2 short discussions assignments-500 words each

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use the attached 3 articles in your discussions for the two assignments. 500 words for each assignment.

Assignment1: Corporate Governance and Ethics

Consider the roles of government, shareholders, the board of directors, and management in your answers to the following questions:

  1. What is the primary function and ethical responsibility of each of the above-mentioned roles in corporate governance?
  2. What is the primary function and ethical responsibility of each of the above-mentioned roles toward society?
  3. To what extent are your answers to each of these questions congruent and aligned? In other words, to what extent are your answers to these consistent and reasonable, and in what ways are these roles and ethical responsibilities tied to each other?

Assignment 2: Social Shareholder Engagement

For this forum, respond to the following questions. Please reference resources with your posting.

  1. What is Social Shareholder Engagement?
  2. Which organizations use Social Shareholder Engagement?
  3. Is there a downside to practicing Social Shareholder Engagement?
  4. What organizations should integrate this practice into business operations?

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New Directions in Corporate Governance and Finance: Implications for Business Ethics Research Lori Verstegen Ryan, Ann K. Buchholtz, and Robert W. Kolb ABSTRACT: Corporate governance and finance are dynamic academic fields that offer myriad opportunities for business ethics analysis. Within the corporate governance triad in recent years, shareholders have increased their power over boards of directors and executives through both regulation and movements to change corporate by-laws. The impact of board characteristics on firm performance has proven elusive, leading to questions conceming board processes and individual director beliefs and behaviors. At the same time, CEOs have lost considerable power, leaving many struggling to regain their control and maintain their compensation levels, while others adopt a stewardship approach to their posts. In the field of finance, the recent financial debacle has led to a reexamination of financial regulation and of the fundamental nature and purpose of the industry. All of these issues provide business ethicists fodder for investigation and analysis. N O ACADEMIC DISCIPLINES have been more affected by the "Decade from Hell" (Serwer, 2009) than those of corporate govemance and finance. From the perspective of these fields, the decade began with the dot-com "bust," then moved through the Enron-era scandals and their ensuing legislation and listing mies, to the drawn-out implementation of compliance with those mies, and then, ultimately, to the most recent debacle in the govemance of the U.S. financial and automotive industries. The compilation of these well publicized episodes resulted in a radical shift both in the public's awareness of these academic disciplines and in corporate behavior. Our goal in this paper is to illuminate some of these recent events and changes in corporate govemance and finance practices that offer research opportunities for business ethics scholars, as well as to assess long-standing issues still in need of ethical investigation. We will address the fields of corporate govemance and finance in tum. CORPORATE GOVERNANCE Corporate govemance comprises the roles, responsibilities, and balance of power among executives, directors, and shareholders. After abrief description of the varied roots of the field, we assess the changing roles and responsibilities of these three groups and conclude with a brief discussion of their dynamic balance of power. The academic discipline of corporate govemance draws on three underlying disciplines: law, management, and finance. The legal discipline—both corporate law and contract law—is central to the field. Corporate law has set the parameters ©2010 Business Ethics Quarterly 20:4 (October 2010); ISSN 1052-150X pp. 673-694 674 BUSINESS ETHICS QUARTERLY of corporate governance since the inception of the corporate form (Macey, 2008). Contract law, on the other hand, involves the enforcement of corporate contracts between governance constituencies, often working within the framework of a bargain that would have been reached between shareholders and executives of a firm in a hypothetical negotiation (dubbed "non-contractual law" by one skeptical leading researcher [Macey, 2008: 29]). Many law review articles in the field make careful legal arguments based on explicit ethical premises, offering a rich resource for the business-ethics researcher investigating corporate governance. Research ranges from insightful analyses of more traditional legal topics, including trends in securities regulation (Gerding, 2006) and principle-based vs. rule-based corporate governance law (Anand, 2006), to examinations of the roles of the media (Borden, 2007) and of hedge funds (Briggs, 2007; Kahan & Rock, 2007) in corporate governance. The scholarly management literature addresses issues related to all three constituent groups, both theoretically, such as recent articles related to director interlocks (Shropshire, 2010) and management's treatment of institutional investors (Westphal & Bednar, 2008), and empirically, such as studies of the relationship between firm environmental performance and executive compensation (Berrone & Gomez-Mejia, 2009) and of the impact of CEOs' advice networks on firm performance (McDonald, Khanna & Westphal, 2008). This literature is also fundamental to the corporate governance field. Finally, thefinancediscipline, which will be discussed in its own right below, offers a plethora of primarily empirical resources for the corporate governance researcher. Topics as varied as the impact of governance mechanisms and investor activism on firm performance (Brav, Jiang, Partnoy & Thomas, 2008; Cremers & Nair, 2005), the ethics surrounding the subprime debacle (Jennings, 2008), investor trust in the market (Guiso, Sapienza & Zingales, 2008), and the effectiveness of "busy" directors (Fich & Shivdasani, 2006) are all within the purview of finance researchers. Corporate governance scholars combine, contrast, and test arguments and findings from these three literatures to focus on the behaviors and nuances of the corporate governance triad. As noted above, researchers from all three fields address such ethical issues as trust, subprime ethics, principles vs. rules, and conflicts of interest, all topics of interest to business ethics scholars. While traditional questions of the separation of ownership and control and managerialism remain, the primary entry into these conversations lies in the dynamism of the field: corporate governance practice is in constant flux, offering researchers ongoing opportunities to examine and comment on these new and competing practices. In order to facilitate business ethics scholars' potential exploration of the field, we now discuss the recent events and research in corporate governance, examining shareholders, directors, and executives in turn. Shareholders Through the early 2000s, institutional investors have waged a multi-stage campaign to gain greater control over excessive CEO compensation, which many consider to NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 675 be a clear indicator of poor oversight by boards of directors. The campaign began with the push for majority voting for directors, followed by the say-on-pay movement, and most recently by the demand for the right to nominate directors. All of these battles offer fodder for ethical investigation. The first initiative was to move corporate voting from a pluralist model to a majority model (Lesser, Hoffman & Bromfield, 2006), Through most of the twentieth century, U,S, shareholders received—and seldom returned—proxy ballots that allowed them to vote "yes" or "withhold" for director candidates. Thus, any director who ran uncontested (which was most) and who received any number of "yes" votes gained or retained the board seat, even if the vast majority of proxies were voted "withhold," Institutional investors found this system untenable, and in 2004 began campaigning with corporations to change their by-laws to allow for "majority voting" (Lesser et al,, 2006), While it comes in several forms, majority voting generally consists of allowing shareholders "yes" or "no" votes, and requires an aspiring director to eam a majority of "yes" votes of the ballots cast in order to join the board. Many corporations converted their voting systems voluntarily as they recognized this impending sea change. Others resisted until investors filed proposals for a formal shareholder vote, many of which passed. However, such proposals are non-binding "advisory" votes that simply communicate to management that investors would "prefer" an amendment to corporate by-laws. In this case, many firms whose investors recommended the by-law change complied. More than 66 percent of S&P 500 firms now have majority-voting mies for uncontested elections (CalPERS, 2009), an impressively smooth victory for shareholders. Business ethics researchers could examine both the historical roots and current demise of the pluralist voting system in the United States, along with the advisability of and ethical problems inherent in majority voting. Boards who receive these advisory votes have a choice whether or not to remove a given director, and must decide whether fiduciary duty leads them to cooperate with investors' stated desires or to do what they take to be in shareholders' long-term interests. Shareholders' reactions to that decision—including potentially filing a lawsuit—also deserve examination. Investors next sought to add "say-on-pay" amendments to the by-laws of their portfolio firms (Blandeburgo, 2009), which would allow them to voice non-binding votes of support or opposition to a CEO's compensation package. While some see executive compensation as well within the proper purview of boards of directors, others argue that boards have abused that discretion and have been co-opted by management. Some firms, such as first-mover Afiac (Jones, 2007) and Microsoft (Investment Weekly News, 2009), adopted the measure voluntarily, while others, such as Cisco (Modine, 2009), faced shareholder proposals that yielded positive votes. In the midst of the "say on pay" movement, the financial crisis and ensuing bailouts led the federal govemment to become involved in executive pay limits and now legislation on the subject. The House of Representatives passed the Wall Street Reform and Consumer Protection Act in December 2009, which