Normative Ethical Theories as Frameworks for Better

Corporate Governance: A Practitioner’s Perspective

Malla Praveen Bhasa*

Corporation is a unique, complex and amongst the most influential social institutions
that has ever existed in human history. Actions taken by corporations impact the
societal ecosystem that they operate in. Beginning 1950, with Howard Bowen’s call
for corporate social responsibility, ethicists have channeled their focus on corporate
behavior. Today, there is a huge body of scholarly literature on business ethics
prescribing what constitutes ethical corporate behavior. However, corporate greed
seems to surpass all boundaries with each passing year and scams have gained
mainstream status. This paper makes an attempt at drawing the attention of ‘ethics’
researchers as well as business practitioners to various ethical theories that complement
business actions. As a practitioner, the author feels that among all the normative
ethical models, ‘value theory’ offers a potent framework to base one’s business actions
in. An action is right or wrong based on how the value seeker perceives value and
how an individual is affected by it. Corporations should appreciate the value cognitions
and value judgments made by their stakeholders to deliver the right value which is
construed ethical, irrespective of whether it is right or wrong in act.

Introduction
Modern corporations are no more owned by single individuals. Separation of ‘control from
ownership’ has delegated the residual control rights, i.e., decision-making rights to individuals
managing the corporations (Berle and Means, 1932). Managerial libertarianism has redefined
the way corporations serve the interests of a multitude of stakeholders. Modern theories of
running enterprises are solidly ground in the perpetual dilemma of ‘conflict of interests’. Who
is the manager supposed to serve—the stockholder (provider of funds and thus the principal)
or the stakeholder whose interests lie in the personal benefits that an individual accrues from
the business? Who has the primary claims to the organization’s resources? Why are there
conflicts of interests at all? How should business conduct itself? What is the role of business
in society? Is business morally or professionally obligated to serve the interests of a plethora
of claimants? How is business to structure itself in the ever-demanding, dynamic marketplace?
Should the values of business be consistent with those of the society? Such questions throw
ample light on why and how ‘ethics’ is closely related to business.

* Managing Director, Lemon Bridge Research and Innovations Ltd. and Visiting Researcher, Hanken Centre
for Corporate Governance, Hanken School of Economics, PO Box No. 479, Arkadiankatu 22, Helsinki,
Finland 00100. E-mail: Praveen.Malla@lemonbridgeconsulting.com

Normative
© 2017 IUP.Ethical Theories
All Rights as Frameworks for Better Corporate Governance:
Reserved. 29
A Practitioner’s Perspective
 The capitalists strongly believe that the primary responsibility of business is maximizing
shareholder wealth. Friedman (1970) was an exponent of the shareholder theory; though he
does not reject the responsibilities of individuals toward maximizing welfare of other
constituents that are affected by business, he argues that, “there is one and only one social
responsibility of business—to use its resources and engage in activities designed to increase
its profits so long as it stays within the rules of the game, which is to say, engages in open and
free competition without deception or fraud”.
The managerial capitalistic view is that though profits are the ends of any business activity,
societal welfare is maximized only through distribution and reinvestment of such profits.
Profits are a means to building the business and rewarding employees, executives and
investors.
Friedman’s contention, though contemporary then, is anachronistic now. Complexity in
running businesses has today led to stricter laws that aim at eschewing any possible
appropriation of corporate resources by individuals that run them. The stricter the laws, the
more are the complications in running businesses and the vicious cycle continues. In the
process, stakeholders that are part of the business ecosystem are directly or indirectly, positively
or negatively impacted.

Corporation – A Social Institution

Modern business is strikingly different from what it was a century ago. Sweeping changes in
size, organization structures, governmental regulations, capital needs and professional skills
have marked the transformation of business from a slow-treading activity to a fast-paced
economic institution. Developments in consumerist movements, growth of stake-claiming
societies and the establishment of independent monitoring agencies by states have coerced
corporations to become more aware of themselves not only as economic institutions but also
as active participants in the larger social ecosystem.
Modern-day corporations are looked upon as social institutions. They exist in societies and
intend to serve them as well. As social institutions, they provide an incentive structure to build
the economy by maximizing the welfare of all stakeholding groups. Corporations are a center
for agglomeration of individuals from the society who come together to serve their own
interests in particular, and as also the interests of the society in general. All activities of these
individuals are mostly determined by social norms. As an institution, the primary function of
the corporation is the upkeep of the norms set out by society.
The role the modern corporations play in society justifies their claim of being social
institutions. They provide employment to the labor; cater to consumer demands; offer investors
investment opportunities thereby allowing them a share in profits; fuel the business of suppliers
and vendors; and deliver value to all their stakeholders. In short, they cater to most
socioeconomic needs. In the words of DesJardins and McCall (2000), “from the perspective of
society, however, the corporation is an institution that enables both human and material
resources to be organized for the (one hopes) efficient production of the things the people of
the society need to maintain a way of life.”

