2.

Corporate moral agency

One way to think about business ethics is in terms of the moral obligations of agents engaged in
business activity. Who is a moral agent? Individual persons, obviously. What about firms? This question
is typically described as a question of “corporate moral agency” or “corporate moral responsibility”.
Here ‘corporate’ does not refer to the corporation as a legal entity, but to a collective or group of
individuals. To be precise, the question is whether firms are moral agents and morally responsible
considered as (qua) firms, not considered as aggregates of individual members of firms.

In the business ethics literature, French is a seminal thinker on this topic. In early work (1979, 1984), he
argued that firms are morally responsible for what they do, and hence should be seen as “full-fledged”
moral persons. He bases this conclusion on his claim that firms have internal decision-making structures,
through which they (1) cause events to happen, and (2) act intentionally. Some early responses to
French’s work accepted the claim that firms are moral agents, but denied that firms are moral persons.
Donaldson (1982) claims that firms cannot be persons because they lack important human capacities,
such as the ability to pursue their own happiness (see also Werhane 1985). Other responses denied that
firms are moral agents (also). Velasquez (1983) argues that firms lack a necessary condition of agency,
viz., the ability to act (see also his 2003). In later work, French (1995) recanted his claim that firms are
moral persons, though not his claim that they are moral agents.

Discussions of corporate moral agency and moral responsibility have largely faded from the business
ethics literature (as of 2016). But they continue to receive attention in the mainstream philosophical
literature, where they are treated with a high degree of sophistication. Here the focus is on collectives
more generally, with the business firm playing a role as an example of a collective. As in the business
ethics literature, in the mainstream philosophical literature a key question is: What are the conditions
for moral agency and responsibility, such that collectives qua collectives, including firms, do or do not
satisfy them? A number of writers, including Copp (2006), Hess (2014), and List & Pettit (2011), believe
that firms can be moral agents. This view has strong intuitive appeal. We routinely say things like:
“Costco treats its employees well” or “BP polluted the Gulf of Mexico”, and in doing so we appear to
assign agency and responsibility to firms themselves. On the other side are writers who deny that firms
can be moral agents, such as Gilbert (1989), S. Miller (2006), and Rönnegard (2015). A claim advanced
on this side is that agency requires intention, and firms are not the kinds of things that can have
intentions (S. Miller 2006). The common way of speaking about the agency and responsibility of firms
may be metaphorical, or a shorthand way of referring to the agency and responsibility of individuals
within firms. (For discussions of these issues, see the entries on collective responsibility, collective
intentionality, and shared agency.)

While the question of whether firms themselves are moral agents is of theoretical interest, its practical
import is uncertain. Perhaps BP itself was morally responsible for polluting the Gulf of Mexico. Perhaps
certain individuals who work at BP were. What hangs on this? According to Hasnas (2012), very little.
Firms such as BP can be legally required to pay restitution for harms they cause even if they are not
morally responsible for them. What ascribing agency and responsibility to firms enables us to do,
according to Hasnas, is blame and punish them. But, he argues, we should not engage in this practice.
Phillips (1995), by contrast, argues that in some cases no individual employee in a firm is responsible for
the harm a firm causes. To the extent that it makes sense—and it often does, he believes—to assign
responsibility for the harm, it must be assigned to the firm itself. On Phillips’s view, corporate moral
agency makes blaming behavior possible where it would otherwise not be. Because corporate
reputation can be a significant asset or liability (Roberts & Dowling 2002), this provides an incentive for
firms to exercise due care in their operations (see also Rönnegard 2015).

3. The ends and means of corporate governance

There is significant debate about the ends and means of corporate governance, i.e., about who firms
should be managed for, and who should (ultimately) manage them. Much of this debate is carried on
with the large publicly-traded corporation in view.

3.1 Ends: shareholder primacy or stakeholder balance?

There are two main views about the proper ends of corporate governance. According to one view, firms
should be managed in the best interests of shareholders. It is typically assumed that managing firms in
shareholders’ best interests requires maximizing their wealth. This view is often called “shareholder
primacy” (Stout 2002) or—in order to contrast it more directly with its main rival (to be discussed below)
“shareholder theory”. (Confusingly, the label ‘shareholder primacy’ is sometimes used—e.g., by
Bainbridge [2008]—to refer to the view that shareholders should have ultimate control over the firm.)
Shareholder primacy is the dominant view about the ends of corporate governance among financial
professionals and in business schools.