includes a provision for shareholders to have an advisory vote on executive compensation (Bay, 2009), 676 BUSINESS ETHICS QUARTERLY The Senate financial reform bill ultimately passed in May 2010, and continues to undergo reconciliation in Congress (Dennis, 2010). Business ethics researchers examining this subject could consider the proper role of investors in setting CEO pay, which has long fallen under the business judgment mle, protecting firms from investor interference in day-to-day operations. If boards have, indeed, been co-opted and are paying CEOs unnecessarily exorbitant salaries, shareholder involvement may be appropriate. However, the question remains whether this involvement should be legislated and whether an existing, more macro-level tool, such as board elections, should be used to solve the problem. The latest shareholder empowerment action to gain ground is "proxy access," which would give investors the right to place competing nominees for director seats on companies' official proxies. While this issue has been under discussion since the early 2000s (Pozen, 2003), it achieved a major milestone when, as of August 1, 2009, Delaware corporations were freed to adopt by-laws that allow shareholder nomination of directors (McGregor, 2009). Proxy access that would enable onepercent owners to nominate directors was also proposed as an SEC mling as of July 2009, with the public comment period extended into 2010 (Nathan, Brauer & Papadima, 2010). Many shareholders believe that the ability to propose their own slate of directors could reduce the entrenchment of management-co-opted directors. Opponents argue that investors are less capable than nominating committees at recognizing and fulfilling boards' personnel needs and that frequent tumover would reduce a board's teamwork and its focus on long-term initiatives. Proxy access has been controversial due to investors' implied presumption that their knowledge of which directors are optimal for a given board tmmps current board members' knowledge and willingness to follow their fiduciary duties. The intentions of both sides deserve business ethics researchers' attention. Aside from this campaign to gain more power over boards, investors have also focused significant effort on abolishing CEO duality in the U.S., which consists of CEOs also serving as Chairmen of the Board of their corporations. While empirical evidence conceming the impact of CEO duality on firm performance continues to be inconclusive (Finegold, Benson & Hecht, 2007), investors have voiced their preference for the separation model prevalent in other corporate govemance systems. Many U.S. corporations have responded to this demand not by separating the roles, but by adding a new role of lead or presiding independent director to take charge of such duties as the independent directors' annual executive session, required of NYSE-listed firms (Monks & Minow, 2008). The benefits of CEO duality remain unclear, as does the rationale behind U.S. firms' unwillingness to follow the remainder of the world's corporate govemance systems in separating the two roles in non-family controlled firms. Given the lack of empirical support for duality's impact on firm performance, investors' presumptions about the ethical dangers of CEO duality also deserve examination. These efforts by traditional institutional investors have been augmented over the last decade by those of a new activist partner, the hedge fund and private equity industries. These funds are significantly less regulated than traditional institutional investors, and hedge funds, in particular, are able to engage in a variety of risky NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 677 investment strategies that gamer exorbitant pay for managing partners (Schneider & Ryan, forthcoming). Their activism has resulted in radical change in corporate board rooms in recent years, and has eamed on average a 4-7 percent abnormal retum on investment for the twenty days surrounding the filing of their 13(d) announcement of intent to intervene (Brav et al., 2008). The high level of risk and lack of transparency surrounding these funds have led to a public outcry for increased regulation that concluded in heightened SEC restrictions in recent years, only to be overtumed by the federal courts due to the funds' special characteristics (Schneider & Ryan, forthcoming). Donaldson (2008) initiated the business-ethics analysis of hedge funds by examining the ethics of increased regulation. Despite regulation advocates' complaints of unfair tax benefits, investor "duping," and "alleged social harm," Donaldson opposes greater regulation, concluding that it would reduce fund managers' entrepreneurial motivation and be nearly impossible to enforce. Other scholars agree, arguing that hedge fund and private equity activism are a last bastion of corporate governance monitoring and control (Macey, 2008). While free-rider problems and heavy regulation hamstring individual and institutional investors, private equity and hedge fund investors are free to take major positions in underperforming firms and work with management to improve their corporate govemance and strategic practices. Private equity firms that engage in highly leveraged buyouts have also come under recent scmtiny in the business ethics literature. Concemed that these firms focus excessively on shareholder welfare at the expense of other constituencies, Nielsen (2008) offers both ways to stop these buyouts and other mechanisms for hampering them. Clearly, the issues of risk, transparency, faimess, and regulation associated with hedge funds and private equity firms offer rich and timely opportunities for further ethical analysis. Most recently, an even newer form of shareholder has entered the scene in the U.S. The relationship between govemment and business has shifted, as the federal govemment has become a major shareholder in some firms and has intensified regulatory pressure on others. This new relationship creates a plethora of potential conflicts of interest for federal officials, as they simultaneously serve as regulator, pension guarantor, tax beneficiary, customer, owner, and lender (King, Neil, McCracken & Spector, 2009). Businesses' side of the equation also presents an opportunity for ethical analysis, as General Motors, for example, used millions in TARP monies to fund both its sixty-day money-back guarantees and its federal lobbying efforts for concessions in non-TARP arenas (Camey, 2009). Of course, access to such a deep well of funds is not available to Ford as an independent competitor (Anonymous, 2009). Many TARP firms have also mshed to repay the loans, perhaps primarily driven by the govemment's caps on executive pay, which severely limit the pool of candidates qualified and willing to lead the troubled companies out of distress (Rothacker, 2009). Both the govemment's interventions and the companies' attitudes toward TARP expenditures and repayment offer fmitful topics for ethical investigation. Shareholder power has escalated rapidly over the last two decades with the consolidation of equity holdings into the hands of institutional investors, and 2000s laws and regulations have raised shareholder control to unprecedented heights. This level 678 BUSINESS ETHICS QUARTERLY of power in relation to executives and boards of directors, and investors' proper use of it, offers a wide variety of avenues for business ethics researchers. Boards of Directors For years, corporate govemance research has been dominated by concems with board stmcture, composition, and vigilance (Finkelstein, Hambrick & Cannella, 2009). As a result, corporate govemance scholars have tended to focus on such variables as CEO duality, percentage of outsiders on the board, percentage of stock ownership by directors and CEOs, and board size. These "usual suspects" (Finkelstein & Mooney, 2003: 101) have not been shown to improve firm performance (Dalton, Daily, Certo & Roengpitya, 2003; Dalton, Daily, Ellstrand & Johnson, 1998), yet they appear on "best practices" checklists, and many boards have enacted these recommended reforms in response to pressure from institutional investors and public opinion. In 2000, with the stmctural reforms mostly in place. Business Week suggested that, "the govemance battle has largely been won at big companies" (Byme, 2000: 142). One year later the Enron and WorldCom debacles unfolded, followed by a wave of restatements that demonstrated that boards were not running as tight a ship as their performance on traditional govemance indicators suggested. Not only had the govemance items on those checklists never received robust empirical support (Finegold et al., 2007), but they then also failed to achieve desired results in practice (Finkelstein & Mooney, 2003). These occurrences brought home the point that research into boards of directors needs new theoretical perspectives and new ways of examining what boards actually do. This failure of stmctural board research underscores an opportunity for business ethics scholars to add new value to corporate govemance discussions by diving more deeply into board processes (Ravasi & Zattoni, 2006). Board stmcture and composition variables have been widely exploited in corporate govemance studies, because these data can be obtained relatively easily from publicly available corporate proxies. For corporate govemance research to expand in new directions, however, it will be important for govemance scholars to adopt new approaches both conceptually and methodologically (Daily, Dalton & Cannella, 2003; Forbes & Milliken, 1999). This opportunity presents a challenge for scholarship on boards of directors, because boards are understandably resistant to being observed as they go about their work, concemed that confidential information may be leaked and that being observed might affect board processes (Leblanc & Schwartz, 2007). Surmounting that obstacle will require innovative and even bold research designs, while deriving necessary insights from such studies will require a broader range of theoretical perspectives (Daily et al., 2003; Huse & Zattoni, 2008; van Ees, Gabrielsson & Huse, 2009). Researchers should also look beyond the Fortune 500 firms that have populated the majority of corporate govemance samples. The boards of smaller firms (Huse & Zattoni, 2008), younger firms (Pollock, Chen, Jackson & Hambrick, 2010), family firms (Le Breton-Miller & Miller, 2009), and private firms (Uhlaner, Wright & Huse, 2007) remain understudied in spite of the opportunities they offer to researchers. NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 679 As new ways of collecting information about boards are developed, new