are built on assertions about the function or purpose of investor owned corporations.

xvi
An agent for these purposes is simply something capable of acting purposefully. This is not to say that all
agents create artefacts. This would seem to be false. At least, it is not obviously true. Human beings are agents
in this sense of the term. They do create artefacts for a wide variety of purposes. The focus of this essay is on
human agents and the artefacts they create.
xvii
The OECD defines an artefact as: “A product of human art or workmanship”.
xviii
For more detailed analyse of the concept of function and its implications for moving from descriptions to
evaluations, see The Language of Morals by R.M Hare at p. 100 ff. See also "Functional Words, Facts and
Values", The Canadian Journal of Philosophy, Vol VI, No. 1, March 1976 by Wesley Cragg.

14
 What shareholder theory ignores, however, is the fact that corporations are not simply
artefacts; they are legal artefacts. That is to say, they can only exist where legal systems and
specific provisions within those systems make it possible for them to exist. To put it more
formally, a legal framework of a particular character is a necessary condition for the existence of
corporations. It is the law that creates the framework for building modern organizations that
have the character of a corporation. More specifically, investor owned corporations as we know
them exist because specific legal systems have made provision for limiting the liability of
owners. Corporations are mechanisms for pooling capital. They attract capital in part because
the law limits the liability of their shareholder owners to the capital invested in the corporation.
Any investor stands to lose the money invested in a corporation. However, that is where their
legal liability ends. Hence what is at risk is defined and limited.
The fact that corporations are legal artefacts carries with it important implications. First,
corporations can only operate successfully within communities with functioning legal systems.
Any action tending to undermine a legal system within which a corporation is nested is a
potential threat to the corporation itself. Secondly, investor owned corporations can operate only
if their relationships with their stakeholders can be defined legally. For example, the modern
investor owned corporation builds on the institution of private property. Thus, for example,
retailers operate with great difficulties in social environments where theft and break and enter
are commonplace. People won’t shop there for fear of losing possession of their purchases and
retailer shy away from such environments because of the fear of losing merchandise and the
proceeds of sales. Equally, unless retailers recognize an obligation to pay for goods received, an
obligation that is largely meaningless in the absence of social practices built on the institution of
private property, supply chains collapse and commerce as we know it becomes seriously
constrained and, in worst case situations, impossible.
The operation of corporations requires, therefore, a legal environment in which basic
practices, for example, respect for private property, guide social behaviour. These practices
reflect rules that define roles which in turn specify “a system of expectations, commitments,
burdens and rewards attached to the roles defined in the activity” (Wolff, 1973, 166). These
practices, seen from a corporate perspective, would normally include the roles of: employees,
themselves located in an organizational structure with complex inter relationships with their
roles and responsibilities, customers, clients, and shareholders. In some cases relationships and
responsibilities generated by existing practices will be defined contractually; in others
relationships and responsibilities will be set out in other ways. A corporation can exist and
operate only by first consciously locating itself within the matrices of the practices just sketched
and second, by publicly committing to adhere to them. Equally, any corporation can exist and
pursue its goals with the possibility of success only if those, whose activities are integral parts of
the practice, play their various roles in a way which acknowledges and give expression to the
expectations and commitments of others participating in or dependant on the practice.
Where practices are concerned, justifications for actions related to or called for by the
practice are internal to the practice. A financial official or an inspector has a role to play
whatever extrinsic benefits or burdens intersect with his or her activities. An inspector, who
forms a policy to do his or her duty except when offered an adequate inducement to do otherwise
(a bribe), is repudiating or corrupting the role of inspector. A senior executive who forms the
intention to fulfil his or her responsibilities only when it is to his or her personal advantage is
likewise repudiating or corrupting the role to which he or she has been assigned. A corporation,
that operates with a disguised intention to meet commitments and address expectations defined

