Law, virtue, and the corporation

INTRODUCTION

In recent years, business ethicists have drawn increasingly upon the work of Aristotle in examining ethical issues in the workplace. In doing so, they have provided numerous insights into the moral complexities of business.(1) However, in developing their Aristotelian conceptions of business ethics such scholars have left unexplored a crucial dimension of Aristotle’s ethical inquiry: the legal tradition 2 within which his examination of ethics occurs. This aspect of Aristotle’s world view differs markedly from the perspective on law implicitly assumed in much of contemporary ethical discourse on business.

The perspective on law often implicitly assumed today is one rooted in liberal political theory. Liberalism holds a conception of law that rejects for the law any “aspirations to make men moral.'”(3) In contrast, Aristotle’s inquiry occurs within a pre-liberal legal tradition that sees law as aspiring “not only to help make people safe, comfortable, and prosperous, but also to help make them virtuous.”(4)

Because Aristotle’s inquiry occurs within a pre-liberal legal tradition, developing his thought for today’s business world requires reflecting critically upon some contemporary assumptions regarding the relation of law and ethics. Most crucially, such reflection needs to occur from a perspective that acknowledges for the law a role in promoting the moral development of individuals.

An effort to develop Aristotle’s thought in this connection can contribute significantly to the field of business ethics. The contribution here is primarily a descriptive one. Such an effort can bring into view the rich and profound role of law in the dynamics of ethical decision-making in the business setting. Most importantly, it can reveal the creative dimension of the law within our moral lives.

Developing Aristotle’s thought in this way is important beyond the field of business ethics. It can make an equally valuable contribution to an area of law central to business – corporate law scholarship. Here the contribution has a mainly normative import. If a pre-liberal conception of law – one that allows the law a role in fostering the development of virtuous individuals – conveys an accurate description of the interaction of law and ethics in the business environment, it thus provides the basis for an important new perspective from which to evaluate the corporate law concepts and principles of that environment. For if the law affects the moral development of individuals in business, we need to ask. Is it doing this job well?

Introducing this new perspective from which to evaluate corporate law concepts and principles is particularly important now because of the vigorous debate among corporate law scholars regarding the basic nature and purpose of the corporation. 5 Such an inquiry into the foundations of corporate law is seriously deficient without an examination of how corporate law concepts interact with the moral development of individuals working in corporate organizations.

Thus, my aim here is to respond to debates in two scholarly fields business ethics and corporate law – which too often have failed to explore fully their own rich interconnections. In taking this integrated approach, I hope to contribute to the expansion of dialogue between these two areas of inquiry.

My argument has two parts. First, I will bring into view the significant connections between law and the development of virtues in the contemporary business world. By virtues, I mean those traits of character that dispose individuals to act in appropriate ways. The key to revealing this interaction of law and virtues lies in focusing on three elements in the environment of business. the nature of roles individuals occupy, the kinds of choices they confront, and the character of community in which they participate. Second, I will show how a focus on such connections between law and the development of virtues provides the basis for evaluating a central point of contention in the current debate among corporate law scholars. This central point of contention is the conflict between the shareholder priority and multifiduciary models of managerial responsibility.

The Nature of Roles

Business ethicists who draw upon Aristotle in their work often emphasize the concept of the good community. One of their distinctive contributions to the field is the way in which this concept is given a foundational role in the analysis of ethical issues in the workplace. Ethical inquiry into business begins not with moral principles such as utility, autonomy, and justice(6) but with an understanding of the good community. “I suggest,” writes Edwin Hartman, “that instead of taking time-honored moral principles as foundational and trying to figure out what communal or organizational arrangements best encourage people to act according to them, we try to say something about what a good community looks like, and then see bow a good community requires people to treat each other.”(7)