questions can be asked. The motivations of board members hold normative implications that merit further study. For example, board member compensation creates a natural conflict of interest because board members design and set their own compensation (Dalton & Daily, 2001). Certo, Dalton, Dalton, and Lester (2008) noted that board pay can lead to ethical dilemmas and subjected their theory to a test. Focusing on takeovers, they found that board members of the acquiring firms were paid significantly more than those in a control group, and they questioned whether the board members might have been expanding the firm to increase their own pay instead of to enhance shareholder wealth. Hillman, Nicholson, and Shropshire (2008) extended the research on individual board members by examining the extent to which board members identified with the organization, with being a CEO, with being a board member, with shareholders, with customers, and with suppliers affected by their actions. Lack of identification might also provide a window into board member values. Perhaps the most interesting question regarding board member motivation is why they want to be board members at all (Hambrick, Werder & Zajac 2008). Board members receive blame for corporate failure but relatively little credit for corporate success. They risk attacks from the press and stigmatization when the company does poorly (Wiesenfeld, Wurthmann & Hambrick, 2008), and they do so for less than extravagant rewards (Finkelstein et al., 2009). Understanding the individual motivations and contributions of board members will not only shine a light on board member processes, but also aid practitioners in both recruitment and succession planning. Typically, boards have been viewed at the group level of analysis and individual differences among members have been outside the scope of the research. This limitation has begun to change, with an increase in attention to board member diversity, as more women and minority representation on boards makes the examination of diversity possible. Studies of board diversity can help us to understand the values of individual board members. For example, Williams (2003) found a relationship between the proportion of women on the board and the firm's corporate philanthropy. In theory, diverse boards should have the range of experiences necessary to understand the needs of diverse constituencies, helping them to guide organizations toward more effective management (Joo, 2003). Recent research showed that boards tend to have more women in industries with more women in the customer base (Brammer & Pavelin, 2008) and that the reputational effects of having more women on the board are felt only in those industries (Brammer, Millington & Pavelin, 2009). Of course, boards of directors remain relatively homogeneous, so it is difficult to find opportunities to test the impact of board diversity and to achieve the statistical power needed to see any impact reflected in empirical findings. As discussed above, recent events have made the government a major player in corporate governance, raising a host of questions for scholars to tackle. Researchers have just begun to contribute to these questions. For example, we know that, in general, having former government officials on boards can benefit the firm (Hillman, 2005; Hillman & Hitt, 1999). Lester, Hillman, Zardkoohi, and Cannella (2008) expanded on this work to explore how individual former government official 680 BUSINESS ETHICS QUARTERLY board members differ. They explored the depth and breadth of the human and social capital that govemment officials provide as outside directors, as well as the ways in which it deteriorates over time. Future studies should also explore the impact of govemment intervention on corporate govemance. One researcher opined that govemment intervention could "kill corporate govemance" by diminishing boards' authority and responsibility (Elson, 2009), Business ethics researchers could add much to this nascent stream. Top Executives Executive values and motivation lie at the heart of ethics research in corporate govemance, as executives' fiduciary duties to shareholders constitute moral obligations (Easterbrook & Fischel, 1996; Williams & Ryan, 2007), Upholding these duties requires adherence to a personal ethic that entails consideration of and respect for others who are not part of the executive's traditional in-group (Cosans, 2009), Shareholders become vulnerable when they relinquish control over their assets to executives, who hold an advantage over them due to information asymmetry (Marcoux, 2003), Executives then sometimes exploit these vulnerabilities by manipulating information in a way that violates their responsibilities of loyalty, candor, and care (Williams & Ryan, 2007), One way that CEOs can exploit CEO/shareholder information asymmetry is to manipulate stock analysts, on whom shareholders rely for stock purchase decisions. Stock analysts have been found to be susceptible to impression management. For example, analyst reviews of charismatic CEOs tend to be both more positive and more error-ridden (Fanelli, Misangyi & Tosi, 2009), Knowing that analyst reviews can be manipulated, CEOs have devised ways of appearing to make meaningful changes in firm govemance without effecting real change in firm practices. Westphal and Graebner (2010) found that CEOs respond to negative analyst appraisals by appearing to make changes in board independence without actually increasing board control. They showed that verbal impression management, combined with fewer board member contractual ties to the firm, resulted in improved subsequent appraisals even with no real difference in board control, Westphal and Clement (2008) examined how some CEOs reward positive analyst appraisals with favor rendering and penalize negative appraisals with negative reciprocity, CEOs can even use persuasion and ingratiation to deter institutional investors from forcing changes that would benefit shareholders at the expense of top executives (Westphal & Bednar, 2008), The marketing of stock to target types of investors has also become increasingly sophisticated, with specialized personnel, dedicated technology, and the ability to single out specific shareholder groups, allowing CEOs to help shape their own firms' shareholder bases (Williams & Ryan, 2007), The extent to which top executives pursue self-interest rather than their moral obligations calls into question the personal ethics of those who hold top executive posts. However, relatively few studies have explored executive ethics and values directly. In an effort to move executive values research forward, Hambrick and Brandon (1988) condensed previous executive values research constmcts into six DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 681 dimensions: collectivism, rationality, novelty, duty, materialism, and power. Others have explored national culture as a source of executive values (Elsayed-Elkhouly & Buda, 1997; Jacoby, Nason & Saguchi, 2005). Direct examinations of the moral reasoning and values of managers (Posner, 2010; Weber & McGivem, 2010) may eventually help in the quest to understand executive morality, as could the emerging field of behavioral ethics (De Cremer, Mayer & Schminke, 2010). The dearth of research on executive values represents a significant loss to corporate govemance research and opportunity for researchers, not only because of the direct effect that values have on executive decision making, but also because of the indirect effect that personal values can have on executives' field of vision (Finkelstein et al., 2009). The personal ethics of top executives leads to the question of the relationship of the board to the CEO, which can be collaborative, confrontational, or some combination of the two. In assessing the board/CEO relationship, researchers most often draw from agency theory, with its assumptions of executive shirking and self-interest maximization (Hambrick et al., 2008). Other research draws from stewardship theory, with its assumptions of executive good will and firm-interest-maximizing motivation (Davis, Schoorman & Donaldson, 1997). The key difference between the two views is the personal ethics of a given CEO and the extent to which that CEO can be trusted to pursue the best interests of shareholders, even when they conflict with that CEO's self-interest. The greater the extent to which the CEO has intemalized firm values, the less extemal control will be needed (Eccles & Wigfield, 2002). Nevertheless, corporate govemance research has typically focused on extrinsic factors, such as board monitoring and incentives, rather than on CEOs' intrinsic motivation (Boivie, Lange, McDonald & Westphal, 2009). Business ethics researchers are well positioned to examine the understudied intrinsic factors that influence the extent to which CEOs fulfill their duties to shareholders. The alignment of incentives is a challenging task, so top executive compensation is another research area in which many business-ethics questions remain. Much of the executive compensation research has focused on establishing a connection between executive pay and firm performance, yet, despite expending considerable effort, researchers have not been able to show a consistently strong link between them (Devers, Cannella Jr., Reilly & Yoder, 2007). Moreover, the executive compensation issue is more complex than simple incentive alignment. Researchers need to consider issues beyond the determinants of executive compensation and its firm-performance outcomes and analyze the ethics and effects of executive compensation. One question being raised relates to the size of compensation packages and whether CEOs face a moral limit on how much compensation they should accept (Moriarty, 2005, 2009). Stock options also pose a host of ethical dilemmas, both for the executives that receive them (Angel & McCabe, 2008) and for the firms that award them (Kanagaretnam, Lobo & Mohammad, 2009). For example, CEOs have been shown to be more likely to manipulate eamings when their options are out of the money and they have lower levels of stock ownership (Zhang, Bartol, Smith, Pfarrer & Khanin, 2008). Similarly, researchers have found an association between stock option repricing and favorable market movements, suggesting opportunism that is made possible by information asymmetry (Callaghan, Saly & Subramaniam, 2004). In the wake 682 BUSINESS ETHICS QUARTERLY of option backdating scandals, newer mechanisms, such as restricted stock grants and option exchanges, also merit ethical analysis (Hamlin, 2009). Clearly, opportunities for business ethics researchers abound in the corporate govemance arena from