15
by the legal matrices that provide the foundations for the practices that make its existence
possible only when to do so has instrumental value for the corporation, is generating policies that
are in explicit conflict with the legal framework and practices which define how the role and
function of a corporation is defined in law.
What is at issue here is not the legal or moral character of corporate policies that direct,
allow or tolerate instrumental calculations to determine whether the law will be respected. That
is to say, the problem with policies that direct or allow management to use cost/benefit analysis
to decide whether to obey the law in particular instances lies not in the fact that such policies
would permit management to act illegally or immorally, which it would. Rather, the problem is
the contradictory character of the stance in question. Such a corporation would be saying at one
and the same time: “we are prepared to play by the rules that define the practices that make our
existence and corporate activities possible; and we will only play by the rules when instrumental
considerations indicate that to do so is the most cost effective way of achieving our goal of profit
maximization..
The problem here parallels Kant’s analysis of false promising. Indeed it is a special
instance of it. Kant’s analysis focuses on promise making and contradictory willing. Someone
makes a false promise when he or she says: “I promise to do X” while at the same time having
no intention of “doing X”. Promising exists as an institution or practice, or social activity that
communicates a commitment to do what is promised. It can exist as an institution or practice
only if the expectations it generates are realized for the most part. If expectations generated by
promising were not met in a reliable way, making a promise would lose its point. Or as Kant
puts it:
“it would make promising, and the very purpose of promising itself impossible, since no
one would believe he was being promised anything, but would laugh at utterances of this
kind as empty shams” (Wolff, 165).
Robert Wolff reshapes Kant’s argument by focusing on the idea of contradictory willing. To
make a promise is to say: “I intend to do what I say I am going to do!” To make a promise with
no intention of keeping it is therefore to form an intention that is internally inconsistent. The
two intentions contradict each other. The result is an instance of contradictory willing.
A corporate policy that implies that it is permissible or required for management to
calculate the advantages and disadvantages of obeying the law and behave accordingly has the
same character. In declaring itself a corporation, a corporation declares that its intention to be
bound by the practices that define the kind of thing it is. That is to say corporations by their
nature as corporations declare their intention to conduct their activities within the law. To then
permit or direct its decision makers to decide the conditions under which the law will be obeyed
is in explicit conflict with the practices and legal framework that make it possible for a
corporation to be a corporation. It is therefore a policy that is internally incoherent. It
constitutes a policy built on the principle that the corporation is both bound by the law and free
to break the law when it suits its purposes.
Let us now refocus the analysis on the concept of a corporation as understood by
shareholder theory. And let us formulate our thesis in the form of a hypothetical understanding
of that theory. If it is the case that shareholder theory, by making profit maximization the
purpose of investor owned corporations, implies that the central relation between corporate
activity and the law is instrumental or pragmatic in nature, then it follows that shareholder
theory is incoherent. That is to say, it is a theory that requires corporations to adopt policies that
are incompatible with each other. It entails a corporate policy structure that cannot consistently

16
guide corporate activities.
To summarize, corporations are legal artefacts. Their ability to achieve their purposes is
dependent on the existence of legal frameworks that create obligations and expectations that in
turn generate burdens and rewards. A corporation cannot come into existence without
acknowledging explicitly its commitment to work within that framework. If it does not
acknowledge the framework and agree to respect the practices associated with it, it cannot enjoy
or benefit from the rewards that the existence of the practices in question makes possible. The
“cannot” here is not a pragmatic “cannot”. It is a logical “cannot”. That is to say, a corporation,
any corporation, cannot establish business relationships of the sort that corporations come into
exist to develop with shareholders or any other stakeholders under those conditions. To put it
otherwise, to reap the rewards hoped for, corporations must shoulder the burdens, whether light
or heavy, that are imposed by legal commitments without which the rewards are in principle out
of reach.
By constituting itself an investor owned corporation under the law, a corporation declares
that it is committed to working within the constraints of the legal framework that makes its
existence possible. The commitment is categorical. It cannot be subject to strategies or policies
either implicit or explicit that require those that direct the activities of corporations to make their
respect for the law conditional on analyses of the instrumental value in particular instances of
obeying the law. For that would build into the concept of a corporations contradictory policies.
It does not follow, of course, that individual corporations cannot simulate a willingness
to play by the rules while in fact building their activities on policies that are in conflict with
those rules. However, corporations that do this are endorsing a matrix of policies that can only
be realized through deception and dishonesty. Clearly, if all corporations were built on similar
policies, the practices that make their existence possible would collapse since no one could rely
on the business commitments that make entering into business relationships with corporations
worthwhile and, seen from a business perspective, profitable.
But, does shareholder theory imply that corporate decision makers must approach the law
from an instrumental perspective? The quick answer would appear to be quite emphatically,
“No!” Milton Friedman, whose views are widely acknowledged to capture the core shareholder
view of the purpose of investor owned corporations, makes the following claim in a New York
Times Magazine article. The responsibility of a corporate executive in a free enterprise, private
property system is to conduct the business for which they are responsible in accordance with the
desires of the owners of the business which will be “to make as much money as possible while
conforming to the basic rules of the society, both those embodied in law and those embodied in
ethical custom” (Poff, 1987, 7).xix This would appear to imply that built into the fiduciary
obligations of corporate decision makers is a categorical and not a hypothetical or instrumental
obligation to obey the law.
Previous discussion was designed to show why explicitly rejecting an instrumental or
pragmatic approach to a corporation’s legal obligations is fundamental to understanding the
nature of a corporation. The condition Friedman has put on the pursuit of profit is therefore
fully understandable. But can it be justified by the theory that underlies the view been espoused.
What in shareholder theory requires or entails support for a non instrumental approach to legal
obligation? What is the theoretical basis of the claim that corporate decision makers should
respect the law as a matter of course or as an unconditional element of their fiduciary
xix
The quotation originates in an article from The New York Times Magazine (Sept. 13, 1970) which is reproduce
in the Poff and Waluchow volume.

