The moral dynamics of law in business

This special issue provides a distinctive forum for legal scholars to interact with others in the business ethics community. By its very existence, such a forum brings to the fore the issue of the relation of law to ethical inquiry in the workplace. It thus may be helpful by way of introduction to raise this issue explicitly and explore it in a preliminary way. My aim here is twofold. First, I wish to provide a larger framework within which to consider the more specific questions raised within the forum. In important ways, the issue of the relation of law and ethics within the business environment underlies and intersects many of the scholarly exchanges presented here. Second, I want to bring into view in a particular way the fundamental value of a forum aspiring to a genuinely interdisciplinary dialogue. Examining the relation of law and ethics in the business setting exposes the way traditional scholarly boundaries can obscure critical areas of inquiry. Responding to such disciplinary lacunae enables the creation of new and richer perspectives.

In keeping with the introductory nature of my remarks, my hope is simply to stimulate in brief fashion some deeper reflection on the role of law in business ethics. As evidenced by the engaging scholarly conversations that follow, this special issue will serve more to provoke debate than to conclude it.

THE PARADOX OF LEGAL DOCTRINES

Understanding the moral significance of law for business requires an appreciation of the paradox of legal doctrines salient for those working in the business environment: Legal doctrines establish context in a way that transcends context.

This paradoxical character of legal doctrines stems from the law’s status as a principled means of governing individual conduct. Each legal doctrine exists both as a provider of context for the individual who must live under its prescriptions and a principle which (potentially at least) may be extended beyond such context. Thus, the decisions of judges provide the context resolving individual disputes, but they never do so as isolated events

Within this paradoxical nature of legal doctrines resides their ethical significance. Ethical evaluation requires both an attention to context and an ability to appropriately transcend context by appeal to more general principles. A recent exchange of Robert Solomon and Patricia Werhane exemplifies these core aspects of ethical decision-making. Emphasizing the first aspect of ethical evaluation, Robert Solomon writes, “All ethics are contextual, and one of the problems with all those grand theories is that they try to transcend context and end up with vacuity.”(1) Countering Solomon, Patricia Werhane stresses the second aspect of ethical evaluation. Asserting the inadequacy of a purely contextualized ethics, she emphasizes the necessity of taking “into account precedents and precedent-setting standards that entail impartial generalizations transcending a particular business situation.(2)

As legal doctrines contribute these two core aspects of ethical evaluation–context and context-transcending principles–to the business environment, they affect significantly the character of ethical analysis within that environment.(3) I would like to suggest some particular ways this occurs by drawing on two ethical theories, virtue ethics and social contract theory, which are increasingly influencing our understanding of ethical issues in business.

VIRTUE ETHICS

Virtue ethics brings to the fore the first aspect of the ethical significance of legal doctrines. This first aspect stems from legal doctrine’s provision of context for those working in the business environment.

Virtue ethics brings to the fore the importance of context for ethical evaluation because of its conception of the virtues. The virtues, Robert Solomon tells us, are context-bound.(4) The context-bound nature of the virtues is evident in their status as both role-related and situated within the community.

The virtues are role-related because our conception of moral excellence can vary depending on the role an individual occupies. Consider, for instance, the virtue of truthfulness as it might apply to an accountant and an advertising executive. While we certainly expect truthfulness from both of them, the character of that truthfulness varies. What we ask of the accountant is a balanced, factual presentation of matters material to a company’s financial status. But with an advertising executive promoting a product, we understand the virtue of truthfulness differently. While we would certainly object to a promotion containing objectively false information, we are here more tolerant of puffery and emotional appeals calculated to encourage our purchase of the product.

Along with being role-related, virtues are situated in a community. Within virtue ethics, there is a deep interdependence between individual moral excellence and community flourishing.