the perspective of all three key players in the corporate govemance triad. Research is also needed conceming the overarching issue of the balance of power among the three groups. As discussed above, over the last several decades, investors have accmed increasing power to affect the govemance of the firms in their investment portfolios, yet many executives continue to resist their intervention. With boards of directors at the fulcmm of this dispute, analysis of the relative rights and responsibilities of the three groups, with a particular focus on power, could yield invaluable results. We tum now to the more specialized issues embedded in recent events in the field of finance. FINANCE In contrast to the corporate govemance field's varied sources, finance has unitary roots as a daughter discipline of economics. Finance traces its independent origins to the 1950s and particularly to the development of portfolio theory (Markowitz, 1952). The early decades of the finance discipline have been characterized by a strong conceptual dependence on three notable borrowings from economics: a narrow conception of rationality, a restricted view of the good as wealth maximization and risk aversion, and a methodological commitment to instmmentalism as an interpretation of science.' (Friedman (1966) represents a powerful and widely influential commitment to this view. For an extended discussion of the issues of scientific realism and instmmentalism as they pertain to economics and finance, see Rosenberg (1994).) These three pillars held sway over finance until the 1980s, and, during the intervening decades, academic finance and the broader finance industry became increasingly intertwined with this common conceptual framework. This posture of thefinancediscipline and industry has left little room for any fmitful interaction between ethics and finance. After all, if rational humans pursue their own very narrowly conceived interests, the ethical critique of finance is restricted to being an extemal one, left merely to call into question the ethics of the entire finance enterprise. For example, with such a narrow specification of rationality, no conceptual room remains for a discussion of moral psychology as it relates to the theory or practice of finance. Since the 1980s, however, these early verities have come under increasing attack from within the finance discipline. Most notably, the development of behavioral finance has forced an increasing recognition of the inadequacy of finance's conception of reality and a broadened understanding of the ends of human life (Kahneman & Tversky, 1979; Kahneman, Slovic & Tversky, 1982; Thaler, 1993). Stemming largely from game theory, experimental economics andfinancequickly demonstrated that cooperation dominated the direct pursuit of narrowly conceived self-interest by using experiments such as the "tit-for-tat" game (Milinski, 1987). A similar experiment showed that people were quite willing to sacrifice immediate self-interest to punish perceived unfairness in the "ultimatum game" (Oosterbeek, NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 683 Sloof & van de Kuilen, 2004). In the ultimatum game there are two players. One player receives a sum of money and is asked to propose a division between the two players. The second player may accept or refuse the division. If the second player accepts the division, both parties keep the funds according to the division that was proposed. However, if the second player refuses the offered division, both players receive zero. If utility is a function only of wealth, and only utility matters, the best proposed offer is only a penny, and the "rational economic man" will accept this increment in wealth even if it means that the other player keeps a huge sum. As a thought experiment, it is easy to see that very unequal divisions may be rejected by the second player as being unfair, which would cause the second player to sacrifice wealth to punish unfaimess. This intuition has been confirmed by hundreds of instances of this kind of game. The sacrifice of any wealth to punish others is inexplicable if human utility is solely a function of increasing wealth and avoiding risk.^ Today, for the most part, finance continues to maintain a commitment to viewing the firm as the property of shareholders and continues to insist that corporations should be managed for the benefit of those shareholders. As a consequence, the main impact of behavioral finance is a challenge to the simple utility functions that emphasize only wealth and risk avoidance, which have dominated thefieldof finance since its exception. Even if the financial management of firms aims only to promote shareholder utility, that utility must now be conceived in terms that embrace more than wealth maximization and risk aversion. It should be noted, in faimess, that finance has long perceived that shareholder wealth maximization might not be the same as shareholder utility maximization for each individual shareholder, but maximizing wealth was taken to be a reasonable proxy for shareholder utility in general. This expanded conception of the good for shareholders opens a richer conceptual space and provides an intellectual foothold that business ethicists may use to engage more fully with the finance discipline. The remainder of this section suggests several broad topic areas and recent events related tofinancethat may offer business ethicists new opportunities to contribute to an enhanced discussion of ethics in finance. Within a model of corporate govemance dedicated to maximizing shareholder utility, a broader understanding of the interests of shareholders may provide a path to at least a partial rapprochement between the shareholder and stakeholder models of governance. Shareholders may expect executives and boards to pursue profit within constraints that include care for communities, the environment, and various aspects of corporate social responsibility. As the ultimatum game shows, individuals do sacrifice monetary gain to promote faimess and punish selfishness. Thus, it must at least be possible that firms could maintain a dedication to promoting shareholder interests without focusing exclusively on maximizing their wealth. The popularity of so-called socially responsible investing shows that some investor clienteles are very interested in corporate goals other than wealth maximization (Harrington, 2003). One perspective on the finance revolution regarding investor utility functions is that finance theory now largely grants at least some form of instmmental stakeholder theory solely as a means to advance the goal of maximizing shareholder value. From this perspective, the utility of shareholders could embrace the utility of the community or of other individuals. At the very least, this position may sharpen the 684 BUSINESS ETHICS QUARTERLY debate, as the real issue is between a focus on shareholder utility (now more broadly conceived) and the demand that the firm must consider as an intrinsic end the well being of others, above and beyond their contracted relationships with the firm. In addition, within a view of shareholder utility maximization that is not merely concerned with wealth maximization and risk avoidance, the ethical question of how broadly one's utility function should range is now much more salient. That is, for a shareholder whose utility is determined to some extent by the well-being of others, how much weight should such other-regarding concerns receive? Perhaps one fruitful way of thinking of this problem is to begin with the smallest business, a sole proprietorship with only one employee, such as a single-person consulting firm. In the battle over the role of the firm, it is seldom alleged that such small firms have broad obligations of "corporate social responsibility," and small firms in general seem to receive a pass in assessments of social obligations. This is true whether these putative social obligations are conceived in a merely instrumental sense or in a richer one. From an ethical point of view, what is the ground of this difference in common intuitions about small versus large firms? From a moral point of view, why should large firms have richer obligations toward those outside the firm than do small firms? If no legitimate ground for distinction exists, and if a one-person firm has obligations that go beyond the financial interests of the single individual involved, then one may well wonder why a mere employee does not have similar responsibilities. In other words, an adequate account of the social role of the corporation needs to embrace businesses of all sizes and must offer a single explanation suitable for firms of all sizes or must offer an explanation of why the obligations of large firms differ from those of small firms. Consistent with its historical emphasis on wealth maximization, finance teaches the evaluation of projects based on maximizing the net present value (NPV) of an investment and on quantitative cost-benefit analysis. From a normative point of view, the finance discipline has made a persuasive case that such modes of analysis maximize societal wealth, so that they are claimed to be morally superior because of that greater contribution. Yet business ethicists seem offended by such an approach to investment decision making. For example, the most popular and prevalent narrative of the Pinto fire hazard case generated widespread outrage based on its alleged monetary valuation of human life through the application of cost-benefit analysis. This appraisal of the events surrounding the Pinto remain prominent in public consciousness, even though more considered scholarship even denies that Ford actually decided to apply such analysis (Schwartz, 1991; Lee & Ermann, 1999). If NPV and cost-benefit analysis are morally offensive as modes of determining the allocation of investment, however, business ethicists in general have so far made no (or at least very modest) contributions to explaining how such decisions should be made from a moral point of view (Zwolinski, 2008). In short, much work could be done on how one should allocate scarce resources, whether those scare resources are capital or health care in a national health plan. Risk management is a growing sub-specialization of finance that has gained increased salience in the aftermath of the financial crisis of 2007-2010 (Fraser and Simkins, 2010). Awareness is growing that risk management has a strong norma- NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 685 tive dimension that is perhaps most poignantly encapsulated in the outrage over the "privatization of profit and the socialization of risk," Yet this important topic has received