17
obligations?
There is to my knowledge nothing in shareholder theory that can explain or justify the
assertion that corporations have a non instrumental obligation to obey the law. The only
unconditional obligation that follows from the nature of a corporation as set out in shareholder
theory is an obligation to maximize share value. That obligation is in place because it is made a
defining characteristic of what it is to be an investor owned corporation. Advancing that
definition is rendered plausible by background economic theories that in turn rest on important
assumptions about what motivates human economic behaviour. Superficial plausibility,
however, can now be seen as a weak reed on which to build an understanding of the nature of a
corporation. What is required of shareholder theory is a demonstration that a justification of the
proposition that corporations have a non instrumental, categorical obligation to obey the law is
possible or available. Analysis of shareholder theories suggests that such a justification is not
likely because in all probability it is not possible.xx Certainly Goodpaster’s argument discussed
at length earlier points in this direction. xxi So too does the brute fact, that shareholder theorists
for the most part accept that addressing ethical concerns can be justified by managers only on
instrumental grounds.. If this is true for ethics, why should it not be equally true for law?
To conclude, investor owned corporations are legal artefacts. Any definition that does
not take this into account and accord it a central place in understanding what corporations are
and how they function is ignoring a central fact about the nature of investor owned corporations.
There is a good deal of commentary that suggests that shareholder theories have just this
character. If so they are logically defective.

VI] Business ethics and the nature and purpose of investor owned corporations.
We have now the building blocks for an alternative, stakeholder theory friendly account
of the nature and the purpose of the modern investor owned corporation.
Investor owned corporations are legal artefacts. That is to say, corporations, specifically
investor owned corporations, could not exist without the active agreement and intervention of
governments and the societies for which they speak. The creation of corporations involves
therefore a kind of partnership between the governments that create the legal space that makes
the kind of activities that corporations are formed to engage in possible and the corporations that
are created and operate in that legal space. The partnership is not an accident; it is intentional.
Corporations are not a by-product or the unintended consequence of legislative activity. They
are its product. Furthermore, the framework without which they could not exist is reviewed,
reinterpreted and evaluated on a continual basis in legislatures and in the courts. xxii
It follows that corporations do not stand apart from society as a distinct self justifying
xx
Margaret Blair (1998) in her article “Whose Interests Should Corporations Serve?” explores some of the
background issues. She grounds shareholder theory on “the property conception” of the corporation. She points
to the close association of the property and the “nexus of contracts” conceptions of the firm. Although it is not a
focus of the theory, the “nexus of contracts” view clearly identifies the corporation as a legal artefact and so
connects directly to the thesis here being defended.
xxi
For a more detailed account and references to important discussions in the literature see Kenneth Goodpaster’s
discussion of “Business and Stakeholder Analysis” in the Corporation and its Stakeholders (Ed. Max B.E.
Clarkson).
xxii
A good example is the attention that has been paid to corporations and their activities by the OECD over the
past decades. The OECD has created Guidelines for Multinational Corporations, reviewed carefully the question
of Corporate Governance and endorsed a convention that prohibits the bribery of foreign public officials.