30 The IUP Journal of Corporate Governance, Vol. XVI, No. 2, 2017

 Two important theories explain the demand corporations implicitly face to fulfill their role
as social institutions:

Social Contract Theory

As Jensen and Meckling (1976) state, the firm is a “nexus of contracts,” social contract theory
has been hijacked from the realms of political philosophy to understand the functioning of
modern-day corporations. By ‘social contract,’ the political philosophers meant that the
members of the society were bound by an implicit contract to enter into a civil setup. This
contract paved the way for legitimizing the rule of particular forms of government and also
categorized explicitly the roles, duties and obligations of the rulers and the ruled. In a broader
sense, individuals or parties to the contract promise each other to hand over their right to
govern themselves to the sovereign.
In a similar vein, management thinkers have described the existence of a corporation in
fulfillment of its social contract. It was assumed that the implicit contract binds the corporation
to serve the society. Whether a particular contract is adequate or not depends on its acceptance
or rejection by the parties to the contract.
The evolution of the modern corporation has altered the structural setting of the initial
contract. In keeping with the demands of time, corporate behavior has changed which has had
both desirable and undesirable consequences on the parties to the contract. For a corporation
to behave responsibly in its dealings with multiple stakeholders, each with their own objectives
and own set of expectations, the contract has become more of an obligation than a definitive
duty it engendered earlier. Some social scientists argue that any culturally specific contract
specifying economic rights and duties must allow individuals both the right of informed consent
to the contract’s terms and the right to exit from the contract.

Stakeholder Theory
Recent business literature is replete with arguments of stakeholder theory, with each
researcher advancing the importance of this theory in line with their field of research.
Interestingly, all arguments converge to a single hypothesis that business has to acknowledge
the existence of a cross-section of parties (including the shareholders)—be they individuals
or groups, who benefit from or are harmed by, and whose rights are violated or respected
by corporate actions.
The stakeholder theory widens the base of a corporation’s accountability and responsibility
by citing different stakeholding parties to its activities (Freeman, 2001). It encourages the
management to come out of the restricted box of shareholder theory and pushes it to expand
its consideration to include a concern for consumers, employees, suppliers, members of the
community at large and all those constituents who are either directly or indirectly affected by
its decisions.
The theory recognizes that many constituencies affect corporate decision-making. A basic
model of the contending claimants is illustrated in Figure 1.

Normative Ethical Theories as Frameworks for Better Corporate Governance: 31

A Practitioner’s Perspective
 Figure 1: A Basic Stakeholder Model of the Corporation

Management

Owners
Local Community

The Corporation

Customers
Suppliers
Employees

Source: Freeman (2001)

Stakeholder theory is being professed vigorously by both academicians and practitioners

alike because of its inherent merits. It is all-inclusive in nature and takes into consideration all
those parties who are affected by corporate actions.

Normative Ethical Models

Business ethics has long been a subject of serious scholarly scrutiny. For an ethicist any act
that results in harm to the subjects of such act is unethical, whereas for a business
practitioner, harm is purely a subjective consequence (Satyaraju, 2000). How else does one
explain the fact that CEOs of companies are judged for their performance every quarter, thus
making them myopic to the larger stakeholders’ interests? For a business executive, actions
that result in profits for the shareholders (who provide funds for the business) are ethical
(Trevino et al., 2000). However, such actions might erode the value of other stakeholders (who
are not shareholders) and therefore are looked upon as unethical. Treading on the ethical-
unethical spectrum is like willfully walking under the sword of Damocles. Ethical theories offer
frameworks that make decision making normative and easier (Hull, 1979). Some relevant
normative ethical models are discussed below.