relatively little attention from business ethicists (Kolb, 2010), While risk management at the societal level is clearly important, significant normative issues come to the fore even in the more pedestrian micro-level instances of risk management. In many situations, managing risk means transferring risk, and the transfer can be directed toward those who willingly bear it for compensation, as it explicitly is in many derivatives markets. Alternatively, risk can be transferred to those who are unable to avoid it, either through their lack of power or due to their ignorance. For example, airlines once paid their night crews for their total duty hours, so that they would be paid when the aircraft was unable to ñy due to mechanical problems or weather delays. Later, the compensation changed so that the crews were paid a higher hourly rate but only for "block to block" time—the time from when the plane pushed back to the time that it arrived at its destination gate. This transferred the risk of mechanical problems and weather delays to flight crews, much to their irritation. As risk management becomes an increasingly important and distinct part of finance, the normative issues involved become more deserving of investigation by business ethicists. The financial crisis of 2007-2010 has also focused attention on the finance industry and brought to the fore the question of whether finance is in some sense special. Broad federal intervention to support the financial system has been justified on the grounds that the provision of credit and the continued functioning of the financial system were necessary to sustain all areas of the economy. In opposition, others decried that the govemment was bailing out Wall Street, claims that tended to ignore that these bailouts usually involved the total loss of shareholder equity and that the bailouts actually favored the firms' creditors. For the business ethicist, the financial crisis and responses to it raise the question of how the finance industry should be viewed compared to other industries. If finance plays some special economic role, then might it be subject to special obligations? From the point of view of social organization, a special role for finance in the economy might also justify special oversight or regulation. In fact, many would argue that such a view antedates the financial crisis, as finance has long been one of the most intensively regulated industries. However, the ethical implications of this (perhaps) special role of the finance industry and its attendant high level of regulation have not been fully explored. Finally, if the finance industry is special in an important sense and involves special obligations, then do managers of financial firms have a different role and special obligations that do not fall on those who manage firms in other industries? Compared to many areas of human life, it has seemed to some that finance is especially arcane and that financial contracting is particularly opaque and subject to extreme informational asymmetries. This issue has been brought to the fore by the financial crisis, with its allegations of abuse of homebuyers by the finance industry through predatory lending, "Predatory lending" is a term subject to an extremely wide variety of definitions, many of which are polemical in their intent to capture an extremely wide range of behaviors and phenomena. Perhaps predatory lending can be usefully defined as "knowingly creating a mortgage that the mortgage bro- 686 BUSINESS ETHICS QUARTERLY ker and originator know, or should know, is financially injurious to the mortgagor" (Kolb, 2010, forthcoming). In addition, the financial debacle has demonstrated the opacity of financial contracting by the extreme complexity of the securities that were based on home mortgages, a complexity that even the creators of these instmments did not fully understand. If financial contracting is highly subject to such extremely severe informational asymmetries, then perhaps these kinds of contracts raise special ethical problems, or at least raise familiar ethical problems in a heightened manner. This too may be an area in which business ethicists can make a contribution by addressing the obligation of the parties to achieve conceptual clarity in the contracting process. By the same token, there is a danger of ethicists attempting to enforce patemalism in the contracting process that may mn counter to democratic ideals and individual freedoms. At a minimum, the area of financial contracting provides an opportunity for business ethicists to explore general issues of contracting and informational asymmetry in a context where these issues are particularly salient. In a perhaps extreme attempt to find a silver lining to a very dark cloud, the financial crisis presents some ethical research opportunities in a particularly intense form. In many instances in human life, there is a gradation of roles between being free to pursue one's interests and having a strict fiduciary duty. Often in finance one party presents itself merely as a "market maker" trading for one's own account, thereby abjuring any responsibility toward another trading party. The business ethicist may well inquire as to whether any such claim is ever sound, and, if it is, under what circumstances such a posture is ethical. Even if I announce that I intend to act only in my own interest in an exchange, is such a position an ethical one? Much more commonly, relationships of exchange involve at least some tinge of fiduciary duty, as when an appliance salesman recommends one model over another, or when a broker recommends a stock. In thefinancialcrisis, it has been alleged that Goldman Sachs and other investment banks created complex securities and offered them for sale to their clients, perhaps even recomtnending them as suitable to those clients (Goldfarb, 2010). Yet, at the same time, the investment bank was alleged to have taken a short position in those same instmments, seeking to profit from those securities being overvalued. In defense of this behavior, it might be argued, perhaps unpersuasively, that the investment bank was merely hedging its exposure to those instmments, not seeking a speculative profit, and so was not really abdicating an apparent fiduciary role. Further ethical analysis of the corporate govemance of these banks is warranted. As goods and services become more complex, whether those goods are machinery, financial products, or medical procedures, information asymmetry between purveyors and consumers becomes more extreme and questions of duties of care become more acute. So the problem is an important and general one. However, finance may provide a useful laboratory for the business ethicist in this regard, as the gradation of roles from market maker to pure fiduciary is particularly fine-grained. Furthermore, in finance, documentation attempting to state those roles explicitly is often available for inspection, as in the case of account-opening documents or trade confirmations. NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE 687 This brief account of recent changes in the field of finance and a highlighting of some of the large and outstanding normative issues in the field has attempted to point the way to some research topics for business ethics scholars. Before the financial crisis, finance was already a discipline in which the earlier verities had come under intemal pressure. With the financial crisis, the finance function has come under increased scmtiny that will surely persist for some time. The intellectual ferment in finance, coupled with greater societal attention, should mean that there will be fertile research opportunities and a larger audience for business ethicists engaged with the normative issues that finance presents, CONCLUSION The fields of corporate govemance and finance are socially important and dynamic, as evidenced by a decade of tumult and scandal. They offer business ethics researchers the opportunity both to dig deep into long-standing and overarching moral issues and to delve into new and potentially transitory ones. As detailed above, the field of corporate governance proffers questions related to the roles, responsibilities, and balance of power among executives, directors, and shareholders. In recent decades, shareholders have successfully consolidated their power into fewer institutional hands and have used it to achieve favorable legislation and SEC regulation. Seeing the handwriting on the wall, some companies have also capitulated on such issues as say on pay and majority voting. In the wake of this significant change, the proper role of shareholders—both their rights and their responsibilities—remains a fascinating avenue for future research. After more than a decade of studies of boards of directors that fail to conclusively link stmctural board characteristics to firm performance, perhaps more fruitful research opportunities lie in the study of board processes and individual director motivations. Gaining access to the board room has become increasingly important, as has the need for creative empirical approaches. Finally, CEOs have had their wings clipped in recent years, and some continue to stmggle to regain their earlier power, A wide variety of executive issues, such as those related to compensation, selective communication, and manipulation through impression management, are rife with ethical undertones. Business-ethics researchers should continue to dig beneath CEOs' public personae into the nuances of executive behavior. The field of finance also presents an unprecedented opportunity for business ethicists to explore both classic issues and those uncovered during the recent financial crisis. Enduring issues, such as the meaning of shareholder utility, remain to be solved, as do those underscored more recently, such as the proper levels of risk management and disclosure by investment banks. Business ethics researchers in this potentially fmitful area should consider using varying approaches in their analyses. Most of the work done at the intersection of ethics with corporate govemance and finance approaches issues from a consequentialist perspective, perhaps because economists tend to do the same. But fascinating nonconsequentialist questions are embedded in this area, related to such issues as 688 BUSINESS ETHICS QUARTERLY property rights, free markets, responsibility, personal freedom, and power. Ethicists who investigate the field using a principle-based approach may arrive at outcomes that are both novel and illuminating. Researchers should also monitor carefully the changing legislative limits within which corporate govemance is carried out. The Sarbanes-Oxley Act caused