18
organization. The function of corporations cannot be defined independently of the intentions
and purpose of one of the parties to their creation and existence. The responsibilities of
corporations cannot be defined independently of the intentions of their co creators. And if “the
business of business is business” narrowly defined, the justification cannot rest exclusively on
the “interests” of the investors whose invests are a necessary but not a sufficient explanation for
the existence of the corporations in which they invest.
We are now in a position to ask why a society might be persuaded to create the legal
framework that made it possible to form corporations? It is hard to accept that a society or
government might be motivated simply and solely by the desire to allow investors to generate
private wealth. It is even harder to accept that the legal frameworks required for the existence of
corporations are put in place with a view to allowing owners to make as much money as possible
without regard to public benefits or harms resulting from their activities. xxiii
It is not insignificant that these intuitions are confirmed by overarching political
justifications of market economies. Even politicians arguing for open, relatively unregulated
free markets justify what they are advocating by reference to the increased wealth that will
thereby accrue to everyone in those communities that permit it.xxiv
A critic might argue that the basic legal frameworks that created the legal tools that in
turn opened the door to the creation of the modern investor owned corporation were set in place
historically by governments that did not speak for the societies they governed. xxv To this it
might be responded that even despots seek to justify their activities by reference to the interests
of the people. However, we can, if need be, concede the point. Whatever the intentions of the
governing bodies that created the legal space allowing the creation of corporations as we know
them, the view that governments ought to govern with the public interest as a central concern is
now common place.xxvi What is more, and perhaps more emphatically to the point, democratic
institutions of government now prevail in those countries in which investor owned corporations
are most deeply institutionalized. Why should or would a democratic society craft or tolerate the
continued existence of the legal tools required for the creation and activity of corporations whose
sole purpose was to benefit their owners without regard for or interest in their wider implications
xxiii
This argument ressembles Donalson’s argument in Chapter Three of Corporations and Morality. Englewood
Cliffs, New Jersey, Prentice-Hall. In that chapter, Donaldson asks why society would choose to have
corporations, noting, among other things, that corporations need legal status. (, Donaldson, T. (1982))
xxiv
In a comment on this paper, Bill Woof (Philosophy, York University) points out that , Adam Smith argued in
"The Wealth of Nations" (1776) that legal status
should be granted only to firms (i.e. joint stock companies) capable of advancing the public
interest, as well as turning a profit. (Smith confined his list of such
enterprises to banks, insurance companies, canal builders and public
utilities). This theme is developed and defended in a contemporary form by Theodore Levitt in The Marketing Imagination
(1986) who argues that “If no greater purpose (than profit maximization) can be discerned or justified, business cannot
morally justify its existence” (p. 7)

xxv
Here the argument intersects with debates generated by social contract theory in its abstract philosophical form
and its more concrete recent expressions in the work of Tom Donaldson and Tom Dunfee. I don’t propose to
probe this debate in this essay. I have done so in a preliminary form in an essay entitled: “Human Rights and
Business Ethics: Fashioning a New Social Contract, (Cragg, 2000, 205-214).
xxvi
See for example the OECD Public Management Policy Brief entitled “Building Public Trust: Ethics Measures
in OECD Countries”. That brief begins with the statement: “Public service is a public trust. Citizens expect
public servants to serve the public interest with fairness and to manage public resources properly on a daily basis”.
Ensuring that these goals are accomplished in an accepted responsibility of governments.