Utilitarianism
The central philosophy underlying utilitarianism is directed at determining the moral worth of
actions solely based on the consequences as a result of those actions. Utilitarianism seeks the
greatest good for the greatest number. In other words, it tries to maximize the overall good
or utility.
The utilitarian principle can be summarized in a single statement as follows: An action is
right from an ethical point of view if and only if the sum total of utilities produced by the act
is greater than the sum total of utilities produced by any other act the agent could have
performed in its place (Velasquez, 1992).

32 The IUP Journal of Corporate Governance, Vol. XVI, No. 2, 2017

 The principle has been widely interpreted by the utilitarians in terms of what constitutes
right action and what is meant by benefits. A right action is that which produces the most utility
for all persons, agent inclusive, affected by the action. Amongst the many alternative actions
that may all seemingly look contentious, only that one action is considered right whose benefits
outweigh the benefits that are accrued as a result of taking other actions. In taking such a right
action, one must consider the immediate and foreseeable future costs and benefits of that action
as well as all the other contending actions. Such an action taken is bound to maximize value.
But how does one determine the relative values of the consequences of a right action and the
probable consequences of an action not taken? To remove these cobwebs, utilitarians
distinguish between two types of values: intrinsic value and instrumental value.
Intrinsic value is the good that is independently desired irrespective of any other benefits
it produces. Any good that is valued for its own sake, which stands as a measurement metric
for other goods, is supposed to have intrinsic value. On the other hand, goods that are
considered valuable in so far as they lead to good consequences are known to have
instrumental value. Hence, actions that carry these values while maximizing overall good are
considered to be the best actions.

Other Versions of Utilitarianism

Rule Utilitarianism
As Velasquez (1992) mentions, the import of rule utilitarianism can be summarized in the
following two principles:
• An action is right from an ethical point of view if and only if the action would be
required by those moral rules that are correct.
• A moral rule is correct if and only if the sum total of utilities produced if everyone
were to follow that rule, is greater than the sum total of utilities produced if everyone
were to follow some alternative rule.
Rule utilitarians have shifted the focus from maximum utility to the analysis of moral rules.
They contend that only those actions that are morally appropriate are right actions. If the
benefits accrued out of an action that is followed by everyone (i.e., a morally correct rule)
outweigh all the benefits that result out of an alternative rule, then the morally maximizing
utility rule is the right rule.
However, the confusion of rule utilitarians in proposing a theory which maximizes utility
based on correct moral values is dispelled when one refutes such claims by arguing in the
following lines: Utility can be maximized when rules provide for more exceptions.
Exceptions to rules are exploited by self-interested individuals or the agents involved in the
action to leave everyone worse off. Exceptions in rules are a must for achieving the
objectives of maximizing overall good. In the process, exceptions breed benefactors in the
form of individuals who are weak, self-centered, self-interested and who can stretch
themselves to any extent to take advantage of the allowable exceptions.

Normative Ethical Theories as Frameworks for Better Corporate Governance: 33

A Practitioner’s Perspective
Preference Utilitarianism
A more contemporary version of utilitarianism is preference utilitarianism. It advocates that
human good lies in the satisfaction of one’s wants or desires. Pursuit of one’s wants should be
valued for the inherent good it characterizes in terms of satisfaction if the want is fulfilled.
Preference utilitarianists believe that instead of getting frustrated for not having satisfied one’s
wants, it is always better to take those actions that maximize satisfaction through want or desire
fulfillment.

Interest Utilitarianism
Interest utilitarianism argument built itself around the criticism of preference utilitarianism’s
theory of wants hypothesis. Though not much different from the hypothesis that it claims to
counter, except for prefixing an attentive emotion, interest utilitarianism emphasizes on
‘interests’ instead of wants or desires. It advocates that a world in which people get as much
of what is in their interests rather than as much as they want is ethically preferable.
Utilitarianism makes reference to character. It entails an ideal character that is neither good
nor rational to aim. Utilitarianism on the whole is rather more idealistic than practical.