From this perspective, virtue for an individual is related to the ends or goals of the community in which he or she participates. Thus, virtue for a CEO of a non-profit corporation may differ in some ways from the virtue of a CEO heading a for-profit enterprise. A morally praiseworthy executive for the Red Cross, for example, may well guide the organization towards socially beneficial though financially unprofitable activities in ways we might find objectionable for a CEO heading Exxon. The difference here stems from the different characters of the communities involved. The first corporate community has a service orientation

Virtue ethics can aid our understanding of the ethical significance of legal doctrines by prompting an examination of the law’s relation to its constructs of role and community. As noted, such constructs are central to the way virtue ethics evaluates the ethical character of decision-making in business. Significantly, legal doctrines contribute to the kinds of roles and the characters of communities available in the business environment. Thus, as these legal doctrines change, so will the nature of ethical analysis within business settings.

An example from corporate law may be helpful here. Consider how legal doctrines have dealt with the conflict of interest issue arising whenever directors engage in business transactions with the corporations they lead. In recounting the modern corporate history of this matter, Harold Marsh identified three legal approaches.(5) The first doctrine held such transactions to be voidable regardless of their fairness. The second doctrine viewed these transactions as valid if approved by a disinterested majority of directors and not found unfair by the courts. The third doctrine subjects transactions between a corporation and its directors to a judicial review of fairness. Laurence Mitchell describes this change in the nature of corporate directors’ fiduciary duties as “a shift … from a command to pursue the best interests of stockholders to a direction to provide fairly for stockholders.”(6) Drawing a contrast with the earlier strict prohibition of self-dealing in conflict of interest situations, Mitchell writes, “Fairness is a relatively low level of fiduciary conduct.”(7)

In this way, changes in legal doctrine have contributed to the evolving nature of the role of corporate director in contemporary corporations. The trend is one of increasing permissiveness regarding transactions between corporations and their directors. And since the virtues are role-related, these changes in legal doctrine help to foster a new conception of virtue for corporate directors. From this perspective, moral excellence for directors is no longer marked by a rigid adherence solely to actions promoting the best interests of shareholders, but now includes a more significant degree of professional autonomy and judgment.

Mitchell’s comments confirm this change in corporate morality. “The ‘fairness’ standard significantly dilutes the implied standard under the old formulation, which treated self-dealing as inherently bad. This observation leads to another significant aspect of the evolution: when self-interested behavior by directors was not absolutely proscribed, it became, at least at some level, morally acceptable.”(8)

Changing the nature of the role of the corporate director in this way fosters subtle changes in the broader character of the director’s community–the corporation. In developing virtue ethics for the business environment, Robert Solomon stresses the need to recognize the corporation’s status as a community. “Corporations,” he writes, “are real communities, neither ideal nor idealized, and therefore the perfect place to start understanding the nature of the virtues.”(9)

The change in the role of corporate director changes this community because it subtly alters the ends or goals of this community. Such ends or goals are less dominated by the best interests of the shareholders and more subject to the professional autonomy and judgment of directors. To the degree virtue for individuals is related to the ends or goals of their community, this change in the character of the corporate community has a broader ethical significance than the alteration of the director’s role. It can help to foster an evolving conception of virtue that extends beyond directors to others in the corporate community, such as shareholders and employees.

SOCIAL CONTRACT THEORY

Social contract theory brings to the fore the second aspect of the ethical significance of legal doctrines. This second aspect stems from the status of legal doctrines as context-transcending principles.

Social contract theory’s connection with this second aspect of the ethical significance of legal doctrines arises because of the function of individual choice within such theory. Individual choice functions here in a way very different from that contemplated by virtue ethics. Within virtue ethics, individual choice derives from an individual’s character, which is itself shaped by the community.(10) But for social contract theory, individual choice provides the ground for the rules governing interaction within the community. Thus, from the perspective of virtue ethics, social context determines choice. But for social contract theory, choice transcends and determines social context. Such theory thus connects with the status of legal doctrines as context-transcending principles. Social contract theory provides moral sanction for an individual transcending his or her social context by an appeal to the more general principle of individual autonomy.