Recognizing this status accorded to the good community is important for understanding the particular character of Aristotelian approaches to business ethics. Markedly different relationships exist between individuals and moral principles on one hand and individuals and communities on the other. Moral principles such as utility, autonomy, and justice gain their moral authority through their abstraction from context. Such principles command our respect due to their general nature and the concomitant assumption that they are thus free of the distortive biases arising from particular circumstance and individual preference. In contrast, the good community acquires its moral authority through its provision of context. Its moral significance is derived from the way it situates an individual within a nexus of relationships. Thus, while individuals may live by moral principles, they live in communities.(8)

This emphasis on context gives Aristotelian approaches to business ethics a distinctive relation to the law. By emphasizing context, such approaches bring to the fore the myriad legal rules that constitute a significant part of the context in which contemporary business occurs. In particular, they require us to focus our attention on how legal rules can change or modify the context of modern commercial transactions in important ways.(9)

The ability of legal rules to alter the context of modern commercial transactions is morally significant because of the nature of the virtues. From an Aristotelian perspective, the virtues are dispositions of character that generate appropriate conduct. As such, they can not be defined in the abstract. Rather, as Robert Solomon puts it, the virtues are context-bound.(10)

It is in the nature of the virtues as context-bound that the creative role of the law comes into view. When legal rules change or modify the context in which contemporary business occurs, they contribute to the development of the conceptions of virtue that gain prominence within today’s business world.

Understanding precisely how this occurs requires a consideration of roles within the business environment. If virtues are context-bound, they are also role-related. One of the central features of context provided by any community – business or otherwise – is the roles in which and through which individuals exercise their participation in that community.

An example here may clarify the essential relationship between roles and virtues. Consider the respective roles of legislator and judge. We have very different expectations of individuals who occupy these two roles. For instance, we might say that a legislator who is responsive to public opinion is doing his or her job well, but that a judge who bases his or her ruling simply on its popularity with the public is performing in a poor or even corrupt fashion. Our different evaluations of these two situations reflect the different conceptions of virtue we hold for legislators and judges. Such different conceptions of virtue arise from the different natures of the roles legislators and judges occupy. The role of legislator involves an obligation to be responsive to constituents. The role of judge entails an obligation to decide cases on a principled basis in accordance with precedent, even when such decisions are unpopular. Virtue, recall, is a disposition of character that gives rise to appropriate actions. If the nature of appropriate action differs from role to role, so will the conception of virtue for individuals occupying different roles.

It is important to note that the differing roles of legislator and judge are, in part, artifacts of the law. Contrast, for example, a member of Congress with a Justice of the Supreme Court. While the Constitution provides for the continuous tenure of Supreme Court Justices, it requires those serving in Congress to stand periodically for reelection.(11) Such constitutional provisions thus contribute to the nature of roles occupied by members of Congress and those who sit on the Supreme Court. The requirement to stand for periodic reelection fosters the development of a role informed by an ongoing responsiveness to changing public sentiments. In contrast, the legal provision for continuous tenure promotes a role that aims at granting its occupant some measure of freedom from the pressures of public opinion.

Just as the law helps to structure the nature of roles in government, so it can have an effect on the roles occupied by those in business. Consider, for instance, how the expansion of environmental protection legislation during the 1960s and 70s has contributed to the nature of the roles occupied by many corporate managers. One of the ways corporations have responded to their increased exposure to legal liability in the environmental area is to raise their expectations of managers making business decisions with environmental impact. Thus, the nature of the role of corporate manager is developing to include an increased sensitivity to and awareness of environmental problems. This new environmental sensibility is evident in such areas as the increased emphasis on environmentally-safe products and the growing attention to business opportunities involved in pollution control.

Because the law exhibits a creative character in altering the nature of the roles of those in business, it also plays a creative role within the moral lives of such individuals. In this connection, the creative role of the law is evident in the conceptions of virtue it helps to bring to the fore within the environment of business. Because the virtues are role-related, the law’s alteration of roles in the business setting changes the conceptions of virtue appropriate for individuals who occupy these roles. In this way, legal doctrines and principles can influence significantly the moral character of the business environment.

