Toward an ethics of corporate restructuring

Corporate restructuring in the 1980s and 1990s has had a profound impact on the US economy. On the positive side, corporate restructuring is said to have revitalized the US manufacturing sector, increased international competitive-ness, and created jobs that emphasize teamwork and initiative. However, even the most enthusiastic supporter of corporate restructuring recognizes that the costs have been substantial for many Americans. The stumbling-block to finding an answer to this question is the lack of a satisfactory framework for evaluating restructuring decisions. The purpose of this essay is to develop the groundwork for an ethics of restructuring. The first part of the paper examines the ethical guidance provided by the standard economic theory of the firm including a discussion of the corporate responsibility argument.

Corporate restructuring and social costs

Certain actions are clearly outside the basic rules of society. In the 1980s several notorious cases of unethical behavior by business fueled interest in ethics among academics, the business community and the public. One of the more shocking examples involved the Johns Manville Corporation (Gellerman, 1986). These situations occur with sufficient frequency, that they deserve careful consideration. However, there is no ethical uncertainty here. The key issue in these cases is not whether the action is ethical or unethical. The central question is whether it represents misconduct by an individual in violation of company policy, or whether the misconduct was sanctioned by upper management.

Conti
The firm runs a relatively small chance of a lawsuit which it may well win. In many cases, the firm risks only an adverse administrative decision that imposes negligible penalties. However, unless we believe that corporations should engage in civil disobedience, there is also no ambiguity regarding the appropriate decision in these cases. If ethical considerations are not a sufficient guide, individuals and corporations can simply obey the law. However, urging corporations to do the right thing is easier said than done. The problem is not that managers do not consider the consequences of their actions on the community. The next section discusses the role of ethics in the standard economic theory of the firm. Orthodox economic theory does not address ethical questions directly, but the philosophical underpinning is utilitarianism. For purposes of developing an ethics of restructuring, the main drawback of utilitarianism is that it provides either a clear guide to rational action or an ethical guide to socially responsible behavior.

Rationality and ethics in economics

Decision making in mainstream economics is based on the notion of rationality, not ethics. Rationality and ethics are on either side of the well-known economic dualism, positive/normative. Economics, as most introductory textbooks are careful to point out, is a positive science. In the theory of the firm, this view of decision making means that rational managers will maximize profits. Alternative theories have argued that managers do not maximize profits but focus on something else such as market share, sales, or stock price (Baumol, 1983). Berle and Means (1932) suggested that managers may not maximize profits, since their own wellbeing may not be represented by maximum corporate profits. In contrast to theories that posit a different measure of wellbeing, Friedman, in his often cited 1970 article in the New York Times, goes much further.

 This is the flip side of Friedmans argument. Instead of the negative argument that not maximizing profits is unethical, we have the affirmative argument that maximizing profits is ethical. This view can take two forms: Maximizing profits is ethical; or Acting ethically will maximize profits. This last conclusion is true only for unethical behavior that is costly, however. Unethical behavior is costly only for firms that get caught and suffer legal sanctions, are vulnerable to lawsuits, or suffer loss of reputation. In this case unethical behavior is not costly. The good for business approach to ethics is entirely consistent with the recommendation that managers undertake unethical behavior only when there is a relatively low risk of being found out. One could certainly eliminate ethical risk altogether by behaving ethically, but no business decision is risk-free.

Corporate restructuring and consequentialism

From an ethical standpoint, economic theory is consequentialist. That is, a decision is judged ethical or unethical solely on the basis of its outcome. The distinction between a decision and the consequences of that decision is an important one in economics. There are a number of difficulties associated with utilitarianism. In the first place, there is the problem of which consequences to take into account. Conventional economic theory states that the task of the manager is to maximize profits.

The expressive theory of rational action

The previous section discussed some of the drawbacks of consequentialism. In order to avoid falling prey to the same problems, an alternative approach to an ethics of restructuring must rely on a theory of rational action that is very different from the one used in the conventional theory of the firm. In Value in Ethics and Economics (1993), Anderson sets forth an expressive theory of rational action that offers a more fruitful foundation for an ethics of restructuring than the rational maximization of economic theory. First, Andersons expressive theory of rational action is not consequentialist. Using Sens terminology, Andersons theory fully recognizes the importance of agency as well as wellbeing.

The dual nature of a decision

Andersons expressive theory of rational action recognizes the dual aspect of a decision. This is a key difference between consequentialism and her expressive theory: What matters in a decision is not only the outcome or the effect on well-being, but also whether the decision, itself, reflects expressive norms. Expressive norms are intentional. They tell people to intend or aim at certain things . Consequentialist norms, by contrast, simply tell people to achieve certain consequences, whether they intend them or not This second aspect of a decision is found in everyday language and in law in the recognition of the importance of intent. We make a distinction between an accident, carelessness, and premeditation. The Johns Manville case mentioned above was notorious, because it represented a breach of the agency aspect of ethics. The issue was not whether asbestos is harmful to human beings, but whether the managers at Johns Manville knew it was harmful and intentionally withheld this information from employees. Agent-centered restrictions An ethical framework is, by its very nature, evaluative and normative. In economic theory, normative criteria are eschewed, and economic decisions are viewed as value-free. This avoidance of value judgments presents obvious difficulties for the development of an ethics of restructuring. For example, in the corporate responsibility argument discussed above managers are urged to take all stakeholders of a corporation into account.

 Finally, the most important advantage of a theory that allows for agent-centered restrictions is that it is useful. The concept is not necessary as long as one adheres strictly to the self-interested behavior recommended by economic theory and maximizes only ones own wellbeing. However, most businesses are not in a position to ignore the various other stakeholders with interests in the behavior of the firm. In his book on stakeholder management Carroll (1989) develops stakeholder maps for several specific cases including the case of Hooker Chemical Company, a subsidiary of Occidental Petroleum.

Conclusion
This paper has thus far focused only on the advantages of Andersons expressive theory of rational action and the disadvantages of consequentialism as a foundation for an ethics of restructuring. Consequentialism promises to provide a single, simple, precise, and determinate procedure of justification that employs objective calculation to overcome disputes about what to do. The pluralist-expressive theory calls for action to be guided by norms described in terms of ideals and evaluative concepts such as respect, friendship, and charity. This is also the advantage found in the conventional theory of the firm. The profit maximization rule provides a a single, simple, precise, and determinate procedure that does not require interpretation to be used. It is an absolute rule that is not historically or socially relative. A managers decision is always either rational or irrational with no restrictions, caveats, or explanations. In contrast, normative criteria typically rely on a particular context unless they are regarded as moral absolutes.

Conti
This change in social norms does not mean that the old standard was wrong and the new standard is right. It simply means that priorities shift with changing circumstances. Anderson uses the example of using school figures to judge ice skating competitions. Formerly, this standard was considered important in determining a skaters artistry. Now ice skating places more emphasis on athleticism, and the school figures were dropped. No one claimed that artistry was an unauthentic standard, that past awards informed by this standard were fraudulent. Anderson recognizes that the same decision may be evaluated differently in different contexts. This level of variability means that decision making is more difficult. There is no simple decision rule that will apply to all cases of restructuring.