a furor among practitioners and market advocates, and has now been pulled back for small firms. But in the wake of the financial debacle, federal intervention in corporate affairs is occurring at an unprecedented rate. No group is better prepared to comment on the finer points of its morality than are business ethics scholars schooled in corporate govemance or finance. While corporate govemance and finance topics have been well researched in the past, they continue to present dynamic issues and valuable opportunities for rewarding ethical analysis. We have outlined both recent events and enduring issues that would benefit from investigation by business-ethics scholars. NOTES 1. The early part of this discussion of finance draws on Robert W. Kolb, "Ethical Implications of Finance," in Finance Ethics: Critical Issues in Theory and Practice, ed. John R. Boatright (Hoboken, N.J.: John Wiley & Sons, Inc., 2010), 23-43. This extremely truncated view of rationality and limited conception of the good are acknowledged to be unrealistic and were never initially presented as being descriptive of reality. However, these simplifications were posited as useful methodological fictions and justified according to an instrumentalist understanding of scientific theories. Here the contrast is between instrumentalism and scientific realism: the view that science undertakes to describe the world as it really is. For the most ardent exponents of scientific realism, such as Wilfred Sellars, the entities postulated by science constitute a claimed ontology, such that what is held to be real are the entities countenance by science. The most important articles by Sellars are "Empiricism and the Philosophy of Mind," in The Foundations of Science and the Concepts of Psychoanalysis, Minnesota Studies in the Philosophy of Science, vol. 1, ed. H. Feigl and M. Scriven (Minneapolis: University of Minnesota Press, 1956); "Philosophy and the Scientific Image of Man," in Frontiers of Science and Philosophy, ed. Robert Colodny (Pittsburgh: University of Pittsburgh Press, 1962); and "Scientific Realism or Irenic Instrumentalism: A Critique of Nagel and Feyerabend on Theoretical Explanation," in Boston Studies in the Philosophy of Science, Vol. 2, ed. 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Copyright of Business Ethics Quarterly is the property of Philosophy Documentation Center and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Engaging Ethically: A Discourse Ethics Perspective on Social Shareholder Engagement Jennifer Goodman Daniel Arenas ESADE Business School, Ramon Llull University ABSTRACT: The primacy of shareholder demands in the traditional theory of the firm has typically excluded marginalised stakeholder voices. However, shareholders involved in social shareholder engagement (SSE) purport to bring these voices into corporate decision-making. In response to ethical concerns about the legitimacy of SSE, we use the lens of discourse ethics to provide a normative analysis at both action and constitutional levels. By specifying three normative questions, we extend the analysis of SSE to identify a political role for shareholders in pursuit of the common good. We demonstrate the desirability for SSE to promote regulatory/ institutional change to guarantee marginalised stakeholders a voice in corporate decisions that affect them. The theory of SSE we propose thus calls into question the stark separation of the political and economic spheres and reveals an underlying tension, often overlooked, within the responsible investment literature. KEY WORDS: social shareholder engagement, discourse ethics, communicative action, deliberative democracy, stakeholder engagement, Habermas INTRODUCTION S HAREHOLDERS ARE JUST ONE OF THE MULTIPLE STAKEHOLDER groups which can affect and are affected by business firms (Donaldson & Preston, 1995; Freeman & Reed, 1983). The shareholder primacy orientation of traditional agency theory assumes shareholders will maximise their individual utility (Jensen & Meckling, 1976). Social shareholder engagement1 (SSE) poses a challenge to this approach, as shareholders bring the concerns of often voiceless and marginalised stakeholders, such as victims of human rights abuses and environmental degradation, to the heart of corporate decision-making (Dhir, 2012; Hennchen, forthcoming; Kraemer, Whiteman, & Banerjee, 2013; Lee & Lounsbury, 2011; McLaren, 2004; Proffitt & Spicer, 2006). Yet research suggests that neglecting to consider the ethics of the process of SSE can pose a threat to its legitimacy (Dhir, 2012; O’Rourke, 2003). The role of business firms in addressing social and environmental problems has been discussed widely in the management literature, usually under the rubric of corporate social responsibility (Garriga & Mele, 2004; Jamali, 2008). Perspectives such as stakeholder democracy (Freeman, 1984; Matten & Crane, 2005; Moriarty, 2014), ©2015 Business Ethics Quarterly 25:2 (April 2015). ISSN 1052-150X DOI: 10.1017/beq.2015.8 pp. 163–189 164 Business Ethics Quarterly corporate citizenship (Moon, Crane, & Matten, 2005) and political CSR (Scherer & Palazzo, 2007; Scherer, Palazzo, & Matten, 2014) have defended a much broader set of responsibilities for the business firm in society. Research in the field of law (Freshfields, 2005; Stout, 2012) has also challenged the mantra of shareholder wealth maximisation by focusing on a broader interpretation of fiduciary duty. The growth in responsible investment practice (Eurosif, 2014) and research has demonstrated the plurality of demands made by shareholders and the continuously growing interest in environmental, social, and governance (ESG) issues in investment. But what of these shareholders who purport to speak for marginalised stakeholders? Despite their oft-stated commitment to voicing unheard stakeholder concerns, and the extensive descriptive research on shareholder engagement, a normative, ethical approach has so far been neglected. Rather, the literature has focused on strategy and tactics (den Hond & de Bakker, 2007; Lee & Lounsbury, 2011; Rojas, M’Zali, Turcotte, & Merrigan, 2009) or identity (Arjaliès, 2010; Rehbein, Waddock, & Graves, 2004). Furthermore, existing research has raised concerns about how shareholders undertake SSE. These include the need to establish legitimacy in the face of a plurality of demands on the firm (Scherer & Palazzo, 2007), the potential for shareholders to actually harm rather than help the local communities they seek to represent (Coumans, 2012; Dhir, 2012), the lack of accountability of engagement behind “closed doors” (McLaren, 2004; O’Rourke, 2003), and the use of divestment or threat of disclosure (Goodman, Louche, van Cranenburgh, & Arenas, 2014). In addressing this gap, we provide a benchmark for reflecting on the ethics of the SSE process. This article explores how shareholders involved in SSE can ensure they engage ethically. We structure our analysis according to the action and constitutional levels identified by Schreck et al. (2013). In this way we address SSE within existing institutional and regulatory constraints, before going on to consider to what extent and how SSE should challenge the constraints themselves to change the “rules of the game” (North, 1990: 3). We approach our analysis through the lens of Habermasian discourse ethics (Habermas, 1984, 1987, 1992), which helps examine SSE from a much-needed normative perspective and allows for the mediation of a plurality of ethea. Particularly relevant to SSE is the Habermasian emphasis on the participation of all affected parties in fair dialogues to establish valid, moral norms (Beschorner, 2006). Another advantage of discourse ethics is that it is process-focused and therefore avoids assumptions of the moral content of norms underlying other ethical theories. Finally, the extension of discourse ethics to deliberative democracy in Habermas’ later work (Habermas, 1996) is increasingly used in debates about the political role of business in society (Moon et al., 2005; Palazzo & Scherer, 2006; Scherer & Palazzo, 2007). Our analysis of SSE through a discourse ethics lens enables us to develop a normative perspective of SSE, heretofore absent in the stakeholder engagement literature. This analysis identifies three normative questions related to voicing stakeholder concerns, promoting stakeholder engagement, and promoting institutional/ regulatory change. The first two questions belong to the action level and the last to Engaging Ethically 165 the constitutional level. We extend the analysis of SSE beyond most work on political CSR to include the desirability of promoting regulatory/institutional change to ensure marginalised stakeholders a voice in corporate decisions that affect them. In this way we elaborate a deliberative democratic political conception of SSE, which in turn questions the stark separation of the spheres of economics and politics. Our analysis also implies a dilemma for shareholders involved in SSE as to whether they are prepared to yield power in order to ensure the participation of marginalised stakeholders. This dilemma reveals the significance of the often overlooked difference between purely ethically motivated shareholders and shareholders who may also use SSE instrumentally as a means to reduce risk. We begin by clarifying the concept of SSE and its prevalence in practice. We then review the literature to date on SSE, which reveals the existence of ethical concerns for shareholders in SSE. We next outline discourse ethics, and present and justify this theory as our lens for developing a normative perspective of SSE. The subsequent section presents our multi-level analysis structured around three normative questions and our findings. We then explore these findings and discuss their implications for existing theory on SSE and business ethics, and their relevance to practice. We end with avenues for future research and some conclusions. SOCIAL SHAREHOLDER ENGAGEMENT In contrast with shareholder engagement which prioritises financial performance (Chung & Talaulicar, 2010; Gillan & Starks, 2007), SSE represents the choice by shareholders dissatisfied with a firm’s environmental, social, governance, and ethical performance to use the “voice” rather than “exit” option described by Hirschman (1970), or the dynamics between the two, to influence company actions (Goodman et al., 2014). Shareholder engagement can be done through letter writing, asking questions at annual general meetings, filing and voting on shareholder resolutions, as well as dialogue with management or the board, either behind the scenes, or in public confrontation (Lydenberg, 2007; Sjöström, 2008). The tradition of SSE in the US can be traced back to the 1970s when regulation changes at the US Securities and Exchange Commission (SEC) allowed social policy topics to be considered2 (Dhir, 2006; Glac, 2010; Proffitt & Spicer, 2006). The level of SSE is increasing (Goldstein, 2011; Lee & Lounsbury, 2011): between 2010 and 2012 over 200 institutions representing $1.5 trillion in assets filed or co-filed shareholder resolutions related to ESG issues at US companies (USSIF, 2012). In a study of 81 of the largest companies in the US between 2000 and 2003, almost 40% of shareholder engagement through shareholder resolutions was socially or CSR-driven (Monks, Miller, & Cook, 2004). Religious organisations in the US are the most active filers of social policy shareholder resolutions, accounting for around 25% of all shareholder proposals each year (Copland & O’Keefe, 2013; Proffitt & Spicer, 2006). But research has also identified other actors involved in SSE such as NGOs, public pension funds, individuals, and unions (Guay, Doh, & Sinclair, 2004; Proffitt & Spicer, 2006; Sjöström, 2010; Tkac, 2006). 