19
for society generally. And could any theory of democratic government justify a legal framework
that in turn allowed for the emergence of practices and institutions that were in principle
indifferent to their impact on the public good?xxvii The answer would appear to be obvious and
uncontroversial.
At this point, our critic might once again enter the debate with a disclaimer. The fact that
government has an obligation to legislate in the public interest, and the fact that corporations are
legal artefacts does not prove that corporations have an obligation either legal or moral to
promote the public good. There are two possible reasons for this, our critic might argue. The
first develops around the “hidden hand” metaphor. The second utilizes the concept of a social
contract.
The “Hidden Hand” argument might go like this. Whether by artifice or accident,
legislation has opened the door to the evolution of organizations that have the characteristics of
the contemporary investor owned corporation. With the emergence of organizations of this
nature has come the realization that if left to pursue in a relatively single minded way the
creation of economic wealth for their investors, investor owned corporate activity will have
indirect general or public wealth enhancing impacts. In the event that the wealth thus generated
is not equitably dispersed through society, government intervention in the form of taxation and
social welfare programs to correct the resulting inequities is available. The responsibility for
controlling and guiding public impacts of corporate activity is therefore properly a function of
government.
This line of argument is fine as it stands so long as it is recognized that it concedes the
point and ignores a crucial riposte. The first is a recognition that built into the legislative
intentions creating the legal framework required for the creation and operation of corporations is
the concept of the public good. This concept therefore has an explicit role in measuring
corporate performance. Corporate activities that militate against the public good are by their
very nature suspect and subject to censure whether legislative, judicial or moral. What is left
unclear on this account is where the initiative lies to correct what might be a socially harmful
anomaly or a socially harmful pattern. There is no reason to suppose that as a matter of
principle, correcting anomalies or socially harmful tendencies or patterns should be left
exclusively to government. Indeed, some of the most persuasive arguments for corporate
intervention rest on the assumption that self regulation in a least some instances is more efficient
and effective from both a private and a public perspective.
The riposte is of a different nature. As corporations have evolved so has public
understanding of the role and importance of ethical standards of corporate behaviour. For
example, it is increasingly wide recognized that respect for human rights generates both private
and public benefits for corporations and society generally. There are two senses in which this is
true. One points to the intrinsic goods associated with principled behaviour. The other speaks to
associated instrumental goods. The intrinsic goods are those goods that are inherent in the
ethical treatment of people. For example, social interaction that occurs within a framework of
human rights principles communicates respect. And for those who are both objects and subjects
of the resulting behaviour, the respect communicated is an intrinsic good. It elevates the quality
xxvii
Notice that what is being examined here is not whether corporations operating in the context of the practices
essential to their existence would or could ever be indifferent to the impact of their operations on the public good
as a matter of fact. Rather the focus is on whether one could find a justification for government legislation or
public laws that allowed for the emergence of institutions and practices that as a matter of principle or by virtue of
their character or nature as institutions or practices took the impact of their activities on the public good into
account only when failing to do so was inconsistent with the pursuit of their own private interests.

20
of life of those who fall within its ambit. This impact is independent of other impacts or
benefits. Thus, regardless of one’s status as rich or poor, being treated with respect is
intrinsically valuable for those thus treated.
Equally, being treated unethically generates intrinsic harms. Practices that identify some
people as morally inferior to others by virtue of some arbitrarily selected characteristic are
degrading not just because of their consequences but because of the message they communicate,
namely: “You don’t count!”; “You are inferior!”; “You do not belong where we belong!”; “you
are not fully human!”. The fact that there is not a universal consensus on the content and range
of principles to which this applies is beside the point. What is crucial is that to treat people
unethically is to communicate messages of this sort.
Equally important, however, is the fact that working within ethical frameworks has
instrumental benefits. Principles of non discrimination open the market to the participation of
people whose talents and energies would otherwise not be available. The claim that corporations
and their stakeholders have benefited from the removal of barriers to the participation of women
in all parts of the economy is now common place. Its assertion no longer requires defence
except in exceptional circumstances. Neither it is a form of heresy for a think tank or
international institution to point out that respect for fundamental ethical values is fundamental to
economic development.xxviii
All of this will be commonplace for stakeholder theorists. Max Clarkson (1998) makes
the point eloquently. Good managers are aware of their stakeholders and treat them with
consideration and respect. Failure to do so creates serious risks for any corporation. But
equally, corporations that treat their stakeholders with consideration and respect are on the whole
more profitable. We have already pointed to the caution that must attend such claims.
Nonetheless, the empirical research that points to the benefits that accrue to corporations that
attempt to articulate and implement the ethical principles which they see as defining their social
responsibilities do have an inherent plausibility, framed as we are here framing them.
How then does this apply to those who would calculate the role and responsibilities of
corporations from within the framework of “Hidden Hand” economic theories? Once we
concede that benchmarks that examine the wider public impacts of corporations are relevant in
measuring corporate performance, ethical standards enter the picture for reasons already set out.
Failure to measure up to those standards, even on a “Hidden Hand” type of argument, would
therefore constitute justification for a corporate response or legislative intervention. The
corporate response might be initiated to circumvent the need for legislative intervention. Or
government intervention might be preferred by the corporate community and the public
generally as a way of dealing with free rider or level playing field problems. In either case, the
interventions thus inspired would not be in conflict with the mission or function of a modern
investor owned corporation. Furthermore, initiating them or acceding to them can now be seen
as a fundamental corporate responsibility.
We can now move to a consideration of a second response available to someone wishing
to maintain that corporations have responsibilities that reach beyond their fiduciary obligations
narrowly defined to their shareholders. This second option might go like this. Let us accept, our
critic might argue, that built into the concept of these legal artefacts called corporations is some

xxviii
See for example the OECD study entitled “OECD Trad, Employment and Labour Standards: A study of core
workers’ rights and international trade (1996). This study found that “respect for basic labour standards similar to
those in the ILO Declaration (on Fundamental Principles and Rights at Work, Geneva, 1998), supports rather than
undermines open trade-oriented growth policies in developing countries. Howse & Mutua, 2000, 15).