Kantian Ethics
Quite contrary to the utilitarian view of taking only that right action which maximizes utility
for all, Kant argues that only a ‘right’ action needs to be taken because it is our moral duty
to do so and not because of the consequences that it might beget later. Kant opines that the
rightness or wrongness of an act does not depend on its effect or consequences. As long as
the motive of the agent is good, it hardly matters whether happiness, perfection or agony
results from the act. Acts do lead to some ends. The ends are immaterial if the act is done out
of a moral obligation of duty. Kant lays down a fundamental principle known as categorical
imperative: “Always act so that you can and will the maxim or determining principle of your
action to become universal law; act so that you can will that everybody shall follow the principle
of your action.” The law is categorical because it provides for no exceptions and imperative
because it is absolutely binding.
The import of categorical imperative lies in universalizing all moral acts that arise out of
duty. No act, which is not obligated by duty, can be willed by individuals for universalization.
That would ensure that posterity is served with only the right acts that are both moral and duty-
conscious.
Implied in the law of categorical imperative is another law: Act so as to treat humanity,
whether in your own person or that of any other, in every case as an end in itself and never
merely as a means. This law has a very serious implication for business actions where
individuals are being used as a means to someone else’s ends. If individuals are used as a
means to produce goods and services, the law of categorical imperative holds good, since
they are bound by duty to perform some acts despite their preferences. However, if they are
exploited unlawfully as a means to some ends for which they are not obligated, then the act
is considered immoral.

34 The IUP Journal of Corporate Governance, Vol. XVI, No. 2, 2017

Rights Theory
One of the most important developments in ethical theories is the emergence of theories of
rights as an answer to moral obligations. Rights theory is generally categorized under three
distinct classes: (i) human rights; (ii) legal rights; and (iii) moral rights. All the three categories
overlap in the understanding of business practices from the rights theory perspective.
Rights theorists have proposed that rights and obligations have a cause-effect relationship.
Obligations are derived from rights and rights best express the purpose of morality. Rights can
be either positive or negative. Positive rights are implied obligations, whereas negative rights
are obligations demanded.

Virtue Theory
Virtue theory traces its roots to the ancient Greek philosophy of Socrates, Plato and Aristotle.
Their focus on virtues, i.e., traits of character, as the subject of ethics has found application
in modern business theories. Virtue theorists lay much emphasis on the virtuous traits of
individuals rather than on principles, rules, rights and obligations. They contend that a person
with virtuous character would be motivated to act in ways that would lead to better
consequences.
Virtues are to be acquired by people just like other skills. Consistent practice and single-
minded devotion to performing just acts make a man just. Persons whose character is
manifested by truthfulness, justice, compassion, respectfulness and patience exude positive
energy to perform acts of benefits to the mankind. Agents who perform acts out of obligation
exhibit no special moral character, whereas virtuous people are driven by the desire to perform
all morally assertive acts.

Value Theory
Value theory establishes the relationship between normative and positive business ethics
(Hutcheon, 1972). Value is an adjectival connotation assigned to the consequences of a given
act by individuals or groups, in consonance with their needs and expectations from the act.
Value depends on values and values are subject to individual sensibilities and hence are
individualistically determined. The acceptance of certain values by individuals are not acts made
at a contingent level, instead they come as a part of the mores of the society that one lives in.
These mores grow out of contextualized pragmatic practices. Different mores ascribe different
values to the same subject.
Values of individuals help determine the value of an act-consequence. Under the stakeholder
theory framework of business, different stakeholding parties have different value systems and
each party imputes value to the act-consequence in line with its own accepted mores. For the
investor, value lies in the appreciation of capital invested. The supplier looks at value as
sustained business relationship with its client under acceptable profit margins. Value for the
employee means job security coupled with acceptable pay. For the customer, value means good
quality goods or services at reasonable prices. Value for the community lies in its overall