166 Business Ethics Quarterly Driven by principle rather than economic rationality, SSE has a different ideology to conventional market logic (Clark, Salo, & Hebb, 2008; Lee & Lounsbury, 2011; McLaren, 2004). One of the largest and most active coalitions of shareholders working on SSE, the Interfaith Center on Corporate Responsibility (ICCR), claims that “it is the impact on people, usually economically vulnerable people, who inspire us to act” (ICCR, 2014c). Research has highlighted the challenge of measuring the impact and success of SSE. Many studies focus primarily on shareholder resolutions in the US and their voting outcomes (Campbell, Gillan, & Niden, 1999; Graves, Rehbein, & Waddock, 2001; Monks et al., 2004; Rojas et al., 2009). However, this approach can be misleading, as even strongly supported resolutions are not necessarily legally binding (Engle, 2006; Levit & Malenko, 2011; Rojas et al., 2009). Social movement theory frames SSE as a broader movement to effect social change and shape public discourse and norms by framing agendas and raising awareness of social, environmental and ethical issues (Arjaliès, 2010; Lee & Lounsbury, 2011; Proffitt & Spicer, 2006; Sjöström, 2010). However, as SSE moves increasingly towards private dialogue behind the scenes where it is argued to be more effective (Becht, Franks, Mayer, & Rossi, 2009; Goldstein, 2011; Goranova & Ryan, 2014; Logsdon & Van Buren, 2009), its impacts and successes on the stakeholders, which SSE claims to represent, remain opaque. SSE: ETHICAL CONCERNS While most literature has focused on the success, strategies, and identity of SSE (Ferraro & Beunza, 2014), in this section we highlight some of the ethical concerns which have been raised about SSE. The motives of SSE come from a moral basis rather than an economic one; however, civil society claims, or shareholders who give voice to them, should not uncritically be assumed to be legitimate. As Scherer and Palazzo (2007: 1109) argue, it is over simplistic to conceive of the corporation as the “bad guy” representing economic interests and civil society actors as the “good guys” representing moral interests. Just as shareholders focusing on economic interests can be divided in their demands (Anabtawi, 2007; Barnea & Rubin, 2010; Stout, 2012; Williams & Ryan, 2007), there can be different demands coming from SSE, and their legitimacy must be established rather than assumed. A second concern raised in the SSE literature is whether shareholders are effective representatives of stakeholder interests (Coumans, 2012; Dhir, 2012). These studies focus on the actions of a consortium of socially conscious investors who, in 2008, submitted a shareholder proposal to a Canadian multinational regarding the human rights impacts of its Guatemalan mining operations. Between 2008 and 2010 various civil society and international organisations strongly condemned the mine’s contamination of the local environment and the associated significant health risks posed for the local community. The condemnations called for a suspension of the mine’s operations until the negative impacts could be addressed. The 2008 proposal was withdrawn and the company agreed to its demands for an independent human rights impact assessment. However, the proposal attracted much controversy. Engaging Ethically 167 Before the Guatemalan government could implement the recommendations of the civil society organisations and suspend the mine’s activities, the company announced its own action plan to address the issues raised. The human rights organisations and affected local communities were highly critical of their exclusion both from the drafting of the shareholder proposal, and from participating in any direct management or oversight of the assessment process. The engagement was seen to have provided a “whitewashing” of the situation for the company and its shareholders while harming and undermining the demands of the local community (Dhir, 2012). Thus, the need for shareholder resolutions to appeal to “the business or affairs of the corporation” (Dhir, 2012: 106) led to the divergence of interests: risk mitigation by investors on one hand, versus the complete cessation of mining operations by the local community. The concern arises as to how SSE can avoid doing harm, albeit unwittingly, to the stakeholders whose interests they strive to defend. Thirdly, as noted in the previous section, it is behind-the-scenes dialogue which is said to represent the vast majority of shareholder engagement and where much of the real “action” happens. In light of SSE’s purported proximity to stakeholders and civil society, the need for shareholders to gain the trust of those stakeholders, and to report the effectiveness of SSE, it is uncertain whether “closed door” engagement can provide the transparency and accountability demanded of SSE (McLaren, 2004; O’Rourke, 2003). Despite its importance, very little research has been done on behind-the-scenes engagement (Rehbein, Logsdon, & Van Buren, 2013), not least due to the lack of data resulting from the confidential nature of many dialogues. Finally, from a legal viewpoint, the notion of shareholder democracy has become popular (Anabtawi & Stout, 2008; Bebchuk, 2005). Following this approach, greater shareholder equality achieved through empowering minority shareholders, a group which generally includes SSE shareholders (Clark et al., 2008), should go hand in hand with a greater shareholder responsibility to both the firm and other shareholders (Anabtawi & Stout, 2008). With more power, questions about how to use it become more relevant. Shareholder tactics such as the threat to “exit” or divest from the company if their demands are not met (Admati & Pfleiderer, 2009; Goodman et al., 2014) could be interpreted as coercive and therefore raise ethical questions about which are the appropriate tactics for SSE. Research has primarily taken a descriptive and empirical approach to exploring SSE. However, as explained in this section, this research has identified ethical concerns about SSE, such as the need to establish legitimacy in the face of a plurality of demands on the firm, the potential for shareholders to actually harm rather than help those they seek to represent, the lack of accountability of engagement behind “closed doors,” and the use of divestment or threat of disclosure. The following section presents the theoretical lens selected for our analysis and its appropriateness for establishing a normative perspective on SSE. SSE THROUGH THE LENS OF DISCOURSE ETHICS In this section we outline a Habermasian discourse ethics approach and argue that it is appropriate for the analysis of SSE for 3 main reasons: 1) it focuses on the 168 Business Ethics Quarterly participation of affected parties; 2) it focuses on the process avoiding assumptions about moral content and offering a means to include a plurality of worldviews and ethea; and 3) it has recently become popular for exploring new aspects of CSR such as the political role of firms and the notion of corporate citizenship, thus opening up discussion of broader implications of SSE. Habermasian Discourse Ethics Habermasian discourse ethics is a normative, process-oriented ethical theory. It is centred on the process of reaching valid, moral norms through participating in fair dialogues (Beschorner, 2006; Habermas, 1984, 1987). These dialogues offer an opportunity to deliberate a wide variety of worldviews and ethea and to develop a norm, which all participants can accept. Habermas states that for a norm to be valid it must fulfill the principle of universalisation: “All affected can accept the consequences and the side effects its general observance can be anticipated to have for the satisfaction of everyone’s interests (and these consequences are preferred to those of known alternative possibilities for regulation)” (Habermas, 1992: 65 emphasis in original). According to this principle, the universal validation of a norm is dependent on consensus achieved through discursive legitimacy rather than solely on individual reflection as other philosophers such as Kant and Rawls have suggested3 (Gilbert & Rasche, 2007; McCarthy, 1992: viii; Unerman & Bennett, 2004). Habermas (1992: 68) states, “the justification of norms and commands requires that a real discourse be carried out and thus cannot occur in a strictly monological form, i.e., in the form of a hypothetical process of argumentation occurring in the individual mind.” Habermas then develops a second principle, which introduces the ethics of discourse: “Only those norms can claim to be valid that meet (or could meet) with the approval of all affected in their capacity as participants in a practical discourse.” (Habermas, 1992: 66 emphasis in original) Habermas argues that only through the process of “communicative action,” whereby a plurality of affected actors seek “rationally to motivate” each other through speech acts can the universal validity of a moral norm be tested (Habermas, 1992: 58 emphasis in original). Communicative action is contrasted to “strategic action” where actors aim to influence, manipulate or coerce others through sanctions or gratification. Strategic action is a concern for Habermas because its objectives are “power, economic efficiency, or other egocentric aims” (Smith, 2004: 319) and it seeks to achieve individual success (Habermas, 1984). In contrast, communicative action adopts an attitude “oriented to reaching understanding” (Habermas, 1984: 286). To achieve communicative action, Habermas identifies rules for discourse that characterise an “ideal speech situation” (Habermas, 