21
notion of serving the public good. Nonetheless, it is quite conceivable that a society might come
to the conclusion that the most effective way of enhancing public welfare would be to assign
economic wealth creation to the private sector, recognizing the wealth generating powers of
investor owned corporations, while leaving to the government the responsibility for ensuring that
wealth generated through corporate investment was distributed equitably.
I have argued elsewhere that an arrangement of this sort, which might be described
tentatively as a kind of social contract, may describe the division of responsibilities that have
characterized the industrialized democracies and the multi national corporations to which they
have given birth since the second world war (Cragg, 2000). In the context of this kind of
understanding, setting standards ensuring that corporate activity generated socially responsible
outcomes could then be construed as the responsibility of legislatures, not of corporations
themselves. And one might reasonably conclude that under these conditions the primary
responsibilities of a corporation would be to maximize their profitability within the legal
constraints set by the state. I have argued elsewhere that while it is plausible to suggest that a
division of labour of this nature may well have been tacitly in place since the second world war,
the arrangement is no longer appropriate due to a rapidly globalizing international economy that
has undermined the capacity of nation states to control the international activities of
multinational corporations. If this is true and legislative tools taken by themselves can no
longer ensure responsible corporate behaviour, striking a new social contract must be viewed as
a high priority by the public, governments and the corporate community.

VII] Concluding comments

I have argued that investor owned corporations are legal artefacts whose function or
purpose, by virtue of their status as legal artefacts, has both a public and a private component.
The public component is wealth enhancement seen from a public policy perspective. The
private component is wealth enhancement seen from the perspective of investors. For investors,
a central element will be a competitive return on their financial investment. For government, a
central element will be wealth enhancement seen from a societal or public perspective. Neither
element taken alone can adequately define the purpose or function of investor owned
corporations. Both together provide a normative foundation for describing the fiduciary
obligations of the corporation and its managers and directors.
Ironically, the dimensions of these fiduciary obligations have been correctly intuited
though incorrectly interpreted by shareholder theorists like Milton Friedman. They include an
obligation to work within the framework of the law with a view to advancing both public and
private (i.e. shareholder) interests. They also include an obligation to work within the framework
of prevailing moral standards again with a view to advancing public as well as private
interests.xxix
This account leaves two questions to be addressed. First, by arguing for a broadened
understanding of the fiduciary obligations of corporations and their managers, have we
generated what Goodpaster describes as “the stakeholder paradox”?xxx Second, is this account
vulnerable to the concern that our account, like the concept of corporate responsibility, lacks

xxix
Using Kantian language, these two general obligations are categorical and not hypothetical. That is to say,
they are the product of a fiduciary obligation to maximize profits. Rather, they apply independently of their
instrumental value seen from the perspective of risk or cost/benefit analysis.
xxx
See Goodpaster (1998), p. 113.