With its appeal to individual autonomy, social contract theory focuses on consent as the source of moral authority. Drawing on this view of consent, social contract theory makes use of its central construct–the contract–as the ground for moral obligations.

The contracts that ground moral obligations may be theoretical or real. Theoretical contracts arise from the hypothetical consent of rational agents. Real contracts come into existence through the actual consent of individuals. Thus, in describing their own integrative view of social contract theory, Thomas Donaldson and Thomas Dunfee write, “Derived from roots in classical and social contract theory, this integrative theory recognizes ethical obligation based upon two levels of consent: first, to a theoretical ‘macrosocial’ contract appealing to all rational contractors and second, to real ‘microsocial’ contracts by members of numerous localized communities.”(11)

Focusing on this basic construct–contract–allows us to see the particular way in which social contract theory reveals the ethical significance of legal doctrines. Legal doctrines exhibit their moral nature to the degree they embody theoretical or real contracts. By analyzing the contractual character of such doctrines, we can reveal their moral status.

Once again corporate law provides a helpful example. In this connection, the recent development of the “nexus of contracts” model of corporate law is illuminating. This prominent model within corporate legal scholarship exposes the contractual underpinnings of corporate law doctrines.

For instance, a basic contract occurs in the choice of state of incorporation. Corporate law rules vary from state to state, and those wishing to incorporate a business enterprise seek out the state law regime most compatible with their aims. In choosing a particular state in which to incorporate, the incorporators thus signal their consent to be bound by that state’s legal rules. Corporate law scholars debate the effects of the state-based character of corporate law, some seeing in it a “race to the bottom,” others a “race to the top.” The variety of choices available reveals the fundamental contractual character of the incorporation process.

Moreover, the “nexus of contract” model brings into view the broader contractual structure in corporate law. Michael Klausner puts the matter this way. “From these positive claims follows a normative view of corporate law: that the primary objective of corporate law should be to facilitate the drafting of corporate contracts by providing a set of default terms that firms may accept or reject at their option.”(12) Under this model, corporate legal doctrines provide the rules which apply to the corporate enterprise unless corporate decision-makers specify otherwise. Thus, for instance, shareholder action typically requires a majority vote, but the corporate charter may specify supermajority voting requirements.

In this way, a second contractual dimension of corporate law doctrines is evident. An express contract comes into being when the parties tailor a charter provision to meet their special needs, as might occur with a supermajority voting requirement. However, the parties’ silence on such a matter constitutes an implied consent to the default terms provided by the corporate law statute. There thus arises an implied contract for shareholder action by majority vote.

Just as legal doctrines affect the character of the central constructs of virtue ethics–role and community–so they contribute to the nature of social contract theory’s central construct-contract-within the business environment. Such contracts, as we have seen, ground individual moral obligations. Thus, as developments in legal doctrine influence the character of contracts within the business world, such developments impact upon the ethical obligations of individuals working within business.

LEGAL DOCTRINE AS CONDITIONING ETHICAL PRINCIPLE

This look at virtue ethics and social contract theory can deepen our understanding of the relationship between legal rules and ethical responsibilities. It does so by enriching our perspective on the relation of law and ethics in the business world.

Our consideration of the two ethical theories reveals that the very constructs through which ethical analysis proceeds–the constructs of role, community, and contract–are themselves in significant ways legal artifacts. A central significance of this “artifactual”(13) nature of business is this: At a number of crucial junctures, legal doctrine conditions ethical principle.

This view of the relation of law and ethics in business is of central import both for ethical inquiry and legal analysis. It means that in examining the business environment, ethical inquiry can not proceed independent of current legal regimes and legal analysis requires a developed awareness of its own ethical significance.

For ethicists, this means there is a need for a renewed focus on law in the business world. In significant respects, ethical inquiry here proceeds within a framework provided by legal doctrine. Because of the important ways in which legal rules structure the business environment, ethical inquiry that proceeds without an awareness of legal schemes is conceptually deficient. It risks significant analytic errors in its own moral evaluations.