1992: 88). We summarise these key motifs4 below. Engaging Ethically 169 Argumentation. The notion of transforming preferences through argumentation, rather than simply aggregating them, is central to Habermasian discourse ethics. The focus is on the process of argumentation rather than making moral claims on the content itself. To achieve intersubjective understanding, it is fundamental that all participants present their own arguments, interests and needs, and that they be free to introduce any assertion into the discourse. In this way arguments remain undistorted by representation by another and participants are open to criticism and questioning by others (Habermas, 1992). Plural participation. Habermas’s principle of universalisation makes clear that pluralism is an essential criterion for testing validity since “all affected are admitted as participants” (Habermas, 1992: 66). This perspective is formulated into a more specific rule: “Every subject with the competence to speak and act is allowed to take part in a discourse” (Habermas, 1992: 89). Non-coercion. According to Habermas, “No speaker may be prevented, by internal or external coercion, from exercising his rights” (Habermas, 1992: 89); rights in this case refer to the right of participation and of introducing and questioning assertions and expressing interests. The aim of communicative action is reaching “rationally motivated agreement” (Habermas, 1992: 88) based on the primacy of the best argument rather than any power-related threat or incentive (Lozano, 2001). Transparency. Communicative action also requires transparency, which in turn demands truthful arguments. Habermas states that with “every intelligible utterance” (Habermas, 1992: 136 emphasis in original) the speaker claims that the utterance is true, is right in a particular normative context, and is truthful with no intention to mislead. Discourse Ethics Relevance to SSE While we do not attempt to discount other ethical theories, we present our case for using discourse ethics as a compelling normative perspective to analyse SSE. Firstly, there have been wide-ranging claims for the use of a participatory dialogue approach, such as that proposed by Habermas, by business firms in their relationships with stakeholders (Brenkert, 1992; Gilbert & Rasche, 2007; Matten & Crane, 2005; O’Dwyer, 2005; Reed, 1999; Unerman & Bennett, 2004). Since shareholders in SSE are speaking for stakeholders or addressing issues which can strongly affect the lives of other stakeholders (Goodman et al., 2014; O’Rourke, 2003), discourse ethics, with its focus on the participation of all affected by decisions, is highly relevant to SSE. Discourse ethics offers a useful point of entry for analysing concerns pointed out in the previous section: stakeholder participation, transparency in behind-the-scenes engagement and the potentially misguided reframing of stakeholder demands by shareholders in SSE. Second, discourse ethics focuses on the process of establishing moral norms by rational argumentation. As such, this perspective holds that those affected by decisions are able to reach a reasoned agreement on what outcome they seek to achieve (Dryzek, 2000) rather than assuming that they are limited to an economic or utilitarian framework. It also avoids making any (culturally restricted) assumptions 170 Business Ethics Quarterly as to the ethical content of outcomes or “material norms” (Beschorner, 2006: 127)5. If we take this perspective to shareholders involved in SSE, they would be expected to present cogent arguments and to assume that others (managers and stakeholders, including other shareholders) are capable of being convinced. Given that stakeholders can be expected to hold different worldviews (Arenas, Lozano, & Albareda, 2009), that shareholders have been shown to have differing ethea (Lee & Lounsbury, 2011; McLaren, 2004), and that norms can change in a pluralistic business environment (Stansbury, 2009), an approach to SSE that avoids specific ethical content and allows for mediation and deliberation of a diversity of perspectives is particularly valuable. Finally, discussion of the political dimension of CSR (Scherer & Palazzo, 2007; Whelan, 2012) and corporate citizenship (Moon et al., 2005) has used Habermasian discourse ethics to reflect on the direct participation of firms and stakeholders in resolving problems in society, especially global issues that escape the capacities of national governments. As such, the use of a discourse ethics perspective to analyse SSE enables us to extend the analysis of ethical questions to broader, political implications of SSE; that is, to discuss the consequences of SSE for the rules of the game at a regulatory/institutional level. It also enables us to contribute to a political view of the business firm which is concerned with the common good rather than the more frequent focus on power games with egoistic motives (Scherer et al., 2014). As stated at the start of this section, we do not dismiss the appropriateness of other ethical theories. We do, however, briefly note some shortcomings of two other well-established alternatives. A utilitarian perspective, in addition to focusing on ethical content e.g. happiness, is perhaps not best placed to deal with the voices of marginalised or ‘unheard’ stakeholders which have been shown to be of concern to shareholders in SSE (Goodman et al., 2014). By emphasising the greatest happiness for the greatest number, the views of marginalised stakeholders may be disregarded. Examples of such stakeholders can be found in the social and environmental impacts on indigenous people who live on land destined for mineral or oil extraction, such as the cases of the Ogoni in Nigeria (Hennchen, forthcoming) and the Dongria Kondh in India (Kraemer et al., 2013). A contractarian approach (Phillips, 1997) takes a more instrumental view of stakeholders. By assuming that business firms and their stakeholders act only for strategic reasons and seek mutual advantage, this approach overlooks the ability of individuals to take a position which goes beyond self-interest, and to transform their judgments upon hearing others’ arguments in a deliberation process. Actions taken by shareholders in SSE have been shown to be principle-based or concerned with collective and social benefits (Lee & Lounsbury, 2011; McLaren, 2004), thus indicating that SSE goes beyond instrumentalism. One should not rule out the possibility that shareholders in SSE are open to changing their point of view through arguments presenting better alternatives. Discourse ethics is not without its critics. Doubts are raised even by Habermas himself about the possibility of attaining an ideal speech situation in practical discourse (Gilbert & Rasche, 2007; Habermas, 1992; Smith, 2004). However, advocates have claimed that it is not necessary to achieve full ideal speech to benefit from the positive effects of deliberation and communicative action (Arnold, 2013; Engaging Ethically 171 O’Dwyer, 2005; Scherer & Palazzo, 2007; Unerman & Bennett, 2004). A normative ideal has been argued to improve discursive quality (Scherer & Palazzo, 2007), help develop authentic moral norms for dialogue (Lozano, 2001), and evaluate the interaction between NGOs and corporations (Baur and Arenas, 2014). In the responsible investment literature, McLaren (2004) suggests that norms and standards would help investors using an engagement approach assess their effectiveness and quality. Another possible difficulty is that Habermas himself starkly separates political and economic spheres (Scherer et al., 2014), seeing deliberation as relevant primarily for “a separate, constitutionally organized political system, but not as a model for all social institutions” (Habermas, 1996: 305). However, some supporters of discourse ethics have argued for the application of deliberation in a broader context including the business environment (Gutmann & Thompson, 2004: 32-33; Lozano, 2001). More specifically, scholars have demonstrated the applicability of discourse ethics as a normative frame for business ethics (Scherer & Palazzo, 2007). We thus follow those who suggest that Habermas’s objective of universalization, whereby all participants can accept the consequences of decisions taken through deliberation, is still a valid yardstick by which to judge the moral legitimacy of company and stakeholder actions. In particular, we apply this perspective to shareholders involved in SSE. MULTI-LEVEL ANALYSIS OF SSE To get a fuller picture, we divide our inquiry into two different levels, where different ethical concerns emerge. In order to avoid the normativistic fallacy of ignoring the existing practical constraints imposed by the rules of the game, we follow the distinction used by Schreck et al. (2013) of an action level, where actors face choices within a set of given constraints; and a constitutional lev...
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ASSIGNMENT 1: CORPORATE GOVERNANCE AND ETHICS
The primary function and ethical responsibility of the government, shareholders, the board
of directors, and management in corporate governance
Corporate governance essentially constitutes the principles, practices as well as processes
that determine how an organization or an entity is directed and controlled. It comprises the roles,
responsibilities, and balance of power among the company’s executives, directors, and
shareholders. The government, shareholders, the board of directors, and management have
different roles in corporate governance. The government plays the role of the policy-maker in
corporate governance to ensure that organizations operate in-line with the appropriate and
effective principles. Considering the range of policy issues involved in corporate governance, as
well as the diverse nature of industries and firms involved, the government must understand
thoroughly the impacts of different regulatory actions in terms of different policy criteria. The
government also plays the role of enforcement and oversight, where it ensures that the regulatory
and policy standards, procedure and principles are implemented and executed by the respective
organizations (Jo & Harjoto, 2011).
Shareholders have a huge influence on corporate governance and leadership models.
They, for instance, have concerted their efforts towards abolishing CEO duality in the U.S.,
whereby the CEOs also serve as Chairmen of the Board of their corporations. Shareholder plays
a crucial role in electing the directors in the respective entities. They ensure better strategic
practices in issues of risk, transparency, fairness, and regulation related to ...


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