22
clarity and specificity?xxxi
Detailed answers to these concerns are not possible here. However, brief comments are
in order. Goodpaster’s “stakeholder paradox” arises, he claims, with multi fiduciary accounts
that “cut management loose from certain well-defined bonds of stockholder accountability.” xxxii
The worry, to put the matter otherwise, is that the multi fiduciary approach will blur:
... traditional goals in terms of entrepreneurial risk-taking, pushes decision-making
towards paralysis because of the dilemmas posed by divided loyalties and, in the final
analysis, represents nothing less than the conversion of the modern private corporation
into a public institution ... xxxiii
But is this the consequence of acknowledging that corporations as corporations and managers as
mangers have public as well as private obligations or that corporations are morally accountable
to multiple distinct constituencies? Surely not! Corporations are private organizations with
public responsibilities. As with individuals, their accountability is multi faceted. Corporations
are responsible to both civil and criminal courts for their conduct. They are accountable to the
government for reporting income accurately as required by law and paying the appropriate taxes.
They are accountable to local communities for respecting zoning bylaws, pollution standards and
other agreements and so. None of this diminishes in any way their responsibility to their
shareholders. Indeed, in all these cases, not only are corporations responsible to multiple
constituencies in a variety of different ways, they are also accountable to their shareholders for
meeting their accountability obligations to their multiple constituencies or stakeholders. It is
true that multiple accountability generates complexity for management. However, the
complexity is a feature of modern business environments. It is not a fiction promulgated by
stakeholder theory. Furthermore, it is a kind of complexity that good management understands
and addresses in the normal course of events.xxxiv
Recognizing that corporations have public responsibilities does not diminish their
accountability to their shareholders, it broadens it. A corporation with public responsibilities
becomes accountable to its shareholders for the management of those responsibilities for
strategic, legal and moral reasons. Failure to live up to their public responsibilities may generate
serious financial risks. The law requires it xxxv. And it is a fiduciary (i.e. ethical) responsibility
that is generated by the relationship of trust that grounds investor activity.
There is one last issue to be addressed. Is the account offered here vulnerable to the
criticism that like the concept of corporate responsibility, its description of the social/ethical
responsibilities of corporations lacks clarity and specificity? There is a sense in which this is
true. A generic account of the function of investor owned corporations cannot provide detailed
specifics about the ethical responsibilities of corporations. In fact, on this account, the public
responsibilities of corporations will be a function of evolving public understandings and on-
going negotiations. Indeed, there is something quite odd about the suggestion that the
xxxi
See Clarkson (1998), p. 250.
xxxii
Goodpaster (1998), p. 113.
xxxiii
Ibid, p. 115.
xxxiv
Max Clarkson (1998, p. 249-250) describes this as one of the finding that emerged from a two year study
(1986-88) of 28 corporations whose focus was the analysis of corporate performance.
xxxv
I have in mind reporting requirements imposed by securities legislation or legislation prohibiting the bribery
of foreign public officials and so on.

23
responsibilities of a corporation working in a developing country that lacks the capacity and
resources to tax efficiently, or ensure its regulations are respected are identical to the
responsibilities of the same company working in an industrialized country with a fully developed
government structure including democratic institutions and practices and a developed social
welfare system.
There is, however, a general observation that can be made. Corporations do have an
obligation to work within the framework of prevailing standards of moral conduct, or so we have
argued. The building block of twentieth century moral systems in the industrialized democracies
of Europe and North America and increasingly the instruments of the United Nations and other
international institutions is the view that:
... in fundamental ethical matters, everyone ought to count, and all ought to count in the
same way. Within this outlook, one absolute requirement of ethical thinking is that we
respect other human agents as subjects of practical reasoning on the same footing as
ourselves.”xxxvi
This principle, I suggest, is at the heart of stakeholder theory. It does not require, as some have
suggested, that the interests of every stakeholder have equal status in corporate decision making.
What it does require is that the legitimate concerns of all stakeholders be equitably addressed.
To those for whom this account is unsatisfactorily vague, two responses are in order.
First, business ethics has now produced a variety of sophisticated proposals for understanding
both the public and private obligations of the modern corporation. Perhaps even more
indicative, however, are the principles that continue to emerge from international institutions
like the United Nations and its agencies, for example the International Labour Organization.
International standards that interpret the application of the principle set out by Taylor are
emerging through dialogue and negotiation. In a global economy, those standards provide ready
benchmarks against which the modern corporation can begin to understand its specific
obligations.xxxvii

xxxvi
See Taylor, “The Diversity of Goods”, p. 224 (Clarke and Simpson, 1989).
xxxvii
There are many examples to which reference might be made. The Clarkson volume (1998) to which I have
referred throughout this essay is an example. So too is the work of Donaldson and Dunfee, for example their
recent book entitled Ties that Bind (1999).

24
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26
27
1
. Gyges is described in the Republic Book II (358B – 360C) as a shepherd in the service of the ruler of Lydia who one
day while tending his sheep comes upon a ring under magical circumstances. He puts the ring on and then discovers that
when he turns it around on his finger he becomes invisible. Realizing the potential power this gives him, he has himself
designed a messenger to the king. On arrival at the king’s household, he meets and seduces the king’s wife, kills the king
and assumes control of the kingdom. Having recounted the myth, Thrasymachus then proposes that if there were two
rings and one was put on by a just person and the other by someone who was unjust, the just person would not act any
differently from the unjust person given that both now had the power to engage in unjust bahaviour without the fear of
punishment. Everyone agrees, Thrasymachus claims, that the best of all possible worlds is one in which one has the
reputation of being a just person while in fact living an unjust life and reaping the benefits of living unjustly without
detection and punishment.