Kinds of Choices

While the law’s effect on the nature of roles within the business environment can be subtle, the impact of the law on individual choices is immediately apparent. The law is widely used as a means of influencing business decisions. Congress may change the tax laws in hopes of getting executives to invest more in research and development. A judge may rule against a corporation in a product liability case with the goal of encouraging the manufacture of safer products. In the law’s influence over business decisions, the law takes manifold stances: It may require, prohibit, promote, discourage, or simply authorize. Even a decision not to extend the law into a particular area may itself have a significant influence on the choices individuals adopt.

What is less obvious is how the law’s influence over business decisions affects the moral lives of those working in the business setting. This is because of the “reflexive”(12) nature of morality. Morality can not be coerced

[C]oercing people to do the right thing, even when it is successful, does not make them morally better

Thus, because the law’s influence over business decisions has a coercive aspect, the law at first glance may not appear to foster the moral improvement of the individuals whose behavior it regulates.

Yet while morality is certainly “reflexive” in nature, this aspect of its character can not be divorced from a larger account of moral development. This larger account must ask. How do individuals become such that they freely choose moral courses of action?

Aristotle affirms the “reflexive” nature of morality but embeds it in a particular account of moral development. Because persons of good moral character freely choose to do the right thing for the right reason, a key question for Aristotle lies in how individuals acquire such character. He answers this question by asserting a relationship between a person’s choices and the formation of a person’s character. Choices of one kind produce a corresponding development of character. “Thus, in one word, states of character arise out of like activities. This is why the activities we exhibit must be of a certain kind

Here, then, is the link between the law’s influence over choices made in business and the moral lives of those in business making such choices. On Aristotle’s account, choices made in the business environment produce a corresponding development of character in the decision-maker. Moreover, such character is at the core of a person’s moral being. The virtues, recall, are dispositions of character that give rise to appropriate conduct. So, in influencing the character development of individuals in business, the law contributes to the virtues such individuals acquire.

In this way, a second significant connection between law and ethics in the business setting comes into view. In its impact on the nature of roles for business decision-makers, the law influences the conceptions of virtue that gain prominence within the business environment. However, in affecting the kinds of choices made by those in business, the law’s moral influence extends further. It contributes to the virtues such individuals develop.

Aristotle sees this latter aspect of the law’s moral influence as central to the law’s purpose. It is an important part of the work of those who establish the law. “[F]or legislators make citizens good by forming habits in them, and this is the wish of every legislator, and those who do not effect it miss their mark ….”(15)

Character of Community

The third significant connection between law and ethics in the business setting lies in the character of community the law fosters within the business environment. In Aristotle’s view, we are political creatures.(16) Both in times of good fortune and adversity, we need others.(17) This is no leak true of the virtuous individual. Indeed, virtuous individuals require good communities.(18) “But for a good person,” writes Edwin Hartman, “in particular a cooperator inclined to trust others, life in a community full of treacherous free riders would be unhappy. So we can see the point of Aristotle’s claim that a virtuous person must live in a great polis – can only survive in a good community, we might say.”(19)

Hartman goes on to describe the character of a good community.

What then is the right kind of community? It is one in which at least the following is true: the commons is prserved (sic), and people are able to reflect on and have extended conversations, based on their shared experience, about morality-for example, about the nature of happiness and of justice and about the scope of rights – from which moral progress may emerge.(20)

In this way, Hartman reveals the possibility of moral reflection and dialogue as a crucial feature of a good community.

The most prominent form of community in the contemporary business world is that of the corporation. In putting forth his Aristotelian approach to business ethics, Robert Solomon stresses the status of the corporation as a community. “Corporations are real communities, neither ideal nor idealized, and therefore the perfect place to start to understand the nature of the virtues.”(21)

The corporation’s status as a community is coupled with its status as a legal entity. Many aspects of the modern corporation, such as its ability to limit the liability of individuals, stem from particular legal principles and doctrines. Thus, changes in legal rules can lead to changes in the nature of the corporation, including its character as a community. In this way, corporate law rules represent a significant nexus for the interaction of law and ethics in today’s business environment. This nexus has a particular importance for Aristotelian approaches to business ethics because of their insistence on the dependency of the individual on the community.