In turn, this view of the relation of law and ethics within the business world also underscores the need for ethicists to subject legal doctrines to a broader moral scrutiny. While the artifactual nature of business may suggest a “moral free space,”(14) it by no means sanctions licentiousness. Particularly because of the law’s pervasive and sometimes subtle moral influence, ethicists need to analyze legal doctrines for their harmony with our important moral values.

For legal scholars, there is a need to enlarge the scope of their analysis. Given the way legal doctrine conditions ethical principle, legal inquiry requires an attentiveness to a new set of concerns. If changes in legal doctrine can mean changes in ethical obligation, then legal scholars must be willing to evaluate their new legal proposals from this distinctively moral perspective. In particular, they must frame arguments for such proposals that reveal a sensitivity to how law can debase as well as elevate our ethical standards.

What emerges from this view of the relation of law and ethics in business is a common ground for ethicists and legal scholars. This common ground provides the basis for a potential new synergy in the efforts of the two groups, with each group enriching its own research in ways that benefit the other. Ethicists who focus on the law’s role in shaping the environment in which individuals make moral choices should provide new insights into legal doctrines. Legal scholars who attend to the dynamics of the law’s moral influence should deepen our understanding of ethical decision-making.

By providing a forum for the interaction of legal scholars and ethicists, this special issue on business ethics can help to develop and expand the common ground among those of different disciplines. Exposing potential new synergies between disciplines is central to the development of business ethics as an interdisciplinary field. It is my hope that this special issue serves to foster the best efforts of individuals engaged in this important collective endeavor.

(1) Robert C. Solomon, Business and the Humanities: An Aristotelian Approach to Business Ethics, in Business as a Humanity 45, 58 (Thomas J. Donaldson & R. Edward Freeman eds., 1994).

(2) Patricia H. Werhane, Moral Character and Moral Reasoning, in Business as a Humanity 98, 100 (Thomas J. Donaldson & R. Edward Freeman eds., 1994).

(3) Werhane goes on to connect these two core aspects of ethical evaluation specifically to ethics in the business environment. “What is unique or at least interesting about business decision-making,” she writes, “is that it is inherently contextual … while at the same time it demands the application, or setting out, of more general principles or rules.” Id.

(4) See Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business 196-97 (1992).

(5) See Harold March, Jr., Are Directors Trustees?: Conflict of Interest and Corporate Morality, 22 Bus. Law. 35 (1966).

(6) Lawrenee E. Mitchell, A Critical Look at Corporate Governance, 45 Vand. L. Rev. 1263, 1295 (1992).

(7) Id. at 1297 n.147.

(8) Id. at 1297.

(9) Robert C. Solomon, Corporate Roles, Personal Virtues: An Aristotelian Approach to Business Ethics 2 Bus. Ethics Q. 317, 325 (1992).

(10) Robert Solomon notes, “What it means to be part of a community is something more than cooperation, something more than having something (‘a commons’) in common. It is, among other things, to identify yourself and your interests in and with the community. It is, simply, to become a different person.” Robert C. Solomon, The Corporation as Community: A Reply to Ed Hartman, 4 Bus. Ethics Q. 271, 281 (1994).

(11) Thomas Donaldson & Thomas W. Dunfee, Toward A Unified Conception of Business Ethics: Integrative Social Contracts Theory, 19 Acad. Mgmt. Rev. 252, 254 (1994).

(12) Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757, 760 (1995).

(13) I take this term from Thomas Donaldson and Thomas W. Dunfee. See Donaldson & Dunfee, supra note 11, at 258.

(14) I also take this term from Thomas Donaldson and Thomas W. Dunfee, though I here use it only in a general way. See Donaldson & Dunfee, supra note 11, at 262.

JEFFREY NESTERUK, Associate Professor of Business Law, Franklin & Marshall