Normative Ethical Theories as Frameworks for Better Corporate Governance: 35

A Practitioner’s Perspective
development. Value mentioned above in each case is the most preliminary value ascribed by
each stakeholding group to the act-consequence. However, it should not be overlooked that
each group may assign multiple value criteria to the same act consequence. For example, for
some employees, the value of a job is its challenge or the satisfaction that it gives; for some,
value may lie in liberty. Still for some, value means recognition. This we refer to as secondary
value. This level of granularity in understanding value is in line with Maslow’s need-hierarchy
theory. The primary value remaining the same, individuals go up the value ladder in search of
better and stronger value maximizing actions.
Under circumstances where multiple stakeholders, each with their predetermined primary
value connotation and subsequently through their multiple secondary value determinations,
affect the operations of corporations, managing such businesses becomes a complex and
arduous affair. In the modern-day corporation where management is synonymous with the
agent (or the manager) who too ascribes value to their employment, both at primary and
secondary levels, the stakes of delivering value to the stakeholders are too high, much to the
detriment of the firm’s existence in case of failure. Of all resources that are employed by an
organization, the managerial resource is the only and perhaps the most animate resource
capable of employing, directing and extracting value from inanimate resources, both to serve
itself and to meet the value determinations of parties, internal and external to the organization.
Till a decade ago, valuing was conditioned by organic and physiological process. Value is
more of a conscious choice made by individuals. Since individuals differ in motives, the value
ascribed to one subject by one individual might not carry any value for another individual. Value
theory employs an appropriate logic in the analysis of value to frame some meaningful
hypothesis. Unlike other normative ethical theories that go about prescribing values, value
theory investigates value. In doing so, it stitches the loose ends of value determinations of
different individuals under a single general value proposition. Thus the single most important
test of the theory of value is its generality. It tries to eliminate pluralistic value determinations
through a logical inquiry, thus bringing to the fore the most acceptable and reasonable value.
Value theory integrates observational data with factual, empirical data to describe the
existent relationships between various actors. In doing so, value theorists argue, it considers
value-feelings (pleasures, pains and affective dispositions); volitional activity (based on felt
tensions) setting up ends or purposes, the drive towards which is not simply additive of the
moments or points of felt-pleasures along the way; value- judgment (appraisal or evaluation),
which may reject, censure or approve both feeling and will; and value object which may be
anything—quality or situation, actual or ideal—and of any degree of intricacy. Value theory is
a practice in assimilating as much data as possible on human behavior, its changes and its
implications to the determination or discrimination of value. The foundations of value theory
lie on the precise understanding of human behavior because human-acts that are committed
under some motivations affect all other parties related to the act.
However, value theory is not any special science nor does it submerge itself in the deluge
of history to arrive at conclusions. It is flexible to the effect that it customizes its search for

36 The IUP Journal of Corporate Governance, Vol. XVI, No. 2, 2017

‘value’ based on contingent needs, though taking the help of history for some data to initialize
the inquiry. It investigates the claims of individuals of their rights to an assigned value by
peeping into the gaps that exist between factuality and blind adherence to mores. Value theory
goes about estimating value by first defining what value is and what its features are in a given
case context.

Conclusion
Business and ethics have an oxymoronic relationship. Pursuit of profit by corporations is more
often than not likely to result in value erosion for a multitude of stakeholders. Corporate actions
deliver value to some stakeholders while appropriating value from others. The tension inherent
in maximizing value for all stakeholders without eroding value—be it actual or perceptual—
of any stakeholding group is what constitutes the core problem of corporate governance.
Philosophers have for ages debated both positive (what is) and normative (what ought to be)
ethics to delineate the acceptable from the unacceptable. Business ethicists have liberally
borrowed from the philosophy of ethics to offer normative ethical frameworks for business
managers to adopt in their decision-making process. While some models are applicable in some
corporate scenarios, I feel the robustness of value theory far exceeds that of the other models
and therefore is a better framework for business managers to adopt. As value theory framework
suggests that value be investigated logically to arrive at a reasonable and acceptable value, it
is understood that all stakeholders including the corporate decision makers would be well off
with the act-consequences. o

References
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2. DesJardins R J and McCall J J (2000), Contemporary Issues in Business Ethics, Belmont,
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R E Frederick and M S Schwartz (Eds.), Business Ethics: Reading and Cases in Corporate
Morality, pp. 38-48, McGraw-Hill, Boston.
4. Friedman M (1970), “The Social Responsibility of Business is to Increase Profits”, The New
York Times Magazine, September 13.
5. Hull R T (1979), “The Varieties of Ethical Theories”, Seminar Given at the Buffalo Psychiatric
Centre on March 27.
6. Hutcheon P D (1972), “Value Theory: Toward Conceptual Clarification”, The British Journal
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Normative Ethical Theories as Frameworks for Better Corporate Governance: 37

A Practitioner’s Perspective
 8. Satyaraju R (2000), “Need for Ethics in Corporate Governance”, Productivity, Vol. 40,
No. 4, pp. 530-543.
9. Trevino K L, Hartman P L and Brown M (2000), “Moral Person and Moral Manager: How
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Reference # 04J-2017-04-02-01

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