The Interaction of Law and Ethics in a Corporate Law

Context

My focus on three elements – the nature of roles, the kinds of choices, and the character of community – within the business envi ronment has thus far been primarily descriptive. Attention to these three elements reveals the creative dimension of the law within the moral lives of those in the business setting. However, such a descriptive account also implies a normative perspective in the evaluation of business law rules and doctrines. If such legal rules and doctrines influence the moral lives of those in business, we need to ask. Are they doing it well? This is important. For there is certainly the potential for the law’s moral influence to be corrupting as well as edifying.

Because of the current debate among corporate law scholars regarding the basic nature and purpose of the corporation, it is fruitful to pursue this line of inquiry within the context of corporate law. Without an examination of the moral influence of corporate law concepts, the debate over the nature and purpose of the corporation lacks an essential dimension. What we want the corporation to be may turn in significant ways on its influence over our moral lives.

Corporate law scholar David Millon has framed the current debate over the foundations of corporate law as a conflict between contractarians and communitarians.(22) While the disagreements between the two groups are broad and multifaceted, (23) the relevance of my account of the law’s moral influence may be seen by focusing on a central point of contention. Contractarians and communitarians tend to take different views of the nature of corporate management’s duty. Contractarians, writes Millon, are “[t]oday’s advocates of the shareholder primacy position.”(24) In contrast, communitarians have brought to the fore a multifiduciary, model, according to which management’s duty is redefined to embrace nonshareholder as well as shareholder interests.”(25)

In describing the debate between contractarians and communitarians, Millon notes bow the two groups tend to focus on different aspects of the corporate entity. While communitarians emphasize the corporation’s external environment, contractarians stress the relationships within the corporation.

Communitarian also differ from contractarians in emphasizing the broad social effects of corporate activity. Contractarians tend to focus on the corporation’s internal relationships, applying a cost-benefit analysis to a relatively narrow range of more or less monetizable interests. Communitarians see corporations as more than just agglomerations of private contracts@ they are powerful institutions whose conduct has substantial public implications.

Communitarians, focus on the external environment of the corporation has an obvious connection with the attention communitarians give to nonshareholder interests. Viewing corporate conduct as having “broad social effects” with “substantial public implications” leads naturally to a concern with its impact on groups beyond the shareholders.

My account of the law’s influence over the moral lives of those in the business environment suggests the need for a broadened perspective in the development of communitarian corporate theory. Communitarians should consider anew the internal relationships of the corporation. By attending to the effects of corporate law upon the nature of roles, the kinds of choices, and the character of community within the corporation, communitarians can significantly bolster their case for a multifiduciary model of managerial responsibility. This is because the superiority of the multifiduciary model lies in how it affects the moral development of individuals occupying managerial positions within the corporate hierarchy.

Examining how such a corporate law concept can affect the moral development of corporate managers requires a model making explicit the nature of moral decision-making. The model I shall use is one I have elaborated upon elsewhere.(27) Its core concept is this. The essence of moral decision-making lies in the evaluation of the relative worthiness of competing ends or goals.

This model of moral decision-making readily comports with our common understanding of moral choice. Consider a typical moral issue within business ethics – whistleblowing. Employee choices regarding whistleblowing have a moral character because they involve competing ends or goals. In the usual case, the tension is between the goal of company loyalty and some other end such as serving the public good or avoiding harm to others. Take away the goal of company loyalty – or the ends with which it is in competition – and the employee’s difficult moral choice disappears. Indeed, one strategy for resolving the moral issue of whistleblowing has been the denial of the legitimacy of the goal of company loyalty.(28)

CORPORATE ROLES

The shareholder priority and multifiduciary models put forth very different visions of the role of corporate managers. The shareholder priority model promotes a role for corporate managers informed by the end of serving the shareholders. The multifiduciary model puts forth a role of broader scope, seeing corporate managers as also having responsibilities to a number of nonshareholder groups, including consumers, employees, suppliers, and local community members.