A few writers argue for shareholder primacy on deontological grounds. On this argument, shareholders
own the firm, and hire managers to run it for them on the condition that the firm is managed in their
interests. Shareholder primacy is thus based on a promise that managers make to shareholders
(Friedman 1970; Hasnas 1998). In response, some argue that shareholders do not own the firm. They
own stock, a type of corporate security (Bainbridge 2008; Stout 2002); the firm itself may be unowned
(Strudler 2017). Others argue that managers do not make, explicitly or implicitly, any promises to
shareholders to manage the firm in a certain way (Boatright 1994). More writers argue for shareholder
primacy on consequentialist grounds. On this argument, managing firms in the interests of shareholders
is more efficient than managing them in any other way (Hansmann & Kraakman 2001; Jensen 2002). In
support of this, some argue that, if managers are not given a single objective that is clear and
measurable—viz., maximizing shareholder value—then they will have an enhanced opportunity for self-
dealing (Stout 2002). Consequentialist arguments for shareholder primacy run into problems that afflict
many versions of consequentialism: in requiring all firms to be managed in a certain way, it does not
allow sufficient scope for personal choice (Hussain 2012). Most think that people should be able to
pursue projects, including economic projects, that matter to them, even if those projects do not
maximize welfare.

The second main view about the proper ends of corporate governance is given by stakeholder theory.
This theory was first put forward by Freeman in the 1980s (Freeman 1984; Freeman & Reed 1983), and
then refined by Freeman and various collaborators over the next 30 years (see, e.g., Freeman et al.
2010; Jones, Wicks, & Freeman 2002). According to stakeholder theory—or at least, early formulations
of the theory—instead of managing the firm in the best interests of shareholders only, managers should
seek to “balance” the interests of all stakeholders, where a stakeholder is anyone who has a “stake”, or
interest (including a financial interest), in the firm.
To its critics, stakeholder theory has seemed both insufficiently articulated and weakly defended. With
respect to articulation, one question that has been pressed is: Who are the stakeholders (Orts & Strudler
2002, 2009)? The groups most commonly identified are shareholders, employees, the community,
suppliers, and customers. But other groups have stakes in the firm, including creditors, the government,
and competitors. It makes a great deal of difference where the line is drawn, but stakeholder theorists
have not provided a clear rationale for drawing a line in one place rather than another. Another
question is: What does it mean to “balance” the interests of all stakeholders—other than not always
giving precedence to shareholders’ interests (Orts & Strudler 2009)? With respect to defense, critics
have wondered what the rationale for managing firms in the interests of all stakeholders is. In one place,
Freeman (1984) offers an instrumental argument for his view, claiming that balancing stakeholders’
interests is better for the firm strategically than maximizing shareholder wealth. (This is precisely what
defenders of shareholder primacy say about that view.) In another, he gives an argument that appeals to
Rawls’s justice as fairness (Evan & Freeman 1988; cf. Child & Marcoux 1999).

In recent years, questions have been raised about whether stakeholder theory is appropriately seen as a
genuine competitor to shareholder primacy, or is even appropriately called a “theory”. In one article,
Freeman and collaborators say that stakeholder theory is simply “the body of research … in which the
idea of ‘stakeholders’ plays a crucial role” (Jones et al. 2002). In another, Freeman describes stakeholder
theory as “a genre of stories about how we could live” (1994: 413). It may be, as Norman (2013) says,
that stakeholder is now best regarded as “mindset”, i.e., a way of looking at the firm that emphasizes its
embeddedness in a network of relationships.

It is important to realize that a resolution of the debate between shareholder and stakeholder theorists
(however we conceive of the latter) will not resolve all or even most of the ethical questions in business.
This is because this is a debate about the ends of corporate governance; it cannot answer all of the
questions about the moral constraints that must be observed in pursuit of those ends (Goodpaster
1991; Norman 2013). Neither shareholder primacy nor stakeholder theory is plausibly interpreted as the
view that corporate managers should do whatever is possible to maximize shareholder wealth and
balance all stakeholders’ interests, respectively. Rather, these views should be interpreted as views that
managers should do whatever is morally permissible to achieve these ends. A large part of business
ethics is trying to determine what morality permits in this domain.