As noted earlier, the virtues are in important ways context-bound and thus role-related. Therefore, in promoting different roles for corporate managers, the shareholder priority and multifiduciary models promote different conceptions of virtue as appropriate for individuals in such roles. This difference between the two models is significant because conceptions of virtue help to define the meaning of moral excellence in the business setting.

The shareholder priority model gives rise to an exclusive conception of virtue. Under this model, moral excellence for corporate managers entails the ability to exclude from their decision-making process considerations arising from the interests of other groups so as to maintain a focus on promoting the interest of shareholders. The good manager is one who maintains this focus well, taking account of the interests of consumers, employees, and others only as they bear on fostering shareholder welfare.

The multifiduciary model brings to the fore an inclusive conception of virtue. Under this model, the moral excellence of corporate managers has a broader character. Good corporate managers strive to attend to and accommodate the interests of the many groups associated with the corporation, including such nonshareholder constituencies as consumers and employees.

In giving rise to this conception of moral excellence, the multifiduciary model reveals one of its essential advantages over the shareholder priority model. The multifiduciary model contributes to the business environment a conception of moral excellence respectful of individual moral agency.

By excluding from the decision-making process considerations arising from the interests of nonshareholder groups, the shareholder priority model promotes a conception of moral excellence inconsistent with the moral agency of individual corporate managers. Moral decision-making requires the evaluation of competing ends or goals. However, the conception of moral excellence spawned by the shareholder priority model encourages the exclusion of the ends or goals of groups other than shareholders from the dynamic of managerial choices. In doing so, it deprives such choices of the context of competing ends or goals. It thus defines moral excellence for such choices in a way that is incompatible with a corporate manager’s engagement as a moral agent.

In contrast, the multifiduciary model gives rise to a conception of moral excellence that promotes the moral agency of individual corporate managers. Moral excellence under this model requires corporate managers to take account of the sometimes conflicting interests of multiple corporate constituencies within their decision-making. Such conflicting interests provide a context of competing ends or goals that must be evaluated in the examination of specific corporate issues. Because this conception of moral excellence requires corporate managers to evaluate competing ends or goals, it encourages the engagement of such managers as moral agents.

CORPORATE CHOICES

Corporate law debate regarding the conflict between the shareholder priority and multifiduciary models has implications beyond the conceptions of virtue that come to prominence within the business environment. Law also has a direct impact on the choices of individuals subject to its prescriptions. Because the shareholder priority and multifiduciary models encourage different directions for the development of corporate law rules, they can affect directly the kinds of choices made by corporate managers.

Shareholder priority and multifiduciary models foster markedly different kinds of choices for corporate managers. Under the shareholder priority model, the decisions of corporate managers have primarily an instrumental character. They are about means to a end that is already given – shareholder gain. This strict focus on means surfaced in the actual language of the classic opinion in Dodge v. Ford Motor Co.:

A business corporation is organized and carried on primarily for the profit of stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.(29)

With the multifiduciary model, the choices of managers require engagement in moral decision-making. In taking account of the varied interests of multiple corporate constituencies, the decisions of corporate managers are not simply about the means to an already-given end, but involve competing ends or goals. Choices that necessarily entail evaluating the relative worthiness of such ends or goals have a genuinely moral character.

These different kinds of choices fostered by the two models have a crucial significance for the moral development of corporate managers. This is because of the connection Aristotle makes between choices and character formation. Different kinds of individual choices mean different directions for individual character development. Lacking the dynamic of moral choice, instrumental decisions help to promote the development of an individual character that excludes, marginalizes, or simply fails to notice the moral dimensions of choices. However, engagement in moral decision-making fosters an individual character aware of, sensitive to, and skilled at examining the moral aspects of different courses of action.

In this way, the superiority of the multifiduciary model comes into view again. As a corporate law concept, the model fosters the development of character in corporate managers in a way that contributes to their ability to face the difficult ethical choices in the modern business environment.

CORPORATE COMMUNITY

The development of character in individual managers – although important – is in itself insufficient from an Aristotelian viewpoint. Virtuous individuals can survive and thrive only in a good community. Thus, a full evaluation of the shareholder priority and multifiduciary models requires an examination of how such models affect the status of the corporation as a community.

According to Edwin Hartman, one of the essential elements of the good community is that people are able to reflect on and have extended conversations, based on their shared experience, about morality.”(30) Understanding how the shareholder priority and multifiduciary models may affect the character of corporate communities therefore requires consideration of how such models may promote or discourage moral dialogue among corporate managers.

Prior analysis of corporate roles and corporate choices provides a starting point here. Under the multifiduciary model, corporate roles give rise to a conception of moral excellence respectful of individual moral agency. An environment that defines moral excellence in a way that promotes the engagement of individuals as moral agents would certainly support individual reflection on and collective conversations about morality.

Similarly, corporate choices by managers under the multifiduciary model would help to promote the moral dialogue that characterizes the good community. Such corporate choices – marked by the evaluation of competing ends or goals involve the dynamic of moral choice. Such choices over time constitute the “shared experience” that provides the basis for managerial conversations about morality.

The multifiduciary model promotes the status of the corporation as a good community in an even more basic fashion. Seeing how this is so reveals the most fundamental way in which Aristotelian conceptions of business ethics challenge the status quo in corporate law.

Aristotelian approaches to business ethics bring to the corporate law debate an emphasis on the virtues. Current corporate law has as its underlying rationale the effectuation of interests, most notably shareholder interests. The chief difference between a regime of corporate law inspired by Aristotelian ethics and the current status quo lies in substituting the cultivation of virtues for the effectuation of interests. The justification for this approach stems from the more fundamental nature of virtues. Virtues are dispositions of character. Thus, it is the virtues individuals possess that determine their interests, not the other way around. Edwin Hartman writes: “From the (somewhat updated) Aristotelian viewpoint it can make little sense to say virtue is or is not in your interests because vice or virtue determines what your interests are.”(31)

Ultimately, the multifiduciary model of corporate management involves recognizing the more fundamental nature of virtues. Under the shareholder priority model, managerial choices can remain at the level of the effectuation of interests. Their primary aim is giving effect to the preferences of shareholders. However, because the multifiduciary model requires managers to take into account the interests of multiple groups, the choices of managers under this model must involve more than the effectuation of interests, even the varied interests of multiple corporate constituencies. This is because in the inevitable conflict of interests, mere effectuation of interests is impossible. Rather, there must be an evaluation of interests in order to determine the best corporate course of action. The proper evaluation of conflicting interests requires virtuous managers, managers whose character disposes them to act in appropriate ways. Thus, successful corporate action comes to depend on cultivating virtues rather than giving effect to interests.

In this fundamental way, the multifiduciary model promotes the development of good corporate communities. As communities that depend on the virtues of their members, they require the ongoing moral reflection and dialogue Hartman describes for their sustainment.

CONCLUSION

Developing Aristotle’s pre-liberal conception of law sheds light on current debates within both business ethics and corporate law scholarship. For business ethics, this line of inquiry provides a descriptive account of the interaction of law and ethics in the business environment. Through a focus on the nature of roles, the kinds of choices, and the character of community within such environment, this account reveals the significant connections between law and the development of virtues in the contemporary business world. Revealing these connections in turn brings into view the normative significance the development of Aristotle’s thought has for current corporate law scholarship. Exposing how corporate law concepts bear on the moral development of individuals within corporations reveals a new perspective from which to evaluate current controversies in corporate law. This new perspective brings to light the superiority of the multifiduciary model of managerial responsibility over its shareholder priority counterpart.

The relationship between normative significance and descriptive account here represents a crucial juncture for business ethics and corporate law. At this intersection of the two fields, new ways of seeing ethics mean new ways of seeing the law. (1) For some prominent examples of the work of such business ethicists, see Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (1992)